Stocks Reverse Sharply Higher into Final Hour on Diminishing Subprime Angst, Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my I-banking longs, Medical longs, Semi longs, Biotech longs and Base Metal shorts. I covered some of my (EEM) short and all of my (IWM)/(QQQQ) hedges this morning, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, almost every sector is rising and volume is above average. AppleInsider is reporting today that, according to two recent reports, Mac sales are accelerating faster than anticipated across the board. Numerous pundits and analysts attempted to paint a negative picture of Apple (AAPL) back when the stock was around $90 per share on news of the iPhone. These bearish comments, which were hailed as hard-hitting and thorough analysis at the time, rarely mentioned the traction of the Mac or the inferior competition that the iPhone would face. I suspect similar bearish attacks will occur next week in an attempt to paint the iPhone’s release as a flop. I plan to use any material weakness in the shares to add to my long position, which is my second largest, behind Google (GOOG). I continue to believe that even the most optimistic investors are underestimating the company's financial prospects going forward and that the stock still has substantial upside. I expect US stocks to trade modestly higher into the close from current levels on short-covering, diminishing sub-prime angst and bargain-hunting.

Today's Headlines

Bloomberg:
- Goldman Meets Match in Googleplex When Recruiting Graduates.
- Merrill Lynch(MER) CEO O’Neal says subprime mortgage losses are contained.
- White House spokesman Tony Snow said the Bush administration is critical of Democratic legislation that would more than double taxes paid by managers of hedge funds, buyout firms, real estate partnerships and venture capital firms.
- The wealth of the world’s millionaires swelled at the fastest pace in seven years in 2006, led by growth in emerging markets such as China, according to an annual survey by Capgemini SA and Merrill Lynch.
- Lloyd Blankfein, CEO of Goldman Sachs(GS), said “the private equity boom isn’t over” and that “market conditions are quite benign.”
- Corn is falling another 4.1% in Chicago on speculation that rains will revive Midwest crops.
- Oil is rising over $1/bbl. on a fall in gasoline supplies as refinery utilization remains very low for this time of year due to ongoing maintenance “problems” and the cancellation of plans by refiners to increase production capacity by 500,000 barrels per day earlier in the year.
- Apple Inc.(AAPL) is offering easy activation of its new iPhone by using iTunes, which will be critical to a successful introduction of the mobile device, according to American Technology Research analysts.
- Iranians rioted in the streets of Tehran after the government imposed rationing of gasoline, which the country spends $5 billion a year to import.
- Fidelity National Information Services(FIS) agreed to buy rival EFunds(EFD) for about $1.8 billion in cash to bolster its debit-card business.
- CommScope Inc.(CTV), a maker of cable for high-speed services, agreed to buy mobile-phone equipment maker Andrew Corp.(ANDW) for about $2.6 billion.
- China, the world’s biggest producer and consumer of cotton, may reduce imports by 32% this year, pressuring international prices, as a record domestic crop boosts supplies.

Wall Street Journal:
- US Treasury Secretary Henry Paulson will announce today a review of financial-market regulation. Recommendations might include consolidating some overlapping regulatory jurisdictions. Also today, Paulson will probably call for hedge-fund managers to develop voluntary standards for behavior to minimize market risks.
- Wal-Mart Stores(WMT), Home Depot(HD), Best Buy(BBY) and other big-box retailers are putting up clearer signs, adding brighter lights and speeding up checkouts to make shopping less tedious.
- Apple Inc., Nokia Corp., Samsung and other makers of cell phones are increasingly offering wireless Internet access.
- About 17% of the fund managers questioned said US stocks are overrated, the highest percentage in the survey’s three-year history, despite the fact that valuations have fallen substantially over that timeframe, citing a quarterly Russell Investment Group survey.
- United Auto Group(UAG) will change its name to Penske Automotive Group next week to tap the name recognition of its CEO and controlling shareholder.
- Amazon.com(AMZN) is increasing services to business Internet usurers, selling digital storage and computing power that could lift sales in 2008 and 2009, citing Deutsche Bank analyst Jeetil Patel.

