Today's Headlines

Bloomberg:
- Volatility on options for interest-rate swaps may decline as concern eases that losses in subprime mortgage loans and other risky debt will spread, according to RBS Greenwich Capital.
- US company bond risk fell from a two-year high today, according to credit-default swap traders who bet on corporate creditworthiness.
- Morgan Stanley(MS) says investors should reduce bets on European credit quality deteriorating because prices of credit-default swaps overstate the risk of companies missing debt payments.
- Crude oil fell for a third day on speculation that US refineries are increasing output and that OPEC might pump more.
- Eli Lilly(LLY) won the backing of a US panel to sell its osteoporosis medicine Evista for the prevention of breast caner in women after menopause.
- The US and Iranian ambassadors to Iraq agreed to establish a forum on security challenges in the war-torn country, including the threat posed by al-Qaeda.

Wall Street Journal:
- Nokia Oyj(NOK) will say today that it has purchased Twango Inc., an online photo- and video-sharing start-up, as the Espoo, Finland-based company seeks to move beyond mobile phones and into Web-related services.
- Lockheed Martin(LMT) is finding it hard to meet its production schedule for the new “Marine One” helicopter designed to carry US presidents.
- Foreign governments are increasing their investments in US and European companies, prompting concern over a political backlash and rise in prices for speculative assets.

Dow Jones:
- TPG Inc., a private-equity company, has made a bid to buy Ford Motor’s(F) Jaguar and Land Rover units.

NY Post:
- Time Warner’s(TWX) AOL unit plans to acquire the “behavioral targeting” advertising firm Tacoda for $200 million to $300 million.

AP:
- New Haven, Connecticut, today will become the first US city to issue identification cards to illegal immigrants.

CNBC-TV18:
- India’s Wipro Ltd. may pay as much as $550 million to buy a US company.

Sueddeutsche Zeitung:
- German intelligence authorities are bracing for possible terrorist attacks by members of the al-Qaeda network, citing senior security officials.

Islamic Republic News Agency:
- The Iranian Oil Ministry said OPEC will increase production if required. “If the oil market needs it, OPEC will inject more oil into it,” said Javad Yarjani, head of OPEC affairs at the country’s oil ministry.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- BHP Billiton Ltd.(BHP) posted record annual production in eight of its 19 main commodities, setting up for its largest yearly profit.
- Suncor Energy said its oil-sands production is returning to full strength after a 50-day shutdown at a Canadian processing plant.
- French President Nicolas Sarkozy, Deutsche Telecom AG shareholders and American lawyers are laying the groundwork to make Europe the next battleground for US-style class-action lawsuits.
- Newmont Mining Corp.(NEM) needs to rebuild its credibility with investors and may consider takeovers, CEO Richard T. O’Brien said.
- Midwest Air Group’s(MEH) largest investor, hedge fund Octavian Management LLC, renewed its call fro the carrier to “immediately engage” with AirTran Holdings about AirTran’s hostile takeover offer.
- Pakistan told the US to refrain from any military action on its territory against al-Qaeda members, saying Pakistani security forces are responsible for anti-terrorist operations.

Wall Street Journal:
- Foreign governments, flush with cash and no longer content with the meager returns to be had on safe but low-yielding investments like Treasurys, are becoming increasingly aggressive players on the equity front.
- With states around the country working on bills to force their public pension funds to unload shares of foreign companies doing business in Iran, a coalition of large public funds has begun pressuring companies to reconsider their ties to that nation.

NY Times:
- So it seems as Virgin Atlantic Airways and British Airways are indicating that they may compete with four start-up carriers for a market that no one knew existed just a few years ago: all-business-class flights.

TheStreet.com:
- Huge iPhone Fees Juice Apple

USA Today:
- Gasoline prices fall to 3-month low

MarketWatch.com:
- Managers see M&A activity bidding up stock prices. Individual investors likely to move off sidelines over next three months.

Financial Times:
- Crude prices ‘could be poised for rapid fall’ Crude oil prices fell more than $1/bbl. At one stage yesterday as hedge funds took profits after their rise to near-record levels.
- Baugur, the Icelandic investment group that has bought up much of the UK shopping scene, is turning its attention to the US luxury retail sector, with a $250 million investment in Saks(SKS), the department store chain.

Economic Daily News:
- Taiwan’s central bank may raise benchmark interest rates before its regular scheduled quarterly meeting.

Australian:
- James Packer’s Publishing & Broadcasting and partners proposed building the tallest tower in the US for their Crown Las Vegas casino.

