Stocks Slightly Higher into Final Hour on Lower Long-term Rates and Buyout Activity

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Medical longs, Internet longs and Computer 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 about average. Reuters is reporting that U.S. refiners nixed expansion plans over the last year that would have added 500,000 barrels per day to production. The refiners cited demand uncertainty and costs, according to Briefing.com. This news will likely result in even more intense scrutiny of the business, considering the recent historical rash of nationwide refinery "outages." Refinery “problems” have been the driving force behind record gas prices and have been propping up the entire complex, in my opinion. I continue to believe this will result in an even greater decline in energy prices before year-end as traders anticipate lower demand and greater production. It is interesting to note that insider selling in US stocks remains muted into recent market record highs. In fact, according to CNBC, insider buying was the strongest in May vs. any month over the last 12. May saw insider purchases of $476,800,864 worth of shares. As well, net insider sales are nowhere near levels normally associated with meaningful market tops, according to sentimentTrader.com. This is another large positive even as the herd remains historically bearish given DJIA record highs. I expect US stocks to trade modestly higher into the close from current levels on buyout speculation, lower long-term rates, short-covering and investment manager performance anxiety.

Today's Headlines

Bloomberg:
- Citadel Investment Group’s purchase of Resmae Mortgage Corp. is the latest evidence that investors’ appetite for bonds backed by subprime mortgages is returning five months after the industry crashed.
- Accredited Home Lenders Holding(LEND), the subprime mortgage lender that said in March its survival might be in doubt, will be sold to private equity firm Lone Star Funds for about $400 million in cash.
- Crude oil rose above $66/bbl. to a one-month high in NY on worries over Nigerian production and a cyclone near the Strait of Hormuz.
- US Representative William Jefferson, a Louisiana Democrat, was indicted by a federal grand jury on charges of racketeering and seeking bribes.
- Shares of Dow Jones(DJ) declined for the first time in six days amid investors expectations that the Bancroft family may accept Rupert Murdoch’s $60 a share bid for the publisher of the Wall Street Journal.
- Apple Inc.(AAPL) plans to start selling iPhone June 29, as the company prepares to challenge Nokia Oyj and Motorola Inc.(MOT) with the new combination mobile phone and iPod music player.
- NYSE Euronext(NYX), owner of the world’s largest stock exchange, was sued for $4 billion along with three securities firms for providing inferior prices for trades executed through the Big Board’s automated Super Dot system.
- Flextronics(FLEX) will buy Solectron Corp.(SLR) for $3.6 billion to narrow the sales gap with larger rival Hon Hai Precision Industry.
- Wal-Mart Stores(WMT) was upgraded by at least 4 US brokerages following its decision to buy back as much as $15 billion of shares and reduce the number of stores being opened this year.
- China plans to use hydropower, nuclear energy, biomass fuels and gas to help cut 950 million metric tons of so-called greenhouse gas output by 2010.
- China’s benchmark stock index plunged 7.7% after the government’s main business newspaper signaled officials won’t try to halt a slump that’s erased more than $350 billion of market value in four days.

Wall Street Journal:
- Palm Inc.(PALM) is selling a 25% stake to Elevation Partners, a private-equity firm, for $325 million.
- Hewlett-Packard’s(HPQ) focus on selling through retail outlets helped the company reclaim its market lead over rival Dell Inc.(DELL).
- Google Inc.(GOOG) will broker advertising for the fashion and lifestyle sites of Glam Media Inc. and some of the more than 300 blogs and Web sites affiliated with the company.
- Hearst-Argyle Television(HTV) will distribute news, weather and entertainment video to Google’s YouTube in exchange for part of the revenue from advertising sold against the clips.
- Former Tennessee Senator Fred Thompson will rely heavily on the Internet to raise money and campaign for the Republican presidential nomination. Thompson plans extensive use of blogging and online video.

NY Times:
- The Weather Channel has devoted an increasing amount of resources to covering the issue of climate change since Hurricane Katrina stuck the US Gulf Coast in 2005. The network was criticized after host Heidi Cullen suggested in a blog that the American Meteorological Society not give its approval to meteorologists who “can’t speak to the fundamental science of climate change.”
- Some Apple(AAPL) executives are concerned that expectations for the iPhone may be too high and that initial customers may be disappointed.

Washington Post:
- Lawmakers returning to Washington after a week-long Memorial Day recess are confident the Senate will pass an overhaul of the nation’s immigration laws this week.

