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Tuesday Watch

Late-Night Headlines
Bloomberg:
- CME Group Inc.(CME), the world’s largest futures exchange, received Dept. of Justice approval for its planned acquisition of the New York Mercantile Exchange.
- Crude oil extended its decline from the record $139.89/bbl. reached in NY yesterday on signs Saudi Arabia will increase production to stabilize prices.
- Samuel Israel, the convicted co-founder of bankrupt hedge fund firm Bayou Group LLC, was declared a fugitive by US authorities who dismissed the possibility that he killed himself by jumping off a bridge.
- Andy Lipow, president of Lipow Oil Associates LLC says oil may fall as much as $30/bbl. on Fed rate hikes.
- The cost of protecting the bonds of Lehman Brothers(LEH) from default fell after the fourth-largest US securities firm cut its mortgage holdings by 20%. The credit-default swaps dropped 5 basis points to 260 basis points, according to broker Phoenix Partners Group.
- Ryan Lentell, an analyst at Morningstar Inc.(MORN), says Lehman(LEH) has a ‘very strong’ balance sheet. (video)
- Citigroup Inc.(C), Bank of America(BAC) and other leading US mortgage lenders agreed to expand efforts to help borrowers avert foreclosures as the Senate prepares to weigh legislation addressing the housing crisis.
- General Motors Corp.(GM) returned to full production today for the first time since a three-month strike at its biggest axle supplier shut or partially idled about 30 North American plants.
- Australia’s central bank said interest-rate increases this year that have taken borrowing costs to a 12-year high may be enough to cool demand that has driven inflation to the highest since 1991.
- Toshiba Corp., Japan’s largest chipmaker, said it will reduce flash-memory chip production at some of its older manufacturing lines by 40% to cut costs.

Wall Street Journal:
- The hedge-fund business – among the most reliable fortune-producing machines in recent years – is going through a brutal shakeout.

MarketWatch.com:
- Toyota executive talks of US recovery at year’s end. "We'll start to see some recovery near the end of the calendar year," he said. "People will start spending money and get the economy fired up again when the tax incentives start kicking in. In a year, we should be back on pace."

CNBC.com:
- Telecommuting Picking Up As Gasoline Prices Soar.

Forbes.com:
- GE(GE) to Release Study on Economic Benefits of Wind Farms; Inform Congressional Debate on Extension of Tax Incentive.

CNNMoney.com:
- Honda hits the hydrogen highway. The FCX Clarity fuel cell car is now available in California.
- America’s 100 fastest-growing small public companies.

USA Today.com:
- John McCain called Monday for lifting a federal moratorium on offshore drilling for oil and gas. States should decide for themselves whether to permit drilling, McCain said, but they should be given the option to combat an “energy crisis.” McCain’s plan represents a shift for the presumptive Republican nominee. A spokesman for Senator McCain said he understands that voters want action to meet new problems. He continues to oppose drilling in some areas, including the Alaskan wilderness. Democrat Barack Obama’s campaign and environmental groups said McCain’s proposal threatens US coastlines and does little to reduce American dependence on foreign oil.

Siliconvalley.com:
- Cisco Systems(CSCO) is projecting a 600% jump in Internet traffic between 2007 and 2012, with online video the biggest driver of global data communications. Cisco predicts that Internet video – which accounted for 5% of data traffic in 2005 – will represent 30% of total data transfers by the end of this year and 50% by 2012. The trend is largely due to the surging popularity of Web sites such as Google’s(GOOG) YouTube, according to the study.

Schaeffersreserach.com:
- RBC's analyst – Mike Abramsky – noted that the recent price cuts, the addition of 3G wireless technology, and plans to start selling the iPhone in 22 countries in July should lead to a "breakout" fourth quarter. Abramsky believes that Apple(AAPL) is set to see the same results with the iPhone as it did with the iPod in the fourth quarter of 2005. During that quarter, 14 million iPods were sold. Abramsky also kept his rating on Apple at "outperform" with a $220-per-share price target.

Reuters:
- Hedge funds attracted $2.6 billion in net new money during the first quarter, marking an 81 percent drop from what they pulled in during the fourth quarter, data released on Monday showed. During the first quarter, the largest hedge fund inflows went to managers betting on big events like mergers or interest rate moves, currency fluctuations and commodity price swings.

