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Thursday Watch

Late-Night Headlines
Bloomberg:
- The US dollar rose against the euro on speculation a government report today will show US retail sales climbed in May.
- Commodity prices have a “very weak” correlation with inflation measures, minimizing the appeal of raw materials as a hedge against rising consumer prices, Lehman Brothers said. Investors have poured a total $235 billion into indexes of raw materials, Lehman said.
- InBev NV made an unsolicited offer to buy Anheuser-Busch Cos.(BUD) for $46.3 billion to gain half of the US beer market and overtake SABMiller Plc as the world’s biggest brewer by volume.
- India Rate Rise Means BRICs to Suffer in Price Fight.
- Former Fannie Mae(FNM) Chairman James Johnson said he has quit Senator Barack Obama’s vice presidential search committee after the Wall Street Journal reported he may have received preferential mortgage terms from Countrywide Financial Corp.(CFC).
- General Motors(GM) and Clean Energy(CLNE) announced today Clean Energy will open a hydrogen fueling station in Los Angles with support from GM. The two companies also said they are exploring further opportunities to expand the hydrogen infrastructure.
- China Is Nowhere Close to Victory on Inflation. The 8.1%, one-day slump in China’s key stock index this week shows investors are shifting their gaze away from food prices – which are stabilizing – to other sources of inflation simmering below the surface.
- Foreign direct investment in China rose 37.9% in May from a year earlier, adding to the flood of cash that fuels inflation.
- Merrill Lynch(MER) CEO Thain said no longer able to rule out selling a stake in Bloomberg LP or offering new shares to raise capital after credit-market conditions worsened in the past two months.
- Australia’s economy unexpectedly lost jobs in May, ending a record employment boom and sending the nation’s currency lower on speculation the central bank won’t raise interest rates again.
- The Bank of Korea kept interest rates unchanged at the highest in seven years after oil prices surged to a record and inflation accelerated.

Wall Street Journal:
- Democrat Barack Obama begins his presidential race against Republican John McCain with a lead in the latest Wall Street Journal/NBC News poll, but not so great an edge as might be expected.

NY Times:
- A federal court judge ruled in favor of CSX in the railroad operator’s battle with a pair of activist hedge funds that are seeking to oust five members of its board.

UPI:
- China plans to triple its wind power capacity over the next two years.

Reuters:
- Daimler AG plans to sell a completely electric version of its Smart two-seat minicar within a few years, citing Herbert Kohler, head of Daimler’s engine research.
- Sometime next year, Cuba plans to begin drilling a major oil field off its northern coast that might do what little else has done – bring change to US-Cuba relations.

Financial Times:
- Wall Street securities firms are unlikely to face the borrowing limits imposed on commercial banks even if the US financial system emerges fr4om the credit crisis with a single regulator, a top Treasury official said.
- The European Central Bank moved to damp market expectations of a flurry of interest rate rises in the coming months by signaling on Wednesday that a planned rise in eurozone rates next month was likely to be a one-off.
- Fed’s economic survey offers some cheer.

Daily Telegraph:
- The FBI and New York State Police are leading the search for Samuel Israel III, the founder of the Bayou Group of hedge funds who was sentenced in April and ordered to pay $300 million in restitution to defrauded clients.

Hong Kong Economic Journal:
- UBS AG will be back on the “right track” by the end of this year, citing Chairman Peter Kurer. UBS will be one of the banks to recover the quickest from the credit-market crisis, which has mostly run its course, he said.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (HON), target $70.

Night Trading
Asian Indices are -2.25% to -1.0% on average.
S&P 500 futures +.18%.
NASDAQ 100 futures +.05%.

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Earnings of Note
Company/EPS Estimate
- (PAY)/.26
- (TMA)/-3.38
- (FNSR)/.03

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Import Price Index for May is estimated to rise 2.5% versus a 1.8% gain in April.
- Advance Retail Sales for May are estimated to rise .5% versus a .2% decline in April.
- Retail Sales Less Autos for May are estimated to rise .7% versus a .5% increase in April.
- Initial Jobless Claims for this week are estimated to rise to 370K versus 357K the prior week.
- Continuing Claims are estimated to rise to 3118K versus 3093K prior.

10:00 am EST
- Business Inventories for April are estimated to rise .3% versus a .1% increase in March.

Other Potential Market Movers
- The Fed’s Bernanke speaking, weekly EIA natural gas inventory report, (CAH) MedTech Day, (PPG) Analyst Meeting, (MTD) investor presentation, (SYMC) analyst meeting, Goldman Sachs Healthcare Conference, Needham Biotech/Medical Tech Conference, Thomas Weisel Alternative Energy Conference and Avondale Behavioral Healthcare Conference could also impact trading today.

