Stocks Finish Slightly Lower on Profit-taking, China Bubble Worries and Higher Long-term Rates

Indices
S&P 500 1,522.28 -.12%
DJIA 13,525.65 -.11%
NASDAQ 2,577.05 -.42%
Russell 2000 836.54 -.40%
Wilshire 5000 15,323.55 -.16%
Russell 1000 Growth 598.65 -.13%
Russell 1000 Value 878.09 -.18%
Morgan Stanley Consumer 745.48 +.11%
Morgan Stanley Cyclical 1,063.06 +.27%
Morgan Stanley Technology 613.81 -.41%
Transports 5,199.73 +.05%
Utilities 527.84 -1.10%
MSCI Emerging Markets 127.22 +.07%

Sentiment/Internals
Total Put/Call .97 -14.91%
NYSE Arms .74 -33.52%
Volatility(VIX) 13.24 +1.38%
ISE Sentiment 140.0 +6.87%

Futures Spot Prices
Crude Oil 65.85 +.52%
Reformulated Gasoline 230.55 -.03%
Natural Gas 7.76 -.55%
Heating Oil 193.34 +1.37%
Gold 662.30 +.35%
Base Metals 262.56 -4.01%
Copper 330.75 +.15%

Economy
10-year US Treasury Yield 4.85% +3 basis points
US Dollar 82.28 -.13%
CRB Index 311.62 +.06%

Leading Sectors
Gold +1.62%
Medical Equipment +.92%
Oil Service +.81%

Lagging Sectors
Restaurants -1.25%
Semis -1.55%
Airlines -1.59%

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Afternoon Recommendations
Bank of America:
- Rated (TYL) Buy, target $15.

Afternoon/Evening Headlines
Bloomberg:
- Former SEC Chairman Arthur Levitt said that private equity buyout are “not a bad trend.”
- The US will seek greater pressure on Iran to abandon its nuclear ambitions than Europeans want, diplomats said after the UN nuclear watchdog agency said existing sanctions aren’t working.
- The SEC approved rules that will make it easier for additional credit-rating companies to gain federal recognition and compete with S&P’s and Moody’s Investors Service.
- Chinese stocks fell in US trading after Former Federal Reserve Chairman Alan Greenspan said he was concerned that equities in China might undergo a “dramatic contraction.”
- Treasury 10-year note yields rose to the highest level since January as traders reduced the odds of an interest rate cut by the Federal Reserve this year on improving US economic prospects.
- Network Appliance(NTAP) forecast sales and profit for the first quarter that fell short of analysts’ estimates, prompting shares to tumble 19% after-hours.
- CA Inc.(CA) posted an unexpected fourth-quarter loss because of a decline in orders. The shares fell 6% in extended trading as forecasts fell short of analysts’ predictions.
- The Gymboree Corp.(GYMB) today reported earnings for the first fiscal quarter ended May 5, 2007, of $20.9 million versus $18.6 million the prior year. The shares surged 7% in after-hours trading.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Semi longs and Medical longs. I added to my (EEM) short and added (IWM)/(QQQQ) hedges in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was mildly negative today as the advance/decline line finished lower, sector performance was mostly negative and volume was above average. Measures of investor anxiety were about average into the close. Today's overall market action was bearish. The 10-year yield is moving modestly higher as investors continue to price out a U.S. recession, in my opinion. Inflation worries have subsided to an extent. Gold continues to trade very poorly considering all of the potential positive catalysts it has had of late. The percent chance of a recession beginning this year has plunged to 13.5% on Intrade.com. Moreover, the 10-year yield is still very low by historical standards. Furthermore, housing will likely prevent any significant moves higher in yield from current levels as mortgage rates rise modestly. I continue to believe it would take a convincing move above 5% on the 10-year yield to impact U.S. stocks in any meaningfully negative way. I still don't expect that to occur and still believe the 10-year yield will average about 4.75% for the year. In the current U.S. negativity bubble, most investors continue to focus on any short-term negatives, while the big picture remains very positive. The iShares FTSE/Xinhua China 25 Index (FXI) finished at session lows, falling 0.8% on Greenspan's China bubble comments. Given how extended China is, these comments might provide the catalyst for at the very least a short-term dip in the Shanghai. As well, April new home sales may very well be weaker than expected, which could also lead to some more weakness here in the morning.

