Stocks Finish Higher on Fall in Energy Prices, More Economic Optimism and Buyout Speculation

Indices
S&P 500 1,518.11 +.16%
DJIA 13,521.34 +.10%
NASDAQ 2,572.06 +.58%
Russell 2000 837.53 +.92%
Wilshire 5000 15,286.36 +.28%
Russell 1000 Growth 597.80 +.33%
Russell 1000 Value 874.88 +.15%
Morgan Stanley Consumer 744.76 +.11%
Morgan Stanley Cyclical 1,062.67 +.23%
Morgan Stanley Technology 610.87 +.40%
Transports 5,206.63 +1.15%
Utilities 515.86 +.63%
MSCI Emerging Markets 125.38 -.13%

Sentiment/Internals
Total Put/Call .93 -8.82%
NYSE Arms 1.20 +46.53%
Volatility(VIX) 13.53 +1.42%
ISE Sentiment 128.0 +9.4%

Futures Spot Prices
Crude Oil 63.37 -2.81%
Reformulated Gasoline 230.50 -4.11%
Natural Gas 7.59 -.64%
Heating Oil 187.80 -3.15%
Gold 663.20 +.27%
Base Metals 263.80 +.99%
Copper 330.0 -.62%

Economy
10-year US Treasury Yield 4.88% +3 basis points
US Dollar 82.31 -.02%
CRB Index 307.47 -1.80%

Leading Sectors
REITs +3.54%
Networking +3.12%
Internet +2.14%

Lagging Sectors
Gold -.42%
Oil Service -.73%
Energy -.76%

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Afternoon Recommendations
Bank of America:
- Rated (RNR) Buy.

Piper Jaffray:
- Rated (JMBA) Outperform.

Afternoon/Evening Headlines
Bloomberg:
- The private-equity boom will continue in the next few years as near-record-low borrowing costs keep buyouts affordable, KKR co-founder Henry Kravis said.
- Shares of Coldwater Creek(CWTR), the Idaho-based women’s clothing retailer, soared as much as 15% after-hours as first-quarter profit unexpectedly rose.
- Cotton futures declined 2.2% in NY on speculation the US may miss government export forecasts on cooling demand from China.
- Coffee had its biggest decline in six weeks, falling 2%, on expectations that favorable weather will aid crops in Brazil, the world’s largest producer.
- Corn fell 3% to a two-week low in Chicago and soybeans dropped 1.9% after rains boosted moisture levels in fields east of the Mississippi River, increasing yield potential for the two biggest US crops.
- Gasoline futures in NY plunged 4.4%, the most in seven months, on estimates that gasoline supplies rose for the fourth consecutive week, which curtailed investment fund speculation on the commodity.
- Robert Zoellick, the former US trade representative and an executive at Goldman Sachs Group(GS), will be nominated by President Bush to replace Paul Wolfowitz as head of the World Bank, a senior administration official said.
- Broadcom(BRCM) won a $19.6 million verdict after a California jury ruled rival Qualcomm(QCOM) intentionally infringed three patents for mobile-phone technology.
- Nationwide gasoline prices at the pump fell $.01/gallon, breaking a string of increases, to $3.21/gallon, a government report said.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs, I-Banking longs and Energy-related shorts. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, sector performance was mostly positive and volume was below average. Measures of investor anxiety were about average into the close. Today's overall market action was mildly bullish. Small-caps and mid-caps outperformed throughout the day. The U.S. dollar recouped morning losses, finishing unchanged. The 10-year yield was up 3 basis points on the home price data and better-than-expected consumer confidence reading. Gasoline futures are near session lows, falling 4.4%. This is significant. It appears to me the gasoline crack spread is finally breaking down, as well. The iShares FTSE/Xinhua China 25 (FXI) finished off session lows, falling 1.2% on news of increased trading fees for investors in China. Google (GOOG) finished off session highs, rising $3.59, but it has broken out of its recent downtrend. I suspect another attack on $500 is imminent and I expect it to hold this time.