Financial Times:
- Goldman Sachs(GS) is close to finalizing a plan to restructure a $7 billion investment vehicle formerly run by London-based hedge fund Cheyne Capital, in a move that could potentially usher in a crucial new phase in the credit turmoil. The US bank’s proposed reorganization of the so-called structured investment vehicle is set to be just the first of a number of deals that could see about $18 billion worth of SIV assets restructured in the coming months.
- Call to tear up ‘offset’ CDS contracts.
- Financial markets are in danger of getting carried away with their expectations for Federal Reserve interest rate increases, some senior Fed officials believe. They do not dispute that the next move in US interest rates is very likely to be up. But they feel the market may be pricing in too much tightening too soon.

Late Buy/Sell Recommendations
Citigroup:
- Upgraded (CME) to Buy, target $485.
- Reiterated Buy on (ADBE), target $50.

CSFB:
- Reiterated Outperform on (CME), target $685.

Night Trading
Asian Indices are -.50% to +.50% on average.
S&P 500 futures +.01%.
NASDAQ 100 futures -.06%.

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Earnings of Note
Company/EPS Estimate
- (BBY)/.37
- (FDS)/.63
- (GS)/3.42

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Current Account Deficit for 1Q is estimated at -$172.5 billion versus -$172.9 billion in 4Q.
- The Producer Price Index for May is estimated to rise 1.0% versus a .2% gain in April.
- The PPI Ex Food & Energy for May is estimated to rise .2% versus a .4% gain in April.
- Housing Starts for May are estimated to fall to 980K versus 1032K in April.
- Building Permits for May are estimated to fall to 960K versus 982K in April.

9:15 am EST
- Industrial Production for May is estimated to rise .1% versus a -.7% decline in April.
- Capacity Utilization for May is estimated at 79.7% versus 79.7% in April.

Other Potential Market Movers
- The weekly retail sales reports, (FSL) analyst meeting, (MAT) analyst conference, (WTM) investor meeting, (ACXM) investor day, CSFB Global Nanotech Conference, William Blair Growth Stock Conference, BIO International Convention, Merrill Lynch Transport Conference, could also impact trading today.

BOTTOM LINE: Asian indices are mixed as gains in mining shares are offsetting losses in steel stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Mostly Higher, Boosted by Gaming, Financial, Alternative Energy, Steel, Technology, Airline and Homebuilding Shares

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In Play

Stocks Mostly Higher into Final Hour on Reveral Lower in Oil, Less Economic Pessimism, Diminishing Credit Market Angst

