Stocks Close at Session Highs on Heavy Volume on Plunging Energy Prices, Bargain-Hunting and Short-Covering

Indices
S&P 500 1,467.67 +2.42%
DJIA 13,468.78 +2.18%
NASDAQ 2,547.33 +1.44%
Russell 2000 766.39 +1.45%
Wilshire 5000 14,686.50 +2.07%
Russell 1000 Growth 589.71 +1.77%
Russell 1000 Value 821.64 +2.61%
Morgan Stanley Consumer 717.87 +2.41%
Morgan Stanley Cyclical 1,029.13 +1.25%
Morgan Stanley Technology 628.98 +1.81%
Transports 4,965.09 +1.87%
Utilities 493.32 +3.48%
MSCI Emerging Markets 130.43 -.43%

Sentiment/Internals
Total Put/Call 1.27 -11.19%
NYSE Arms .46 -87.04%
Volatility(VIX) 22.94 -8.82%
ISE Sentiment 92.0 -10.68%

Futures Spot Prices
Crude Oil 72.12 -4.45%
Reformulated Gasoline 193.40 -4.68%
Natural Gas 6.26 +2.96%
Heating Oil 194.96 -4.15%
Gold 683.10 -.16%
Base Metals 249.96 -2.17%
Copper 347.40 -.14%

Economy
10-year US Treasury Yield 4.74% +5 basis points
US Dollar 80.32 +.19%
CRB Index 312.29 -1.85%

Leading Sectors
Banks +5.36%
I-Banks +3.77%
Utilities +3.48%

Lagging Sectors
Steel -.08%
Airlines -1.65%
Gold -2.84%

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Afternoon Recommendations
Oppenheimer:
- Rated ARJ Buy, target $50.

BMO Capital:
- Rated (DELL), (HPQ) and (WDC) Outperform.

Afternoon/Evening Headlines
Bloomberg:
- Crude oil fell more than 4.5% in NY, the most in seven months, on worries over slowing demand with US supplies near a 10-year high.
- Sun Microsystems(SUNW) announced a new version of the Niagara processor used in its most-powerful server computers and said it will license the chip to other equipment makers as part of a plan to create a new line of business.
- Wynn Resorts(WYNN) reported second-quarter profit and revenue that exceeded analyst’ estimates after it opened a new casino in Macau, China, and drew more gamblers to Las Vegas. The shares jumped 10% in after-hours trading.
- The risk of borrowing debt of US financial companies including Bear Stearns(BSC) fell from the highest in more than five years today, as their stocks rallied and concerns eased about how much subprime mortgage securities will siphon off profits, according to credit-default swap traders.
- Ethanol in Chicago fell a fourth day amid concern of oversupply and as gasoline futures fell.
- China and other nations must meet US quality standards as imports of food, drugs and other products increases, healthy secretary Michael Leavitt said.
- SLM Corp.(SLM), or Sallie Mae, reaffirmed plans to be acquired by JC Flowers, Bank of America and JPMorgan Chase and said the deal would be completed in October.
- Microsoft(MSFT) won a reversal of a jury’s record $1.52 billion verdict in a landmark case over Alcatel-Lucent’s MP3 digital-music patents.
- Shares of Fannie Mae(FNM) and Freddie Mac(FRE), the two largest US home-loan companies, rose on speculation the companies’ regulator may lift a cap on the amount of home loan assets they can own, helping pour money into the mortgage market.

Wall Street Journal:
- Chevron Corp.(CVX) won the right to develop a natural-gas field in China.

Reuters:
- He’s made a fortune picking through the bones of failed steelmakers, textile mills and coal miners. Now billionaire investor Wilbur Ross is taking aim at another beleaguered industry: subprime mortgage lenders. He took his first step on Monday by providing $50 million in debtor-in-possession financing for American Home Mortgage, which filed for bankruptcy earlier in the day. It’s a tiny step, but Ross said there are many more to come.

