Stocks Lower into Final Hour on Weakness in Europe and Profit-taking

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Biotech longs and Retail longs. I added (IWM) and (QQQQ) hedges this morning and covered them into afternoon weakness, thus leaving the Portfolio 100% net long. The tone of the market is very negative as the advance/decline line is substantially lower, every sector is declining and volume is above average. Today’s losses aren’t too bad considering Europe’s 1.75-2.0% declines. As well, many market leading stocks are holding very well and the Broker/Dealer Index is higher on the day at session highs. My intraday gauge of investor angst is quite elevated considering the major averages are down just around .75%. Given how quickly and sharply levels of investor angst have risen, I suspect the recent 2-day healthy pullback has just about run its course. Investors seemed to like the Fed’s Hoenig’s comments ,within the last 30 minutes, that a 5.25% fed funds rate allows the economy to grow and inflation to slow. He said the current rate is modestly restrictive, that he is hopeful inflation will slow and that US growth should bounce-back toward 3% trend. I expect US stocks to trade modestly higher into the close from current levels on buyout speculation, lower long-term rates, weakening gas futures and short-covering.

Today's Headlines

Bloomberg:
- Deckers Outdoor Corp.(DECK) CEO Martinez told CNBC in an interview today that the shoe industry is “moving into a sustainable, green approach.” Martinez said the company’s Green Toe shoes, made of organic materials including bamboo and natural latex rubber, deteriorate into the earth a few months after they are discarded.
- TD Ameritrade Holding Corp.(AMTD) shares rose as much as 5.3% after hedge funds Jana Partners LLC and SAC Capital Advisors LLC took a combined 8.4% stake and urged the third-largest online broker to merge with a rival.
- Copper futures in NY are falling the most in two weeks on concern that the metal’s recent rally was overdone.
- Corn is falling to a one-week low in Chicago on speculation that the highest US crop ratings since 1991 signal farmers will harvest more grain than forecast a month ago.
- Stem cells may be produced without destroying embryos or requiring women to donate eggs, say scientists from Harvard University, California and Japan.
- Ford Motor(F) had four of the top 10 brands in a benchmark US survey of new-vehicle quality, which has been dominated by Toyota Motor Corp.(TM).
- New cancer drugs from Pfizer Inc.(PFE) and Genentech(DNA), tested together for the first time, raised each medicine’s tumor fighting power, researchers reported this week.
- The European Central Bank raised interest rates to a six-year high today to keep economic growth from fueling inflation in the 13 nations sharing the euro.

Wall Street Journal:
- Thousands of crosses put on a hill in the San Francisco Bay Area to remember US soldiers killed in Iraq have set off a fight among residents concerned the memorial may lower property values.
- Wal-Mart Stores(WMT) rivals, including Kroger(KR) and SuperValu(SVU), are attracting customers back by cutting back on drugs and beauty products and focusing on gourmet foods and convenience.
- BlackRock Advisors LLC, State Street Global Advisors and Barclays Global Investors are among US management companies offering or set to offer so-called 130/30 funds. Such funds might invest $100 in a group of stocks, then short another $30 in shares they think are overvalued. They then use the proceeds from the short sale to buy stocks believed to be undervalued.
- US patent law faces major revisions in Congress following a Supreme Court ruling this year that makes it harder to get new patents and to defend existing ones.
- Private-equity firms on the acquisition trail are increasingly bringing not only bankers and lawyers to negotiations but also insurance brokers. The reason is that they want to be prepared against nasty surprises, and the trend has meant a significant increase in business for insurance brokerages such as Marsh Inc., Willis Group Holdings and Aon Corp.

NY Times:
- Hillary Rodham Clinton’s comments at a presidential debate that the US is safer now than it was before Sept. 11 has drawn rebuke from challengers for the Democratic presidential nomination.
- Senator Hillary Rodham Clinton has told a gay rights organization that she would support the repeal of part of the federal Defense of Marriage Act.

Washington Post:
- Congress is renewing a push for US terrorism detainees to receive basic legal rights.