Women’s Wear Daily:
- Jones Apparel Group(JNY) may sell its Barneys NY unit for as much as $1.4 billion after bidding by two Middle Eastern investment firms has heated up.

USA Today:
- Nuclear power is gaining renewed interest in Europe amid concerns about fuel prices, climate change and the reliability of oil and natural-gas supplies from Russia.

Wall Street Journal Polska:
- Poland will boost its wind-power capacity almost 1,000% to 2,800 megawatts within two years, citing an Economy Ministry report.

Aksam:
- Turkey’s state exploration company has found evidence of the country’s second-biggest oil field near the central town of Nigde.

al-Watan:
- Kuwait Airways will buy 12 Boeing(BA) Dreamliner 787 passenger planes and seven Airbus A320 jets to upgrade its fleet.

Arab News:
- General Electric(GE) plans to expand its business in Saudi Arabia by investing in the kingdom’s energy, water and health-care industries, citing John G. Rice, vice-chairman of GE.

Factor Orders Rise for Third Consecutive Month

- Factory Orders for April rose .3% versus estimates of a .7% gain and an upwardly revised 4.1% increase in March.

BOTTOM LINE: Orders placed with American factories rose less than forecast in April, suggesting businesses may still be working inventories down before restocking, Bloomberg reported. Orders for capital goods excluding aircraft and military equipment, a gauge of future business investment, rose 2.1% versus a 4.6% gain in March. Bookings for non-durable goods, including food, petroleum and chemicals, fell .2% in April versus a 2.9% rise the prior month. Businesses now have enough goods to last 1.24 months at April’s sales pace, down from 1.25 months the prior month. I continue to believe manufacturing has bottomed and will add to economic growth this quarter after subtracting from growth meaningfully in 1Q.

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Monday Watch

Weekend Headlines
Bloomberg:
- Defense Secretary Robert Gates urged Asian nations to work with the US to help stabilize Afghanistan and its neighbors by promoting economic development and countering terrorism.
- Treasuries declined, pushing 10-year note yields to the highest level in more than nine months, as larger-than-forecast gains in employment and manufacturing suggested US economic growth is accelerating.
- The US dollar rose to a four-month high against the yen as accelerating US job growth and stronger manufacturing added to signs the economy is gaining momentum.
- Genentech Inc.(DNA) said adding its Avastin to a chemotherapy combination slowed the growth of lung tumors at both high and low doses in a study.
- Former Federal Reserve Chairman Alan Greenspan, promoting his forthcoming book, said the 1987 stock market crash and 2001 terrorist attacks taught him the most during his almost two-decade tenure at the Fed.
- Bristol-Myers Squibb’s(BMY) Sprycel stalls tumor growth in previously untreated patients with rare, hard-to-defeat blood cancers, a study found.
- Four people, including a former airport employee and a former member of the parliament of Guyana, were charged with plotting to blow up fuel lines and tanks at JFK International Airport, the US Justice Department said.
- Four men charged with plotting to bomb fuel tanks and a pipeline at NY’s JFK Intl. Airport had no direct ties to al-Qaeda though they had the “same hatred” that motivates the terrorist group, NY’s police commissioner said.
- Qiagen NV, a Dutch maker of tools for gene research, agreed to buy Digene Corp.(DIGE) for $1.6 billion in shares and cash to gain tests for a virus that causes cervical caner and sexually transmitted diseases.
- Democratic presidential candidate John Edwards said Senators Hillary Clinton and Barack Obama showed no leadership when they didn’t explain in advance their vote last month against an Iraq war funding measure. “There is a difference between leadership and legislating,” said Edwards, during the second debate among the eight Democratic presidential candidates.
- Japan’s largest companies increased spending 13.6%, more than expected, the Ministry of Finance said.
- From General Electric(GE) to Mitsubishi Heavy Industries to E.ON AG, the world’s largest companies are investing in wind power, the best-performing energy in the past year.

Wall Street Journal:
- The family that owns a controlling interest in Dow Jones(DJ) will meet with Rupert Murdoch on June 4 to discuss his company’s $5 billion bid for the news service.
- Real-estate values of US skyscrapers may peak soon because prices are rising more rapidly than the rents that buyers are able to charge.
- Behind the Bancrofts’ Shift at Dow Jones(DJ).

