Thursday Watch

Late-Night Headlines
Bloomberg:
- Apple Inc.'s campaign to build excitement about its iPhone may be the most successful marketing effort ever, surpassing the drive to promote Ford Motor Co.'s 1964 Mustang and Microsoft Corp.'s Windows 95.
- CryoCor Inc.(CRYO) won the backing of US advisers for its experimental device to treat a type of irregular heartbeat, moving the product a step closer to approval more than a year after regulators rejected it.
- UBS AG, Europe’s largest bank by assets, was accused by Massachusetts regulators of “dishonest and unethical” practices in dealings with hedge-fund advisers.
- The yen fell from a two-week high against the US dollar and euro on speculation investors resumed sales of the currency in search of higher returns elsewhere.
- Japan’s industrial production unexpectedly dropped for third month in May, the longest losing streak in almost two years, raising concern that the world’s second-largest economy is slowing.
- The fate of US immigration legislation was cast into doubt when at least six senators who helped revive the proposed overhaul said they either oppose or are leaning against a move to permit a vote on final passage.

Financial Times:
- Motorola(MOT) is worried about the effect of Apple’s(AAPL) iPhone but believes the device has weaknesses, citing an interview with Padmasree Warrior, Motorola’s chief technology officer.
- Signs emerged on Wednesday that efforts by federal officials to tackle the competitiveness of the US capital markets are speeding up.
- Ten international banks, including HSBC and Standard Charter, have been punished by China’s foreign exchange regulator for breaching strict capital controls by helping to funnel huge amounts of foreign exchange into the country’s soaring stock and property markets.
- Iran’s parliament on Wednesday night agreed to press ahead with plans to introduce fuel rationing in the face of panic and rioting across the country over the proposals.

Late Buy/Sell Recommendations
Citigroup:
- We strongly recommend investors take advantage of current weakness to add to their (ABK, target $103) and (MBI, target $74) positions. Valuations are neat the trough, yet market conditions for new business are the most attractive they have been since 2003 as spreads are finally widening.
- Reiterated Buy on (JCI), target raised to $131.

Night Trading
Asian Indices are +.25% to +1.0% on average.
S&P 500 indicated +.05%.
NASDAQ 100 indicated +.12%.

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Earnings of Note
Company/EPS Estimate
- (COMS)/.02
- (ACN)/.55
- (APOL)/.71
- (ARRO)/.37
- (BMET)/.48
- (BBOX)/.61
- (CBK)/.30
- (STZ)/.15
- (FDO)/.41
- (FINL)/-.10
- (GIS)/.63
- (KBH)/.26
- (MU)/-.24
- (MON)/1.00
- (TONS)/.98
- (PALM)/.14
- (RAD)/.00
- (RBN)/.59
- (SLR)/.05
- (TIBX)/.02
- (WOR)/.36

Upcoming Splits
- (FLO) 3-for-2

Economic Releases
8:30 am EST
- Final 1Q GDP is estimated to rise .8% versus prior estimates of .6% increase.
- Final 1Q Personal Consumption is estimated to rise 4.4% versus prior estimates of a 4.4% increase.
- Final 1Q GDP Price Index is estimated to rise 4.0% versus prior estimates of a 4.0% gain.
- Final 1Q Core PCE QoQ is estimated to rise 2.2% versus prior estimates of a 2.2% gain.
- Initial Jobless Claims for last week are estimated to fall to 315K versus 324K the prior week.
- Continuing Claims are estimated to fall to 2500K versus 2523K prior.

2:15 pm EST
- The FOMC is expected to leave the benchmark Fed Funds rate at 5.25%.

Other Potential Market Movers
- The Wachovia CEO Summit, RBC Energy Infrastructure/Trust Conference and Jeffries Healthcare Conference could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by automaker and energy 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 Sharply Higher on Diminishing Sub-Prime Worries and Short-Covering

Indices
S&P 500 1,506.34 +.90%
DJIA 13,427.73 +.68%
NASDAQ 2,605.35 +1.21%
Russell 2000 838.46 +1.49%
Wilshire 5000 15,187.08 +.96%
Russell 1000 Growth 596.72 +1.0%
Russell 1000 Value 858.88 +.85%
Morgan Stanley Consumer 730.23 +.51%
Morgan Stanley Cyclical 1,072.66 +.82%
Morgan Stanley Technology 625.94 +1.30%
Transports 5,129.77 +1.05%
Utilities 496.11 +1.70%
MSCI Emerging Markets 130.21 +.16%

Sentiment/Internals
Total Put/Call 1.05 -2.78%
NYSE Arms .72 -41.42%
Volatility(VIX) 15.53 -17.79%
ISE Sentiment 116.0 -15.94%