China Securities Journal:
- China should focus on using interest rate increases to curb rising investment and asset prices, according to a research note by the nation’s top economic planner.

Xinhua News Agency:
- Chinese propaganda officials signaled increased scrutiny of the media after the government said a television report showing cardboard being used as an ingredient in steamed buns was faked. The reporter on the story, Zi Beijia, has been arrested and three other Beijing Television employees have been fired over the report, which showed cardboard being used as a substitute for pork.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (AKAM), target $68.
- Reiterated Buy on (MRK), target $61.

Night Trading
Asian Indices are +.25% to +.75% on average.
S&P 500 futures -.14%.
NASDAQ 100 futures -.19%.

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Earnings of Note
Company/EPS Estimate
- (AFL)/.81
- (AKS)/.68
- (AMZN)/.25
- (T)/.67
- (BIIB)/.63
- (BJS)/.56
- (BOW)/-.75
- (BNI)/1.23
- (CDWC)/.98
- (CEC)/.34
- (CTX)/-.06
- (CERN)/.41
- (CAKE)/.31
- (CB)/1.38
- (CME)/3.66
- (CFC)/.91
- (DPZ)/.24
- (LLY)/.82
- (EMC)/.16
- (ENR)/.83
- (ESV)/1.65
- (ILMN)/.13
- (JBLU)/.11
- (KMB)/1.03
- (LRCX)/1.17
- (LM)/1.24
- (LMT)/1.53
- (MCD)/.71
- (NBR)/.81
- (NOC)/1.24
- (PNRA)/.39
- (PEP)/.89
- (RJF)/.53
- (SWK)/1.02
- (TLAB)/.06
- (TIE)/.40
- (UPS)/1.03
- (X)/2.35
- (XTO)/1.13

Upcoming Splits
- (DIOD) 3-for-2
- (GMCR) 3-for-1

Economic Releases
- None of note

Other Potential Market Movers
- The Fed’s Mishkin speaking, Fed’s Poole speaking, Richmond Fed Manufacturing Index and weekly retail sales reports could also impact trading today.

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

Stocks Close Higher on Buyout Activity, Strong Earnings Reports, Falling Energy Prices

Indices
S&P 500 1,541.57 +.49%
DJIA 13,943.42 +.67%
NASDAQ 2,690.58 +.11%
Russell 2000 835.62 -.10%
Wilshire 5000 15,514.96 +.36%
Russell 1000 Growth 617.46 +.48%
Russell 1000 Value 870.43 +.34%
Morgan Stanley Consumer 736.99 +.88%
Morgan Stanley Cyclical 1,110.34 +.04%
Morgan Stanley Technology 654.50 +.19%
Transports 5,367.0 +.13%
Utilities 514.60 +.54%
MSCI Emerging Markets 143.52 +1.54%

Sentiment/Internals
Total Put/Call .79 -35.77%
NYSE Arms .73 -66.14%
Volatility(VIX) 16.81 -.83%
ISE Sentiment 171.0 +29.55%

Futures Spot Prices
Crude Oil 75.06 -.96%
Reformulated Gasoline 210.75 -2.64%
Natural Gas 6.03 -6.4%
Heating Oil 206.0 -1.54%
Gold 682.0 -.39%
Base Metals 268.72 +.57%
Copper 364.90 -1.52%

Economy
10-year US Treasury Yield 4.95% +1 basis point
US Dollar 80.32 +.04%
CRB Index 319.09 -1.65%

Leading Sectors
Oil Service +2.32%
Telecom +1.55%
Restaurants +1.09%

Lagging Sectors
Coal -1.21%
Hospitals -2.23%
Homebuilders -2.28%

Evening Review
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In Play

Afternoon Recommendations
Oppenheimer:
- Rated (ROSG) Buy, target $11.
- Rated (HALO) Buy, target $14.