BOTTOM LINE: The Portfolio finished higher today on gains in my Computer longs, Semi longs, Biotech longs, Medical longs and Commodity shorts. I added to my (PWR) long and to an existing short 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, most sectors rose and volume was heavy. Measures of investor anxiety were elevated again into the close. Today's overall market action was very bullish. S&P said this afternoon that the market is overreacting to its Bear Stearns (BSC) outlook. It also said that BSC's liquidity remains "solid" and that the liquidity at the Big 5 brokers is sound. These comments helped spur another surge higher in the financials into the close, which in turn boosted the broad market substantially. Only time will tell if the recent market bottom will hold. It is interesting to note that every bottom since the major bear market lows in 2002 has been accompanied by the bears saying that a new bear market had begun and the bulls waiting on a "whoosh" decline that never came. I want to stress, as well, as I said earlier today, that it isn't the news that matters as much as knowing what is already priced into stock prices. The credit fear news will likely remain scary over the coming weeks, but I think that is more than factored into the broad market at current levels. Despite today's huge rally in the major averages, the CBOE total put/call finished at a very high 1.27. As well, the ISE Sentiment Index finished at a depressed 92.0. This significant skepticism regarding today's gains shown by retail options traders is a positive. I expect overseas markets to get a rather large boost tonight, which could result in further gains here tomorrow morning.

Stocks Soaring into Final Hour on Plunging Energy Prices, Bargain-Hunting and Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Biotech longs, Medical longs, Semi longs and commodity shorts. I covered some of my (EEM) short and all of my (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 100% net long. The overall tone of the market is neutral today as the advance/decline line is slightly lower, most sectors are higher and volume is heavy. My intraday gauge of investor angst is still elevated. This weekend's financial headlines were almost universally gloom and doom. While scary credit market stories will continue to dominate headlines for another couple of months, I suspect that the worst of the equity market downturn is over and we are very close to or at the bottom for the year in the major averages. An imminent recession is being partially priced into stocks at current levels, even as this proposition remains an unlikely outcome, in my opinion. Having said that, I am keeping a close eye on emerging market economies as a significant deterioration in growth there would likely lead to another downleg in U.S. stocks. I do not expect that to occur this year, but I do believe the overowned and hyped emerging market stocks have likely already begun a multiyear period of underperformance relative to developed markets. As well, I continue to believe commodity and the most economically sensitive U.S. stocks will underperform over the intermediate term. Stocks that can grow at relatively high rates, notwithstanding slower global growth, will finally be awarded higher valuations for the first time in years. This new trend is likely just in its infancy. Oil is falling almost $4 per barrel, and gasoline futures are dropping to a 16-month low. It is very likely oil has put in place a major double-top, even if we get a Gulf hurricane over the coming weeks. I suspect funds that are historically long crude would use any temporary fear spike to unload long positions. If you trade futures and you are worried by the possibility of a hurricane heading into the Gulf causing a temporary spike in oil, natural gas looks like a good long hedge over the next few weeks. According to my analysis, natural gas is despised almost as much as oil is loved. I would exit the natural gas part of the trade on any break of its recent lows or closer to the peak in hurricane season as I still think it heads lower over the intermediate-term on declining industrial demand and record inventories. The VIX rose to the highest level since April 2003 this morning. Moreover, the 10-day put/call hit 1.31, right at the historic record set in March of this year. Finally, the ISE Sentiment index is a very depressed 68.0. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, lower energy prices and bargain hunting.

Today's Headlines

Bloomberg:
- US stocks rebounded from three weeks of declines, led by financial companies, on prospects that earnings at banks and brokerages will buoy shares battered by credit-market losses.
- Crude oil is plunging almost $4/bbl. as funds cut their record long positions on worries over demand and diminishing hurricane-related worries.
- McDonald’s(MCD) will sell its Boston Market chain to buyout firm Sun Capital Partners to focus on hamburgers.
- Credit Suisse Group’s equity strategists, who have been bearish on US stocks since 2000, recommended investors increase holdings of shares as a refuge amid slowing global economic growth.
- Merrill Lynch(MER) was raised to “buy” from “neutral” at UBS AG, which said the stock was inexpensive after concern about losses in credit businesses drove down the price of the world’s biggest brokerage.
- Gasoline futures in NY are falling below $2 a gallon for the first time in more than three months as supplies may be adequate for the last few weeks of the summer.
- Gold and silver fell in NY on speculation the dollar’s decline will stall, reducing the appeal of the precious metals as alternative investments.

