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Tuesday Watch

Late-Night Headlines
Bloomberg:
- The perceived risk of owning BHP Billiton Ltd.(BHP) bonds rose on concern the world’s largest mining company may need to borrow to finance any bid for aluminum producers Alcoa(AA) or Alcan(AL).
- Republican presidential candidate Rudy Giuliani said he’s against raising taxes on hedge-fund managers and private-equity partners who classify their pay as capital gains. Giuliani said he disagreed with former Clinton administration Treasury Secretary Robert Rubin, who suggested last week that Congress should more than double tax rates for those executives.

Financial Times:
- Europe’s biggest hedge funds recruited Andrew Large, former Bank of England deputy governor, to conduct a study into voluntary standards for the industry in a bid to pre-empt politically imposed regulation.

Daily Telegraph:
- Richard Buxton, a senior executive at one of Pearson Plc’s largest shareholders, said he was opposed to the publisher bidding for Dow Jones(DJ).

Shanghai Securities News:
- China’s shipbuilding industry loses $262 million for every 1% gain in the value of the yuan against the US dollar, citing Zhang Xiangmu, a manager at the Commissioner of Science Technology and Industry for National Defense.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (YHOO), target lowered to $34.

Night Trading
Asian Indices are unch. to +.25% on average.
S&P 500 indicated -.07%.
NASDAQ 100 indicated -.17%.

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Earnings of Note
Company/EPS Estimate
- (ATU)/.93
- (BBY)/.50
- (CCL)/.47
- (CLC)/.38
- (DRI)/.69
- (FDS)/.52
- (LZB)/.07
- (PRGS)/.41
- (SHRP)/-.89

Upcoming Splits
- (SEIC) 2-for-1
- (AGN) 2-for-1
- (ESRX) 2-for-1

Economic Releases
8:30 am EST
- Housing Starts for May are estimated to fall to 1472K versus 1528K in April.
- Building Permits for May are estimated to rise to 1473K versus 1457K in April.

Other Potential Market Movers
- The Fed’s Minehan speaking, former Fed head Volcker speaking, weekly retail sales reports, William Blair Growth Stock Conference, (ALKS) Analyst Day and (TYC) analyst meeting could also impact trading today.

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

Stocks Finish Slightly Lower on Low Volume, Healthy Consolidation of Recent Gains

Indices
S&P 500 1,531.05 -.12%
DJIA 13,612.98 -.19%
NASDAQ 2,626.60 unch.
Russell 2000 846.28 -.23%
Wilshire 5000 15,424.19 -.13%
Russell 1000 Growth 604.52 -.14%
Russell 1000 Value 877.93 -.15%
Morgan Stanley Consumer 739.36 unch.
Morgan Stanley Cyclical 1,090.02 -.01%
Morgan Stanley Technology 625.83 +.42%
Transports 5,135.75 -.80%
Utilities 502.81 -1.04%
MSCI Emerging Markets 132.36 +.86%

Sentiment/Internals
Total Put/Call .91 -9.9%
NYSE Arms 1.11 +22.57%
Volatility(VIX) 13.42 -3.73%
ISE Sentiment 144.0 -16.8%

Futures Spot Prices
Crude Oil 69.0 +1.40%
Reformulated Gasoline 226.20 +.08%
Natural Gas 7.66 -3.23%
Heating Oil 203.10 +1.01%
Gold 659.90 +.18%
Base Metals 259.98 +1.76%
Copper 341.60 -.16%

Economy
10-year US Treasury Yield 5.13% -3 basis points
US Dollar 82.72 -.15%
CRB Index 320.90 +.50%

Leading Sectors
Papers +.59%
Computer Services +.51%
Oil Service +.39%

Lagging Sectors
REITs -1.58%
Tobacco -1.75%
Coal -2.76%

Evening Review
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In Play

Afternoon Recommendations
UBS:
- Upgraded (BAC) to Buy.

Deutsche Bank:
- Rated (TZIX) Buy, target $24.

Oppenheimer:
- Rated (ATHR) Buy, target $36.
- Rated (ANAD) Buy, target $16.

