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Friday Watch

Late-Night Headlines
Bloomberg:
- Lehman Brother(LEH) and UBS AG(UBS) sold $1 billion in debt backed by commercial mortgages, receiving enough demand to lower the interest rate. “We haven’t seen this kind of demand all year,” said Kent Born, a senior managing director of the commercial mortgage lending group at PPM America. PPM has more than $72 billion in assets under management in the US. “I see this pricing as a very strong indicator for the market.”
- Sugar mills in Brazil’s major producing region will turn a record 58% of this year’s cane crop into ethanol as surging oil prices boost demand for alternative fuels.
- The cost of protecting Japanese and Australian corporate bonds from default declined, according to traders of credit-default swaps. The Markit iTraxx Japan index fell 6 basis points to 98 basis points. The Australia index declined 15 basis points to 103 basis points.
- China’s stocks fell, with the benchmark set for the biggest weekly decline on record amid concern government measures to stem inflation will dent economic growth and corporate profits.
- Google Inc.(GOOG), owner of the most popular search engine, reported a 30% increase in first-quarter profit after international expansion countered a slowdown in US advertising spending. The shares soared 18% in after-hours trading.
- FBI Director Robert Mueller said the agency’s investigation into the subprime loan meltdown may uncover financial crimes committed by hedge funds and private equity firms.
- Yuan gains will slow as China shifts policy late this year to support exporters’ earnings, say Deutsche Bank AG and Citigroup, two of the world’s three biggest currency traders. “We are now looking at a greater risk of an economic slowdown in China and therefore a modest slowdown in the pace of yuan appreciation,” said Mirza Baig, a Singapore-based economist at Deutsche Bank, who forecasts the policy shift in the third quarter. “Export profits may collapse and export jobs may fall,” wrote Huang Yiping, chief Asia economist of Citigroup in Hong Kong.
- India’s central bank ordered banks to set aside more money to cool lending, adding to government efforts to rein in inflation running near a three-year high.
- Democratic presidential candidate Barack Obama hinted today that he may be finished debating rival Hillary Clinton, dismissing the forums as little more than a chance for her to “twist the knife.”
- SanDisk Corp.(SNDK), the biggest maker of digital-camera memory cards, reported revenue that topped analysts’ estimates after selling more storage for MP3 players and mobile phones. The stock rose 4.4% in extended trading.
- Intuitive Surgical Inc.(ISRG) the maker of a machine for robot-assisted surgery, said first-quarter profit jumped 88% on higher sales. The company fell 8.6% in late trading after saying stock compensation costs would double.

MarketWatch.com:
- A benchmark measure of corporate-credit risk has fallen sharply since mid-March, as lenders and investors have looked past massive debt write-downs expected at the likes of Citigroup Inc.(C) and Merrill Lynch(MER) to signs that the financial system is on firmer ground. An index tracking spreads on credit-default swaps, a type of tradable insurance against the possibility a company will renege on its debt, has tumbled 40% since mid-March.

CNBC.com:
- Merrill’s(MER) Stock Surges Amid Hope Worst May Be Over.
- Google(GOOG) Profit Jumps 30%, Blows Past Expectations.

c/net:
- Tests show BMW’s hydrogen car cleans the air.

CNNMoney.com:
- The best place to buy a home these days. The 6 cities where home prices are likely to rise the most – or fall the least – in the next 12 months.

SmartMoney:
- Advisors are moving out of international stock funds and back into US stock funds.

Portfolio.com:
- Things have officially gone from bad to worse at the NY Times Co.(NYT).

Reuters:
- Speaking to a group of nearly 2,000 Microsoft(MSFT) enthusiasts at a technology conference in Seattle, Ballmer asked how many people use Yahoo as their primary Web search engine. Only a handful of arms went up – fewer than for Microsoft’s Windows Live search. The overwhelming majority raised their hands for Google Inc.(GOOG). After the tepid response for Yahoo’s search, Ballmer said jokingly: “Wow! We offered 31 bucks a share.”
- Legendary Texas oil man T. Boone Pickens has gone green with a plan to spend $10 billion to build the world’s biggest wind farm. But he’s not doing it out of generosity – he expects to turn a buck.
- US video game sales rise 57% in May.

Financial Times:
- Global rice prices have overshot their true value based on supply and demand fundamentals and could fall by 40% to around $500 a ton once current seasonal demand has been met, Mari Pangestu, Indonesia’s trade minister, predicted.
- Deutsche Bank(DB) and other investment banks are working on plans to develop a clearing house for the credit derivatives markets in an effort to allay growing regulatory and investor fears about “counterparty risk.”

International Herald Tribune:
- US dollar steadies as worries about subprime crisis ease.

Sydney Morning Herald:
- Cancer researchers are hailing an Australian medical breakthrough that slows the growth of turmors.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (GOOG), target $600. Broad revenue upside. Google’s own Website revenue came in at $3.26B - $121MM or 4% higher than our estimate. Google’s Network revenue came in at $343MM - $19MM or 6% higher than our estimate. TAC was right-in line with our expectations. Adjusting for $202MM FX(in-line with our estimate), we calculate that Y/Y organic net revenue growth was 40%. First pass? We are more positive – Google’s underlying fundamentals appear to remain intrinsically strong and the company continues to have significant option value – display, mobile, etc… There is some deceleration, but it appears to be much more large numbers law trendline than feared, creating a very attractive buying opportunity.
- Reiterated Buy on (APH), raised target to $53.50.
- Reiterated Buy on (CELG), target $79.
- Reiterated Buy on (MAR), target $48.
- Reiterated Buy on (IGT), lowered target to $48.
- Reiterated Buy on (UTX), raised estimates, target $86.

