Thursday Watch

Late-Night Headlines
Bloomberg:
- Central banks and sovereign investment funds are buying mortgage-backed bonds at about the same rate as in recent years as their rising cash hoards offset falling appetite for the debt, according to UBS AG analysts.
- Washington Mutual(WM) said it is dedicating $1 billion to help subprime borrowers with their loans.
- Senator Joseph Lieberman, a Connecticut independent, issued a proposal that could ban institutional investors with more than $500 million in assets from buying commodities. A second proposal would limit the share of commodities held by investors across all exchanges and a third would impose position limits on financial investors not engaged in “bona fide” commodity investing. Lieberman’s measure would be one of at least five proposed in the Senate to try to curb any speculative effects on the price of commodities. Investment groups struck back at the congressional proposals, sending a letter to lawmakers today, cautioning them not to over-regulate financial services. Proposals to raise margin requirements, ban speculation or alter international agreements may undermine markets, the letter said.
- Coventry Health Care(CVH), the Maryland-based HMO, reduced its projected earnings for the second time on higher costs, pulling down shares of Aetna Inc.(AET), WellPoint Inc.(WLP) and other insurers.
- MSCI Inc. will decide within 12 months whether to reclassify South Korea and Israel as developed countries, elevating them from its emerging market indexes.
- China and the US agreed to negotiate an investment treaty and urged each other to strengthen their exchange rates in the fourth round of semiannual economic talks.

Wall Street Journal:
- Treasury Secretary Henry Paulson is expected to call for faster changes to the oversight of financial markets that would expand the role of the Federal Reserve.

MarketWatch.com:
- Is the oil market at $135 per barrel forming a bubble, vulnerable to being popped like Internet stocks did in March 2000? One adviser who has focused on these issues is John Dessauer, editor of the Investors World newsletter. In a recent communication to subscribers, he discussed the impact on the price of oil of the Commodity Futures Modernization Act, which Congress passed in December 2000. One consequence of that legislation, according to Dessauer, is that "the oil market has been grossly distorted." Dessauer estimates that if the government rolled back the regulatory changes made in that legislation, oil's price could fall back all the way to $80 per barrel. That would represent a 40% drop from where crude closed on Tuesday. Dessauer's analysis should give pause to investors and traders alike.
- Thermal solar technology catching the spotlight.
- Yahoo(YHOO) loses two more prominent execs.

NY Times:
- Four Western oil companies are in the final stages of negotiations this month on contracts that will return them to Iraq, 36 years after losing their oil concession to nationalization as Saddam Hussein rose to power. For an industry being frozen out of new ventures in the world’s dominant oil-producing countries, from Russia to Venezuela, Iraq offers a rare and prized opportunity. The impact, experts say, could be remarkable increases in Iraqi oil output.

Forbes.com:
- A trade group representing hedge funds spent $660,000 in the first quarter to lobby Congress against a proposal to hike taxes on the industry and on other regulatory issues.

CNNMoney.com:
- YouTube goes long. The popular video site is experimenting with full-length video to attract more advertisers.

Reuters:
- Hewlett-Packard(HPQ) obtains $8 billion loan commitment to help finance its acquisition of Electronic Data Systems(EDS).
- Japanese manufacturers’ business sentiment in June matched a five-year low set in May as firms felt the pinch from high raw material costs and a global economic slowdown.

Financial Times:
- It’s getting harder to resist the notion that the leveraged loan market may be on the road to recovery.

Daily Telegraph:
- Al Gore’s electricity bill goes through the (insulated) roof. Environment campaigner Al Gore is using more electricity than ever despite pledging to cut consumption more than a year ago, a libertarian research group claims. The TCPR branded him a “hypocrite” in February 2007 after discovering that his eight-bathroom house in Nashville, TN consumed nearly 221,000 kilowatt-hours of electricity in the previous year – more than 20 times the national average.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (SMTS), boosted target to $24.
- Reiterated Buy on (NUAN), added to Top Picks Live List, target $24.
- Upgraded (AIG) to Buy, target $42.
- Reiterated Buy on (TER), target $17.

Night Trading
Asian Indices are -2.0% to -1.25% on average.
S&P 500 futures -.07%.
NASDAQ 100 futures -.29%.

Morning Preview
US AM Market Call
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Earnings of Note
Company/EPS Estimate
- (JW/A)/.35
- (CC)/-1.07
- (CCL)/.41
- (ATU)/.55
- (SJM)/.78
- (GRB)/.24
- (PDC)/.24

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Initial Jobless Claims for this week are estimated to fall to 375K versus 384K the prior week.
- Continuing Claims are estimated to fall to 3135K versus 3139K the prior week.

10:00 am EST
- The Philly Fed for June is estimated at -10.0 versus -15.6 in May.
- Leading Indicators for May are estimated unch. versus a .1% gain in April.

