Wednesday Watch

Late-Night Headlines
Bloomberg:
- Virgin Mobile USA Inc., a joint venture of billionaire Richard Branson’s Virgin Group Ltd. and Sprint Nextel Corp.(S), plans to raise as much as $100 million in an IPO.
- Creative Technology Ltd., whose music players compete with Apple’s(AAPL) iPod, reported its fourth loss in five quarters after losing market share to the US rival.
- Credit Suisse Group plans to sell a $3 billion bond backed by sub-prime mortgages and credit default swaps, most of it with top credit ratings, Fitch Ratings said.
- Oil production in the US Gulf of Mexico could reach 2.1 million barrels per day within 10 years if recent deepwater discoveries are realized, said the US Minerals Management Service. Gulf of Mexico production is expected to be 1.3 million barrels a day in 2007, according to the agency.
- General Electric(GE) won a contract to supply more than $750 million worth of wind turbines to closely held developer Invenergy Wind.
- The New York Mercantile Exchange said it will increase margin requirements on its gasoline futures contracts at the close of business tomorrow.
- California Public Employees’ Retirement System, the 13^th-largest holder of Berkshire Hathaway stock, sided against an investor who wants Berkshire to sell its stake in PetroChina Co. as a statement against violence in Sudan.
- The US dollar climbed to 120 against the yen for the first time since February before a government report that may show growth in factory orders accelerated in March.

Late Buy/Sell Recommendations
Citigroup:
- Upgraded (ADBL) to Speculative Buy, target raised to $13.

Night Trading
Asian Indices are +.50% to +.75% on average.
S&P 500 indicated +.07%.
NASDAQ 100 indicated +.05%.

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Earnings of Note
Company/EPS Estimate
- (APPB)/.33
- (RATE)/.28
- (BEC)/.59
- (BIIB)/.60
- (BBI)/-.16
- (BCO)/.56
- (CAI)/.60
- (CBL)/.32
- (CBI)/.31
- (CI)/2.52
- (CLX)/.78
- (CTSH)/.49
- (CMVT)/.21
- (CCI)/-.18
- (DVN)/1.25
- (DLB)/.28
- (D)/1.48
- (DPZ)/.43
- (GRMN)/.58
- (HVT)/.04
- (HP)/.86
- (ICE)/.71
- (JDSU)/.09
- (JNY)/.61
- (LVS)/.32
- (MA)/1.16
- (MSTR)/1.28
- (PRU)/1.65
- (ROG)/.50
- (RDC)/.68
- (SKYW)/.59
- (S)/.23
- (SPW)/.51
- (SYMC)/.19
- (TWX)/.21
- (TWC)/.19
- (RIG)/1.44
- (VRSN)/.22

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- Factory Orders for March are estimated to rise 2.2% versus a 1.0% gain in February.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil build of 1,500,000 barrels versus a 2,074,000 barrel increase the prior week. Gasoline supplies are expected to fall by -1,300,000 barrels versus a -2,793,000 barrel decline the prior week. Distillate Supplies are estimated to rise by 250,000 barrels versus a 5,000 barrel increase the prior week. Finally, Refinery Utilization is expected to rise .88% versus a -2.62% decline the prior week.

BOTTOM LINE: Asian indices are higher, boosted by commodity and technology stocks in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the day.

DJIA Closes at Another Record High on Oil Price Decline and Buyout Speculation

Indices
S&P 500 1,486.30 +.27%
DJIA 13,136.14 +.56%
NASDAQ 2,531.53 +.26%
Russell 2000 816.25 +.21%
Wilshire 5000 14,949.24 +.23%
Russell 1000 Growth 586.45 +.31%
Russell 1000 Value 853.94 +.21%
Morgan Stanley Consumer 734.99 +.33%
Morgan Stanley Cyclical 1,020.56 +2.0%
Morgan Stanley Technology 596.17 +.46%
Transports 5,034.33 -.06%
Utilities 524.53 +1.02%
MSCI Emerging Markets 121.71 +.17%

