Tuesday Watch

Late-Night Headlines
Bloomberg:
- A strengthening US dollar should push investors away from energy and materials stocks and may make emerging markets “vulnerable,” Bear Stearns(BSC) said. Better-than-expected economic data and forecasts that the Fed has finished cutting interest rates should boost the US currency, Bear Stearns Chief Investment Strategist Jonathan Golub said. “We believe that the significant outperformance of emerging markets over the past several years can largely be explained by a weakened dollar and skyrocketing commodity prices,” Golub said. “These markets should be increasingly vulnerable in a strengthening dollar environment.”
- Some investment-grade bonds backed by auto loans are showing better returns than equity investments in financial companies, according to analysts at Wachovia Corp. Spreads on top-rated auto asset-backed securities have narrowed in recent weeks. The yield on AAA auto loan debt fell to 90 basis points over benchmark rates as of May 9, compared with a high of 150 basis points more than the benchmark on April 25, according to data from Deutsche Bank AG.
- Treasuries were little changed as investor demand for higher-yielding assets pushed Asian stocks higher and sent measures of corporate credit risk down.
- Yen May Extend Declines on Bets Worst of Financial Crisis Over.
- Corn and soybeans fell on speculation that drier weather forecast for the next 10 days will accelerate US planting, after delays from wet, cold conditions in the past month.
- Finmeccanica Agrees to Buy DRS Technologies for $4 Billion.
- London’s property market had the most widespread price declines in at least 14 years last month as the slump in financial services deepened and banks curbed lending, the Royal Institution of Chartered Surveyors said.
- China’s strongest earthquake in 58 years may reduce the nation’s energy demand as damaged power plants and transmission lines force companies to idle some generators. “Demand for oil was already down in April,” said Phil Flynn, a senior trader at Alaron Trading Corp.
- Flour Corp.(FLR) earnings jumped 63% on 32% revenue growth during the first quarter. The shares surged 7.6% in after-hours trading.

Wall Street Journal:
- CIT Group(CIT) Receives Buyer Interest for Lending Subsidiaries.

MarketWatch.com:
- Hewlett-Packard(HPQ) and Electronic Data Systems(EDS) confirmed Monday that they are in “advanced discussions” that could result in H-P acquiring the technology services giant and creating a more-formidable competitor to IBM Corp.(IBM).
- While the threat posed by Microsoft’s(MSFT) takeover bid appears to be receding, Yahoo Inc.(YHOO) may now be confronted by opportunistic investment funds seeking to cash in by pushing the company back toward a deal.

CNBC.com:
- Barton Biggs of hedge fund Traxis Partners says “we’ve seen the worst” and he is “feeling pretty bullish.” (video)
- JPMorgan(JPM) Makes Offers to 6,000 Bear Stearns(BSC) Staff.

USA Today.com:
- George Soros sees ‘reflexivity’ theory of economics as life’s work. Soros, now in his eighth decade and enjoying a personal fortune estimated at $9 billion, yearns to be seen as something other than a financial oracle or Democratic Party sugar daddy. Conservative websites routinely assail him as “anti-American.” The Hungarian émigré, who built a worldwide reputation by out-thinking markets, desperately wants to be acknowledged as a philosopher. His bid for such recognition – in a new book published last week – lies in a theory called “reflexivity,” which Soros argues should supplant conventional economic thought that’s based on coolly calculating rational actors. Soros makes no bones about his judgment that the current financial crisis is the “worst since the 1930s.” Despite Soros’ apocalyptic rhetoric, the Dow is hovering near 13,000 and unemployment is a relatively low 5%. Soros explains the disconnect with the tale of the man who falls off the Empire State building and thinks to himself halfway down: “So far, so good.” “That’s where we are right now,” Soros laughs. He says, when pressed, Americans ultimately won’t escape this episode without suffering a noticeable decline in their standard of living.

Reuters:
- The ability to pay interest on bank reserves would give the US Federal Reserve a powerful tool to tap if it wanted to take further steps to ease credit strains but was worried lower interest rates might spark inflation.

Financial Times:
- Parts of the largely unregulated $62,000bn credit derivatives market may have to be subject to the kind of tighter controls that at present govern the insurance industry, NY’s insurance regulator said on Monday.
- Google(GOOG) triumphant: Search wars look settled. The scale of Google’s victory over Microsoft in online advertising is hard to exaggerate. (very good article)
- Wages the least of Europe’s worries. The ECB should stop trying to put out the inflation fire and instead end the growth freeze by cutting interest rates.

TimesOnline:
- There is talk that the US dollar’s long decline might be over. George Soros said recently that he was ending his long bearish stance on the dollar and had gone neutral. The dollar is now absurdly undervalued. In purchasing power parity terms, the US consumer is at something like a 40% disadvantage to his and her counterparts in Europe. The US trade deficit is plummeting. The financial crisis is probably past the worst. US interest rates may not have touched bottom, but they are surely close. Meanwhile, doubts about eurozone growth are starting to proliferate.
- UK Government backs down on corporate tax. Several big multinational British companies had said that they were prepared to move their headquarters from the UK amid concerns that the Treasury was preparing to tax the profits they derived overseas.