Stocks Mostly Higher into Final Hour as Buyouts and Falling Energy Prices offset China Bubble Worries

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, I-Banking longs and Energy-related shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are higher and volume is below-average. The Yale School of Management Crash Confidence Index is showing the individual (herd) is the most concerned about a stock market crash since December 2002, right near the trough of one of the worst bear markets in U.S. history. This is another amazing number and helps to illustrate how deep-seeded the herd's pessimism towards U.S. stocks really is, in my opinion. Notwithstanding any weekly or monthly blips higher in various measures of investor confidence, I continue to believe overall investor sentiment regarding U.S. stocks has never been worse in history with the DJIA just off fresh record highs. This has to be very disturbing to the many U.S. secular bears. I expect US stocks to trade modestly higher into the close from current levels on buyout speculation, lower energy prices and more economic optimism.

Today's Headlines

Bloomberg:
- China’s Ministry of Public Security warned investors not to fall for scams aimed at capitalizing on enthusiasm over a rapidly rising stock market, such as false initial share offerings or fake investment funds.
- Crude oil is dropping $2.03/bbl. in NY as investment fund speculation subsided after an end to a strike in Nigeria and on expectations that supplies are adequate.
- Stephen Schork, an energy investor and president of Schork Group sees lower gas prices during the summer driving season.
- Venezuelan President Hugo Chavez threatened to shut down the country’s last opposition television station as students took to the streets for a third day protesting what they say is a crackdown on free speech.
- The Bank of Canada said for the first time in a year that it’s ready to increase interest rates because inflation is accelerating faster than it expected.
- Trading in options to buy shares of Commerce Bancorp(CBH) surged ninefold to a six-week high after the largest bank based in NJ canceled an appearance tomorrow at a Sanford C. Bernstein conference.
- President Bush imposed economic sanctions against Sudan in a bid to curb the violence in Darfur and he called on the UN to step up financial pressure on a leader who hasn’t stopped genocide in the war-torn African country.

Wall Street Journal:
- CDW Corp.(CDWC), one of the biggest US resellers of computers, software and related equipment, may be bought by a private-equity firm.
- The World Bank said direct foreign investment in emerging markets was a record $325 billion last year, yet cautioned that there are still concerns over the stability of some banks in such countries.
- Cutbacks in merchandise at Wal-Mart(WMT) are starting to trim orders to some of the company’s suppliers in China.
- Morgan Stanley(MS) Chairman John Mack is directing the investment bank’s business toward propriety trading and advisory services in a bid to boost profit.
- Florida plans to cut property taxes to promote economic growth slowed by a drop in real estate sales.
- US investors in mutual and hedge funds may benefit in coming years as more and more managers depend on third-party providers for internal monitoring and risk management.

NY Times:
- US lawmakers are pushing to subsidize coal as an alternative fuel. Democrat and Republican lawmakers are proposing to guarantee billions of dollars in construction loans for coal-to-liquid production plants, guarantee prices and future government purchases.

AP:
- Sony Corp.(SNE) will introduce its first HD radio tuners in July, as prices for radios that detect AM and FM signals that broadcast digitally fall from their $800 debut more than two years ago.

Efe:
- The Venezuelan lawmaker deported form Colombia yesterday for allegedly interfering in domestic politics, called Colombian President Alvaro Uribe the country’s “biggest terrorist.”

Xinhua News Agency:
- China tripled the stamp tax on securities trading to help promote a “healthy” stock market, citing the Ministry of Finance. The government boosted the stock trading fee from .1% to .3%.

Consumer Confidence Rebounds, % Planning to Buy "Major Appliance" at 9-year High

- Consumer Confidence for May rose to 108.0 versus estimates of 105.0 and an upwardly revised 106.3 in April.

