Friday Watch

Late-Night Headlines
Bloomberg:
- Democratic presidential candidate John Edwards embraced the idea of raising taxes on the managers of private-equity firms and hedge funds.
- Advanced Medical Optics Inc.(EYE), a maker of eye-care and surgical products, bid $75 a share for rival Bausch & Lomb(BOL), topping an offer from private-equity firm Warburg Pincus LLC.
- Microsoft Corp.(MSFT) said it would expand its warranty coverage on its Xbox video-game console, a change that will result in expenses of as much as $1.15 billion.
- Newmont Mining(NEM) said it will close its merchant-banking segment and incur a $1.7 billion charge in the second quarter.
- SAC Capital Advisors LLC increased its stake in Six Flags Inc., the second-largest US theme-park operator, to 5.2%.

Wall Street Journal:
- US presidential candidate John Edwards is hiring two union workers from WakeUpWalMart.com, a watchdog group that has been a frequent critic of the world’s largest retailer.

NY Times:
- The US military in Iraq has teamed up with frustrated residents in the violent region of Diyala Province to combat insurgents from al Qaeda in Mesopotamia. Residents in the area have grown tired of the insurgents, who have killed scores of people, kidnapped for money, evicted people from their homes and implemented a strict form of Islamic law.

Financial Times:
- Microsoft Corp.(MSFT) and Yahoo! Inc. may change their privacy policies amid European Union concerns about the length of time Internet search firms can keep personal information.
- Swiss financial giant UBS AG, buffeted by a series of setbacks, including the costly blowup of an internal hedge fund, is removing CEO Peter Wuffli.
- US senators Hillary Rodham Clinton and Barack Obama have agreed to co-sponsor legislation to prod China to raise the value of its currency.
- Research In Motion(RIMM), the Canadian manufacturer of the BlackBerry family of wireless e-mail devices, plans to begin selling BlackBerry devices in key Chinese cities, including Beijing, Shanghai and Qingdao.

London-based Times:
- Royal Dutch Shell Plc is getting set to start its biggest Arctic Ocean exploration program in more than a decade, citing Malcolml Brinded, Shell’s head of exploration and production. The action could initiate a rush to one of the largest untapped energy reserves, the Beaufort Sea off the coast of Alaska, a region that contains 8 billion barrels of oil and almost 30 trillion cubic feet of gas.

Star:
- Global biodiesel output may increase 600% to more than 21 million tons a year by 2010 as governments encourage usage, and North America and Asia boost production, citing Rabobank International.

Shanghai Securities News:
- China Southern Fund Management and China Asset Management are among five local asset management firms that yesterday applied for permission to sell funds investing outside the mainland.

Late Buy/Sell Recommendations
Morgan Stanley:
- Upgraded Samsung to Overweight from Equal-weight, see 21% upside from current levels. Three consecutive years of core earnings declines for Samsung Electronics should reverse starting in 3Q07, led by seasonal demand improvements. The technical factors that have dragged on the share price for the past 18 months could be stabilizing. We think NAND and TFT-LCD industries are structurally stronger than DRAM. Seasonal demand improvement will give producers some flexibility in holding inventory to influence DRAM price increase soon. iPhone could continue to surprise on the upside, and buildup of competitors’ high-end phones should keep the NAND market stable for the rest of the year. We expect Samsung’s earnings to gradually improve into 2008.

Night Trading
Asian Indices are -.50% to unch. on average.
S&P 500 indicated -.02%.
NASDAQ 100 indicated -.09%.

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- None of note

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Economic Releases
8:30 am EST
- The Change in Non-farm Payrolls for June is estimated at 125K versus 157K in May.
- The Unemployment Rate for June is estimated at 4.5% versus 4.5% in May.
- Average Hourly Earnings for June are estimated to rise .3% versus a .3% gain in May.

Other Potential Market Movers
- The Fed’s Yellen speaking could also impact trading today.

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

Stocks Finish Near Session Highs on More Economic Optimism, Buyout Activity, Short-Covering

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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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