Today's Headlines

Bloomberg:
- BlackRock Inc.(BLK), the largest publicly traded US asset manager, is considering buying minority stakes in hedge-fund managers to raise profit from one of the fastest growing areas of asset management. BlackRock plans to start buying into startup managers within 12 months, said Howard Berkowitz, head of the hedge-fund group.
- Google Inc.(GOOG) outlined a strategy for reducing its energy use and investing in environmental technology.
- Canadian inflation, excluding volatile items such as energy, slowed more than economists forecast last month, which may allow the central bank to limit interest rate increases.
- Corn is falling 4.7%, the most in five weeks in Chicago, and soybeans are falling 3% on forecasts for rain in the US Midwest that may moisten soils and improve prospects for recently seeded crops. The Goldman Sachs Ag Commodity spot index is falling 3.2% today.
- Blackstone Group LP(BX) moved up its $4.75 billion IPO to this week, signaling strong investor demand for the shares.
- BC Partners, a London-based buyout firm, agreed to buy Intelsat Ltd., the world’s largest commercial-satellite operator, for $5.03 billion to profit from growing demand for high-definition television broadcasts and video-conferencing.
- Shares of Expedia Inc.(EXPE), the world’s largest Internet travel agency, rallied the most since the company went public after it announced plans to buy 42% of its common stock for $3.5 billion.
- US 10-year Treasuries are rising for a third consecutive day, their longest rally since April, after a government report showed builders broke ground on fewer homes last month and agricultural commodity prices fell. The 10-year yield is down 24 basis points in 5 trading days.
- GE(GE) and Pearson Plc, weighing a bid for Dow Jones(DJ), may struggle both to top a $5 billion offer from Rupert Murdoch’s News Corp. and to agree on a proposed structure for the combined business.
- Home Depot(HD) agreed to sell its contractor-supplies unit to three buyout firms for more than $10 billion.
- Boeing co.(BA) won an $8.8 billion order for 63 airliners from International Lease Finance Corp.

Wall Street Journal:
- Delta Air Lines may buy as many as 125 of Boeing’s(BA) new 787 jetliners before end of this year.
- The Center for Audit Quality, a US accounting group, came out in support of proposals that would require companies to stop providing analysts with quarterly earnings guidance and to link executive pay with long-term corporate growth.
- Big US companies are now carrying a total of $764 billion in excess working capital due to inefficient bill collection and supplier payments, citing a Hackett-REL survey.
- A SEC meeting today about mutual bunds’ 12b-1 fees, receipts from which are used to compensate intermediaries such as brokers, is likely to turn into a review of funds’ distribution channels in general.

NY Times:
- Each of the 24 types of toys recalled over safety concerns this year in the US was made in China, raising concerns among consumer advocates and others.
- IBM(IBM) plans to introduce a high-performance computer system that provides fast data handling and analysis for business and science information.

NY Post:
- Blackstone Group LP will present to creditors a plan to save a Bear Stearns Cos.(BSC) hedge fund that likely includes a cash infusion and a margin call moratorium.

Financial Times:
- Foreigners have been boosting their investments in Japanese stocks, but they may not end up happy with their investment, the “Lex” column said. By the end of March, foreigners had accumulated a record 28% of Japanese shares.

Kommersant:
- Russia is preparing to deliver fighter jets to Syria after halting weapons deliveries to the Middle East during last year’s conflict between Israel and Lebanon. Iran is financing the purchase.

South China Morning Post:
- Beijing Perfect World Co. plans an IPO on the Nasdaq Stock Exchange(NDAQ) by as early as next month.

Sarmayeh:
- Iran will grant a $268.5 million loan to Cuba, citing Iranian Ministry of Industries and Mines. The two countries also recently signed cooperation agreements on agriculture projects, construction of dams and the delivery of spare parts for industrial machines.

Gulf News:
- United Arab Emirates’ cement production capacity will rise to 50 million tons per year by 2009, almost 300% higher than forecasted demand, citing a government official.

Homebuilding Permits Rise More Than Estimates

- Housing Starts for May fell to 1474K versus estimates of 1472K and 1506K in April.

- Building Permits for May rose to 1501K versus estimates of 1473K and 1457K in April.

BOTTOM LINE: Housing starts in the US fell in May, signaling the slump in home construction will continue to depress growth, Bloomberg reported. Housing starts are down 24% from May of last year. Starts fell 20% in the West and 1.6% in the South. Start rose 16% in both the Northeast and Midwest. The share of total mortgages entering foreclosure increased slightly to .58% in the first quarter from .54% in the fourth quarter. Starts will remain muted until further inventory reduction occurs. I continue to believe home sales are stabilizing at relatively high levels by historic standards.

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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
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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%

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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.