Tuesday Watch

Late-Night Headlines
Bloomberg:
- China’s stocks are dropping another 6.4%, extending a slide that’s wiped out at least $402 billion of market value, or more than Taiwan’s gross domestic product since, May 30.
- Avaya Inc.(AV), a computer-networking company, said it agreed to be bought by Silver Lake Partners and TPG Inc. for $8.2 billion in cash.
- Google Inc.(GOOG), owner of the most popular Internet search engine, said more than half of its US customers can also buy radio ads through a company service that will be available to all US advertisers by the end of the month.
- comScore, a leader in measuring the digital world, today released its comScore Video Metrix rankings for March 2007, showing Google Sites as the top US streaming video property with 57.4 million unique people streaming and 1.2 billion video streams initiated. YouTube.com drove the lion’s share of the video streaming activity at the Google Sites property with 53.5 million unique streamers and 1.1 billion streams initiated.
- The euro rose to a record high versus the yen on prospects the European Central Bank will raise interest rates tomorrow, encouraging Japanese investors to seek the higher yields available in Europe.
- Citic Securities, the most profitable brokerage in China, plans to sell 350 million new shares, worth about $2.5 billion at yesterday’s closing price, to finance expansion.
- Rupert Murdoch held “constructive” talks today with Dow Jones’(DJ) controlling Bancroft family over his proposal to purchase the company for $5 billion.
- Bed Bath & Beyond(BBBY) said first-quarter profit was between 36 cents and 38 cents a share, less than the 40 cents analysts had estimated.
- Tropical Cyclone Gonu weakened slightly into a Category Four storm with winds of 249 kilometers per hour as it headed across the Arabian Sea toward the Gulf of Oman, the US Navy said.

Ming Pao Daily:
- Hong Kong’s de-facto central bank has prepared a contingency plan for the city’s financial system in case of a sharp tumble in China’s stock markets.

China Securities Journal:
- Mutual funds investing in Chinese stocks are being redeemed as investors have turned more wary after the recent slump in the domestic stock market. Fund managers have been pressed to “dump blue-chip stocks” from their portfolios to generate cash to meet investors’ redemption. The confidentiality of the Hong Kong Monetary Authority’s plan ranks as high as the documents related to the Hong Kong-US dollar peg, the Chinese newspaper said, without specifying what measures the government may take in the event of a meltdown in China’s stock markets.

Economic Daily:
- Hon Hai Precision Industry has won desktop computer orders from Dell Inc.(DELL), the first time Dell has outsourced such orders.

Late Buy/Sell Recommendations
Stifel, Nicolaus & Company:
- Reiterated Buy on (GOOG), raised estimates and target to $620 from $585. Google has quietly compiled and recently announced the launches of important initiatives such as iGoogle, Universal Search, Google Gears, an acquisition of FeedBurner, and an agreement with Hearst-Argyle(HTV). The products/initiatives that have been announced could change the landscape of commerce, community, search, and software, over time, in our opinion. We continue to believe many of Google’s initiatives will be “winner take all” over the long-term. Google has become the technology leader of this cycle and it has uniquely built its dominant franchise on consumer choice rather than previous positions that were built on customer lock-in. Google is, by far, our best large-cap idea.

Night Trading
Asian Indices are -.25% to +.25% on average.
S&P 500 indicated -.19%.
NASDAQ 100 indicated -.22%.

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Earnings of Note
Company/EPS Estimate
- (ABM)/.24
- (AMWD)/.46
- (BF/A)/.52
- (CPRT)/.41
- (SCHS)/-.45

Upcoming Splits
- (EPIQ) 3-for-2
- (PMFG) 2-for-1
- (NGA) 3-for-2

Economic Releases
10:00 am EST
- ISM Non-Manufacturing for May is estimated to fall to 55.8 versus a reading of 56.0 in April.