Wall Street Journal:
- Virgin America Ltd., a discount airline founded by UK billionaire Richard Branson, plans to attract US travelers with the latest in-flight technology when it starts flying on August 8.
- Amazon.com(AMZN) will offer a secure payment service for Internet purchases that may rival plans from EBay Inc.(EBAY) and Google Inc.(GOOG), citing company spokesman Jeff Barr.

NY Times:
- As much as 20% of cheap children’s jewelry in the US remains a lead poisoning hazard after a two-year effort to remove the tainted products, citing a report on US inspections.
- US state legislators have considered a record 1,404 immigration measures this year and passed 170, while the federal government hasn’t overhauled its policies, citing a study released today by the National Conference of State Legislatures, a non-Partisan group.
- The US National Science Foundation plans to award International Business Machines(IBM) a contract to construct the world’s fastest supercomputer, citing documents released on a US Web site.

USA Today:
- American Airlines(AMR), US Airways(LCC) and five other US air carriers reported record percentages of filled seats in July.

Financial Sense:
- Panic In The Street, Fear In The Air!

Iran Daily:
- Iran deported 222,760 “illegal immigrants” in the first three months of a crackdown aimed at Afghan refugees, citing the Labor Ministry.

Economic Releases

- None of note

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Monday Watch

Weekend Headlines
Bloomberg:
- Intel Corp.(INTC), Cisco Systems(CSCO) and Johnson & Johnson, perennial favorites of money managers seeking US stocks with the fastest profit growth, are becoming staple for so-called value investors. Shares of growth companies in the S&P 500 trade at an average 16.3 times estimated earnings, while value stocks, those priced at a discount to the market or their historical average, trade at 14 times profits. The gap between them, now 2.3 points, has narrowed from 25.5 at the beginning of the decade, data compiled by Bloomberg show.
- Bear Stearns Cos.(BSC) Co-President Warren Spector resigned after credit market losses and eroding investor confidence increased pressure for management changes at the second-largest underwriter of securities tied to the slumping US housing market.
- The US House completed congressional passage of anti-terrorist legislation that gives President Bush more power to conduct electronic surveillance for the next six months.
- Federal Reserve Chairman Ben Bernanke may respond to the latest squall in financial markets the same way he did when turbulence hit four months ago: with a change in words rather than policy.
- Jones Apparel Group(JNY) said it plans to accept an increased $950 million offer from Fast Retailing Co. of Japan for its Barneys New York stores chain, turning down a bid from Dubai’s Istithmar PJSC.
- Democratic US House Speaker Nancy Pelosi Risks Losing Support by Continuing to Fund Pet Projects.
- Lead, the best-performing commodity in 2007, has peaked and may plummet for the rest of the year.
- Yields on 10-year notes fell below where they started in January after climbing to a five-year high in June. Government securities are on track to return 5.3% this year, the best performance since gaining 12% in 2002, Merrill Lynch index data show.
- The US House for the first time approved a requirement that investor-owned utilities produce electricity from renewable energy sources.
- US officials are coordinating with the Iraqi government to arrange a security meeting with IranBaghdad, a State Dept. spokeswoman said. in
- The US House approved a $16 billion tax plan and a renewable electricity mandate in broad energy legislation that shifts the government’s focus to wind, solar and biomass production at the expense of traditional energy sources.
- Reliance Industries Ltd., India’s largest company by market value, will invest as much as $14 billion over the next three years in oil exploration and production as the government offers new rigs to drill each year.
- The NY Times will shrink the width of its newspaper by 1 ½ inches tomorrow to cut newsprint expenses, almost eight months ahead of schedule, according to a note to its readers.
- Chrysler LLC's new owner, Cerberus Capital Management LP, picked former Home Depot(HD) CEO Robert Nardelli as CEO, succeeding Tom LaSorda.

Wall Street Journal:
- News Corp.(NWS/A) Chairman Murdoch, who agreed to buy Dow Jones(DJ) last week, said the Wall Street Journal “needs a little more urgency” on its front page.
- Imperial Chemical Industries Plc reached a tentative agreement to be taken over by Akzo Nobel NV and a German partner for about $16.3 billion.

NY Times:
- The US government will begin enforcing rules for new highway bridges in October intended to ensure they are safe and their foundations can withstand river currents.
- Many dogs wear collars with ID tags. Now some collars also have Global Positioning System units, motion sensors or other additions to help owners keep track of their pets the high-tech way.