Piper Jaffray:
- Reiterated Overweight on (ITW), lowered target to $63.

Night Trading
Asian Indices are -1.0% to unch. on average.
S&P 500 futures unch.
NASDAQ 100 futures +.33%.

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Earnings of Note
Company/EPS Estimate
- (CAT)/1.33
- (C)/-.95
- (HON)/.82
- (MAN)/.82
- (SLB)/1.11
- (XRX)/.27
- (CAO)/-.18

Upcoming Splits
- None of note

Economic Releases
- None of note

Other Potential Market Movers
- The Fed’s Lacker speaking, Fed’s Rosengren speaking and Morgan Stanley Commodities & Shipping Conference could also impact trading today.

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

Stocks Finish Near Session Highs, Boosted by Financial, Compuer Service, Software Shares

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In Play

Stocks Mostly Lower into Final Hour on Healthy Profit-taking

BOTTOM LINE: The Portfolio is about even into the final hour as gains in my Software longs, Medical longs and Gaming longs offset losses in my Biotech longs and Alternative Energy longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is slightly bearish as the advance/decline line is lower, most sectors are declining and volume is below average. Investor anxiety is about average. Today’s overall market action is neutral. The VIX is rising 2.0% and remains above average at 21.0. The ISE Sentiment Index is a below average 122.0 and the total put/call is about average at .94. Finally, the NYSE Arms has been running about average most of the day and is currently 1.0. Today’s light volume pullback, after yesterday’s sharp advance, is just what investors need to see further gains. The many US stock market bears continue to display little ability to capitalize on recent potential downside catalysts. Moreover, the reaction of financials to today’s news is a big positive. The (XLF) is near session highs, rising 1.6%. The AAII % Bulls plunged this week to 30.4% from 45.8% the prior week. Moreover, the % Bears surged to 48.7% this week from 37.3% the prior week. This is also bodes well for further broad market gains. Google(GOOG) reports after the close today. I like the set-up. Expectations are low with much negative rhetoric in the financial press regarding its prospects. I continue to believe recent weakness in the stock is almost completely related to near-term issues/general market weakness and the company is paving the way for even greater dominance in the future. If they do disappoint again this quarter and the stock falls, I suspect large investors with longer-term time horizons may step up to the plate. There are few stocks in the world with Google’s massive opportunities, current market dominance and cheap valuation, in my opinion. Nikkei futures indicate an +52 open in Japan and DAX futures indicate an +79 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, less economic pessimism and bargain hunting.

Today's Headlines

Bloomberg:
- Merrill Lynch(MER) posted its third straight quarterly loss and said it will cut about 3,000 more jobs after the credit-market seizure forced the investment bank to writedown about $6.5 billion of debt. The shares are surging 4.5% on heavy volume on the news.
- GE(GE) agreed to buy most of Citigroup’s North American commercial lending and leasing unit, adding $13.4 billion in finance assets less than a week after an unexpected first-quarter profit decline.
- Former US President Jimmy Carter Meets Hamas in Cairo, Ignoring US, Israeli Objections.
- Josh Birnbaum, one of the traders who led Goldman Sachs’(GS) push into bets against subprime-mortgage bonds, has left the world’s biggest securities firm and plans to forma $1 billion hedge fund.
- The $62 trillion market for credit derivatives that triggered some of Wall Street’s $245 billion of subprime losses and writedowns remains “vibrant,” defying its critics, according to the industry’s trade body.
- McCain Says Tax, Spending Cuts Will Spark Economy.

Wall Street Journal:
- Yahoo Inc.(YHOO) moved closer to outsourcing its search advertising to Google Inc.(GOOG) after an initial test of the system yielded what the two firms deemed positive results.
- Adobe(ADBE) Web Photo Site Is Great for Editing, But Lacks Some Basics.

USA Today:
- Home buyers are taking advantage of steep price declines and home foreclosures, leading to sales gains in some parts of the US, citing buyers and real estate agents.

Forbes.com:
- A group of leading German economic think tanks on Thursday cut their forecast for growth this year in Europe’s largest economy to 1.8% from a prior forecast of 2.2% growth. They forecast growth of 1.4% next year in Germany.

AltAssets:
- Cleantech investments in North America, Europe and Israel totaled $1.25 billion in the first quarter of 2008, up 42% form the same period a year ago.

Financial Times:
- Risk premiums in European credit derivatives markets fell on Thursday as equities rose in relief that writedowns at Merrill Lynch(MER) and JPMorgan(JPM) were not as dreadful as feared.

AFP:
- Soros urges regulation for hedge funds.

Interfax:
- Russia’s Economy Ministry said inflation in the country will probably be between 9% and 10%, compared with the previous forecast of 8% to 9.5%.

Haaretz.com:
- Hezbollah’s TV station Al-Manar reported on Thursday that Syrian President Bashar Assad has said that Syria is preparing for war with Israel as a real possibility.

O Estado de S. Paulo:
- Brazil may have as much as 70 billion barrels of oil in fields along its Atlantic coast between Espirito Santo and Santa Catarina states. Brazil currently has official oil reserves of 14 billion barrels.

Bear Radar

Style Underperformer:

Small-cap Growth -.98%

Sector Underperformers:

Wireless (-2.83%), Road & Rail (-2.08%) and Drugs (-1.32%)

Stocks Falling on Unusual Volume:

VIVO, NOK, PLCM, FTE, AMFI, FCBP, SMSC, IDCC, PPDI, ISIL, WERN, SPWR, ODFL, HCSG, WTS, BGG, CNW, IGT and FCS

Stocks With Unusual Put Option Activity:

1) AMX 2) ITU 3) DHR 4) NSM 5) SGP