Chronicle of Higher Education:
- The US House of Representatives passes a bill yesterday that would help boost the number of students studying overseas and help them understand other cultures.

San Francisco Chronicle:
- The California Assembly unanimously passed a bill that would force the state’s two public pension funds to sell investments in energy and defense companies that do business in Iran.

USA Today:
- California Attorney General Jerry Brown has filed a lawsuit against San Bernardino County for failing to regulate greenhouse gases releases by new homes and residential developments.

Financial Times:
- Wal-Mart Stores(WMT) is set to offer a payment card aimed at the roughly 80 million Americans who do not have a bank account.

***Alert***

Blogging will be light today due to a scheduling conflict. Sorry for the inconvenience and thanks for reading.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Valero Energy(VLO), the largest US refiner, said it shut fluid catalytic cracking units for maintenance at refineries in Houston and Louisiana. The unit at the Houston plant will be shut for “approximately two weeks.” Gasoline production will drop by 40,000 barrels a day in Houston and 25,000 barrels a day at Krotz Springs during the maintenance period. A historical rash of refinery “problems” has been the driving force behind the recent surge in energy prices.
- China’s new securities account openings were the lowest in almost two months on June 4 as a stock-market rout, triggered by a tripling of the tax on share trades, deterred people from entering the market.
- Australia’s gross domestic product rose 1.6% from the fourth quarter, above estimates of a 1.2% gain.

Shanghai Securities News:
- China may further increase banks’ reserve requirement ratios by 27 basis points to 54 basis points this year, citing a researcher from the Chinese Academy of Social Science.

Economic Daily News:
- Taiwan Semiconductor Manufacturing, AU Optronics and Chunghwa Picture Tubes have postponed planned investments worth more than $20 billion, citing the Central Taiwan Science Park administration.

Late Buy/Sell Recommendations
Suntrust Robinson Humphrey:
- Rated (LOOP) Buy, target $31.

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Asian Indices are unch. to +.25% on average.
S&P 500 indicated unch.
NASDAQ 100 indicated -.01%.

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8:30 am EST
- Final 1Q Non-farm Productivity is estimated to rise 1.0% versus a 1.7% prior estimate.
- Final 1Q Unit Labor Costs are estimated to rise 1.3% versus a .6% prior estimate.

10:30 am EST
- Bloomberg consensus estimates call for a weekly 125,000 barrel crude oil supply increase versus a -1,956,000 barrel decline the prior week. Gasoline supplies are estimated to rise by 1,600,000 barrels versus a 1,361,000 barrel increase the prior week. Distillate inventories are estimated to rise by 900,000 barrels versus a 147,000 barrel build the prior week. Finally, Refinery Utilization is estimated to rise .5% versus a -.02% decline the prior week.

Other Potential Market Movers
- The Fed’s Pianalto speaking, Fed’s Lacker speaking, Fed’s Hoenig speaking, MBA mortgage applications report, Challenger Job Costs, Bank of England Policy Meeting, (NYX) Analyst Day, FTN Midwest Health Care Conference, Keybanc Industrial/Automotive Conference, Kaufman Brothers Digital Media Conference, Piper Jaffray Consumer Conference, Stephens Investment Conference, RBC Energy Conference and Lehman Brothers Global Services Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by technology 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 Finish Lower on Healthy Profit-taking and Higher Long-term Rates

Indices
S&P 500 1,530.95 -.53%
DJIA 13,595.46 -.59%
NASDAQ 2,611.23 -.27%
Russell 2000 848.27 -.80%
Wilshire 5000 15,443.42 -.55%
Russell 1000 Growth 605.68 -.49%
Russell 1000 Value 879.73 -.60%
Morgan Stanley Consumer 746.60 -.59%
Morgan Stanley Cyclical 1,087.26 -.34%
Morgan Stanley Technology 619.87 +.15%
Transports 5,251.54 -.74%
Utilities 510.56 -1.48%
MSCI Emerging Markets 128.85 -.36%

