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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Is Israel the new South Africa? A determined group of British academics thinks it might be. They couldn’t be more wrong.
- PetroChina Co., the country’s biggest oil company, plans to sell as many as 4 billion shares in Shanghai, which may raise $5.6 billion, based on the company’s share price in Hong Kong.
- Microsoft Corp.(MSFT) reached an agreement with state and federal antitrust officials to make competing desktop search programs run more easily through the software maker’s Windows Vista operating system.
- New Zealand’s Finance Minister Michael Cullen said there’s a risk of a “significant downturn” in housing after the central bank raised its benchmark interest rate to a record to cool demand.
- The Bank of Japan’s policy board retained its commitment to gradually raise the country’s interest rates, the lowest among major economies, according to the minutes published today in Tokyo.
- China’s annual inflation rate may climb to about 3.3% in 2007 from a year earlier, citing a government agency.

Wall Street Journal:
- Iraq will ask China to invest in the Middle East nation’s oil fields in a visit by Iraqi President Jalal Talabani to Beijing.

AP:
- North Carolina lawmakers passed a bill that would allow Governor Mike Easley to immediately remove suspended Durham County District Attorney Mike Nifong from office.

London-based Times:
- News Corp.(NWS/A) discussed swapping its Internet social-network unit, MySpace, with Yahoo!(YHOO) Inc. for a 25% share in the combined group to gain more Net exposure.

Guardian:
- China has passed the United States to become the world’s biggest producer of carbon dioxide, figures released yesterday reveal, citing the Netherlands Environmental Assessment Agency.

Shanghai Securities News:
- China Vanke Co. Chairman Wang Shi said bubbles in the country’s property market will burst in two to three years, or earlier. Vanke is the country’s largest publicly traded real estate developer.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (BBY), target lowered to $57.
- We continue to expect record natural gas storage levels by the end of the 2007 injection season. We expect ending inventory this year to be 3,617 Bcf, 5% above last year’s record of 3,461 Bcf and 1% above our prior estimates. Higher storage vs. previous estimates is due to our reduced industrial demand forecast.

Night Trading
Asian Indices are unch. to +.75% on average.
S&P 500 indicated +.01%.
NASDAQ 100 indicated -.03%.

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Earnings of Note
Company/EPS Estimate
- (KMX)/.30
- (CC)/-.32
- (CMC)/.79
- (CMVT)/.17
- (FDX)/1.97
- (MS)/2.00
- (SONC)/.31

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

Economic Releases
10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -50,000 barrels versus an 87,000 barrel build the prior week. Gasoline supplies are estimated to rise by 1,190,000 barrels versus a 3,000 barrel rise the prior week. Distillate inventories are expected to increase by 870,000 barrels versus a 287,000 barrel gain the prior week. Finally, Refinery Utilization is expected to rise by .75% versus a -.40% decline the prior week.

Other Potential Market Movers
- The Fed's Geithner speaking, Fed's Fisher speaking, Fed's Yellen speaking, weekly MBA Mortgage Applications report, (NVDA) analyst meeting, (MDT) analyst meeting, Jeffries Financial Services Conference, NXTcomm 2007, William Blair Growth Stock Conference and Merrill Lynch Financial Services Conference could also impact trading today.

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

Stocks Finish Slightly Higher as 10-year Yield Plunges 24 Basis Ponints in 5 Trading Days

Indices
S&P 500 1,533.70 +.17%
DJIA 13,635.42 +.16%
NASDAQ 2,626.76 +.01%
Russell 2000 848.34 +.24%
Wilshire 5000 15,451.28 +.18%
Russell 1000 Growth 605.19 +.11%
Russell 1000 Value 879.84 +.22%
Morgan Stanley Consumer 738.11 -.17%
Morgan Stanley Cyclical 1,089.29 -.07%
Morgan Stanley Technology 624.56 -.20%
Transports 5,132.50 -.06%
Utilities 503.10 +.06%
MSCI Emerging Markets 132.50 +.14%

Sentiment/Internals
Total Put/Call .87 -4.40%
NYSE Arms 1.09 -4.37%
Volatility(VIX) 12.85 -4.25%
ISE Sentiment 151.0 +6.3%

Futures Spot Prices
Crude Oil 69.09 unch.
Reformulated Gasoline 223.65 -1.23%
Natural Gas 7.53 -2.16%
Heating Oil 202.50 -.45%
Gold 664.50 +.70%
Base Metals 252.61 -2.83%
Copper 341.30 -.20%

Economy
10-year US Treasury Yield 5.08% -5 basis points
US Dollar 82.54 -.21%
CRB Index 317.82 -.96%

Leading Sectors
Airlines +2.08%
Disk Drives +1.89%
Networking +.62%

Lagging Sectors
Energy -.19%
Retail -.40%
Semis -.60%

Evening Review
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Afternoon Recommendations
Piper Jaffray:
- Rated (SPNC) Outperform, target $13.

