Wednesday Watch

Late-Night Headlines
Bloomberg:
- The US dollar traded near a three-month high against the yen on speculation Federal Reserve officials speaking today will highlight the risks of inflation.
- Short interest on the Nasdaq stock market surged another 2.01% the last two weeks of May to a new record 9,860,000,000 shares.
- S&P 500 Short Interest Changes by Industry Group. Short interest in the Banking industry soared 12.8% the last two weeks of May.
- New S&P 500 short-selling targets. Here are the 25 S&P 500 companies with the largest percentage change in short interest relative to their floats over the last two weeks of May.
- Ohio Governor Ted Strickland is ruling out any chance he would join the Democratic presidential ticket as Barack Obama’s running mate. Strickland, who backed former Democratic candidate Hillary Clinton, told National Public Radio today that he would “absolutely not” accept an invitation to run as vice president with Illinois Senator Obama. “If drafted, I will not run; nominated, I will not accept; and if elected, I will not serve,” said Strickland. “I don’t know how more crystal clear I can be,” he said.
- Elpida Memory Inc., Japan’s largest maker of computer memory chips, rose 3.7% in Tokyo trading after Mizuho Financial raised its rating on the stock to “strong buy.”
- Australian consumer confidence slumped to the lowest level in almost 16 years in June after oil prices climbed to a record and the central bank signaled it may increase interest rates.
- Global retailers may cut orders from China and India and source more goods locally in developed markets because of increased energy and transportation costs, PricewaterhouseCoopers said. Companies from supermarket owner Tesco Plc to jeans maker Levi Strauss & Co. are forging partnerships with local producers to reduce shipping expenses, ease environmental concerns and improve quality, according to “Global Sourcing: Shifting Strategies,” a study by the consulting firm released today.
- New Zealand home sales slumped 53% to a 16-year low in May, reinforcing speculation the central bank will cut interest rates fr4om a record high.
- Emerging-market stocks fell the most since March, led by Chinese companies after the central bank ordered lenders to increase their reserves, an anti-inflation measure that threatens to curb growth. “China and India are very populous countries and have a very low degree of tolerance for inflation, even at the cost of slowing down the economy,” said Jerry Zhang, Boston-based manager of the $800 million Evergreen Emerging Markets Growth fund. Markets in resource-based economies of Brazil and Russia “are vulnerable” because they “haven’t discounted cyclical slowdown in China and India,” Evergreen’s Zhang said. His fund outperformed 97% of rivals over the past three years.
- The Russell 2000 Index’s 14% rebound this year may slow after the annual reorganization of the small-cap benchmark removes the best-performing energy stocks and adds slumping banks and retailers. A rally in oil, coal and fertilizer prices has driven shares so high that 8.1% of the Russell 2000’s energy and raw-material stocks are too big for the index.

MarketWatch.com:
- McCain takes tax fight to Obama. Arizona senator lays out tax, trade, health-care plans in economy speech. "Under Sen. Obama's tax plan, Americans of every background would see their taxes rise -- seniors, parents, small business owners and just about everyone who has even a modest investment in the market," McCain said in a speech to the National Federation of Independent Business.
- Global oil consumption climbed 37% less than expected during the first quarter of this year, and lower US oil demand is expected to continue weighing on the outlook, the Energy Information Administration said.
- Where is gold’s wall of worry? Contrarians remain concerned about reaction to bullion price.
- Big brokerage firms may be regulated like banks. Geithner, Citi’s Pandi call for greater oversight of firms like Goldman(GS), Lehman(LEH).

CNBC.com:
- Bubble, Bubble, Oil is Trouble…The commodity bubble will likely burst when the CFTC closes the “swaps loophole” which grants the banks an exemption from speculative position limits when banks hedge over the counter swap transactions.

BusinessWeek.com:
- Nontoxic Financial Stocks.

IBD:
- Despite Price Fears, There Are Few Hikes Past Food, Energy.

CNNMoney.com:
- GM plans humorous ‘Dear Oil’ ad. The US’s biggest automaker is expected to promote cars not dependent on petroleum in an upcoming TV spot.

USA Today.com:
- Carmakers can’t keep up with buyers’ hunger for hybrids.