Commercial Times:
- Taiwan’s automobile sales in the first 10 days of May plunged 42.5% from a year earlier on the incoming government’s plan to raise fuel prices, citing figures from the transportation ministry.

South China Morning Post:
- China’s plan to let investors engage in margin lending and short selling of equities may not be launched until the close of the Olympics Games.

Tuoi Tre:
- Vietnam’s rice prices fell by 400 to 500 dong per kilogram, to between 5,200 dong and 5,500 dong a kilogram as farmers started harvesting a new crop in some areas, citing Nguyen Hoang Chuong, a trader based in the country’s main rice-producing area.

Late Buy/Sell Recommendations
Morgan Stanley:
- Concern over a reversal of the current yuan-appreciating trend, in response to potential US dollar strength, is rising. At the market level, this would make the overall offshore China equities universe less attractive for US dollar investors, although the aggregate impact on earnings would likely be limited. The Morgan Stanley FX Strategy team has turned cautious on Asian currencies for the first time in close to two years.

Night Trading
Asian Indices are -.25% to +1.5% on average.
S&P 500 futures +.05%.
NASDAQ 100 futures +.09%.

Morning Preview
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Earnings of Note
Company/EPS Estimate
- (FOSL)/.39
- (CSIQ)/.25
- (WMT)/.75
- (LIZ)/.10
- (TJX)/.40
- (AMAT)/.22
- (WFMI)/.31
- (ERTS)/.00
- (MELI)/.10

Upcoming Splits
- (CLF) 2-for-1

Economic Releases
8:30 am EST
- The Import Price Index for April is estimated to rise 1.6% versus a 2.8% gain in March.
- Advance Retail Sales for April are estimated to fall .2% versus a .2% gain in March.
- Retail Sales Ex Autos for April are estimated to rise .2% versus a .1% gain in March.

10:00 am EST
- Business Inventories for March are estimated to rise .4% versus a .6% rise in February.

Other Potential Market Movers
- The Fed’s Evans speaking, Fed’s Fisher speaking, Fed’s Hoenig speaking, Fed’s Yellen speaking, Fed’s Plosser speaking, Fed’s Warsh speaking, Fed’s Bernanke speaking, Fed’s Pianalto speaking, IBD/TIPP Economic Optimism Index, (GM) conference, (OI) analyst meeting, (JKHY) analyst conference, Goldman Sachs Power/Utility Conference, UBS Global Financial Services Conference, Bank of America Health Care Conference, Robert W. Baird Growth Stock Conference, Merrill Global Metals/Mining/Steel Conference, Merriman Curhan Ford Clean Tech Conference, Morgan Stanley Communications Conference and CSFB Semi/Hardware Conference could also impact trading today.

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

Stocks Finish at Session Highs, Boosted by Retail, Financial, Restaurant, REIT and Technology Shares

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In Play

Stocks Surging into Final Hour on Lower Energy Prices, Buyout Speculation, Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Software longs, Biotech longs, Computer longs and Internet longs. I covered all of my (IWM)/(QQQQ) hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The tone of the market is bullish as the advance/decline line is substantially higher, most sectors are rising and volume is below average. Investor anxiety is about average. Today’s overall market action is bullish. The VIX is falling 7.3%, but remains above average at 18.0. The ISE Sentiment Index is below average at 120.0 and the total put/call is about average at .86. Finally, the NYSE Arms has been running around average most of the day and is currently .93. I said on Friday that I thought a reversal lower in oil is all that stands in the bulls way of another meaningful market surge higher. Oil trades heavy today for the first time in awhile and is near session lows. A meaningful continuation of oil’s decline should help boost the S&P 500 up through its 200-day moving average over the coming weeks. Market-leading growth stocks continue to trade very well. Retail stocks are especially strong. The action in (FDX) and (MBI) shares, considering the news, is also a very positive indication for the broad market. Moreover, the TED spread is falling another 11 basis points today to .89 basis points, which is the lowest since February 20^th and down from 204.0 on March 19^th, which is a significant positive. The 30-day asset backed commercial paper yield is down another 8 basis points to 2.55%, the lowest since January 2005 and down from 6.18% in December of last year. The European Financial Sector Credit Default Swap Index is falling 3.06 basis points to 64.06 basis points. The Eurozone Economic Surprise Index has fallen to -31.20, down from 79.0 in late March. Reports of a Hewlett-Packard(HPQ) deal for Electronic Data Systems(EDS) are also a major positive for the broad market. Nikkei futures indicate a +112 open in Japan and DAX futures indicate a +66 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower energy prices, diminishing credit market angst, buyout speculation and bargain hunting.

