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Thursday Watch

Late-Night Headlines
Bloomberg:
- The cost of protecting Japanese and Australian bonds against default fell for the second day, according to traders of credit-default swaps. The Markit iTraxx Japan index fell 2 basis points to 84 in Tokyo. Australia’s benchmark of credit quality declined 4.5 basis points to 98, Citigroup prices show.
- Hillary Clinton stepped up her lobbying of Democratic Party superdelegates today as her campaign aides and supporters signaled they won’t compromise in the dispute over counting the Florida and Michigan primaries.
- The chief executive officers of UAL Corp.’s(UAUA) United Airlines and US Airways Group(LCC) will meet tomorrow to discuss a possible merger as rising fuel prices add to pressure for a tie-up.
- Corn fell to the lowest price in more than a week after the US government announced plans to allow livestock grazing on protected land, reducing demand for grain in animal feed.
- The US dollar traded near a two-week high against the yen before a government report today that analysts say will show the economy expanded at a faster pace last quarter than initially estimated.
- Japan’s stocks gained the most in four weeks after orders for durable goods in the US unexpectedly rose last month, reducing concern an economic slowdown will subdue consumer spending in Japan’s biggest export market.
- Shareholders of Taser Intl.(TASR) sued Goldman Sachs(GS), a Merrill Lynch(MER) unit and six other firms, claiming stock-price manipulation through illegal short selling.
- Global demand for rented commercial space declined in the first quarter for the first time in four years as higher borrowing costs prevented some companies from expanding, according to a report by the Royal Institution of Chartered Surveyors. Investors are spending less on office buildings, shopping malls and other commercial properties in emerging markets because of concern about the potential returns, RICS said.
- Inverness Medial Innovations(IMA), a medical test company, is talking with several private equity sponsors about a $1.8 billion joint venture involving three health-management businesses Inverness has acquired.

Wall Street Journal:
- China Hospitals Struggle As Homeless Want to Stay.
- Lies, Damned Lies and ‘Hedge Funds’ When asked at today’s All Things Digital conference about rumors that he would take Expedia(EXPE) private, IAC/Interactive Chairman Barry Diller knocked them down and then hit the ball out of the park: “I am so suspect of current markets and the hedge funds and momentum selling/buying. I think there is a plot behind everything.” The widespread trend now is that when there is no edge, no new information, that doesn’t stop people. They seem to feel free to just make it up and try to convince other to believe it. So how about we go back to that old-fashioned notion of honor and expect everyone to police themselves – and maybe even behave as if they deserved to be trusted with millions of dollars?

MarketWatch.com:
- Short Sellers Targeting Solar & Alternative Energy (AKNS, ASTI, CSIQ, CPS, ESLR, FTEK, OTTR, SPWR).
- Top-performing newsletters oppose Microsoft-Yahoo deal. Here’s why.

CNBC.com:
- The unprecedented run-up in oil prices may finally have reached a peak as the US dollar stabilizes, Saudi Arabia boosts production and demand slows, analysts say.
- Cisco Systems(CSCO) CEO Chambers said Wednesday the company is “extremely comfortable” with its long-term growth target and expects the economy to start recovering toward the end of the year.

BusinessWeek.com:
- Verenium Corp. said Wednesday it is starting up a research ethanol plant that runs on agricultural waste and wood products instead of corn. The company aims to begin construction in the middle of next year on a 30 million-gallon-per year cellulosic ethanol plant.

Gizmodo:
- Sony’s(SNE) sci-fi looking 6-foot glass speaker is turning into an actual product: the Sountina NSA-PF1 – designed for larger rooms and halls – will give you a 50Hz to 20kHz frequency response, analog and digital audio inputs, and a blue, amber or purple-lit 3-foot organic glass tweeter for just $10,000.