Reuters:
- Volume sales are key to new Apple(AAPL) iPhone strategy. Apple hopes that consumer gadgets like the iPhone and its popular iPod media players will help convert people into buyers of its highly lucrative Macintosh computers, which have been gaining market share in recent years. Demand for the cheaper iPhone 3G is expected to be "highly elastic" -- economic speak for the ability of price cuts to drive sales significantly higher. An analyst with Sanford Bernstein, estimated Apple's profit would be between $250 and $450 per phone, compared to about $500 for the previous model after adding in two years of monthly service payments.
- Oil major BP Plc(BP) has told US government regulators it will begin early production from its giant Thunder Horse oil field in the US Gulf of Mexico by June 14. The Thunder Horse platform is designed to handle up to 250,000 barrels per day of oil and 200 million cubic feet of natural gas.

Financial Times:
- The US energy markets watchdog on Tuesday held talks with its UK counterpart about the possibility of introducing limits on traders’ positions in London’s oil markets, underlining in a sign of persistent US congressional concern that London is being exploited by “speculators” contributing to record oil prices.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (CVH), target $56.
- Reiterated Buy on (HS), target $22.

William Blair:
- Rated (ISRG) Outperform.

Night Trading
Asian Indices are -.50% to +.50% on average.
S&P 500 futures +.10%.
NASDAQ 100 futures +.08%.

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Company/EPS Estimate
- (KFY)/.36
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- (SF) 3-for-2

Economic Releases
10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -1,500,000 barrels versus a -4,802,000 barrel decline the prior week. Gasoline Inventories are estimated to rise by 1,450,000 barrels versus a 2,935,000 barrel build the prior week. Distillate Inventories are expected to rise by 2,000,000 barrels versus a 2,273,000 barrel increase the prior week. Finally, Refinery Utilization is estimated to rise by .30% versus a 1.82% increase the prior week.

2:00 pm EST
- The Fed’s Beige Book
- The Monthly Budget Deficit for May is estimated to widen to -$164.5 billion versus -$67.7 billion in April.

Other Potential Market Movers
- The Fed’s Kohn speaking, Fed’s Fisher speaking, Fed’s Kroszner speaking, Fed’s Pianalto speaking, Fed’s Bullard speaking, weekly MBA Mortgage Applications report, Needham Biotech/Medical Tech Conference, Piper Jaffray Consumer Conference, Goldman Sachs Healthcare Conference and Piper Jaffray Industrial Growth Conference could also impact trading today.

BOTTOM LINE: Asian indices are mixed as weakness in commodity shares is offsetting strength in technology stocks in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the day.

Stocks Finish Mostly Lower, Weighed Down by Commodity, Airline, Construction and Gaming Shares

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In Play

Stocks Mostly Lower into Final Hour on Global Growth Worries

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Alternative Energy longs, Computer longs and Commodity/Emerging market shorts. I covered some of my (IWM)/(QQQQ) hedges this morning, thus leaving the Portfolio 75% 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 above average. Investor anxiety is above average. Today’s overall market action is neutral. The VIX is falling .74% and remains above average at 22.97. The ISE Sentiment Index is very low at 84.0 and the total put/call is above average at .98. Finally, the NYSE Arms has been running about average most of the day and is currently .96. The 10-year yield is rising another 10 basis points today. Traders are currently anticipating a 25 basis point Fed rate hike in September. In my opinion, this is unlikely, notwithstanding recent hawkish Fed commentary. The Euro Financial Sector Credit Default Swap Index is rising another 4.1% today to 82.9 basis points. This is up from a low of 52.66 on May 5^th, but still down from 129.46 basis points on March 20^th. On the positive side, the US dollar index is jumping 1.2%, oil has reversed $7/bbl. lower from morning highs and the TED spread is falling 2.3% to .79 basis points today. I think it would take a move in oil back below $120/bbl. to really ignite a broad powerful US stock rally. One of my longs, (ISRG), remains under pressure despite Deutsche Bank saying today that hospitals were recently given the ability to get higher rates for robotic surgery. I plan to add to this long position on any further meaningful decline from current levels. Nikkei futures indicate an +60 open in Japan and DAX futures indicate an +19 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on lower energy prices and short-covering.

Today's Headlines

Bloomberg:
- Senate Republicans thwarted Democratic-supported legislation that would increase windfall-profit taxes on oil companies such as Exxon Mobil(XOM). Democrats fell nine votes short of the 60 needed to proceed to debate. The bill “will undercut US energy security and decrease US energy production, thus exacerbating market tightness and increasing energy prices,” said the White House statement.
- The US dollar rose to a three-month high against the yen and climbed versus the euro after Fed Reserve Chairman Ben S. Bernanke said economic risks have faded, spurring traders to boost wagers interest rates will rise.
- Crude oil fell more than $3/bbl. as the dollar climbed against the euro and yen, curbing the appeal of commodities.
- China’s stocks plunged over 7% to a 14-month low after the central bank told lenders to set aside a record amount of money in reserve to curb credit growth and inflation.