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Software longs, Gaming longs, Computer longs, Medical longs and Internet longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is about average. Investor anxiety is slightly above average. Today’s overall market action is bullish. The VIX is falling 1.9% and remains above average at 20.82. The ISE Sentiment Index is slightly below average at 141.0 and the total put/call is slightly above average at .92. Finally, the NYSE Arms has been running about average most of the day and is currently .92. Oppenheimer said today that the prevailing crude oil market fundamentals should have resulted in oil prices at or below last year’s level of around $65/bbl., but instead, oil prices soared by more than 100% over the last year. Oppenheimer believes the government’s inability, or unwillingness, to curb rampant speculation has significantly contributed to the current oil bubble. I completely agree. On the positive side, the Euro Financial Sector Credit Default Swap Index is falling 3.4% today to 74.0 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 North American Investment Grade Credit Default Swap Index is falling 5.9% today to 107.73, which is also a large positive. Lehman Brothers(LEH), the source of much recent angst, is jumping another 6.2% today. Leading growth stocks are especially strong again today, substantially outperforming the broad market and value stocks. Corporate insider activity remained bullish again last week. (HD), (CHK), (MAS), (VHI), (JAH), (EPD), (DNR), (GE), (DISCA), (HTBK) and (VRX) all saw notable insider buying in their shares last week. Hedge funds remain positioned net short equities. As I said on Friday, given the recent parabolic surge in short interest, positive action in the financial sector and spike in bearish sentiment, I suspect this rally has some legs, as long as commodities behave. Nikkei futures indicate an +51 open in Japan and DAX futures indicate an +26 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on falling energy prices, less economic pessimism, bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- General Electric Co.(GE) fell as much as 2.2% after JPMorgan Chase(JPM) downgraded the stock to “neutral” from “overweight,” saying slower economic growth may reduce profit.
- Crude oil fell from a record on signs that Saudi Arabia will increase production to stabilize prices. ``When you put in a new record and fail to see any follow- through, it suggests that there is some underlying weakness in the market,'' said Michael Fitzpatrick, vice president for energy risk management at MF Global Ltd. in New York.
- Goldman, Morgan Stanley Profits Conceal Reliance on Commodities. On Wall Street ,where just about everyone has lost confidence in financial assets, Goldman Sachs(GS) and Morgan Stanley(MS) are making money the old-fashioned way: Buying and selling commodities. The two NY-based companies accounted for about half of the $15 billion of revenue that the world’s 10 largest investment banks generated from commodities last year. Goldman and Morgan Stanley, the two largest U.S. securities firms by market value, don't report commodity revenue separately, lumping it instead into the same line as fixed-income and currency trading. That makes it difficult to assess just how much commodity revenue has cushioned earnings. ``There's just a lot of money chasing these markets,'' said Peter Fusaro, chairman of New York-based Global Change Associates, which advises hedge funds on energy investments. The number of energy-related hedge funds his company lists has more than tripled to 634 in less than four years. Global trading in commodity derivatives on exchanges rose 52 percent to 489 million contracts in the first quarter from a year earlier, according to data compiled by the Bank for International Settlements. Energy and agricultural products led the climb. In the over-the-counter market, the value of outstanding commodity- derivative contracts jumped 26 percent to $9 trillion in December 2007 from a year earlier, the most recent BIS data show. The dominance of Goldman and Morgan Stanley in commodity trading comes as a 60 percent increase in food prices over the past 18 months has sparked riots in 30 countries and as record oil prices have led to hearings in Congress on energy markets. Goldman's value-at-risk in commodity prices, a statistical measure of how much it estimates it could lose in a day of trading, rose to $38 million in the first quarter from $26 million in the prior quarter, the firm reported in March. At the same time, it lowered risk in equities and kept it unchanged in interest rates. Morgan Stanley lifted trading VaR in commodities to $40 million from $34 million, while reducing the risk in equities and currencies, the firm reported.
- Dazzling Dandelions Foment New Commodities Craze.
- Lehman Brothers(LEH) CEO Richard Fuld declared his “confidence” in the valuation of the firm’s mortgage assets.
- Richmond Federal Reserve Bank President Lacker said downside risks to growth have “diminished” and reversing previous interest rate cuts makes “eminent sense” as the economy recovers.

Wall Street Journal:
- Federal prosecutors are preparing to file criminal charges against managers of two Bear Stearns Cos. hedge funds whose collapse helped mark the start of the credit crisis.
- The staff of the FCC has proposed that the agency approve the merger of XM Satellite Radio(XMSR) and Sirius Satellite Radio(SIRI), setting the stage for a final vote on they multibillion-dollar deal in as little as three weeks if the companies meet several conditions.
- Moody’s Investors Service has started including online sales of major retailers as an important factor in its credit ratings.
- Wall Street’s specialty is chasing returns. And these days it’s chasing returns in places like Nigeria and Oman. While frontier markets offer high-return potential, they can also implode.

Washington Post:
- All Biofuels Are Not The Same. Last month the Wall Street Journal accused me of advocating subsidies for food-based ethanol. I ought to "take a vow of embarrassed silence," it said, for claiming that ethanol's contribution to the food crisis is "overblown." The Journal's claims would be laughable if the stakes were not so high. Cellulosic biofuels offer a chance to have an environmentally meaningful impact on petroleum use while benefiting farmers, entrepreneurs and consumers. We face an energy crisis, an environmental crisis and a terrorism crisis all related to oil.

FINalternatives:
- Rough Seas? Prime Brokerages Change Tack To Navigate Choppy Markets.

Reuters:
- Billionaire financier Carl Icahn, who launched a proxy battle in May to replace the board of Yahoo(YHOO) said on Sunday the subsequent deal Yahoo forged with Google(GOOG) “might have some merit.”

Financial Times:
- Almost $20 billion of real estate funds are to be launched this week as equity raising for property investment shows no sign of slowing, despite apparent difficulties in global property markets.

European Central Bank:
- ECB’s Papademos Says Downside Growth Risks Prevail.

Bear Radar

Style Underperformer:

Large-cap Value +.44%

Sector Underperformers:

Telecomirlind (-1.61%), Hospitals (-.93%) and Foods (-.77%)

Stocks Falling on Unusual Volume:

PPC, EAS, CQB, OESX, HLEX, SAFM, FDP, RSG and KV/A

Stocks With Unusual Put Option Activity:

1) XLNX 2) JOSB 3) CMC 4) TEVA 5) ADBE