Reuters:
- Federal Reserve Bank of Dallas President Richard Fisher said he expects the central bank would raise the benchmark US interest rate should the public begin to expect greater gains in consumer prices. “If inflationary developments and, more important, inflation expectations continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic” economy, Fisher said.
- During the week leading up to the Memorial Day holiday, the traditional start of vacation season, Americans pumped 5.5% less gas than a year ago. The findings follow last week’s US Dept. of Energy data which showed highway miles driven in March fell 4.3% from a year earlier, the first March decline since the last major oil shock in 1979. Moreover, gasoline demand in Britain fell 7% below year-ago levels in April, with diesel use down almost 2%, according to govt. figures released Wed.

Financial Times:
- Toyota(TM), ruler of the global market for low-emission cars, stuck another green jewel in its crown this month when it announced that it had sold 1 million of its Prius petrol-electric hybrids. But even as it celebrates the milestone, it is facing an upsurge in competition.
- Sarkozy calls for EU immigrant crackdown. Plans for a Europe-wide clampdown on immigration that could see asylum-seekers forced to apply for refugee status in advance and more effective deportation measures, are to be at the heart of France’s European Union presidency.
- Efforts to tackle the risk surrounding privately negotiated credit derivatives will take a step forward on Thursday when 11 of the world’s biggest investment banks announce the creation of the first central clearer for the opaque contracts by September.
- The financial services industry is reaping benefits from the turmoil in the credit markets as corporate treasurers, burned by illiquid investments, increasingly hand over their spare cash to professional money managers.

TimesOnline:
- Apple(AAPL) is poised to announce it will start selling films from four major Hollywood studios for download in the UK as part of its iTunes internet service at prices on a par with DVDs.

Late Buy/Sell Recommendations
Citigroup:
- comScore reported that (GOOG)’s US Web Search Paid Clicks were 568MM in April, up 19.6% Y/Y vs. 2.7% Y/Y growth in March and 1.8% Y/Y growth in Q1. Per comScore, while April searches on GOOG’s US Websites grew about 33% Y/Y, GOOG’s coverage ratio declined in the low-teens Y/Y. However, GOOG’s Click Thru Rate grew in the low-single digits Y/Y – the first month of growth since Sept. 07, as reported by comScore.
- Reiterated Buy on (URBN), target $35.
- Reiterated Buy on (COH), target $44.
- Reiterated Buy on (AXL), target $25.
- Reiterated Buy on (DOX), raised estimates, target $46.

Night Trading
Asian Indices are -.5% to +1.75% on average.
S&P 500 futures -.13%.
NASDAQ 100 futures -.05%.

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Earnings of Note
Company/EPS Estimate
- (COST)/.65
- (BIG)/.36
- (GCO)/.09
- (SHLD)/.18
- (JOYG)/.75
- (DSW)/.23
- (HNZ)/.61
- (NOVL)/.05
- (JCG)/.47
- (SIGM)/.41
- (OVTI)/.32
- (WIND)/.02
- (DELL)/.34
- (MRVL)/.13
- (FRED)/.16

Upcoming Splits
- (ATLS) 3-for-2

Economic Releases
8:30 am EST
- Preliminary 1Q GDP is estimated to rise .9% versus a prior estimate of a .6% gain.
- Preliminary 1Q Personal Consumption is estimated to rise 1.0% versus a prior estimate of a 1.0% gain.
- Preliminary 1Q GDP Price Index is estimated to rise 2.6% versus a prior estimate of a 2.6% increase.
- Preliminary 1Q Core PCE is estimated to rise 2.2% versus a prior estimate of a 2.2% increase.
- Initial Jobless Claims for this week are estimated to rise to 370K versus 365K the prior week.
- Continuing Claims are estimated to rise to 3080K versus 3073K prior.

10:30 am EST
- Bloomberg consensus estimates call for crude oil inventories to remain unch. versus a -5,317,000 barrel decline the prior week. Gasoline supplies are also estimated to remain unch. versus a -755,000 barrel drawdown the prior week. Distillate inventories are expected to rise by 1,000,000 barrels versus a 728,000 barrel build the prior week. Natural gas supplies are estimated to rise by 85 bcf versus an 85 bcf injection the prior week. Finally, Refinery Utilization is expected to rise by .5% versus a 1.3% increase the prior week.