Sentiment/Internals
Total Put/Call .94 +5.62%
NYSE Arms 1.10 +10.12%
Volatility(VIX) 13.63 +2.56%
ISE Sentiment 154.0 -7.78%

Futures Spot Prices
Crude Oil 65.60 -.92%
Reformulated Gasoline 220.58 -1.44%
Natural Gas 8.03 -1.87%
Heating Oil 196.46 unch.
Gold 675.20 -.16%
Base Metals 269.06 +.46%
Copper 344.0 -.81%

Economy
10-year US Treasury Yield 4.98% +5 basis points
US Dollar 81.89 -.20%
CRB Index 314.64 -.29%

Leading Sectors
Internet +.24%
Gaming +.18%
Networking +.13%

Lagging Sectors
Gold -1.28%
Utilities -1.48%
Coal -1.54%

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Afternoon Recommendations
Piper Jaffray:
- Rated (CIEN) Outperform, target $40.

Avian:
- Our contacts indicate that spot DRAM pricing exceeds contract for the first time in several months. We view this as positive and note that when spot exceeds contract, it frequently exerts further upward price pressure.

Afternoon/Evening Headlines
Bloomberg:
- A Guyanese man wanted in the alleged plot to blow up jet-fuel tanks at New York’s JFK International AirportTrinidad. surrendered today in
- The private-equity arm of Tudor Jones, raised $262 million for a new venture-capital fund to invest in technology and media companies.
- Sugar tumbled 4% to a two-year low on speculation that cane harvests in Brazil and India will add to a global glut.
- Gasoline futures fell 1.4% before a report tomorrow from the US Energy Dept. that may show inventories grew for a fifth consecutive week.
- TD Ameritrade Holding Corp.(AMTD) should consider a combination with E*Trade Financial Corp. or Charles Schwab Corp., said hedge funds Jana Partners LLC and SAC Capital Advisors LLC. The stocks is surging 6.7% in after-hours trading.
- Whole Foods Market(WFMI) and Wild Oats(OATS) said the US FTC will file a lawsuit to block their merger.
- Dell Inc.(DELL) will stop making televisions and focus on personal computers.

Wall Street Journal:
- Anheuser-Busch Cos.(BUD) agreed to distribute singer Jimmy Buffett’s Margaritaville Tequila in Massachusetts.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs, Networking 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 negative today as the advance/decline line finished lower, sector performance was mostly negative and volume was heavy. Measures of investor anxiety were above average into the close. Today's overall market action was mildly bearish. However, I view it as a healthy pullback after recent gains. Underneath the surface, there were some positives. The Morgan Stanley Tech Index finished slightly higher on the day. The MS Tech Index is now 9.2% higher for the year, slightly outperforming the S&P 500. I expect it to perform even better in the second half of the year as many “deadweight” tech companies gain upside traction as inventories come down significantly. As well, many market-leading growth stocks finished with meaningful gains today despite losses in the major averages. The 10-year yield finished 5 basis points higher. I continue to believe it would take a meaningful move above 5%, somewhere around 5.15%, to impact equities in a substantially negative way. I still believe that type of move is unlikely as the recent rise in rates mutes the rebound in housing and thus slows recent strong economic data, to an extent, over the next couple of months. As well, the substantial inventory rebuilding that is currently taking place will likely run its course by then. Several well-known US stock market bears were pointing today to the fact that the 10-year yield just broke out of a 30-year downtrend. However, if you look at that long-term chart and adjust the trendline down to the top in early 2000, you will see that it also broke out of a 23-year downtrend in 2004. Since then, the S&P 500 has rallied about 40%. I continue to believe the secular trend of disinflation remains firmly in tact and that during the next meaningful global economic slowdown, we will experience a mild bout of deflation, which will likely send long-term rates significantly lower from current levels. I still believe the Fed will remain on hold through year-end while making both hawkish and dovish statements, depending on the strength or weakness of the prevailing data at the time. The NYSE Arms traded at above-average levels throughout the day today. I suspect stocks will rise tomorrow.