NY Times:
- Cadence Design Systems(CDNS) held talks with KKR and Blackstone Group LP about a sale of the company.
- Pornographic video sales and rentals fell 15% last year and are likely to decline more this year in the face of cheap video and photography software that enables easy amateur productions.
- Google(GOOG) Keeps Tweaking Its Search Engine.
- Cars Outsell Light Trucks for First Time Since 2002.

Washington Post:
- NY Senator Hillary Clinton, the frontrunner for the 2008 Democratic presidential nomination, is being portrayed as a “pragmatic Midwesterner” in the same way that her husband, Bill Clinton, was cast by his 1992 campaign as “The Man from Hope.” Introducing biographical information about her childhood and early adulthood, her advisers told the newspaper, will help counter the image of Clinton as an inside-the-Beltway careerist linked to scandal.
- Iran has increased arms shipments to Iraq’s Shiite militias and Afghanistan’s Taliban in recent weeks, citing US and European officials.

All Things Digital:
- Transcript – Bill Gates and Steve Jobs at D5.

AP:
- Siebel Systems Inc. founder Thomas Siebel pledged $100 million to his alma mater, the University of Illinois, upon his death.

Google:
- Google Maps new Street View.

Financial Times:
- Highbridge Capital Management LLC has taken on Scott Kapnick, formerly co-head of Goldman Sachs Group investment banking division, to run a new private equity arm of the hedge fund.
- The Chicago Board of Trad(BOT) plans to mount a new campaign to gain backing for its merger with the Chicago Merc(CME) after US antitrust officers have reviewed the deal, citing CBOT President Dan.

Sunday Telegraph:
- Baidu.com Inc.(BIDU), China’s most-used Internet search site, is poised to enter the European market, competing with rival Google(GOOG).

BBC:
- Mohamed ElBaradei, head of the UN’s nuclear watchdog agency, said those who want to bomb Iranian atomic facilities are “new crazies.”

Corriere della Sera:
- Russian President Vladimir Putin said his country may target Europe with missiles if the US goes ahead with plans for missile defense sites in eastern Europe.

Nikkei:
- Hitachi Ltd. and Oracle Corp.(ORCL) will begin to sell wireless IC tags in China to detect fake goods.

Economic Times:
- China’s government will soon announce new measures to cool its property market, including an increase in the supply of land, citing sources from Beijing. The government will also seek to build more low-cost housing and clamp down on illegal real estate transactions and corruption. China has steeped up measures to curb lending that’s fueling a surge in real estate prices, seeking to maintain social stability.

Economic Daily News:
- CPC Corp., Taiwan’s state oil refiner, plans to order $1 billion in equipment and controlling systems from Honeywell Intl.(HON) this year and in 2008.

China Securities Journal:
- China’s investors should be rational in considering the stock market’s recent declines instead of blaming the government’s stamp duty. The average valuation of Chinese stocks is around 50 times 2007 earnings, much higher than the average in the world’s main stock markets. The speed that stock prices have soared by is “extremely unusual,” which underscores the “structural bubbles” in the stock market. The huge price fluctuations within each trading day reflected the “weak sentiment” among investors and the fact that the trading is “unsustainable.”

The Standard:
- China’s coming collapse is not a fait accompli but there is always someone making the point.

21^st Century Business Herald:
- Investors should heed the increasing risk in China’s stock market and not depend on the government to keep prices up for political reasons, citing a central bank adviser. Many investors have continued to buy shares, betting the government won’t let the market fall ahead of a national meeting of the ruling party later this year and next year’s Beijing Olympics, Fan Gang, a monetary policy committee member of China’s central bank, was cited as saying. The government should take actions to curb price increases because risk is escalating, he said. Possible tools included interest rate increases, currency exchange rates, bank reserve requirements and central bank bill auctions, Fan said.

Weekend Recommendations
Barron's:
- Made positive comments on (GE) and (BLC).
- Made negative comments on (ABT).

Citigroup:
- Reiterated Buy on (PLCE), target $78.
- We believe retail sales in May showed modest improvement over April as warmer, drier weather helped consumers return to Spring buying patterns. While comparisons remain more challenging in May than April, we believe their will be a higher incidence of sales upside to expectations versus what we saw in April.
- We favor Advance Auto Parts(AAP), Office Depot(ODP) and Tractor Supply(TSCO) as our best new money ideas in retail.
- Reiterated Buy on (ORCL), target $23.
- Reiterated Buy on (NKE), raised target to $65 from $58.

Morgan Stanley:
- We expect retail sales in May to benefit from pent-up demand for seasonal apparel following a soft April and the arrival of warmer weather. We continue to favor retailers with strong fundamentals and the ability to drive margins and returns ahead of consensus expectations. Top picks include (JCP) and (COH).

