Stocks at Session Highs into Final Hour on More Economic Optimism, Buyout Speculation and Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, I-Banking longs, Semi longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive today as the advance/decline line is higher, most sectors are gaining and volume is below average. Just like last year before oil peaked on July 14 and then proceeded to plunge $28 per barrel in six months, it is just assumed by many that oil will continue heading higher forever. I am already hearing the $100 per barrel oil calls that came last year around this time. The fundamentals for oil are even worse this year, in my opinion. Core inflation is already decelerating meaningfully. I suspect a significant decline in energy prices that begins over the next couple of months will help bring headline inflation readings down even further before year-end, which should also help bring long-term interest rates back down. Significantly lower energy prices, lower long-term rates, higher stock prices, wages continuing to substantially outpace inflation, low unemployment and stabilizing home sales should help boost consumer spending back to above-average rates this fall. Retail stocks have held up very well despite the many perceived headwinds of late. I suspect retailers will begin to outperform the market again this quarter as investors anticipate these catalysts. I remain long Under Armour(UA) and Tractor Supply (TSCO). For the first time in a long time, domestic fund inflows substantially exceeded non-domestic fund inflows this week.

Here is a summary of AMG Data Services fund flows for the week ended July 3:

• Including ETF activity, equity funds reported net cash inflows totaling $5.83 billion, with domestic funds reporting net inflows of $5.15 billion and non-domestic funds reporting net inflows of $680 million.
• Excluding ETF activity, equity funds reported net cash inflows totaling $209 million, with domestic funds reporting net inflows of $269 million and non-domestic funds reporting net outflows totaling -$60 million.
• ETFs reported net inflows of $5.62 billion, with the largest flows being $4.85 billion to the iShares Russell 2000 Index (IWM) fund, -$2.18 billion from the SPDRs (SPY) fund and $640 million to the iShares Nasdaq Biotechnology Index (IBB) fund.
• Excluding ETF activity, international funds reported net outflows of -$46 million.
• Excluding ETF activity, taxable bond funds reported net inflows totaling $1.16 billion.
• Money market funds reported net cash inflows totaling $16.83 billion.

I expect US stocks to trade mixed-to-higher into the close from current levels on more economic optimism, bargain-hunting, buyout speculation and short-covering.

Today's Headlines

Bloomberg:
- Goldman Sachs Group(GS) said law-enforcement authorities don’t consider letters making threats against the company to be credible.
- North Korea may shut its Yongbyon nuclear power plant as soon as it gets one-10^th to 50,000 tons of heavy fuel oil promised in an international agreement, rather than wait for the full amount, its official news agency said.
- Federal Reserve Bank of San Francisco President Janet Yellen said the central bank’s stance of keeping interest rates unchanged is most likely to achieve faster growth and slower inflation.
- Citadel Investment Group LLC almost doubled its stake in Myriad Genetics(MYGN) to 5.5%.
- John Lonski, chief economist at Moody’s Investors Service(MCO) sees US price inflation “well contained.”
- Share sales by wind, solar and biofuels companies attracted 8% more investment in the first six months of 2007 than a year earlier, led by energy-efficiency and service industries, New Energy Finance said.
- Investing in renewable energy could save the world $180 billion a year in fuel costs by 2030 while reducing emissions of carbon dioxide, the main gas blamed for global warming, according to a recent report by Greenpeace and the European Renewable Energy Council.- Crude oil is rising .6% to a 10-month high as speculators bid up prices before the peak in summer driving demand and hurricane season.
- Coffee futures fell for a fourth straight session in New York as warehouse supplies rose and Brazil, the world’s largest producer, received favorable weather for its crop.
- Stainless-steel output rose 15% to 7.58 million metric tons in the first quarter from a year ago, driven by increases in China, the alloy’s largest producer, the International Stainless Steel Forum said.
- Natural gas in NY is falling another 3% after a government report today showed supplies are heading towards a new all-time record by October.

Wall Street Journal:
- US officials fear global growth may be hurt by a wave of protectionism.
- The US Congress needs to respond to Iran’s growing involvement in training and organizing extremists fighting US forces in Iraq, Senator Joseph Lieberman wrote.
- The new US Regulation NMS, which requires brokers to send orders instantly to the market showing the best prices, will help larger securities firms at the expense of smaller ones.
- The White House’s Office of Management and Budget will advise President Bush to veto a bill that would allow members of OPEC to be sued under US antitrust laws, citing OMB spokesman Sean Kevelighan.
- The US and the European Union agreed to share information about the safety of cosmetics and medical equipment.
- Chicago Mercantile Exchange(CME) will increase its offer for CBOT Holdings Inc.(BOT) in an attempt to get shareholders to approve its bid for the parent of the Chicago Board of Trade.

NY Times:
- In 2005, about the time when hedge funds started sprouting like weeds, investors, money managers and the media started to question whether there might be a hedge fund bubble. With hedge funds lining up to go public, the questioning has turned up a notch.

Financial Times:
- The Bank of England’s decision to raise interest rates to 5.75% and perhaps beyond could severely hurt the UK economy.

Financial Times Deutschland:
- Hewlett-Packard(HPQ) may acquire more software companies, citing an interview with Hans Ulrich Holdenried, who heads the company’s German unit.
- Steel production in Germany rose in the first six months of the year to its highest level since the country’s reunification, citing Dieter Ameling, the president of the Steel Association.

The Business:
- Dow Jones’ board is confident that the Bancroft family, which controls the majority of voting shares, will approve an agreement for Rupert Murdoch’s News Corp.(NWS/A) to buy the company.

Economy Creates More Jobs Than Expected, Unemployment Rate Still Historically Low, Earnings Substantially Outpacing Inflation

- The Change in Non-farm Payrolls for June was 132K versus estimates of 125K and an upwardly revised 190K in May.

- The Unemployment Rate for June came in at 4.5% versus estimates of 4.5% and 4.5% in May.

- Average Hourly Earnings for June rose .3% versus estimates of a .3% gain and an upwardly revised .4% gain in May.

BOTTOM LINE: Employers in the US added 132,000 workers to payrolls last month, wages grew and the unemployment rate held near a six-year low, signaling the job market will continue to sustain American consumers, Bloomberg reported. Payrolls at builders rose 12,000 versus a 2,000 job decline the prior month. The economy has created about 2 million jobs over the last year. The Monster Employment Index is just slightly off its all-time record set in May. The 50-week moving average of jobless claims has been lower during only two other periods since the 70s. The unemployment rate is a historically low 4.5%, down from 5.1% in September 2005, notwithstanding fewer real-estate related jobs and significant auto production cutbacks during that period. The unemployment rate’s current 12-month average is 4.6%. It has only been lower during two other periods since the mid-50s.

Furthermore, most measures of Americans’ income growth are almost twice the rate of inflation. Average Hourly Earnings rose 3.9% year-over-year in June, substantially above the 3.2% 20-year average. The 11-month moving-average of Americans’ Average Hourly Earnings is currently 4.04%. 1998 was the only year during the 90s expansion that it exceeded current levels. This high level of earnings growth comes as the CPI for May rose 2.7% year-over-year, down from a 4.7% increase in September 2005 and well below the 20-year average of 3.1%. Long-term interest rates remain very low by historic standards despite the recent up-tick related to stronger economic growth.

Besides a very healthy job market and below-average inflation, the Case-Shiller Home Price Index is up 125% over the last decade and the S&P 500 has risen 106% since the October 2002 major bear market lows. As a result, Americans’ net worth is at an all-time high right now, a fact that continues to be ignored by the record number of stock market participants that believe it is in their financial and/or political interest to paint a bleak picture of America.

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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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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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