Afternoon/Evening Headlines
Bloomberg:
- Crude oil fell $.67/bbl. after Reuters reported that OPEC was concerned about high oil prices and their impact on the world economy.
- Corn futures fell in Chicago, extending their decline to an eight-month low, and soybeans dropped on speculation rains and a lack of severe heat will promote development of the two biggest US crops.
- Natural gas fell in NY to its lowest closing price since December as a combination of mild temperatures and high inventories served to undercut demand and push down prices.
- Texas Instruments(TXN) reported a 74% drop in second-quarter profit after the sale of a sensors business last year. The shares fell 3.6% in after-hours trading.
- Wal-Mart Stores(WMT) will reduce prices in the US on more than 16,000 back-to-school items as it works to reinforce its image as a discounter and lure back customers lost to Target Corp.(TGT).
- American Express(AXP) said second-quarter profit climbed 12% as customer spending and merchant fees increased. The stock fell $.97 to $63.69 in after-hours trading.
- NYC apartment prices climbed 16% in the second quarter as the country’s most expensive urban market sidestepped declines in the rest of the country.
- JDA Software(JDAS) reported total revenues of $90.8 million and software revenues of $18.6 million for second quarter 2007. This represents a 75% increase over the $51.8 million in total revenues and an 80% increase over the $10.4 million in software revenues reported for second quarter 2006. The shares soared 13% in after-hours trading.
- Treasury Secretary Paulson said today the US economy is at or near the bottom in the housing slump, that the consumer is strong, the subprime fallout is contained, a strong dollar is in the nation’s interest and the US economy is very healthy.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Networking longs and Medical longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was neutral today as the advance/decline line finished slightly lower, sector performance was mostly positive and volume was above average. Measures of investor anxiety were about average into the close. Today's overall market action was mildly bullish. Corn fell another 2.6% today, which helped spur the Goldman Ag commodity index to a 1.15% decline. Corn has plunged 29% from its February highs and its 50-day moving average is breaking down through its 200-day moving average for the first time since October 2005. I continue to believe that inflation fears have already peaked for this cycle, and this will help keep the 10-year yield contained as the myth of problematic inflation is further dispelled. Barron's had an excellent cover story (subscription required to read entire article) over the weekend by Michael Santoli on the lack of participation by the "little guy" in U.S. stocks' recent bull run and records. I would also add that many hedge funds seem to be missing out on sharp gains as well. Tony Crescenzi highlighted today how the short base in the S&P futures continues to grow, which corresponds with SentimenTrader's COT All-Index Stochastic. Moreover, I recently pointed out the Greenwich Associates survey that showed hedge fund managers were only 12% bullish, the lowest reading since 2004. As I highlighted earlier this afternoon, I still think the parabolic rise in short interest matters greatly and is mainly a result of the massive inflow of capital into low-correlation U.S. stock strategies over the last few years. There are several other gauges of hedge fund sentiment registering some pessimism, as well. It is also interesting to note that the Yale Institutional Buy-On-Dips Index is the lowest since late 2000 after the bubble had already burst and stocks were crashing. Also, more financial advisors were recently predicting a correction in U.S. stocks than at any other time in almost a decade, according to Investors Intelligence. The only place I see some relatively normal levels of sentiment given recent gains is the long-only institutional investor, which don’t account for nearly as much of daily trading as they used to. I still believe overall investor sentiment regarding U.S. stocks has never been worse in history with the DJIA materially advancing and soaring to new records.

Stocks Surging into Final Hour on Buyout Activity, Falling Energy Prices and Positive Earnings Reports

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Computer longs, Medical longs and Networking longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly positive today as the advance/decline line is about even, most sectors are rising and volume is above-average. My intraday gauge of investor angst is around average levels. The NYSE reported late last week that short interest on the exchange, from mid-June through mid-July, rose from 12.47 billion shares to 12.95 billion shares, which is yet another all-time high. Moreover, the 3.9% increase leaves NYSE short interest up an astounding 35% since mid-February, the largest five-month percentage jump since at least 1991, when Bloomberg began tracking. This is even more shocking considering the S&P 500 jumped another 7.3% during that period and the DJIA was breaking records on its way to 14,000. It is also noteworthy that odd-lot short sales spiked into Friday's sell-off to levels exceeding those seen during the peak in sub-prime fears in March. This is just more evidence, in my opinion, that the many bears continue to party like it's 2000-2003, despite the S&P 500's 109% gain from that period's lows. NYSE short interest was basically flat from mid-2002 through first quarter 2005, which is what I would expect considering the extraordinary number of new hedge funds created during that period and a large stock rally off the bottom in October 2002. The recent parabolic rise in short interest is stunning, however, and is symptomatic of the current “U.S. negativity bubble”, in my opinion. Moreover, the only ETF that is ranked in the top 40 NYSE short positions is the iShares Russell 2000 Index (IWM). The rest are all equities. I think this is a direct result of the massive capital that has been 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. As well, many investors continue to see a 2000-type market meltdown lurking around every corner. I suspect, given their 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 U.S. 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.