Barron’s:
- EchoStar Communications(DISH) and GMAC LLC are among companies whose high-yield bonds are attractive after a recent decline in the fixed-income market.

MarketWatch.com:
- Newly minted ETF targets companies that cater to the rich.
- Health-care fund manager Rob Junkin is Stockpicker of the Quarter.

AP:
- US Senator Hillary Rodham Clinton drew boos and hisses in Chicago today when she defended representatives of special interests who contribute to campaigns. “A lot of those lobbyists, whether you like it or not, represent real Americans,” the NY Democrat and potential presidential candidate, said at the Yearly Kos convention of 1,500 “bloggers.”

IBD:
- Credit Woes Grow As Fear Over Fears Worsen Problems.

Reuters:
- Markets give short-sellers long-awaited gains.

EE Times:
- The production outage at certain Samsung Electronics fabs could cause the current shortage of NAND flash parts to linger through the first half of August – potentially boosting prices, according to iSuppli Corp.

CBS News.com:
- Republican John McCain said Saturday that Congress could share in the blame for the Minnesota bridge collapse because lawmakers diverted billions of dollars in transportation money from road work to pet projects.

DigiTimes:
- Acer Inc.’s notebook computer shipments will surpass 1.5 million units this month, up from an average 1 million a month in the second quarter.

Washington Post:
- Hedge Funds to the Rescue. A decade ago, financial globalization seemed terrifying. Crises swept from East Asia to Russia and Brazil; the implosion of a globe-spanning hedge fund, Long-Term Capital Management, forced the Fed to orchestrate a bailout. But this decade may be remembered for the opposite lesson.

Financial Times:
- On Wall Street: Hedge fund storm is no reason to panic.

London-based Times:
- Jacques Nasser, former chief executive officer of Ford Motor(F), may visit the Land Rover and Jaguar factories in the UK, as part of an attempt to buy the brands.

Observer:
- British troops serving in Afghanistan may remain in the country for more than 30 years, a UK army chief said.

AFP:
- The Al-Qaeda terror network has warned that US diplomatic missions are legitimate targets and the group would attack them, citing a video posted on a terror-monitoring Web site.

Finanz & Wirtschaft:
- Credit Suisse Group reduced its investments in the US subprime lending market “early” and is now “comfortable” with its position, CEO Brady Dougan said.

China Times:
- Taiwan plans to build wave-energy plants powered by a current flowing past its east coast to help cut fuel imports and carbon dioxide emissions, citing Energy Bureau Director-General Yeh Huey-ching.

Kyodo News:
- Japan’s government plans to ease restrictions on US beef imports after meetings between the two countries ended in Tokyo yesterday with “no serious problems,” citing Japanese officials.

Xinhua:
- Brazil and Mexico will sign accords to promote ethanol production and biofuel technology exchange, Brazil’s Agricultural Minister Reinhold Stephanes said.
- China still faces serious challenges in ensuring the safety of medicines, meat and other products even after recent improvements, citing Hui Lusheng, assistant director of the State Food and Drug Administration.

Weekend Recommendations
Barron's:
- Made positive comments on (CLX), (LBTYA) and (BR).
- Made negative comments on (ACA).

Citigroup:
- Inventories at semiconductor manufacturers declined 3.5% in 2Q07, well below normal seasonal builds of 7.1%. While the inventory correction has been underway since September, the possibility of tightness in a strong end-market environment creates potential for strong sector fundamentals in 2H07.

Night Trading
Asian indices are -1.75% to -1.0% on average.
S&P 500 futures -.26%.
NASDAQ 100 futures -.21%.

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Earnings of Note
Company/Estimate
- (NILE)/.24
- (BMC)/.34
- (CNO)/.19
- (CXW)/.26
- (CTRP)/.15
- (DNB)/.97
- (JCOM)/.35
- (MNT)/.34
- (QSII)/.33
- (ZQK)/.02
- (ROG)/.18
- (SINA)/.24
- (ELOS)/.36
- (TRID)/.25
- (WYNN)/.53

Upcoming Splits
- (HCSG) 3-for-2

Economic Releases
- None of note

Other Potential Market Movers
- The CIBC Enterprise Software Conference and the Pacific Crest Tech Forum could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by financial and commodity shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the week.