Afternoon/Evening Headlines
Bloomberg:
- The prices of lead may fall 29% and copper 17% in 2008 as supplies of the metals increase faster than consumption, Man financial said.
- The average US pump price for regular gasoline fell 6.7 cents to $3.00 a gallon in the week ended today, the government said.
- Valero Energy Corp.(VLO), the largest US refiner, said it shut the fluid catalytic cracking unit at its McKee refinery near Sunray, Texas, for “unplanned maintenance.”
- Yahoo! Inc.(YHOO) CEO Semel, who revived the company after the Internet bust before being surpassed by Google Inc.(GOOG), stepped down. Co-founder Jerry Yang will take his place. Yang said, “Yahoo! will be a vibrant, independent company. Yahoo!(YHOO) also said 2Q net sales will be at the mid-point to the low-end of its forecasted range. Yahoo! shares rose 4.3% on the reports.
- Crude oil in NY approached $70/bbl. for the first time since September on rising investment fund speculation after Nigerian unions planned a strike this week.
- The yen dropped to a record low against the euro and sank to the weakest in more than four years versus the dollar as investors sought higher-yielding assets funded by loans in Japan.
- The California Public Employees’ Retirement System, the largest state pension fund in the US plans to more than double the money it puts or $12 billion in so-called activist funds that push for corporate and management changes.
- The blind trust of NY Senator Hillary Rodham Clinton and former President Bill Clinton invested in such companies as Rupert Murdoch’s News Corp.(NWS/A), Wal-Mart Stores(WMT) and Warren Buffett’s Berkshire Hathaway(BRK/A).
- European Union governments deplored Iran’s pursuit of nuclear enrichment and repeated an offer of economic incentives aimed at persuading the Islamic republic not to seek a weapons program.

Fortune:
- Billionaire Ron Burkle this week may announce an offer for Dow Jones(DJ), citing an unidentified Burkle associate.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs, Computer longs and Retail longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was very positive today as the advance/decline line finished slightly lower, sector performance was slightly negative and volume was below average. Measures of investor anxiety were slightly above average into the close. Today's overall market action was neutral. Today was another great day for stockpickers as beneath the surface, numerous stocks were jumping, especially true growth stocks. As well, tech stocks outperformed again. The much-maligned sector is now 10.7% higher year-to-date vs. an 8.9% return for the S&P 500. I continue to believe cyclical tech will join growth tech's strong performance in the second half, helping to boost the MS Tech Index at least 20% before year-end. The time to buy these stocks is now before sentiment turns more bullish on the group. Bloomberg is reporting today that China's bank regulator has found that eight banks have illegally lent money to companies that used the funds to buy shares in initial public offerings. One of the companies cited for obtaining the illegal loans was China Shipping Company. Moreover, Capital Week reported today that the China Banking Regulatory Commission retracted a June 5 press release on its findings due to concerns that news of the illegal activities would spark a market decline that would result in the borrowers defaulting on their loans. One has to wonder if this is the tip of the iceberg with respect to this type of activity if the Commission is that concerned. To what extent have the corporate balance sheets of all types of companies in China been positively impacted by this type of speculation? I hear some investors state that 50x earnings isn't too much to pay for Chinese companies that are growing at such a rapid rate. However, the major Chinese indices are dominated by commodity and financial shares. To pay 50x earnings for these types of companies with so little transparency is insane, in my opinion. There is no doubt in my mind that China's economy will continue to grow substantially over the long term. However, I continue to believe that the Chinese stock market and economy are due for a substantial contraction and slowdown, respectively, over the intermediate term. The Internet has fulfilled most investors' wildest bullish expectations over the last seven years, however, technology stocks in 2000 were priced to more than anticipate that growth. I think a similar thing is happening right now in China. I still believe that developed markets will substantially outperform emerging markets over the next five years.