Stocks Slightly Lower into Final Hour on Profit-taking, China Bubble Worries and Higher Long-term Rates

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly negative as the advance/decline line is mildly lower, sector performance is mixed and volume is above average. The major averages and breadth have pulled back from session highs. Traders are pointing to Alan Greenspan's comments on China as the negative catalyst. Greenspan basically said the recent parabolic move higher in Chinese stocks is unsustainable and there will be a dramatic decline at some point. Here is an updated chart of the Shanghai Stock Exchange Composite. Predicting that this move is unsustainable isn't a bold prediction, in my opinion. While momentum traders may continue to profit from this in the short run, longer-term investors should prepare now for the eventual bursting of the bubble in Chinese shares and its ramifications. Commodity and deep cyclical stocks that are trading at valuations associated with "new era" thinking are the most at risk in the U.S. The largest beneficiary of a substantial decline in Chinese shares will be true U.S. "growth" stocks. I expect US stocks to trade mixed into the close from current levels as investment manager performance anxiety, buyout speculation and more economic optimism offset worries over China’s bubble and higher long-term rates.

Today's Headlines

Bloomberg:
- Countrywide Financial Corp.(CFC) Chief Operating Officer David Sambol said the US subprime market is stabilizing.
- John Reade, an analyst at UBS AG, said he expects nickel prices to fall “quite sharply” and that he would “not be a buyer of any metals at current prices.”
- The House of Representatives approved legislation today that would make gasoline price gouging a federal crime, subjecting companies to as much as $150 million in fines.
- Marathon Oil(MRO) expects its crude oil and natural-gas output to soar as much as 42% within 3 years from its average last year.
- Ethanol consumption in the European Union may exceed that of biodiesel by 2020.
- The number of US vehicles that can run on ethanol and gasoline will rise 600% within 8 years, boosting demand for the alternative fuel and reducing the prospects of a glut, according to the Renewable Fuels Assoc.
- Microsoft Corp.(MSFT) played down a possible deal with Yahoo!(YHOO) and said its has everything needed to build its advertising business.
- Internet ad sales soared 35% to $16.9 billion in the US last year as marketers accelerated their pursuit of Web-site audiences.
- US Treasury Secretary Henry Paulson, ending a meeting with China’s top economic leaders, said the negotiations produced “tangible results” that will help build confidence in bilateral trade ties.
- Boeing Co.(BA) affirmed its profit forecasts for this year and next with an “upward bias” for 2008, CFO Bell said.
- Former Fed Chairman Greenspan said Chinese stocks may suffer a “dramatic contraction.”

Wall Street Journal:
- A unilateral withdrawal from Iraq would help al-Qaeda because Iraq is the “primary battleground” against “radical Islamists” who “declared war” on the US in the 1990s and carry out attacks today, said Bob Kerrey, a former Democratic senator from Nebraska.
- American Express(AXP) will today say that it is introducing a program to let customers put their monthly mortgage payments on charge cards, and let them earn rewards for doing so.
- Hedge funds have shown more of a bias towards energy, technology and small-company stocks than mutual funds recently, citing a report by Goldman Sachs(GS).
- The FBI’s success foiling a plot to attack the US Army base in New Jersey underscores how the agency has reverted to more methodical investigations before taking action.
- Coach’s(COH) stock does well when the luxury handbag maker’s chief executive scraps plans to sell his shares, as he’s done three times when he thought they were undervalued.

NY Times:
- US Democratic leaders in the House of Representatives are finding it difficult to get members of their party to agree on an overhaul of congressional ethics rules. Some Democrats are opposing a measure that would require lobbyists to make public the campaign contributions they collect on behalf of lawmakers.
- MGM Mirage(MGM) said it has formed an independent committee to study billionaire investor Kirk Kerkorian’s offer to purchase two Las Vegas properties and maybe restructure the company.

AP:
- The US House of Representatives passed a bill to crack down on spyware, software that uses the Internet to collect data on consumers and pass it on to third parties without consent.