BOTTOM LINE: An index of consumer confidence in the US jumped more than forecast in May as rising stock prices and a resilient labor market put Americans in a mood to spend. Better consumer sentiment raises the odds that the Fed’s forecast for accelerating economic activity will come to fruition. The Present Conditions component of the index rose to 136.1 from 133.5 the prior month. The Expectations component rose to 89.2 from 88.2 prior. The percentage of Americans that said jobs are hard to get fell to 19.9% from 20.4% in April. A 2.9% surge in the S&P 500 from the last week in April through May 22 also buoyed confidence. A $3.22/gallon nationwide average gas price on May 22 likely prevented an even greater jump in the reading.

34.4% of consumer said they plan to purchase a “major appliance,” the highest since May 1998 and up 10% from April. Moreover, this number has only been higher during 2 other months(March and May of 1998) over the last 19 years. This is very significant considering the percent that plan to purchase a major appliance is higher now than at any time during the peak of the recent housing boom. This is likely due to the fact that Americans’ net worth is at an all-time high as a result of the 106% gain in the stock market since the October 2002 bottom, a healthy job market, low interest rates, below average inflation and a 127.3% gain(Case-Shiller Home Price Index) in home prices over the last decade. These facts continue to be ignored by those that have expected consumer spending to fall off a cliff over the last couple of years as a result of housing.

The gain in the overall reading was spurred by a 19.2% jump in the Northeast Central region. However, the overall gauge continues to be skewed negatively by depressed confidence in the northern part of the country where most investment funds and major media outlets are located. Here is a breakdown of today’s Consumer Confidence reading by region:

Northeast Central 69.5 +19.2%

New England 74.6 -7.9%

Mid Atlantic 90.2 -8.3%

Northwest Central 99.5 -1.9%

Southeast Central 115.8 -.7%

South Atlantic 116.9 +.3%

Pacific 127.7 +7.7%

Southwest Central 130.5 +2.1%

Mountain 138.20 +1.5%

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Tuesday Watch

Weekend Headlines
Bloomberg:
- Venezuelan President Hugo Chavez put the nation’s most popular TV network off the air this weekend, accusing the broadcaster of “coup-mongering.”
- The US dollar reached the strongest level in six weeks against the euro and a three-month high versus the yen as reports suggested the US economy is gaining momentum.
- President Bush, in a Memorial Day weekend radio address, said the wars in Iraq and Afghanistan are aimed at promoting in those countries the freedom people enjoy in the US.
- Overseas stock exchanges including NYSE Euronext(NYX) and Nasdaq Stock Market(NDAQ) said they plan to open offices in China for the first time, amid efforts to woo Chinese companies to their bourses.
- Japan, a signatory to the Kyoto Protocol on climate change, wants the 21 Asia-Pacific Economic Cooperation members to adopt specific measures to cut energy consumption.
- Venezuela’s new state television channel TVes took control of the country’s most-watched network as protesters accused President Hugo Chavez of seeking to stamp out voices of opposition to his government.
- Venezuela’s streets echoed with sirens, horns and pot-banging late last night as thousands of supporters of Radio Caracas Television readied for a final day of protest hours before the independent TV network exits public airwaves.
- Avaya Inc.(AV) delayed a meeting with analysts scheduled for next week amid speculation the world’s largest maker of corporate phone equipment will be acquired.
- China’s CSI 300 Index rose about 4,000 for the first time, driven by a surge in new investors who are ignoring warnings of a bubble to enter a market that’s doubled this year.
- A tax-cut war is spreading across Europe as leaders of the continent’s biggest economies give up criticizing smaller neighbors for slashing business tax rates and decide to join them instead.
- Venezuela’s government urged a probe of Time Warner’s CNN and local television station Globovision for broadcasting “lies” and inciting violence against President Hugo Chavez.
- Japan’s jobless rate unexpectedly fell to a nine-year low and households increased spending for a fourth month in April, suggesting consumers will help extend the economy’s longest postwar expansion.
- Colorado and Utah have as much oil as Saudi Arabia, Iran, Iraq, Venezuela, Nigeria, Kuwait, Libya, Angola, Algeria, Indonesia, Qatar and the UAE combined. That’s not science fiction. Trapped in limestone up to 200 feet thick in the two Rocky Mountain states is enough so-called shale oil to rival OPEC and supply the US for one hundred years.
- Crude oil fell as much as 1.4% in NY after oil workers in Nigeria ended a two-day strike.