Sentiment/Internals
Total Put/Call 1.12 +19.15%
NYSE Arms .94 -34.88%
Volatility(VIX) 13.51 -4.99%
ISE Sentiment 114.0 -5.79%

Futures Spot Prices
Crude Oil 64.47 -1.89%
Reformulated Gasoline 224.78 -.51%
Natural Gas 7.71 -1.92%
Heating Oil 188.67 -.43
Gold 675.90 -1.11%
Base Metals 272.32 +.70%
Copper 362.25 +1.86%

Economy
10-year US Treasury Yield 4.64% +2 basis points
US Dollar 81.63 +.23%
CRB Index 311.58 -.36%

Leading Sectors
Restaurants +1.27%
Homebuilders +1.05%
Medical Equipment +1.04%

Lagging Sectors
Gold -.71%
REITs -.78%
Alternative Energy -1.09%

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Afternoon Recommendations
Bank of America:
- Upgraded (CME) to Buy, target $622.

Afternoon/Evening Headlines
Bloomberg:
- OPEC should increase production to assure adequate supplies in case of terrorist attacks and other disruptions, the Intl. Energy Agency said.
- The average gasoline pump price in the US is likely to rise to a record this summer because of refinery “disruptions,” Energy Secretary Samuel Bodman said.
- Cotton in NY fell to the lowest price in 20 months on speculation unsold supplies in the US will rise more than estimated as exports slump.
- OPEC’s compliance with output reductions set last year rose to 70% in April, from 65% in March, OPEC’s secretary general said.

Wall Street Journal:
- Shareholders with a slight majority of Dow Jones(DJ) stock don’t support News Corp.’s(NWS/A) $5 billion takeover bid.

Sparkspread.com:
- Dynegy Corp.(DYN) and US Power Generating Co. are considering bids for Mirant Corp.(MIR), citing officials familiar with the proposals.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Retail longs and Telecom longs. I exited my (LVLT) long and took profits in a trading short in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was neutral today as the advance/decline line finished slightly lower, most sectors rose and volume was heavy. Measures of investor anxiety were above average into the close. Today's overall market action was mildly bullish as the major averages finished near session highs, reversing morning losses, on heavy volume. Oil is down $1.22 per bbl. on little news. As well, gold fell $7.50 per ounce and continues to trade poorly, considering all the recent potential upside catalysts. The 10-year yield finished off session highs, rising 1 basis point. Today was another very frustrating day for the bears considering the below-expectations housing report and weak retail sales reports. Given the market's overbought state and heavy volume today, I suspect even more investors and traders are trapped leaning too heavily bearish.

Stocks Higher into Final Hour on Buyout Speculation, Lower Energy Prices and Stable Long-term Rates

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Retail longs and Telecom longs. I sold an existing long and added to my (IWM)/(QQQQ) hedges this morning and then covered some (IWM)/(QQQQ) hedges this afternoon, thus leaving the Portfolio 75% net long. The tone of the market is neutral as the advance/decline line is slightly lower, most sectors are rising and volume is heavy. Under Armour (UA) reported an in-line quarter but gave mildly conservative guidance and the stock is falling 8.4%. I am still very confident in the long-term story and will look to add again to my long position on signs of technical stabilization. Bear Stearns is saying that Dow Jones (DJ) will likely accept the News Corp. (NWS-A) bid. As well, Prudential is saying that it doesn't expect other bidders to materialize. The major averages are moving higher again as the 10-year yield begins to pull back as oil prices decline. Housing stocks are now higher after the morning sell-off on the pending home sales report. Cyclicals are substantially outperforming the broad market, with the MS Cyclical Index rising 2.1%, boosted by Dow Jones(DJ). As well, shares of Whirlpool (WHR), Masco (MAS), Citigroup (C), FedEx (FDX), Honeywell International (HON) and Hewlett-Packard (HPQ) are pushing the index higher. My intraday gauge of investor angst is at high levels considering the gains in the major averages. I expect US stocks to trade mixed-to-higher into the close on positive earnings reports, short-covering, falling energy prices and buyout speculation.

