Tuesday Watch

Late-Night Headlines
Bloomberg:
- What Bubble? China’s Stock Pickers Are More Bullish Than Ever. Analysts who cover Chinese companies, such as steel analyst Zhang Shibao of China Merchants Securities, are the most bullish they’ve been at any time in the past decade. “We are still in the middle of the bull market and the uptrend is irreversible,” said Zhang. By contrast, analysts in the US have never been so bearish.
- The use of heroin, cocaine and other illegal drugs has been “contained,” the UN said in a report that documents a leveling off in the global supply and demand for narcotics. “The runaway train of drug addiction is being slowed down,” Antonio Maria Costa, executive director of the Vienna-based UN Office on Drugs and Crime, said in a statement.
- Shares of China Cosco Holdings, Asia’s largest container line, as much as doubled on their Shanghai trading debut after the company’s $1.98 billion stock sale attracted record demand.

Financial News:
- Larger hedge fund managers seek independence from prime brokers.

GlobeSt.com:
- The Las Vegas City Council approved plans for a $9.5 billion casino and retail development project on 85 acres of land near the Las Vegas Strip.

Automotive News:
- General Motors(GM) is combining advertising for its Buick, Pontiac and GMC brands within the Leo Burnett advertising agency.

London-based Times:
- The SEC and the UK Financial Services Authority plan to collaborate more closely in order to tackle insider trading, citing Linda Thomsen, the SEC’s head of enforcement.
- Citadel Investment Group LLC may be the next hedge fund to reveal plans for a listing.

Commercial Times:
- Quanta Computer Inc. will likely deliver more than seven million laptop computers to its clients in the current quarter, fueled by rising demand for Apple Inc.(AAPL) Macbooks.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (ADM), target $44.
- Reiterated Buy on (SNDK), target $52.

Night Trading
Asian Indices are -.75% to unch. on average.
S&P 500 indicated -.09%.
NASDAQ 100 indicated -.18%.

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Earnings of Note
Company/EPS Estimate
- (APOG)/.22
- (FUL)/.40
- (KR)/.48
- (NKE)/.86
- (ORCL)/.34
- (SCS)/.20
- (SRR)/.38

Upcoming Splits
- (CCF) 2-for-1
- (SPAR) 3-for-2
- (VSEC) 2-for-1
- (FLO) 3-for-2

Economic Releases
10:00 am EST
- New Home Sales for May are estimated to fall to 922K versus 981K in April.
- Consumer Confidence for June is estimated to fall to 105.0 versus a reading of 108.0 in May.

Other Potential Market Movers
- The Fed’s Moskow speaking, Richmond Fed Manufacturing Index, Wachovia Equity Conference, (EYE) Conference Call, (FEIC) Analyst Meeting and Jeffries Healthcare Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by automaker and technology stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Finish Mildly Lower on Lingering Hedge Fund Worries

Indices
S&P 500 1,497.74 -.32%
DJIA 13,352.05 -.06%
NASDAQ 2,577.08 -.46%
Russell 2000 827.46 -.87%
Wilshire 5000 15,094.40 -.43%
Russell 1000 Growth 592.71 -.45%
Russell 1000 Value 855.11 -.33%
Morgan Stanley Consumer 725.87 -.03%
Morgan Stanley Cyclical 1,075.28 -.70%
Morgan Stanley Technology 619.42 -.65%
Transports 5,124.84 +.33%
Utilities 488.49 +.64%
MSCI Emerging Markets 130.45 -.91%

Sentiment/Internals
Total Put/Call 1.11 +7.77%
NYSE Arms 1.34 +53.25%
Volatility(VIX) 16.65 +5.71%
ISE Sentiment 132.0 +3.94%

Futures Spot Prices
Crude Oil 69.15 unch.
Reformulated Gasoline 229.89 +.54%
Natural Gas 6.93 -2.73%
Heating Oil 204.10 +.15%
Gold 653.80 -.49%
Base Metals 248.18 -1.29%
Copper 337.70 -.19%

Economy
10-year US Treasury Yield 5.08% -5 basis points
US Dollar 82.35 +.02%
CRB Index 313.24 -.48%

Leading Sectors
Restaurants +.77%
Utilities +.64%
Telecom +.15%

Lagging Sectors
Gold -1.91%
Coal -2.31%
Oil Service -2.36%

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Afternoon Recommendations
Oppenheimer:
- Rated (GOOG) Buy, target $625.
- Rated (VCLK) Buy, target $36.
- Rated (YHOO) Buy, target $34.

Bank of America:
- Rated (JEF) Buy, target $34.

American Technology Research:
- Reiterated Buy on (ORCL).