Wall Street Journal:
- Avaya Inc.(AV), the world’s largest maker of corporate phone equipment, is in talks with private equity firm Silver Lake Partners about a leveraged buyout.
- Tishman Speyer Properties LP and Lehman Brothers Holdings(LEH) are close to reaching an agreement to acquire Archstone-Smith Trust(ASN).

CNNMoney.com:
- The Top 25 fastest growing tech companies.
- The Top 25 greatest tech stock gainers.

NY Times:
- Amherst College, Harvard University and University of Virginia are among the two dozen elite US schools accepting students based on their low-income backgrounds as the universities diversify “economically.”
- Iraqis say a rapid American troop withdrawal would fuel more violence in the country, citing a survey and interviews with more than 40 Iraqi politicians and residents.
- Coca-Cola(KO) may look for more acquisitions like its agreement to buy Glaceau Vitaminwater to boost its non-carbonated offerings, citing CEO Isdell.
- Witnesses aren’t cooperating with Newark, NJ Mayor Cory Booker’s bid to cut the murder rate in the state’s largest city. Police officers say witnesses often refused to say who committed crimes, the result of public mistrust dating back to riots in 1967 and hip-hop artists railing against informants.
- 33% of NYC residents owned their own homes in 2005, an all-time high and up from 30.2% in 2000, citing an analysis of Census Bureau data.
- Google Inc.(GOOG), Yahoo! Inc.(YHOO), Microsoft Corp.(MSFT) and their technology rivals are using unconventional recruiting methods to lure workers as they compete for top job candidates.
- Will stocks suffer a multi-decade bear market as the baby-boom generation sells its shares to retirement? Some have predicted such an outcome, but a new study – which projects huge growth in 401k assets in future decades – paints a far more sanguine picture.
- Google’s(GOOG) $3.1 billion acquisition of online advertiser DoubleClick Inc.(DCLK) led the US FTC to top a preliminary antitrust probe into the purchase.

Washington Post:
- Ryan Crocker, US ambassador in Baghdad, will tell Iranian diplomats how the Islamic republic can help stabilize Iraq, both militarily and politically, during talks in Baghdad tomorrow.

Newsweek:
- US intelligence has identified a secret Iranian group called Department 9000 as the unit behind Tehran’s efforts to support Shiite insurgent cells in Iraq.

AP:
- To deal with high gas prices, 47% of the 1,000 Americans polled said they were considering buying a more fuel-efficient vehicle versus 39% last year, according to an AP-Ipsos poll.
- US military forces rescued 42 captured Iraqis from an al-Qaeda post near Baghdad today. Some of the group had been held for as longs as four months, including some who showed signs of torture.

Age:
- Rio Tinto Group(RTP) hired Deutsche Bank AG to advise it on a possible bid for aluminum producer Alcan Inc.(AL).

Reuters:
- Iran plans to develop new oil fields with neighboring Iraq, citing National Iranian Oil Co. Managing Director Gholam Hossein Nozari.

Financial Times:
- Japan’s ruling Liberal Democratic Party is preparing to allow casino gambling next year.

Sunday Telegraph:
- Coca-Cola Co.(KO) is in talks to buy the Highland Spring Ltd. bottled water company for as much as $992.3 million.

Sunday Times:
- The Dubai International Financial Centre may block Nasdaq Stock Market’s(NDAQ) acquisition of Sweden’s OMX AB by making its own bid.

BBC:
- World Bank President Paul Wolfowitz, who plans to resign June 30, says the media was a bigger factor in his decision to leave the lender than his standing among bank employees. The bank’s board agreed he hadn’t done anything unethical with regard to compensation for a bank worker who was his girlfriend.