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

Stocks Finish at Session Lows, Weighed Down by Transportation, Financial, Gaming, Homebuilding Shares

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In Play

Stocks Sharply Lower into Final Hour on Soaring Commodities, Global Growth Worries

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Computer longs, Software longs and Medical longs. I added to my (IWM)/(QQQQ) hedges this morning, thus leaving the Portfolio 50% net long. The tone of the market is very bearish as the advance/decline line is substantially lower, almost every sector is declining and volume is about average. Investor anxiety is above average. Today’s overall market action is very bearish. The VIX is rising 1.7% and remains above average at 23.64. The ISE Sentiment Index is depressed at 73.0 and the total put/call is above average at 1.09. Finally, the NYSE Arms has been running about average most of the day and is currently .95. The commodity bubble is once again pressuring the financials and sucking the life out of the broad US stock market. Every move higher in commodities from current levels pours more air into the current “US negativity bubble” and raises the odds for a severe global slowdown/contraction. The Transports, which had been market leaders, are under significant pressure today. The Euro Financial Sector Credit Default Swap Index is rising another 1.9% today to 83.40 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. The TED spread is also rising 8.1% to .84 basis points. On the positive side, weekly retail sales rose 2.1% over the last week, up from a 1.8% gain the prior week, which is the best showing since the week ended Dec. 4 during the holiday shopping season. Nikkei futures indicate a -170 open in Japan and DAX futures indicate an +8 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on soaring commodity prices, rising global growth worries and more record shorting.

Today's Headlines

Bloomberg:
- A US House panel blocked an end to the moratorium on US offshore oil drilling by a 9-6 vote. Ending the moratorium would have potentially freed up 81 billion barrels of oil, said Representative John Peterson, the sponsor of the proposal.
- Crude oil is soaring more than $5/bbl. today on weakness in the US dollar, a larger-than-expected US inventory decline and continuing historic investment fund speculation, despite an energy department report today that showed another decline in demand.
- The world faces an “oil crisis,” and the IEA stands ready to release emergency stockpiles.
- Bank of America(BAC) CEO Kenneth Lewis, who vowed to scale back the company’s investment bank last year after profit evaporated, affirmed his commitment to the unit and said this quarter may be among its most profitable.
- Americans are living longer, with life expectancy topping 78 years of age for the first time, as death rates dropped for a host of ailments, said US health researchers.
- India’s central bank unexpectedly raised interest rates for the first time in 15 months, joining a global wave of monetary tightening to combat a surge in inflation sparked by food and energy costs.
- Mortgage applications in the US jumped 10.9% last week, which may indicate the drop in property values is starting to draw buyers.

Wall Street Journal:
- Southern European countries, which have been weakening, are bracing for – and in some cases, protesting against – a possible interest-rate increase next month by the European Central Bank.
- Change Isn’t More State Intervention. Change We Can Believe In Is All Around Us.

Washington Post:
- Having failed in efforts to impeach Vice President Cheney, Rep. Dennis J. Kucinich(D-Ohio) escalated his battle against the administration this week by introducing 35 articles of impeachment against President Bush, using a parliamentary maneuver that will probably force a vote today. Kucinich insisted on reading the resolution into the Congressional Record, a process that took nearly five hours.
- A Vote for McBama. For the party faithful, this is a sweet moment. They have their candidates and, whatever the obstacles, can still imagine victory in November. But the rest of us ought to remember that the politics of winning and governing often collide. The first involves maximizing popularity. The second requires farsighted choices that ultimately benefit the country but may initially hurt a president's approval ratings. What have we learned about the candidates' capacity for governing? Enough, I think, to temper the excitement.

Reuters:
- US retail gasoline demand slipped 3.8% from last year’s levels, MasterCard Advisors said. The week ending June 6 marked the seventh straight week that gasoline demand has been below 2007 levels. The four-week moving average for gasoline demand, which tends to smooth seasonal fluctuations, fell 5.2% from last year’s levels.

Emirates Business 24/7:
- Recent huge spikes in oil prices are “crazy” and unrelated to supply and demand fundamentals as world markets are adequately supplied with crude, the UAE energy minister said. “There is no shortage of crude oil in the market. Inventory levels are huge, Mohammed Al Hameli said. The UAE has spare capacity and is “quite happy” to supply more oil if called upon, he said. “High prices are really hurting the world economy,” Hameli said. Russia is the biggest oil producer in the world, extracting 10.08 million barrels per day last year ahead of Saudi Arabia pumping 8.48 million barrels, IEA data show.

Bear Radar

Style Underperformer:

Small-cap Value -1.61%

Sector Underperformers:

Road & Railirlind (-4.19%), Airlines (-3.89%) and Homebuilders (-3.13%)

Stocks Falling on Unusual Volume:

QSII, HOFT, MCHP, ANDE, CWEI, FITB, AMLN, GBL, AGP, LEH and NTL

Stocks With Unusual Put Option Activity:

1) LLTC 2) NSC 3) MYL 4) BRL 5) PFE