Night Trading
Asian indices are unch. to +.75% on average.
S&P 500 indicated -.12%.
NASDAQ 100 indicated -.13%.

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Earnings of Note
Company/Estimate
- (CMOS)/.00
- (FRE)/1.09
- (FCEL)/-.37
- (KKD)/.06
- (QSII)/.33

Upcoming Splits
- (TSBK) 2-for-1
- (EPIQ) 3-for-2
- (PFMG) 2-for-1
- (NGA) 3-for-2

Economic Releases
- Factory Orders for April are estimated to rise .7% versus a 3.5% increase in March.

Other Potential Market Movers
- Goldman Sachs Lodging/Gaming/Restaurant/Leisure Conference, ASCO Annual Meeting, Deutsche Bank Media/Telecom Conference, (PMTC) Global Media/Analyst Event, (PFE) Analyst Meeting could also impact trading on Monday.

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

Weekly Outlook

Click here for The Week Ahead by Reuters

Click here for Stocks in Focus for Monday by MarketWatch

There are a few economic reports of note and some significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. – Factory Orders

Tues. – ISM Non-Manufacturing, weekly retail sales reports

Wed. – weekly MBA mortgage applications report, Challenger Job Cuts, Non-farm Productivity, Unit Labor Costs, weekly EIA energy inventory report

Thur. – Initial Jobless Claims, Wholesale Inventories, ICSC Chain Store Sales, Consumer Credit

Fri. – Trade Balance

Some of the more noteworthy companies that release quarterly earnings this week are:

Mon. – Freddie Mac(FRE), FuelCell Energy(FCEL), Krispy Kreme(KKD), Quality Systems(QSII)

Tues. – Bob Evans Farms(BOBE), Brown-Forman(BF/A), Copart Inc.(CPRT), Guess? Inc.(GES)

Wed. – ADC Telecom(ADCT), Comtech Telecom(CMTL), DSW Inc.(DSW), IDT Corp.(IDT), Korn/Ferry(KFY), La-Z-Boy(LZB), Martek Biosciences(MATK)

Thur. – Analogic Corp.(ALOG), Cascade Corp.(CAE), Cooper Cos(COO), JOS A Bank(JOSB), National Semi(NSM), Neiman-Marcus Group(NMG/A), Smithfield Foods(SFD), Timberland Co.(TBL), UTI Worldwide(UTIW)

Fri. – Quiksilver Inc.(ZQK), Shuffle Master(SHFL), Vail Resorts(MTN)

Other events that have market-moving potential this week include:

Mon. – Goldman Sachs Lodging/Gaming/Restaurant/Leisure Conference, ASCO Annual Meeting, Deutsche Bank Media/Telecom Conference, (PMTC) Global Media/Analyst Event, (PFE) Analyst Meeting

Tue. – Deutsche Bank Media/Telecom Conference, Merrill Lynch Agricultural Chemical Conference, RBC Energy Conference, Lehman Brothers Industrial Distribution Conference, ASCO Annual Meeting, Goldman Sachs Lodging/Gaming/Restaurant/Leisure Conference, Morgan Stanley Data Center Symposium, (VRSN) Analyst Day, (ONXX) Analyst Briefing, Fed’s Bernanke speaking, Fed’s Warsh speaking

Wed. – Stephens Spring Investment Conference, RBC Energy Conference, Keybanc Industrial/Automotive Conference, Kaufman Brothers Digital Media Conference, Lehman Brothers Global Services Conference, Piper Jaffray Consumer Conference, BOE Policy Meeting, (NYX) Analyst Day, Fed’s Pianalto speaking, Fed’s Lacker speaking, Fed’s Hoenig speaking

Thur. – CSFB Engineering/Construction Conference, Lehman Brothers Global Services Conference, Bear Stearns Biotech Confab, Keybanc Industrial/Automotive Conference, CIBC Alternative Energy Conference, Piper Jaffray Consumer Conference, Citigroup Power/Gas/Utilities Conference, Stephens Spring Investment Conference

Fri. – Citigroup Power/Gas/Utilities Conference

BOTTOM LINE: I expect US stocks to finish the week modestly higher on buyout speculation, lower energy prices, more economic optimism, stable long-term rates, investment manager performance anxiety and short-covering. My trading indicators are still giving bullish signals and the Portfolio is 100% net long heading into the week.