Here are the 25 NYSE stocks with the largest percentage increase in their short interest relative to their float from mid-June through mid-July:

1. Beazer Homes (BZH) +18.2%
2. Fortress Investment Group (FIG) +16.5%
3. Hovnanian (HOV) +13.8%
4. Titanium Metals (TIE) +13.8%
5. KBW Incorporated (KBW) +12.7%
6. Talbots (TLB) +11.9%
7. Primus Guaranty (PRS) +11.3%
8. Assured Guaranty (AGO) +11.1%
9. Central Vermont Public Service (CV) +11.1%
10. Novastar Financial (NFI) +10.8%
11. Emergency Medical Services (EMS) +10.4%
12. MVC Capital (MVC) +10.0%
13. Citadel Broadcasting (CDL) +9.7%
14. AZZ Incorporated (AZZ) +9.3%
15. General Maritime (GMR) +9.2%
16. Valhi (VHI) +9.2%
17. TriMas (TRS) +8.4%
18. Cal Dive International (DVR) +8.3%
19. Skilled Healthcare Group (SKH) +8.2%
20. Alesco Financial (AFN) +8.0%
21. Grubb & Ellis (GBE) +7.85%
22. Genco Shipping & Trading (GNK) +7.7%
23. RSC Holdings (RRR) +7.6%
24. Best Buy (BBY) +7.5%
25. Meritage Homes (MTH) +7.5%

I expect US stocks to trade modestly higher into the close from current levels as earnings optimism, buyout speculation and falling energy prices offsets lingering sub-prime concerns and profit-taking.

Today's Headlines

Bloomberg:
- Justin Fuller, senior equity analyst at Morningstar Inc. says the Bear Stearns(BSC) hedge fund fallout is “a blip on the radar screen.”
- NY Democratic Governor Eliot Spitzer disciplined two members of his staff after a report by the state attorney general found they improperly used state police to collect information about the use of state aircraft by one of Spitzer’s political rivals, Senate Majority Leader Joseph Bruno.
- Hedge funds attracted $58.7 billion in new money in the second quarter, the industry’s second-highest amount following a record first quarter.
- United Rentals(URI) agreed to be bought by Cerberus Capital Management LP for $4 billion, the third sale of a US construction equipment-rental company in the past year.
- Merck(MRK) and Schering-Plough(SGP) beat analysts’ estimates for second-quarter profit as doctors wrote more prescriptions for their cholesterol drugs Bytorin and Zetia. Merck’s stock rose the most in more than two years.
- Transocean Inc.(RIG) agreed to buy GlobalSantaFe(GSF) for about $17 billion, combining the world’s two largest offshore oil and gas drillers in a market where demand for rigs has never been higher.
- Natural gas is plunging 6.2% today to nearly a seven-month low in NY as a combination of mild temperatures and record inventories served to undercut demand and push prices down.
- Cumulus(CMLS), a radio company with stations in 67 US markets, agreed to be bought for about $1.3 billion by an investor group led by CEO Lewis Dickey.
- Hewlett-Packard(HPQ) will buy Opsware Inc., the software company founded by Internet pioneer Marc Andreeseen, for about $1.6 billion to extend its push into business programs.
- Google Inc.(GOOG), escalating a battle with AT&T(T) and Verizon Wireless(VZ), may team up with smaller mobile-phone service providers to create its own multibillion-dollar network.

NY Times:
- Mattel Inc.(MAT) is releasing a new Barbie doll line that can be linked to a computer to access games, online chat rooms and virtual shops.

Barron’s:
- SAP AG(SAP) may attract a takeover offer from a leveraged buyout firm because its shares are cheap and the company’s earnings are growing.

TheStreet.com:
- Nokia Siemens Networks is considering a $7 billion bid for Tellabs Inc.(TLAB).

NY Post:
- Phillips-Van Heusen(PVH) has begun rolling out an Izod clothing line for women 40-55.
- General Electric’s(GE) NBC plans to move as many as 1,000 employees to a corporate park in Englewood Cliffs, NJ, from offices in Manhattan because of space shortages.

USA Today:
- NY Senator Hillary Rodham Clinton is building what amounts to a separate organization devoted to winning women’s votes. Tonight 400 women plan to hold house parties to watch the Democratic candidates debate, twice as many parties as women held for Illinois Senator Barack Obama on June 24. Clinton’s campaign has special groups targeting nurses, businesswomen, minority women, New Yorkers, young women and graduates of Wellesley College, her alma mater.

Heren Energy:
- French power production at hydro plants rose 40% in June compared with the same month last year, citing monthly stats published by the country’s grid operator.

Financial News:
- Goldman Sachs(GS) is preparing to buy stakes in independent research firms to boost income from research while keeping costs down.