Oppenheimer:
- Rated (BABY) Buy, target $20.
- Rated (ASVI) Buy, target $26.

RBC:
- Reiterated Outperform on (BBY).

Afternoon/Evening Headlines
Bloomberg:
- Nickel plunged 7.2% today, the most in nine months, on speculation that stainless steel makers will continue to cut use of the metal.
- US Senate lawmakers rejected proposals to increase the production of transportation fuel from coal. The fuel process, known as coal-to-liquids, aims to reduce US consumption of oil by creating diesel from coal. The US has the world’s largest known reserves of coal, according to the EIA, with enough supply for about 236 years at current usage levels.
- Merrill Lynch(MER) will proceed with a plan to sell about $800 million of bonds from a money-losing hedge fund run by Bear Stearns(BSC), a day after delaying a similar auction.
- NYC Mayor Bloomberg said today he would leave the Republican Party and switch his voter registration to independent.
- Most members in a group of US liberal arts colleges plan to stop participating in US News & World Report’s higher-education rankings, saying the magazine’s yearly survey misleads students.
- A US Senate panel approved almost $11 billion in new taxes on oil and natural gas drilling in the Gulf of Mexico.
- General Electric(GE) share surged the most since January 2004 amid expectations that profit from selling commercial jet engines will increase because of plane orders announced this week at the Paris Air Show.
- Home Depot(HD) agreed to sell its contractor-supplies unit to three buyout firms for $10.3 billion and may purchase a record $22.5 billion of its stock. The stock surged 5.4% in after-hours trading.

AP:
- Cerberus Capital Management’s planned purchase of DaimlerChrysler’s(DCX) Chrysler Group has been approved by US antitrust regulators.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my I-banking longs, Biotech longs and (TLT) long. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was mildly positive today as the advance/decline line finished slightly higher, sector performance was mostly positive and volume was about average. Measures of investor anxiety were slightly above average into the close. Today's overall market action was mildly bullish. As the many U.S. stock market "fearleaders" were talking about the probability of a 6% yield on the 10-year due to the runaway inflation they see all around them, the bond was putting in a meaningful bottom. Their scary inflation rhetoric came even as gold was falling, the U.S. dollar was rising, and Treasury Inflation Protected Securities(TIPS) were dropping. The 10-year yield has now plunged 24 basis points in five trading days. Investors should never forget that there has never been a time in U.S. history when this many market participants perceive that they personally benefit from a declining or stagnant U.S. economy and stock market. While bonds are getting overbought short-term, I still suspect we will see 4.75% on the 10-year yield during the third quarter. Natural gas dropped another 1.9% today and continues to trade poorly on little news even as oil has headed higher. As well, the Bloomberg Base Metals spot index is weakening noticeably and getting close to a technical breakdown. Agricultural commodities took a beating today with the Goldman Sachs Agricultural Index Spot falling 3.2%. Meteorlogix is forecasting above-average rain for the Midwest over the next 10 days, which should help newly planted crops. Corn closed down 4.7%, soybeans down 2.9% and wheat down 3.2%. There is also speculation that China will announce plans to restrict ethanol production. I suspect corn has put in place another meaningful top. This could further boost the 10-year as inflation expectations ratchet even lower.

Stocks Slightly Higher into Final Hour as Long-term Rates Continue to Plunge

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Medical longs, I-Banking longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly positive as the advance/decline line is slightly higher, sector performance is mostly positive and volume is about average. A recent JPMorgan client survey shows bullishness on US Treasuries, which some well-known US stock market bears are pointing to as evidence that yields are heading higher. I follow that survey, but don't find it that useful. It showed bullishness on treasuries in September 2003, right before the 10-year yield dropped from 4.47% in mid-October 2003 to 3.68% in mid-March 2004. Moreover, there are many other gauges that show very muted sentiment toward long-term US treasuries. For example, the put/call open interest ratio on the 10-year futures is a very high 1.47, the highest in at least a year. As well, 10-year large specs have trimmed their long positions in half over the last couple of months, while commercial hedgers have cut their short positions in half. I continue to believe that long-term yields have peaked for this year as growth slows again in the third quarter and inflation measures decelerate further before year-end. As well, an emerging markets sell-off could fuel increased demand for U.S. treasuries. Weekly retail sales rose 1.9% this week vs. a 1.7% gain the prior week, however, they remain below average levels. Once again, there are many true growth stocks rising meaningfully today, despite the mixed performance of the major averages. I expect US stocks to trade mixed-to-higher into the close from current levels on falling long-term rates, short-covering and investment manager performance anxiety.

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.