NY Times:
- Kurdistan’s relative stability compared with the rest of Iraq has brought it billions of dollars of investment in the past four years.

Dow Jones:
- Carlyle Group may go public after rival buyout firm Blackstone Group’s successful IPO, citing a managing director.

Philadelphia Inquirer:
- Donald Trump’s plan to sell Trump Entertainment Resorts(TRMP), the casino company he controls, to a private-equity partnership has hit snags over the price.

Market News Intl.:
- The European Central Bank hasn’t decided whether to raise interest rates again in September, citing “well-placed monetary sources.”

AppleInsider:
- Mac sales are accelerating faster than anticipated across the board thanks to the iPhone and Leopard, and could even crack the elusive business market that has remained a Windows sanctuary, according to a pair of new reports.

CNBC:
- The Chinese government has shut down 180 food manufacturers after a probe found industrial chemicals and additives in their products.

Frankfurter Allgemeine Zeitung:
- Germany’s government wants to increase energy efficiency and lower the use of electricity, oil and gas by increasing subsidies to meet a goal to cut emissions in 2020 by 40% from 1990’s level.

People’s Daily:
- Cuba will help Nigeria develop technology to produce ethanol from sugar cane, citing Elio Olivia, the Cuban ambassador to Nigeria.

Durable Goods Orders Fall in May after Large April Upward Revision

- Durable Goods Orders for May fell 2.8% versus estimates of a 1% decline and an upwardly revised 1.1% gain in April.

- Durables Ex Transports for May fell 1% versus estimates of a .2% gain and an upwardly revised 2.5% increase in April.

BOTTOM LINE: Orders for US durable goods fell more than forecast in May, Bloomberg reported. The decline was spurred by fewer orders for aircraft, metals and machinery. May’s decline wasn’t a big surprise considering the prior two months’ gains were the best since August/September 2005. Total orders have never been up for four consecutive months since record-keeping began in 1992. Non-defense capital goods orders ex aircraft, a gauge of future business spending, fell 3% after a 2.3% surge the prior month. Unfilled orders for those goods rose .6%. Manufacturers had a 1.46 months’ supply of durable goods on hand at the current sales pace in May, unchanged from April. I continue to believe manufacturing will help boost US economic growth back to 3+% this quarter on inventory rebuilding and a subsiding of auto production cutbacks.

Links of Interest

Market Snapshot Commentary
Market Performance Summary

Style Performance
WSJ Data Center
Top 20 Biz Stories
Movers & Shakers
Upgrades/Downgrades
In Play
Today in IBD
NYSE Unusual Volume
NASDAQ Unusual Volume
Hot Spots
Option Dragon
NASDAQ 100 Heatmap
DJIA Quick Charts
Chart Toppers
Intraday Chart/Quote
Dow Jones Hedge Fund Indexes

Wednesday Watch

Late-Night Headlines
Bloomberg:
- General Motors’(GM) Cadillac luxury-vehicle division is considering hybrid versions of all its models.
- A unit of General Electric(GE), the world’s biggest maker of power generators, will invest in three windparks in New York State, its first wind energy investment there.
- Shares of Cameco Corp.(CCJ), the world’s largest uranium producer, fell the most in eight months on concern that the price of uranium has peaked.
- Countrywide Financial Corp.(CFC) called “unfounded” market speculation that the company was the subject of raids by federal authorities.
- North Korea is “committed” to scrapping its nuclear program and is “positive” about its relations with the US and the international community, a group of European Union lawmakers told reporters in Seoul today.
- Japan’s retail sales unexpectedly rose for the first time in eight months, signaling spending by consumers may drive second-quarter economic growth.