NY Times:
- Verizon(VZ), Sprint(S) and Time Warner Cable have agreed to block access to Internet bulletin boards and Web sites nationwide that disseminate child pornography.

CNBC.com:
- Investors pulled a net $5.9 billion out of US hedge funds in April, marking the industry’s biggest outflow in 6 ½ years as they punished managers for their worst-ever returns at the start of 2008.

NY Sun:
- Eliot Spitzer, in his first big business venture since he was shamed out of office by a prostitution scandal, is shopping around a plan to start a vulture fund what would scoop up distressed real estate assets around the country, revamp them, and flip the properties for a profit.

Dallas Morning News:
- The voice-recognition specialists at Nuance Communications(NUAN), who already have mobile applications that work with BlackBerry smart phones, say they’re working on a program for the iPhone: Voice search.

TechCrunch:
- This morning, Hitwise came out with its search market share numbers for May, 2008. In the U.S., Google was up slightly to 68.3 percent versus 20 percent for Yahoo and 5.9 percent for Microsoft. All the fighting over the fate of Yahoo cannot be helping matters. In the month of May, Google gained 0.39 points from April, while Yahoo was down 0.33 points and Microsoft was down 0.37 points. In the UK, Google’s market share actually slipped as much as it gained in the U.S. (0.39 points), but it is even more dominant there with 87.3 percent market share, according to Hitwise.

AppleInsider:
- Citigroup(C) hikes Apple(AAPL) target to $287, Lehman(LEH) to $234. "We remain aggressive buyers of Apple shares at current levels," said Citigroup analyst Rich Gardner, who raised his price target on the Cupertino-based firm from $248 to $287. "Apple's decision to move from a revenue share model to a traditional subsidy model for the 3G iPhone is a significant positive because Apple receives iPhone-related cash flow sooner."

Business Wire:
- American Superconductor Corp.(AMSC), a leading energy technologies company, today announced that it has received a $450 million order from Beijing-based Sinovel Wind Corp. Limited for core electrical components for 1.5 megawatt(MW) wind turbines. AMSC's wind turbine electrical systems and core electrical components include the company's proprietary PowerModule(TM) power converters. They enable reliable, high-performance wind turbine operation by controlling power flows, regulating voltage, monitoring system performance and controlling the pitch of wind turbine blades to maximize efficiency. The stock is soaring 22% on the news.

Reuters:
- Democratic presidential candidate Barack Obama said on Monday he would impose a windfall profits tax on US oil companies as he sought political gain from Americans’ pain over high gasoline prices. “I’ll make oil companies like Exxon(XOM) pay a tax on their windfall profits, and we’ll use the money to help families pay for their skyrocketing energy costs and other bills,” Obama said.
- Ghana’s initial oil output from its offshore discoveries, due to start up in the first quarter of 2010, will be 120,000 barrels per day, double a previous estimate, the state oil company said.
- The Commodity Futures Trading Commission(CFTC) said on Tuesday it formed an interagency task force to evaluate commodity markets because of the “significant strain” high prices were having on American households.

International Herald Tribune:
- Global demand for oil is likely to be lower than previously estimated as the effect of shrinking government subsidies for fuel in Asia softens demand in the region, the IEA forecast.

Bear Radar

Style Underperformer:

Mid-cap Growth -.81%

Sector Underperformers:

Coalirlind (-4.99%), Gold (-4.4%) and Oil Service (-3.0%)

Stocks Falling on Unusual Volume:

LEH, CCJ, CMGI, SNCR, XIDE, BEAV, SPIR and ABR

Stocks With Unusual Put Option Activity:

1) DHI 2) STI 3) TSRA 4) TOL 5) CCRT

Trade Deficit Widens on Record Energy Prices

- The Trade Deficit for April widened to -$60.9 billion versus a downwardly revised -$56.5 billion in March.

BOTTOM LINE: The US trade deficit widened in April as the surging cost of oil boosted imports to a record, overshadowing the biggest gain in exports in four years, Bloomberg said. Excluding petroleum, the trade deficit was little changed. After eliminating the influence of prices, which are the numbers used to compute GDP, the trade deficit shrank to $46.9 billion, the lowest since August 2003. This should help boost economic growth during the quarter. I still expect the trade deficit to continue trending lower over the intermediate-term.