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Computer longs and Retail 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 slightly lower, sector performance is mixed and volume is below average. I continue to believe that the 59-basis-point rise in the average 30-year mortgage rate we have seen over the last six weeks, a subsiding in the recent substantial inventory rebuilding and falling energy prices later this year will help bring the 10-year yield back down below 5% during the third quarter. Apple (AAPL) said today that the battery life on its iPhone will be longer than analysts expected. This is a positive, however, I continue to believe many investors are missing the big picture. Any initial glitches or perceived weaknesses in the phone will likely be fixed quickly in future releases. Moreover, any analysis of the iPhone that doesn't compare it with the competition is meaningless, in my opinion. The competition is far from perfect. I still believe that the iPhone will drive a whole new demographic into the stores, which will boost earnings much more than even optimistic analysts expect. Besides Apple, many other true “growth” stocks are substantially outperforming the broad market today. My intraday gauge of investor angst is at above-average levels. I expect US stocks to trade mixed-to-higher into the close from current levels on falling long-term rates, short-covering, buyout speculation and investment manager performance anxiety.

Today's Headlines

Bloomberg:
- Confidence among US homebuilders fell this month more than estimates as interest rates rose and delinquencies increased.
- Crude oil jumped to a nine-month high after investment fund speculation rose on a report that a coalition of labor unions in Nigeria threatened to strike this week.
- Watson Farley & Williams LLP, a 200-lawyer law firm based in London, is in preliminary merger talks with NY’s Chadbourne & Parke LLP to create a 625 lawyer firm focused on the energy industry.
- Finish Line(FINL) agreed to buy Genesco Inc.(GCO), the owner of the Johnston & Murphy and Journeys shoe-store chains, for $1.5 billion in cash.

Wall Street Journal:
- Investment Technology Group(ITG), which supplies some of Wall Street’s most innovative trading technologies, is discussing its options after being urged by a hedge-fund firm to put itself up for sale or start a stock-repurchase program.
- US-backed anti-terrorism tactics are proving a success in the Philippines and helped weaken the Abu Sayyaf group, one of the leading bands in the country’s Muslim-dominated south.
- Thomas Marsico, who’s buying back his money-management business from Bank of America(BAC), hopes the purchase will secure the firm’s future. He says that, while he hasn’t lost anyone to hedge funds, he wants to be able to give the 23 investment professionals he employs stakes in the business, so they have “the same incentives here that they might have in other circumstances.”

CNBC:
- A plan by Bear Stearns(BSC) to recapitalize an internal hedge fund that’s based on subprime mortgage securities will be presented to major creditors at a 1pm est meeting today.

NY Times:
- Cadbury Schweppes Plc, the world’s largest confectioner, is expected to announce tomorrow the sale of its US beverage business.
- Bank of America(BAC) is expected to announce today the renaming of its business for wealthy private banking customers to US Trust, Bank of America Private Wealth Management, after the private bank it acquired in November for $3.3 billion.
- The US Air Force plans to speed up a program to develop a synthetic jet fuel to cut its dependence on foreign oil and ensure resources are available in times of crisis.

AP:
- The US government is ready to lift sanctions against the Palestinian government in the West Bank in a bid to support President Mahmoud Abbas.

Financial Times:
- Stonebrook Capital, a NYC-based hedge fund, is among firms starting funds seeking to duplicate the returns of hedge funds without the high fees. The firms use models to replicate hedge-fund strategies. Goldman Sachs(GS), Merrill Lynch(MER) and Deutsche Bank AG offer such strategies to institutional investors.
- Blackstone Group LP may be worth about 15% less if Congress passes a bill that would end special tax provisions for partnership investors.

Daily Telegraph:
- MySpace, the social-networking site owned by News Corp.(NWS/A), may start an online retail service, citing CEO Chris DeWolfe.

Die Welt:
- General Motors(GM) aims to quadruple sales of entry-level Chevrolet in Germany over the next seven years, citing Peter Sommer, who heads the brand in Germany.

Capital Week:
- China’s bank regulator has found that eight banks including Bank of China Ltd. have illegally lent money to companies that used the funds to buy stocks. The China Banking Regulatory Commission retracted a June 5 press release on its findings, amid concern news of the illegal lending may spark a market slump that causes borrowers to default on their loans, according to China’s Stock Exchange Executive Council.

Ma’ariv:
- Syrian President Bashar Assad is ready to negotiate peace with Israel and will not set any conditions.
- Orckit Communications(ORCT) is close to signing a $40 million contract with an unidentified new Japanese customer.

Zambia Daily Mail:
- Zambia may increase corn production almost 500% in the next five years, citing Agriculture Minister Ben Kapita.

Economic Releases

- None of note