Other Potential Market Movers
- The Fed’s Geithner speaking, Fed’s Bernanke speaking, Fed’s Kohn speaking, (NVLS) Mid-Q Update, (CBT) analyst day, (ELX) analyst day, (MA) investment community meeting, (HAE) analyst meeting, (STZ) analyst meeting, (UA) investor meeting, Help Wanted Index, FBR Investor Conference, Deutsche Bank Energy/Utilities Conference, Sanford C. Bernstein Conference, UBS Global Specialty Pharma Conference, Cowen TMT Conference, Lehman Wireless/Wireline Conference, could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and automaker shares 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 at Session Highs, Boosted by Gaming, Retail, Homebuilding, Commodity, Construction, Telecom Shares

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In Play

Stocks Slightly Higher into Final Hour on Less Economic Pessimism, Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Gaming longs, Alternative Energy longs and Software longs. I added to my (WMS) and (NUAN) longs and took profits in a trading long today, thus leaving the Portfolio 100% net long. The tone of the market is mildly bearish as the advance/decline line is slightly lower, sector performance is mixed and volume is below average. Investor anxiety is slightly above average. Today’s overall market action is neutral. The VIX is rising .8% and remains above average at 19.80. The ISE Sentiment Index is below average at 120.0 and the total put/call is slightly below average at .83. Finally, the NYSE Arms has been running about average most of the day and is currently .90. Mid-cap “growth” stocks are substantially outperforming the broad market today. Considering the rise in oil and decline in bank stocks, today’s broad market stock performance is more impressive. The US dollar is also near session highs versus the euro, which is also a large positive considering oil’s rise. The Citigroup US Economic Surprise Index is rising to -11.4 today, up from -100 in March. As well, the EU Index and Japanese Index are still below the US at -21.0 and -25.60, respectively. Mastercard(MA) just reported that the four-week moving average of retail US gasoline demand fell for the fifteenth week in a row, declining 6.3% from last year’s levels. That is a very serious decline in demand from the world’s largest user. The Bloomberg Base Metals Spot Index is falling below its 200-day moving average today for the first time since last October. One of my longs, (AMSC), is jumping 10% today to a new eight-year high after Kaufman Brothers rated it “Buy.” The stock is getting a bit extended short-term, but I would add to it on any meaningful pullback from current levels. Nikkei futures indicate a +176 open in Japan and DAX futures indicate a +27 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 diminishing credit market angst.

Today's Headlines

Bloomberg:
- Hedge Funds Foment Russia Credit Crunch With 16% Puts.
- Amazon.com(AMZN), the world’s largest online retailer, will introduce a paid video-streaming service within the next few weeks.
- US stocks, which began the year with their biggest quarterly drop since 2002, may be poised to rally now that credit markets have returned to normal since mid-March, Bear Stearns said.
- The Markit CDX North America Investment Grade Index of 125 companies in the US and Canada declined 5.5 basis points to 101.5 basis points as of this morning.
- Credit-Default Swaps Enter ‘Mainstream,’ Bank of America Says.
- Dennis Gartman, economist and editor of the Gartman Letter, Says Oil Market ‘Fearful’ Over Trading Rules. (video)
- Copper fell to a two-month low as inventories of the metal climbed and the dollar rallied. Supplies of copper have increased 14% just this month.
- Crude oil rose more than $2 a barrel after Morgan Stanley said that Brent oil from the North Sea could “easily” reach $150 a barrel, thus boosting investment fund speculation in the commodity.
- Treasuries fell, pushing the 10-year note’s yield above 4% for the first time since January, as a measure of durable goods orders unexpectedly rose.
- Expedia(EXPE) Rises on Speculation Diller May Take Company Private.
- Polo Ralph Lauren(RL) rose the most in almost two years in NY trading after reporting an unexpected increase in profit.
- American Eagle Outfitters(AEO) rose the most in four months in NY after forecasting second-quarter profit that exceeds some analysts’ estimates.
- As the Olympics countdown clock in Tiananmen Square ticked down to 73 days yesterday, the pollution reading in Beijing climbed to “hazardous.”