Wall Street Journal:
- Apple’s iPhone is a breakthrough smart phone with some flaws, according to a review by Walter S. Mossberg. The “simply beautiful” handheld computer, set to go on sale June 29, offers the “best Web browser,” the biggest and highest-resolution screen and better battery life than key competitors, according to the review, also written by Katherine Boehret.

Late Buy/Sell Recommendations
Citigroup:
- (TSO) and (VLO) are downgraded to Sell and (SUN) is lowered to Hold. We are lowering ratings across the board for the US refiners. Valuations have moved within striking distance of levels we believe take full account of structural changes that have underpinned our positive view since early 2007. But from here the balance of risk has moved to the downside. Share price appreciation has benefited from a number of transitory factors that have inflated earnings expectations beyond levels we believe can reasonably be viewed as repeatable.
- Reiterated Buy on (NKE), target $65.

Morgan Stanley:
- Reiterated Outperform on (ORCL), target $24.

Night Trading
Asian Indices are -1.0% to -.25% on average.
S&P 500 indicated -.09%.
NASDAQ 100 indicated -.10%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Pre-market Stock Quote/Chart
Before the Bell CNBC Video(bottom right)
Global Commentary
WSJ Intl Markets Performance
Commodity Movers
Top 25 Stories
Top 20 Business Stories
Today in IBD
In Play
Bond Ticker
Economic Preview/Calendar
Daily Stock Events
Macro Calls
Upgrades/Downgrades
Rasmussen Business/Economy Polling
CNBC Guest Schedule

Earnings of Note
Company/EPS Estimate
- (ATML)/.03
- (BBBY)/.37
- (CKR)/.27
- (CAG)/.31
- (GY)/-.04
- (MLHR)/.49
- (MKC)/.33
- (PKE)/.41
- (PAYX)/.36
- (RHT)/.15
- (SMOD)/.22
- (SMSC)/.25
- (TBL)/.15
- (XRTX)/.14

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

Economic Releases
8:30 am EST
- Durable Goods Orders for May are estimated to fall -1.0% versus a .8% gain in April.
- Durables Ex Transports for May are estimated to rise .2% versus a 1.9% increase in April.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil build of 1,500,000 barrels versus a 6,902,000 barrel build the prior week. Gasoline supplies are estimated to rise by 1,000,000 barrels versus a 1,791,000 barrel increase the prior week. Distillate inventories are expected to rise by 500,000 barrels versus a 157,000 barrel build the prior week. Finally, Refinery Utilization is expected to rise by .83% versus a -1.63% decline the prior week.

Other Potential Market Movers
- The weekly MBA Mortgage Applications report, (LUV) analyst meeting, Wachovia CEO Summit and Jeffries Healthcare Conference could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by automaker 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 75% net long heading into the day.

Stocks Finish Slightly Lower on Weakness in Commodity Stocks and Lingering Housing Worries

Indices
S&P 500 1,492.89 -.32%
DJIA 13,337.66 -.11%
NASDAQ 2,574.16 -.11%
Russell 2000 826.13 -.16%
Wilshire 5000 15,043.04 -.34%
Russell 1000 Growth 590.79 -.32%
Russell 1000 Value 851.68 -.40%
Morgan Stanley Consumer 726.53 +.09%
Morgan Stanley Cyclical 1,063.97 -1.05%
Morgan Stanley Technology 617.93 -.24%
Transports 5,076.57 -.94%
Utilities 487.84 -.13%
MSCI Emerging Markets 129.99 -.35%

Sentiment/Internals
Total Put/Call 1.08 -2.70%
NYSE Arms 1.24 -7.51%
Volatility(VIX) 18.89 +13.45%
ISE Sentiment 143.0 +8.33%

Futures Spot Prices
Crude Oil 67.94 -1.79%
Reformulated Gasoline 224.89 -2.33%
Natural Gas 6.85 -1.27%
Heating Oil 199.71 -2.22%
Gold 644.30 -1.59%
Base Metals 252.70 +1.82%
Copper 332.85 -2.05%