Nikkei English News:
- Toshiba Corp. will start using Advanced Micro Devices(AMD) chips in some products to cut costs.

South China Morning Post:
- The Chinese Central government has asked local officials to stop offering tax and power incentives to energy-intensive industries.

Shanghai Securities News:
- China may have more than 100 million stock market accounts as of yesterday, as new investors stormed in to tap a record share rally. The value of shares in China surged more than 600% in the past two years to $2.4 trillion. So far this year, about 20.9 million accounts have been opened at brokerages, 400% more than the entire amount in 2006.

Xinhua News Agency:
- China won’t meet its energy efficiency targets if annual economic growth reaches 9% or higher, citing the deputy head of energy efficiency research at the nation’s top planning agency.
- Chinese university students shouldn’t be involved in stock trading, because they are unable to bear the losses should their investments turn sour, citing the Ministry of Education.

21^st Century Business Herald:
- Yu Yongding, a former monetary policy adviser to China’s central bank, says the nation faces a “most urgent” problem of a “quite serious” stock market bubble. The government needs to curb share prices to make them drop gradually. Yu proposed raising stamp duty on share trading, cracking down on irregularities by brokers and increasing the supply of shares. Monetary policy alone can’t curb the asset bubble, because small interest rate increases won’t be enough to siphon money back into back accounts and raising rates too much risks hurting the economy, he said.
- China’s government may soon let citizens buy stocks overseas, broadening an investment program that currently only allows banks to invest abroad. Chinese brokerages and fund management companies may also be allowed to invest abroad as qualified domestic institutional investors.

Chosun Ilbo:
- North Korean dictator Kim Jong Il may be ill, citing a South Korean government official.

Emirates Today:
- Taxis in Dubai will be converted into more environmentally friendly “duel fuel” vehicles that will use electricity as well as gasoline.

Al-Ahram:
- Egypt is expected to produce eight metric tons of gold next year, one ton more than its entire production in the past 100 years, citing a government official. The increase is expected following new government regulations that encourage foreign companies to explore for gold.

Weekend Recommendations
Barron's:
- Made positive comments on (LWSN) and (ARC).
- Made negative comments on (JSDA).

Morgan Stanley:
- As China’s Shanghai A-share market continues to rise rapidly despite historically high valuations, fears of serious consequences from a potential burst of the stock market bubble have intensified greatly in recent weeks. However, on examination of household and corporate exposure to the stock market, we conclude that the negative wealth effect on consumption would be moderate and financing conditions for corporate investments would be unlikely to deteriorate significantly in the aftermath of such a burst. The potential impact on the banking sector is much more difficult to gauge, given the paucity of data. However, our stress test suggests that the impact on banks’ balance sheets would, while significant, likely be manageable. A major correction of the A-share market could well result in a significant contagion to global markets, as seen during February’s short-lived correction. However, to the extent that any such global sell-off were driven by concerns about a stock-market-correction-triggered-recession in China’s real economy, it would likely prove overdone, in our view. We think the risk of a much more serious impact from a potential stock market correction will heighten significantly if Chinese shares continue rising rapidly from current levels.

Night Trading
Asian indices are unch. to +.50% on average.
S&P 500 indicated +.03%.
NASDAQ 100 indicated +.09%.

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Earnings of Note
Company/Estimate
- (ALKS)/.02
- (BCSI)/.28
- (BMC)/.39
- (BAMM)/.12
- (BGP)/-.36
- (CWTR)/.09
- (DCI)/.46
- (PVH)/.86
- (SGR)/.18
- (STP)/.22
- (TSAI)/.31
- (PAY)/.37

Upcoming Splits
- (VSEA) 3-for-2
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Economic Releases
- Consumer Confidence for May is estimated to rise to 105.0 from 104.0 in April

Other Potential Market Movers
- The Case-Shiller 1Q Home Price report and Merrill Lynch Small-cap Technology Healthcare Conference could also impact trading Tuesday.

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