Today's Headlines

Bloomberg:
- Money Markets Signal Worst of Credit Market Crisis May Be Over. The difference between the yield on three-month Treasury bills and the rate on dollar-denominated loans in London, an indication of credit risk known as the TED spread, is narrowing.
- India Cheapest BRIC Market, May Get Cheaper on Costs. Investors are punishing stocks in India more than in any of the largest emerging markets as government measures to curb inflation cut profits at companies from Steel Authority of India Ltd. to Grasim Industries Ltd.
- HSBC Investment Management’s $2.7 billion Absolute Return Service cut commodity holdings to less than 2% of the fund, from a 17% peak in December, because of a “high” risk of prices slumping from records. “The risk of a sharp correction is high,” said Charlie Morris, the fund’s manager. This year’s rally in so-called soft commodities including coffee, cocoa and sugar is “finished,” and gold and silver will fall further from their peaks, he said. Morris predicted gold prices will fall to $750 an ounce within a year.
- MBIA Inc.(MBI) rose 5% in NY trading after saying it will pump $900 million into its insurance unit and reporting a first-quarter loss that was narrower than some analysts’ estimates.
- India’s industrial production grew at the slowest pace since 2002 in March as borrowing costs at a six-year high discouraged consumers from buying cars and motorcycles.
- Crude oil fell $1.81/bbl. to $124.11 after touching a record of $126.40/bbl. in NY amid signs that rising prices may curb demand in emerging markets. China’s oil imports fell 3.9% in April from a year earlier as refiners cut demand, and India’s industrial production grew at slowest pace since 2002.
- AnnTaylor Stores(ANN) increased the most in six years in NY trading after first-quarter profit exceeded estimates.
- China Hit by 7.9-Magnitude Quake; More Than 8,700 Die.
- Lehman CFO Callan Says Firm Boosted Liquidity, Added Customers.
- China and India must take equal responsibility with the US and other industrialized nations in cutting global warming pollution, Republican presidential candidate John McCain said.
- China ordered banks to set aside more deposits as reserves for the fourth time this year after inflation accelerated, approaching the fastest pace since 1996.

Wall Street Journal:
- Keep America Open to Trade. Recently, prominent voices in punditry and politics have questioned the benefits of America’s openness and called for an isolationist U-turn that would choke off our innovation and prosperity.
- After spending several weeks staking out positions on taxes, Iraq and judges designed to appeal to conservatives, John McCain is shifting his attention to independents and Democrats, with proposals on climate change.
- Banks may agree to fund the buyout of Clear Channel Communications(CCU) for $36 a share as part of a legal settlement.
- Hedge funds and other investors have started buying leveraged loans and asset-backed securities that have been languishing on banks’ balance sheets since the credit crisis began last summer. This is the latest indication that the credit market may have turned.

AP:
- An Energy Department report concludes that wind turbines can produce 20% of the nation’s annual electricity needs within 20 years. This is about the same share of electricity produced today by nuclear power.

Portfolio.com:
- Apple(AAPL) is close to announcing it has signed a deal to sell HBO programs and movies on the iTunes website.

MarketWatch.com
- Merrill Lynch(MER) has enough capital and access to cash to pay off some $50 billion of debt due in the next year and to rebuild its financial strength, the investment bank’s senior financial executives said Monday.

InvestmentNews:
- California has backed away from a controversial proposal to regulate hedge funds under strong opposition from its hedge fund industry.

Reuters:
- Russia’s Economy Ministry raised its forecast for inflation this year to 9-10.5% from 9-10% after consumer prices rose more than expected in the first four months.

TimesOnline:
- Greg Fleming hurtles through the door of a plush London meeting room. The 45-year old Merrill Lynch(MER) president and chief operating officer is running on empty. He has come to rally the troops and get them re-focused and back on track after the extreme turbulence of the past nine months. His tone is much more upbeat than most and he speaks about the credit crunch in the past tense. He figures that the worst of the writedowns are over and that the price of leveraged finance paper is picking up. He says that buyers have come out that were not there in the first quarter of this year. It is time to turn a back on the rain clouds, he says.

Xinhua News:
- Five more children died of hand, foot and mouth disease in China, taking the death toll to 39. China has now registered 24,934 cases of the disease so far.

Bear Radar

Style Underperformer:

Mid-cap Growth +.14%

Sector Underperformers:

Oil Serviceirlind (-1.60%), Coal (-1.21%) and HMOs (-.94%)

Stocks Falling on Unusual Volume:

CRYP, CCOI, CLWR, PDC, GENC, IMCL, PSUN, JASO, CTS, FMR and EVR, KFS, PDX, JAH, NSR, OMG,

Stocks With Unusual Put Option Activity:

1) ACAS 2) SHW 3) JOSB 4) CCU 5) ARO

Economic Releases

- None of note