Financial Times:
- The venture-capital market might be tempting some investors to take a fresh look to avoid the crowds chasing leveraged buyouts.

Toronto Globe and Mail:
- Alcan Inc.(AL) has started “early-stage” talks with BHP Billiton Ltd.(BHP) to help fend off a takeover bid by rival Alcoa(AA).

Al-Hayat:- Iraq’s debt was reduced by $140 billion as part of an agreement with the International Monetary Fund and countries including Saudi Arabia and China, citing Finance Minister Bayan al-Zubaidi.

Economic Releases

- None of note

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Morgan Stanley(MS), the biggest real estate investor among Wall Street banks, agreed to buy Crescent Real Estate Equities(CEI), an investment trust founded by Texas billionaire Richard Rainwater, for $2.78 billion.
- Wyeth(WYE) won US approval for its contraceptive Lybrel, the first birth control pill designed to completely eliminate monthly periods.
- Nintendo Co. expects to sell as many as 35 million Wii video-game consoles in the US, close to the record 38.2 million PlayStation 2 players sold by Sony Corp.
- The yen weakened to a three-month low against the US dollar on speculation Japanese investors will snap up new investment trusts that buy higher-yielding overseas assets.
- Fletcher Building Ltd., New Zealand’s largest construction company, agreed to buy US-based Formica Corp. for $700 million, creating the world’s biggest maker of laminated board.
- A farm-bill plan that calls for $400 million a year in loan guarantees for ethanol plants that use crops other than corn got the backing of the House subcommittee that oversees Agriculture Department energy programs.
- The Fed’s Lacker said after a speech to the Money Marketeers of NYU tonight that the Fed’s benchmark rate “has us on track to achieve what we want.”

Financial Times:
- Google’s(GOOG) desire to make best use of the personal information it retains about users is such that the company sees a time when it may be able to advise people on careers or leisure activities, citing Google CEO Schmidt.
- The Bancroft family, which controls Dow Jones(DJ), plans to hold a private meeting to discuss its options following a $5 billion bid for the company from Rupert Murdoch’s News Corp.(NWS/A).
- US regulators are poised on Wednesday to approve the first changes to the implementations of the Sarbanes-Oxley law since its passage five years ago, hoping to make compliance with its controversial provisions easier for top company executives.

Xinhua News Agency:
- US labor unions agreed to cooperate with the All-China Federation of Trade Unions, ending a decades-long boycott.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (KYPH).
- Reiterated Buy on (PLCE), target $78.

Morgan Stanley:
- Reiterated Overweight on (ADI), target $48. With ADI significantly outperforming YTD we would buy the stock aggressively if some investor’s aggressive near-term expectations were not met and the stock comes under near-term pressure.

Night Trading
Asian Indices are +.25% to +.50% on average.
S&P 500 indicated +.08%.
NASDAQ 100 indicated -.03%.

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Earnings of Note
Company/EPS Estimate
- (ANF)/.65
- (CA)/.20
- (DKS)/.37
- (DDS)/.72
- (EV)/.16
- (FL)/.13
- (GME)/.16
- (GYMB)/.63
- (LTD)/.13
- (NTAP)/.29
- (ROST)/.47
- (SNPS)/.28
- (TLB)/.09
- (TGT)/.71
- (ZUMZ)/.06

Upcoming Splits
- (ATLS) 3-for-2
- (GIL) 2-for-1

Economic Releases
10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil build of 600,000 barrels versus a 1,061,000 barrel increase the prior week. Gasoline supplies are expected to rise by 1,200,000 barrels versus a 1,764,000 barrel build the prior week. Distillate inventories are expected to rise by 1,300,000 barrels versus a 992,000 barrel increase the prior week. Finally, Refinery Utilization is estimated to rise by .45% versus a .47% the prior week.

Other Potential Market Movers
- The Fed board meeting on Truth-in-Lending regulations, Fed’s Kroszner speaking, weekly EIA energy inventory report, weekly MBA Mortgage Applications report, Citigroup Healthcare Conference, Thomas Weisel RFID Conference, Robinson Humphrey Financial Services Conference, Goldman Sachs Internet Conference, JPMorgan Tech Conference and UBS Oil&Gas Conference could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by technology and financial stocks in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.