Afternoon/Evening Headlines
Bloomberg:
- Bear Stearns(BSC) may put up only $1.6 billion to rescue one of its money-losing hedge funds, half as much as it offered last week. The size of the bailout dropped after the Bear Stearns High-Grade Structured Credit Fund found buyers for some assets and creditors sold others.
- The average US pump price for regular gasoline fell 2.7 cents to $2.98 a galloon in the week ended today, the government said.
- Natural gas in NY fell for a sixth consecutive session, closing at a three-month low, on forecasts for mild weather in key demand areas and near record supplies in storage.
- Roche Holding AG, the world’s biggest maker of diagnostic tests, offered to buy Ventana Medical Systems(VMSI) for about $3 billion as part of a push into wider use of screening to match patients with drugs. The stock soared 52% in after-hours trading.
- The SEC has made it easier for investors to find out whether companies do business in nations identified as supporting terrorism. The SEC said it’s added a search tool to its Web site that lets shareholders search annual reports for “business interests in countries the US Secretary of State has designated state sponsors of terrorism.”
- US Treasuries extended a week-long advance fueled by concern hedge fund losses on bets linked to subprime mortgages will become more widespread and falling commodity prices.

Business Week:
- The SEC opened a preliminary probe into why Bear Stearns(BSC) restated one of its failing hedge funds’ April losses.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my I-banking longs and Semi longs. I added to my (EEM) short and added (IWM)/(QQQQ) hedges in the final hour, thus leaving the Portfolio 75% 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 above average. Measures of investor anxiety were above average into the close. Today's overall market action was mildly bearish. Uncertainty over the ramifications of the housing downturn continues to allow the many market bears to paint a worst-case scenario for U.S. equities and the economy. There remains little evidence that these real estate-related issues are having an overall negative impact on the broad economy, but in the U.S. negativity bubble, the worst is always assumed and promptly priced in. Another meaningful push higher in U.S. stocks will likely commence as the 10-year yield falls back below 5% and the Broker/Dealer Index stabilizes. I suspect this will begin to happen over the coming weeks. Natural gas fell another 2.7% and broke below $7 for the first time since the beginning of the year. As well, the Bloomberg Base Metals Spot Index fell another 1.3% today and is poised to test its 200-day moving average. Furthermore, corn fell another 2.7% today and is breaking below its 200-day moving average for the first time since first quarter 2006. The Goldman Sachs Agricultural Commodity Sub-Index is down about 6% in the last week. It is also noteworthy that today's worst-performing equity sector was oil service, notwithstanding the afternoon rise in the price of oil. In my opinion, the oil service sector is the most loved and most over-owned sector in the entire market and poses the greatest risk to investors through year-end.

Stocks Lower into Final Hour on Hedge Fund Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my I-Banking longs and Semi longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, sector performance is negative and volume is above average. The NYSE reported that short interest on the exchange, from mid-May through mid-June, rose from 11.747 trillion shares to 12.747 billion shares, which is yet another all-time high. Moreover, this 8.51% increase leaves NYSE short interest up an astounding 30% since mid-February, the largest four-month percentage jump since at least 1991 when Bloomberg began tracking. This is even more shocking considering the S&P 500 rose about 6% during that period as the DJIA was hitting one record after another. The largest overall short on the NYSE remains the iShares Russell 2000 Index (IWM) at 290,557,518 shares, up from 237,133,225 shares the prior month. Moreover, short interest on the American Stock Exchange has exploded a mind-boggling 46% over the last four months. This is just more evidence that the many US stock market bears remain stunningly complacent and continue to party like it's 2000-2003, despite the S&P 500's 104% gain from that periods' lows. I continue to believe the current "U.S. negativity bubble" will eventually burst, thus spurring the "mother of all short-covering rallies."

Here are the 25 NYSE stocks with the largest percentage increase in their short interest relative to their float from mid-May through mid-June:

1. Citadel Broadcasting Corporation (CDL) +32.9%
2. Total System Services (TSS) +21.3%
3. National Semiconductor (NSM) +13.8%
4. Greenhill & Company (GHL) +11.8%
5. Cal Dive International (DVR) +11.8%
6. TOUSA (TOA) +10.8%
7. Mueller Water Products (MWA) +10.4%
8. The Great Atlantic & Pacific Tea Company (GAP) +10.1%
9. American Oriental Bioengineering (AOB) +9.2%
10. Federal Agricultural Mortgage (AGM) +9.2%
11. Luminent Mortgage Capital (LUM) +8.5%
12. CNA Financial (CNA) +8.4%
13. Nymex Holdings (NMX) +7.3%
14. eFunds (EFD) +7.0%
15. LeapFrog Enterprises (LF) +7.0%
16. Under Armour (UA) +6.7%
17. Medifast (MED) +6.6%
18. Retail Ventures (RVI) +6.1%
19. CACI International (CAI) +6.0%
20. SWS Group (SWS) +5.6%
21. Pinnacle West Capital (PNW) +5.6%
22. Live Nation (LYV) +5.0%
23. Diamond Offshore Drilling (DO) +4.9%
24. RadioShack (RSH) +4.8%
25. Navigant Consulting (NCI) +4.8%

I expect US stocks to trade modestly higher into the close from current levels on lower long-term rates, short-covering and bargain-hunting.