Futures Spot Prices
Crude Oil 69.01 +1.83%
Reformulated Gasoline 225.46 +.34%
Natural Gas 6.93 +.76%
Heating Oil 202.51 +1.60%
Gold 645.80 +.08%
Base Metals 246.31 -2.53%
Copper 335.25 +1.09%

Economy
10-year US Treasury Yield 5.08% unch.
US Dollar 82.32 +.03%
CRB Index 312.30 +.51%

Leading Sectors
Biotech +2.20%
REITs +2.08%
Alternative Energy +2.12%

Lagging Sectors
Insurance +.20%
Gaming +.08%
Hospitals +.05%

Evening Review
Market Performance Summary
WSJ Data Center
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Commodity Movers
Market Wrap CNBC Video(bottom right)
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Timely Economic Charts
GuruFocus.com
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In Play

Afternoon Recommendations
Bank of America:
- Rated (SPR) Buy, target $42.

Oppenheimer:
- Rated (CRWN) Buy, target $9.25.

Afternoon/Evening Headlines
Bloomberg:
- Treasury Secretary Henry Paulson said Congress shouldn’t punish Blackstone Group LP with higher taxes because it became a publicly traded partnership, and he warned against “unintended consequences” of broader efforts to tax hedge funds and buyout firms.
- Merrill Lynch(MER) CEO O’Neal and Goldman Sachs Group(GS) CEO Lloyd Blankfein offered reassurance to investors today, saying they see few risks of widespread turmoil in the credit markets.
- James Glassman, senior US economist at JPMorgan(JPM), sees the Fed “on the sidelines” and the price of oil dropping.
- Corn fell to a six-week low in Chicago on speculation that rains will revive Midwest crops threatened by hot, dry weather earlier this month.
- Sugar fell in NY on renewed speculation that rising Brazilian and Indian production will widen a global glut.
- A Senate panel probing the National Security Agency’s domestic terrorism surveillance program issued subpoenas to the White House, VP Dick Cheney and the Justice Dept. for documents showing the Bush administration’s legal justification for the program.
- Shares of Nike Inc.(NKE), the world’s largest sneaker maker, posted their biggest gain in 4 ½ years after the company said orders for clothing and shoes rose 12%, the most since 1997.
- Shares of ComScore Inc.(SCOR), Data Domain(DDUP) and Spreadtrum Communications(SPRD) soared in their first day of trading as demand for speedier wireless connections and Web content renewed investor appetite for technology stocks.
- Bed Bath & Beyond(BBBY) said first quarter profit rose 4.2% after customers bought less bedding and curtains as US home sales slowed. The stock fell 4.3% in after-hours trading.

WABC television:
- NYC is experiencing scattered power outages, affecting parts of the South Bronx, East Harlem and the Upper East Side.

BOTTOM LINE: The Portfolio finished higher today on gains in my I-Banking longs, Medical longs, Semi longs, Biotech longs and Base Metal shorts. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, every sector rose and volume was above average. Measures of investor anxiety were above-average into the close. Today's overall market action was very bullish. Growth stocks were especially strong, however, every sector I follow finished higher. Technology stocks outperformed again today, and the MS Tech Index is now 10.6% higher year-to-date vs. a 7.2% gain for the S&P 500. Corn fell another 3.6% and has completely broken down technically. I continue to believe a major top in the commodity is already in place. This spurred another 1% decline in the Goldman Ag Commodity Sub-Index. Retail options traders exhibited bearish sentiment throughout the day. The Nikkei futures are indicating an up 100 open in Japan. I suspect U.S. stocks will build on today's gains tomorrow.

Here is a five-year chart of NYSE short-interest:

As you can see, short interest was basically flat from mid-2002 through first quarter 2005, which is what I would expect considering the massive number of new hedge funds created during that period and a large stock rally off the bottom in October 2002. However, the recent parabolic rise in short interest, the largest four-month percentage increase on record (+30%), is stunning considering recent stock gains and is symptomatic of the current U.S. negativity bubble, in my opinion. Moreover, the only ETF that is ranked in the top 30 NYSE short positions is the iShares Russell 2000 Index (IWM). The rest are equities. I think this is a direct result of the massive capital that is allocated to low correlation U.S. stock strategies and the undying belief by the herd that the U.S. will continue to underperform all other global markets indefinitely. I suspect, given their horrific risk-adjusted underperformance over the last few years, that some low-correlation U.S. stock strategies will see significant redemptions at year-end and that a large percentage of this capital will move into more positively correlated U.S. stock strategies. As well, I think a chain reaction of events has already begun that will lead to a dramatic positive change in perception by global portfolio managers regarding the prospects for US stocks vs. most other global markets. The recent parabolic rise in short interest is unsustainable and only brings the "mother of all short-covering rallies" closer, in my opinion.

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
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In Play
Today in IBD
NYSE Unusual Volume
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