Other Potential Market Movers
- The Fed’s Bernanke speaking, Fed’s Warsh speaking, weekly retail sales reports, (VRSN) Analyst Day, (ONXX) Analyst Briefing, ASCO Annual Meeting, Deutsche Bank Media & Telecom Conference, Merrill Lynch Agricultural Chemical Conference, RBC Energy Conference, Sidoti Emerging Growth Institutional Investor Forum, Goldman Sachs Lodging/Gaming/Restaurant/Leisure Conference and Lehman Brothers Industrial Distribution Conference could also impact trading today.

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

Stocks Close Near Session Highs Despite Perceived Headwinds

Indices
S&P 500 1,539.18 +.18%
DJIA 13,676.32 +.06%
NASDAQ 2,618.29 +.17%
Russell 2000 855.10 +.20%
Wilshire 5000 15,528.98 +.22%
Russell 1000 Growth 608.66 +.28%
Russell 1000 Value 885.03 +.10%
Morgan Stanley Consumer 751.04 -.24%
Morgan Stanley Cyclical 1,090.93 +.01%
Morgan Stanley Technology 618.96 +.29%
Transports 5,290.52 -.67%
Utilities 518.25 -.20%
MSCI Emerging Markets 129.25 +.42%

Sentiment/Internals
Total Put/Call .89 unch.
NYSE Arms .95 +19.51%
Volatility(VIX) 13.29 +4.0%
ISE Sentiment 168.0 +41.18%

Futures Spot Prices
Crude Oil 66.04 +1.46%
Reformulated Gasoline 222.80 -.74%
Natural Gas 8.18 +3.83%
Heating Oil 196.20 +2.04%
Gold 676.50 -.06%
Base Metals 267.82 -.08%
Copper 347.0 +1.91%

Economy
10-year US Treasury Yield 4.93% -2 basis points
US Dollar 82.04 -.34%
CRB Index 315.55 +.46%

Leading Sectors
Oil Service +2.63%
Internet +1.94%
Computer Hardware +1.38%

Lagging Sectors
Steel -.83%
Biotech -1.24%
Airlines -2.75%

Evening Review
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Afternoon Recommendations
Goldman Sachs:
- Rated (M) Buy.

Afternoon/Evening Headlines
Bloomberg:
- Ritchie Capital Management Ltd. is preparing to seek bankruptcy protection for life-insurance holdings in its flagship hedge fund, a month after blaming its co-investor for more than $700 million in losses.
- Openwave Systems(OPWV) rejected a $335 million offer from Harbinger Capital Partners to buy control of the mobile-phone software maker.
- The average US pump price for regular gasoline fell 5.2 cents to $3.16/gallon in the week ended yesterday.
- The perceived risk of owning US corporate bonds held at a 10-week low, according to credit-default swap traders who bet on corporate creditworthiness.
- Gasoline futures fell on forecasts for a fifth weekly rise in US inventories.
- Global spending by oil and natural-gas producers will probably rise 13% this year, according to a Lehman Brothers survey.

Nikkei English News:
- Japan’s government will set targets for industries to improve energy efficiency as it tries to take the lead in cutting greenhouse-gas emissions.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs, Medical longs and Computer longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was neutral today as the advance/decline line finished mildly higher, sector performance was mixed and volume was above average. Measures of investor anxiety were above average into the close. Today's overall market action was bullish as the major averages finished near session highs, notwithstanding the plunge in Chinese shares, profit-taking and higher energy prices. The rise in oil today was mostly a function of worries over the category 5 cyclone heading into the Strait of Hormuz. Gasoline futures actually fell 0.47%, and the crack spread closed floor trading below its 50-day moving average for the first time in several months. The 10-year yield is near session lows, despite the rise in oil, falling over 2 basis points. If Chinese shares come under significant pressure again tonight, we will likely see more morning weakness in US shares tomorrow. I continue to observe unbelievable complacency in the bearish camp given what has transpired over the last year and the positive macro backdrop for US stocks.

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.

Links of Interest

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