Today's Headlines

Bloomberg:
- A flurry of so-called collateralized debt obligations backed by other CDOs may be crated soon to lure investors who might be more interested in assets linked to subprime mortgages if they were less risky, according to managers, underwriters and lawyers at a conference in Miami.
- Oil is falling another $1.26/bbl. $64.44/bbl. as investment funds sell ahead of tomorrow’s energy inventory data report.
- Gold fell $7/oz. in NY on speculation investors may sell the metal after the US dollar rallied on a better-than-expected ISM Manufacturing report.
- The cheating episode at Duke University may cause academics to conclude the post-Enron emphasis on teaching ethics in graduate business schools is a failure.
- National City Corp.(NCC) agreed to buy MAF Bancorp(MAFB) for about $1.9 billion in stock to expand in Chicago and enter Wisconsin.
- Federal Reserve Chairman Ben Bernanke warned against any retreat by US policy makers into protectionism, as the economy stands to benefit more over the long term from free trade.
- Citigroup Inc.(C) would be worth more if broken up and shareholders are pressing for action, said Michael Jones, chief executive officer of Clover Capital Management.

Wall Street Journal:
- Ford Motor(F) plans to aggressively market the company’s F-150 pickup truck with advertising that indirectly targets the safety ratings of rival Toyota Motor(TM) Corp’s Tundra.
- Carl Icahn stepped up his campaign to get a seat on the board of Motorola Inc.(MOT) with a letter to shareholders published as a full-page advertisement in today’s Wall Street Journal.

NY Times:
- US Immigration officials increased deportation of illegal immigrants by 20% during the past year compared with a year earlier.

NY Post:
- Microsoft Corp.(MSFT) is weighing a bid to acquire Internet advertising provider 24/7 Real Media(TFSM).

CNBC:
- News Corp.(NWS/A) has made an unsolicited offer of $60 a share to buy Dow Jones(DJ). Shares of Dow Jones soared 56% on the report.

LA Times:
- Southern California will again set records for international trade this year, although the railroad system serving the region is at capacity and cargo fees may drive business to other ports.

Billings Gazette:
- ConocoPhillips’(COP) refinery in Billings, Montana, may operate at full capacity by the end of the week, after a shutdown for “maintenance.” The plant has a capacity to process 58,000 barrels of crude oil a day.

ISNA:
- Iran’s foreign minister will not hold a “dialogue” with US Secretary of State Condoleezza Rice at the Iraq security conference planned this week.

Kuwait News Agency:
- Kuwait, the Middle East’s fourth-largest oil producer, has made a “large” discovery of light crude oil and natural gas in the north of the country, citing the country’s oil minister.

Pending Home Sales Fall, ISM Manufacturing Surges

- Pending Home Sales for March fell -4.9% versus estimates of a .1% increase and an upwardly revised 1.1% gain in February.
- ISM Manufacturing for April rose to 54.7 versus estimates of 51.0 and 50.9 in March.
- ISM Prices Paid for April rose to 73.0 versus estimates of 67.8 and a reading of 65.5 in March.

BOTTOM LINE: An index of pending sales of existing homes in the US unexpectedly fell in March, Bloomberg reported. Pending re-sales declined 7.1% in the South, 6.9% in the Midwest and 4.9% in the Northeast. Sales rose 1.6% in the West. Residential construction fell at a 17% pace in the first quarter, subtracting 1 percentage point from overall US gdp growth. Low unemployment, record net worth and strong wage growth continue to give consumers’ the confidence to purchase houses at relatively high rates by historic standards. I continue to believe the worst of the housing downturn is past.

Manufacturing in the US grew in April at the fastest pace in almost a year as orders jumped and production improved, Bloomberg reported. The prices paid component rose to 73.0 from 65.5 the prior month. The New Orders component of the index jumped to 58.5, the highest since February 2006, from 51.6 the prior month. The Production component rose to 57.3 from 53.0 the prior month. The Inventory component fell to 46.3 versus 47.5 in March. I continue to believe manufacturing will begin adding to US growth this quarter after substantial inventory de-stocking pressured growth in 1Q.

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