Today's Headlines

Bloomberg:
- Venezuelan President Hugo Chavez said that he will discuss the purchase of eight Russian submarines when he meets President Vladimir Putin this week.
- The US natural gas market lacks sufficient oversight and Congress needs to close a federal loophole that allowed Amaranth Advisors LLC to evade regulators in the biggest-ever hedge fund collapse, Senator Carl Levin said.
- Coffee fell 3.7%, the most since October, in NY as mild temperatures and dry weather ease concern that crops may be damaged in Brazil, the world’s largest producer.
- Corn is falling another 2.7% and is breaking below its 200-day moving average for the first time since 1Q 2006.
- General Motors(GM) shares rose as much as 3.9% after Goldman Sachs(GS) rated the stock a “buy,” saying the United Auto Workers union may offer larger concessions than expected to the biggest US automaker.
- Robert Zoellick, a former US trade representative, was approved as president of the World Bank to replace Paul Wolfowitz, who resigned last month.
- Bear Stearns(BSC) may have to salvage the second of its two teetering hedge funds after offering $3.2 billion last week to bail out the first one, Merrill Lynch said.
- Berkshire Hathaway(BRK/A) Chairman Warren Buffett, the billionaire investor who pledged most of his fortune to charity last year, predicted the world will become increasingly philanthropic as the wealthy donate more of their assets.
- The 10-year yield is falling another 6 basis points as investors buy US treasuries on lingering worries over the subprime mortgage market and falling commodity prices.
- Emerging-market stocks aren’t worth the risk as the shares become expensive and the returns associated with owning the more volatile assets fade, according to Lehman Brothers(LEH).

Wall Street Journal:
- The European Union may offer China designation as a “market economy” to gain concessions it believes are needed to balance their trading relationship. The status would be a declaration that the country has limited state aid and banned monopolies.
- Dobson Communications(DCEL), an Oklahoma City-based mobile-phone company, is considering options including a sale.
- Tyson Foods(TSN) and Syntroleum Corp.(SYNM) may say today that they’ll build a $150 million plant to take fat from Tyson’s agricultural processing activities and turn it into liquid fuel.
- US hospitals want to hire managers with factory experience, to raise efficiency as they grow bigger and harder to run.

Alpha:
- Europe’s 50 biggest hedge funds manage more than $300 billion, an increase of more than 50% on September 2005, according to a ranking of the region’s top hedge fund managers.

NY Times:
- Hollywood movie studios are looking for ways to take advantage of Apple Inc.’s(AAPL) introduction of the iPhone, as it could create a larger market for videos playable on mobile devices.
- National Lampoon Inc. will release its first film in 18 years as the company tries to revitalize frat-boy humor through its college cable television network.

Philadelphia Inquirer:
- Donald Trump, chairman and president of Trump Entertainment Resorts(TRMP), may announce this week he is selling the casino company.

USA Today:
- The number of US Roman Catholics increased to 64.6 million last year from 63.9 million in 2005, citing the newest Official Catholic Directory.

Broadcasting & Cable:
- US television networks completed negotiations for the September season with advertising sales of about $9.1 billion, an increase of about 1% from last year.

Financial Times:
- Reforms to corporate governance that increase shareholder rights threaten to destroy value for bond investors, citing a report by Moody’s(MCO) Investors Service.

AFP:
- Michel Gaudin, who overseas security and the police in Paris, told a town council meeting today that the capital city is on the “front line” for terrorism risks and is “vastly under-equipped.”

Handelsblatt:
- Sony Corp.’s(SNE) Sony Pictures will consider buying an Internet company if a “good opportunity” arises, citing Sony Pictures CEO Lynton.

El Universal:
- Mexico’s government fired all of its 34 federal police state chiefs to fight corruption.

The Standard:
- The China Banking Regulatory Commission will ease restrictions on investing overseas.

Existing Home Sales Better-Than-Expected

- Existing Home Sales for May fell to 5.99M versus estimates of 5.97M and an upwardly revised 6.01M in April.

BOTTOM LINE: Sales of previously owned homes in the US fell less-than-expected in May and April sales were revised slightly higher, Bloomberg reported. The supply of existing homes at the current sales pace rose to 8.9 months’ worth versus 8.4 months’ worth at the end of the prior month. The median price of an existing home fell slightly to $223,700. Sales of condos and co-ops rose 2.6%. Overall, purchases fell 3.4% in the South and .8% in the West. Sales rose 5.8% in the Northeast and .7% in the Midwest. The Fed’s Bernanke recently reiterated his view that the US economy was poised for a moderate rate of growth despite ongoing softness in housing. I continue to believe home sales are stabilizing at relatively high levels by historic standards. However, construction activity will continue to remain muted as homebuilders work down inventories.

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