Wall Street Journal:
- SEC Will Scour Bear Trading Data. Bear Stearns(BSC) plans to turn over documents to securities regulators showing that several financial giants, including Goldman Sachs(GS), Citadel Investment Group and Paulson & Co., slashed their exposure to the securities firm in the weeks before its collapse. The SEC is expected to use the data to determine whether any trading activity was improperly coordinated in any way, constituted manipulation or otherwise contributed to Bear Stearns’s collapse. The SEC has delved more deeply into the ties among hedge funds, their clients and their prime brokers with a particular focus on flows of information and potential insider trading.
- Soaring cocoa prices are driving up the cost of chocolate around the world. The chocolate industry points its finger at speculative buying by professional investors, especially hedge funds. Given the small size of the cocoa market – the annual crop is valued at $10 billion, roughly equity to a day’s oil production – hedge funds can move prices with relatively small amounts of cash. For the week ended May 13, financial speculators on the Intercontinental Exchange owned futures contracts over 654,760 metric tons of cocoa. The Swiss maker of Lindt chocolates says speculative investment is distorting the cocoa market. “The increase in cocoa prices has little to do with supply and demand,” CEO Ernst Tanner said.

NY Times:
- Coors Light Expands Advertising on Facebook, MySpace.
- TiVo Will Start Service to Deliver TV Critic’s Picks.

Senate Committee on HSGA:
- Testimony of hedge fund manager Michael Masters, before the Senate Committee on Homeland Security and Governmental Affairs, on the role that speculation has played in recent commodity price movements.

CNNMoney.com:
- Recession? Maybe. Depression? Get Real. Some people think that the economy isn’t in recession and that journalists are just spreading doom and gloom for various self-serving reasons. Take your pick among the following: We’re trying to get Obama in the White House. We’re helping our numerous short-seller friends. Scary headlines generate more reader interest and hence, advertising dollars.

Washington Post:
- Rx for Global Poverty is Growth.

Morningstar:
- US federal lawmakers think they may have found a way to pop what’s possibly an energy market bubble. If they have, proposed regulations targeting speculation limits could prick one of the most dramatic run-ups in crude-oil prices in history. By targeting two loopholes, US legislators from both parties hope to limit the amount of buying by purely financial players such as hedge funds and investment banks – effectively cutting billions of dollars in additional demand in commodity markets – and to bring prices closer to earth.

Forbes:
- Hedge Fund Administrators Report $2.759 Trillion in Hedge Fund Assets in Q1 2008.

AP:
- Democratic Party lawyers says that the rules committee could potentially seat some, not all, of the delegates from Michigan and Florida. Democratic presidential candidate Hillary Clinton wants all delegates seated from Michigan and Florida. One option lawyers outlined could restore all delegates if the Credentials Committee decides to recommend that. If so, a final decision wouldn’t be made until the first day of the party’s convention in August.

BBC:
- UK Prime Minister Gordon Brown and Chancellor of the Exchequer Alistair Darling will meet with oil industry leaders in Scotland to discuss soaring fuel prices. Brown, who is under pressure from protesting truck drivers to lower road and fuel taxes, will ask oil company representatives what help they would need from the government to increase production, such as investment in new infrastructure or oil exploration.

Bear Radar

Style Underperformer:

Large-cap Value -.54%

Sector Underperformers:

Banksirlind (-2.78%), Insurance (-1.20%) and Biotech (-1.04%)

Stocks Falling on Unusual Volume:

KEY, MDCO, SNDA, PSEC, CEDC, PAC and IRE

Stocks With Unusual Put Option Activity:

1) LM 2) RL 3) BUD 4) AEO 5) BBT