Stocks Mixed into Final Hour as More Buyouts and Economic Optimism is Offsetting Higher Long-term Rates

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Internet longs, Semi longs, Medical longs and Computer longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is neutral today as the advance/decline line is slightly lower, most sectors are gaining and volume is below average. I have heard numerous market bears say that the parabolic rise in short interest doesn't matter because of the proliferation of hedge funds. I couldn't disagree more. Look no further than Under Armour's (UA) stock action today. It is soaring 13% to an all-time high on no news. Maybe there is some big news coming for the company. However, does anyone think this stock would be up so much today if 43.4% of the float weren't sold short? Just last month, short interest in the shares surged 22.7%. I remain long UA. This is just one of many examples of heavily shorted stocks soaring on little new news. In fact, I have never seen so much reckless shorting in my career. It isn't just hedging as the many bears would have you believe. Just because a stock is up or has an above-market valuation doesn't make it a good short. There usually needs to be a downside catalyst. I believe many hedge fund managers that cut their teeth during the bubble and ensuing bursting have indiscriminately shorted growth stocks and had much success over the last seven years due to the huge relative underperformance growth has displayed vs. value. I think those days are over as growth is now outperforming value. It is important to remember that growth stocks are the cheapest relative to value stocks in at least 30 years. The saying "don't confuse brains with a bull market" can also apply to shorting. "Don't confuse brains with a bear market." Greenwich Associates recently said hedge funds managers were the most bearish since 2004. Moreover, Investors Intelligence reported today that more financial advisors are expecting a correction than at any time in the last 10 years. I suspect these investors are positioned accordingly. I still think better-than-expected second-quarter earnings, lower long-term rates, subsiding sub-prime fears and more major buyouts will propel the averages higher over the coming weeks. Moreover, I continue to believe overall sentiment regarding U.S. stocks has never been worse in history with most of the major averages near highs. I still believe the eventual bursting of the current U.S. negativity bubble will lead to the "mother of all short-covering rallies." I expect US stocks to trade mixed-to-higher into the close from current levels on more economic optimism, bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- The Commodity Futures Trading Commission is asking a US court to hold the Chicago-based hedge fund, Lake Shore Asset Management Ltd., in contempt of court for not providing documents.
- The European Union can make enough ethanol to meet its consumption targets by 2020 without relying on imports or damaging food production, a producer group said.
- More financial advisers are predicting a so-called correction in the US stock market than at any other time in almost a decade, according to Investors Intelligence.
- China’s stocks fell the most in a month on concern $20 billion of planned share sales will overwhelm demand for equities as regulators seek to damp speculation in Asia’s best-performing stock market. The Shanghai Composite is approaching bear market territory, falling 17% from its all-time high.
- Samsonite Corp.(SAMC) agreed to be bought by CVC Capital Partners Ltd. for about $1.1 billion, giving the 97-year-old luggage maker its fifth owner in 21 years.
- Tropical Storm Risk slightly reduced its forecast of a more intense hurricane season.
- Treasuries declined the most in three weeks after private reports showed the US added more jobs last month than economists forecast and services industries unexpectedly accelerated.
- Jones Apparel Group(JNY) received an unsolicited $900 million offer for its Barneys NY chain from Japan-based Fast Retailing, topping an earlier bid from a Dubai investment firm by 9.1%.
- Bruce Wasserstein, the chairman of Lazard Ltd., agreed to sell American Lawyer magazine and the rest of his legal and real estate publishing business to Incisive Media of the UK for $630 million.
- Boeing Co.(BA) said it delivered 18% more airliners in the second quarter than a year earlier as the company boosted production of 737s.

Wall Street Journal:
- Beijing plans to ban a million cars for a two-week test of smog-control measures as part of a pollution cleanup before the city hosts the Olympic Games in 2008.
- Apple’s(AAPL) new iPhone offers some useful accessories, Walter Mossberg said.

NY Times:
- US citizenship applications were 75% higher in May than in December, the government having said in January that it plans to raise processing fees.

USA Today:
- The US National Guard’s ranks reached 351,400 through May, the highest since November 2001 and more than its recruiting goal, citing data from the National Guard Burea.

AP:
- Malaysia will order the blending of biofuels with standard petroleum products within 12 months, citing the Minister for Plantation Industries and Commodities.

Beijing News:
- China still hasn’t brought its overheating economy under control and the country may be losing the advantage of having a low per capita emission level, citing the director of the top planning agency.

Job Market Still Healthy, ISM Non-Manufacturing Surges to 14-Month High

- Initial Jobless Claims for last week rose to 318K versus estimates of 315K and 316K prior.

- Continuing Claims rose to 2569K versus estimates of 2503K and 2485K prior.

- ISM Non-Manufacturing for June rose to 60.7 versus estimates of 58.0 and 59.7 in May.