Economy
10-year US Treasury Yield 5.08% unch.
US Dollar 82.32 unch.
CRB Index 310.73 -.80%

Leading Sectors
Internet +1.53%
Drugs +.86%
Restaurants +.64%

Lagging Sectors
Oil Service -1.85%
Steel -1.93%
Gold -2.64%

Evening Review
Market Performance Summary
Market Gauges
ETF Performance
Style Performance
Market Wrap CNBC Video(bottom right)
S&P 500 Gallery View
Economic Calendar
Timely Economic Charts
GuruFocus.com
PM Market Call
After-hours Movers
After-hours Stock Quote
In Play

Afternoon Recommendations
Deutsche Bank:
- Rated (RYL) Buy, target $52.

Citigroup:
- Reiterated Buy on (MO).

Afternoon/Evening Headlines
Bloomberg:
- Bear Stearns(BSC) probably won’t bail out the second of its money-losing hedge funds, Merrill Lynch(MER) analyst Guy Moszkowski said, a day after sounding the alarm that investors couldn’t “rule out” such a rescue.
- Bear Stearns(BSC) said it will put up $1.6 billion to rescue one of its money-losing hedge funds, half as much as it offered last week, after raising additional money through asset sales.
- NY harbor conventional gasoline’s discount to futures widened for a second day and reformulated gasoline’s premium declined as traders may be anticipating lower prices next month.
- The Intl. Monetary Fund said it will consider whether to sell gold and invest the proceeds in interest-bearing accounts during a board meeting next month.
- The SEC has undertaken about a dozen probes involving collateralized loans, Chairman Christopher Cox said.
- US steel stocks fell after Arcelor Mittal, the world’s biggest steelmaker, was downgraded by Merrill Lynch(MER) to neutral on concern that steel prices may decline.
- US steel imports reached the highest this year in May as countries including China and South Korea exported more of the metal, an industry group said. Chinese imports were 85% higher than a month earlier, the group said. “The surge in steel imports from China to over 500,000 net tons in May, which equates to an annualized rate in excess of 6 million tons, is of particular concern to domestic steel producers,” Andrew Sharkey, CEO of the institute said.
- Oracle Corp.(ORCL) said fourth-quarter profit rose 23%, beating analysts’ estimates, buoyed by database sales and recent acquisitions. The stocks is rising .23 to $19.39 in after-hours trading.
- Nike Inc.(NKE) said fourth quarter profit climbed 32% on a weaker dollar and increased US clothing and equipment sales. The stock is surging 5.2% in after-hours trading.
- Apple’s(AAPL) iPhone already has people lining up at two Apple stores in New York, four days before the device is scheduled to be released.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Internet longs, Medical longs and Commodity shorts. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was slightly negative today as the advance/decline line finished mildly lower, sector performance was mostly negative and volume was above average. Measures of investor anxiety were high into the close. Today's overall market action was mildly bearish. Cyclicals undperformed meaningfully today as commodity-related stocks (-1.75% to -3.25%) remained under significant pressure for the second day in a row. The two main sources of inflation over the last few years have been commodities and housing. While a significant hurricane could temporarily send energy prices higher, I suspect almost every commodity has already seen its highs for the year. This should help spur another substantial deceleration in inflation readings during the third quarter. I still believe that the 10-year yield has peaked for the year, as well. Google (GOOG) continues to trade very well. The stock looks like it is coiling before another surge higher. It remains my largest equity long position. According to sentimenTrader.com, the All-Index, All-Product Dollar-Weighted Stochastic is now at an extreme level that is normally associated with meaningful market bottoms. At 90.9, this chart shows that it is at the extremes it hit during the trough of the February/March pullback. Readings at 80 or above are historically followed by a 13.6% gain in the S&P 500 89% of the time on average over the next 12 months.