BOTTOM LINE: First-time claims for jobless benefits barely rose last week, remaining at a level that points to strength in the US labor market, Bloomberg reported. The four-week moving-average of jobless claims rose to 318,500 from 316,750 the prior week. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, rose to 2.0% from 1.9% the prior week. However, the ADP Employment Change report showed US companies added 150,000 jobs in June, the biggest gain in seven months. As well, Challenger Job Cuts fell 17% in June, according to another report today. I suspect tomorrow’s non-farm payrolls report will likely show a gain of around the estimate of 125,000.

Growth in US service industries unexpectedly accelerated to the fastest pace in 14 months in June, reinforcing evidence the economy picked up steam last quarter, Bloomberg said. The Employment component of the index rose to 55.0, the highest since May 2006. The New Orders component fell to 56.9 from 57.4 in May. The Prices Paid component fell to 65.5 from 66.4 in May. The Inventories component fell to 52.5 from 61 the prior month. I suspect the service sector will weaken modestly over the next couple of months before strengthening again in 4Q.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- Dynamic random access memory, or DRAM, contract prices will advance 15%-20% in the first half of July from the second half of last month, a “significant rise,” CJ Investment & Securities said. Demand is rising while chip supply may increase less than expected this year, wrote Song Myung Sup, an analyst. Dramexchange.com, Asia's biggest DRAM spot market, said yesterday that prices will rise at least 10% this month from June.
- Coca-Cola(KO) may consider making a bid for Cadbury Schweppes’ Snapple fruit-beverage unit, a move that would fit into its plan to expand with water and teas as soda consumption falls.
- Hilton Hotels Corp.(HLT) agreed to be taken private by buyout firm Blackstone Group LP for $20 billion, ending more than 60 years as a public company.
- Asian stocks rose for a fifth day, led by Samsung Electronics and Kookmin Bank, after North Korean leader Kim Jong Il signaled he’s ready to dismantle the country’s nuclear program.
- Apollo Management LP, a NY-based private-equity firm, offered to buy US chemical maker Huntsman Corp.(HUN) for about $6 billion, topping a bid from billionaire Len Blavatnik’s Access Industries Holdings.
- China said one-fifth of its consumer products don’t meet government safety and quality standards, underscoring the nation’s challenge in restoring confidence after scandals ranging from tainted pet food to defective toys.
- Kohlberg Kravis Roberts, the leader in leveraged buyouts this year, plans to raise as much as $1.25 billion in an IPO to help finance its appetite for the biggest takeovers.

Wall Street Journal:
- Starwood Hotels & Resorts(HOT) could be the next hotel chain to be purchased after private equity firm Blackstone Group LP announced its $20 billion takeover of Hilton Hotels(HLT).

NY Times:
- A riddle: Why has the Toyota Prius enjoyed such success, with sales of more than 400,000 in the United States, when most other hybrid models struggle to find buyers? One answer may be that buyers of the Prius want everyone to know they are driving a hybrid.
- Only a week ago, the buyout boom seemed ready to deflate. Then over the last week, a torrent of big buyout activity swept in: Bell Canada agreed to be acquired on Saturday for $48.8 billion, the largest leveraged buyout ever. The Blackstone Group, newly public, made a $26 billion offer for Hilton Hotels late Tuesday. And Kohlberg Kravis Roberts & Company, credited with creating the leveraged buyout, said at last that it would go public, in a $1.25 billion stock offering.

Financial Times:
- Telefonica SA’s O2 wireless unit is close to signing a contract with Apple Inc.(AAPL) to become the exclusive UK network partner for the iPhone.
- Lead prices show how the long-running world commodities boom is continuing yet also may demonstrate how fragile that expansion is.

Miami Herald:
- Three of the five senior forecasters at the National Hurricane Center in Miami called for the ouster of the center’s new director on the grounds he has damaged public confidence in their forecasts.

Globe and Mail:
- Research In Motion(RIMM) has obtained permission to sell its BlackBerry e-mail phone in China for the first time.

Jornal de Negocios:
- The European Union won’t be ready to classify China as having a market economy any time soon, EU Trade Commissioner Peter Mandelson said in an interview.

Xinhua News Agency:
- China’s planned issuance of $200 billion of special government bonds won’t “directly affect” the stock market’s financial liquidity, citing the finance ministry.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are +.25% to +.75% on average.
S&P 500 indicated +.20%.
NASDAQ 100 indicated +.20%.

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Economic Releases
8:30 am EST
- Initial Jobless Claims for last week are estimated to rise to 315K versus 313K the prior week.
- Continuing Claims are estimated to rise to 2503K versus 2490K prior.

10:00 am EST:
- ISM Non-Manufacturing for June is estimated to fall to 58.0 versus 59.7 in May.

Other Potential Market Movers
- The ECB Policy Meeting, Challenger Job Cuts, ADP Employment Change and weekly MBA Mortgage Applications report could also impact trading today.

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

Stocks Finish Near Session Highs Despite High Oil and Terror Worries

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