Other Potential Market Movers
- The EIA weekly natural gas inventory report, (MCK) analyst meeting, (HIG) investor day, (ARO) analyst day, (TD) analyst meeting, (ESLR) analyst day, (MET) investor day, BIO International Convention, Deutsche Bank Consumer & Food Retail Conference, Merrill Lynch Transports Conference, BMO Capital eMerging Media Forum, William Blair Growth Stock Conference and Bank of America Homebuilders Conference could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by financial and automaker shares 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 Lower, Weighed Down by Bank, Airline, Gaming, Retail, Semi Shares

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After-hours Commentary
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In Play

Stocks Lower into Final Hour on Rise in Oil, Bank Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Computer longs and Gaming longs. I covered all my (IWM)/(QQQQ) hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is substantially lower, most sectors are declining and volume is below average. Investor anxiety is above average. Today’s overall market action is mildly bearish. The VIX is rising 2.8% and remains above average at 21.7. The ISE Sentiment Index is below average at 118.0 and the total put/call is high at 1.10. Finally, the NYSE Arms has been running high most of the day and is currently 1.31. The Euro Financial Sector Credit Default Swap Index is rising 6.7% today to 76.46 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 rising 2.4% today to 108.37. The TED spread is rising 5.4% today to .88 basis points. On the positive side, the NYSE Arms hit a very high 2.24 this morning. Investor pessimism is reaching very high levels once again. However, it seems the bears may be running low on firepower. The (XLF) has trimmed losses meaningfully as the I-Banks trade 1.3% higher on the day. A number of leading growth stocks are actually higher today, despite losses in the headline averages and the rise in oil. Nikkei futures indicate a -92 open in Japan and DAX futures indicate an +11 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- Boeing Co.(BA) deserves another chance to bid on the $35 billion US Air Force aerial-tanker contract won by rival Northrop Grumman(NOC), a government agency said.
- Brazilian central bank President Henrique Meirelles said policy makers are on the lookout for increases in consumer prices and are ready to raise interest rates further if their inflation target is threatened.
- New York Times(NYT) said advertising revenue at its newspapers and their Web sites dropped 13% in May, the biggest monthly drop this year.
- Crude oil’s “bull run” may be over as prices become increasingly volatile and Saudi Arabia pledged to boost supplies, according to JPMorgan Chase(JPM). Spare production capacity may reach 5 million barrels a day by 2010, similar to levels in 2002 to 2003, when oil was $30 a barrel, the analysts said.
- Crude oil is surging more than $2/bbl. as historic investment fund speculation for the commodity continues unabated, despite a smaller-than-expected weekly US oil inventory drawdown and a rise in the US dollar.

Wall Street Journal:
- China’s investment-banking market is about to become increasingly crowded. After a two-year hiatus, regulators are opening the way for global banks to set up joint ventures and allow them to expand their businesses in the country.
- EU Rethinks Farm Subsides, Seeks More Production. With global food prices and arable land in short supply, the EU finds itself at loggerheads over how to overhaul a subsidy system that frequently pays landowners not to grow crops.
- A new exchange-traded note is attempting to break new ground by employing a sophisticated strategy popular with hedge-fund investors: using short-selling and stock selection in an effort to outperform the market. In late May, JPMorgan Chase(JPM) teamed up with asset manager First Trust Advisors on an ETN that uses a so-called 130/30 strategy.

NY Times:
- Michelle Obama Seeks New Introduction After Stumbles.

CNBC.com:
- The economy of California, the most populous US state, will remain weak this year as the downturn in its housing market persists, but strong exports and agricultural activity will help offset that drag, according to a UCLA Anderson report. “Though you still hear talk of recession these days, it does appear that California will not exhibit the type of job loss that typically goes with a national recession,” the report said. "We are looking for a 2008 growth rate of 1.5 percent in personal income after adjusting for inflation. Not a barn burner, but not bad in a slow economy," the report said. "Most of that growth will take place later in the year. Through 2009 the growth rate will increase towards more normal trend levels." "Suffice it to say, the housing market has yet to hit the affordability bottom, an event we think will occur before year end," their report said. "When that happens, home prices and mortgage interest rates will once again stimulate the demand for housing, though not nearly to the extent we have seen in recent years."

MarketWatch.com:
- President Bush called for the lifting of a ban on offshore oil drilling on Wednesday, touting it as a way to boost US oil production as Americans suffer from high and rising gasoline prices and echoing an identical proposal made Tuesday by Republican presidential contender John McCain. "For many Americans, there is no more pressing concern than the price of gasoline," Bush said at the White House, laying out a four-part plan including allowing drilling off of U.S. coasts. A majority of Americans -- 57% -- support opening up new territories to drilling, according to a recent Gallup poll.

Washington Post:
- The campaigns of Senators John McCain and Barack Obama on Tuesday engaged in a heated exchange over the rights of terrorism suspects, with each side accusing the other of embracing a policy that would put the country at risk of more attacks in the future.

USA Today:
- The Air Force is expected to double patrols of armed drones in Iraq and Afghanistan to help save more lives.

Hedgeweek:
- Net hedge fund industry inflows slumped to $2.62 billion during the first quarter. Combined with a new performance loss of some $36 billion, this resulted in estimated assets falling to $1.75 trillion at the end of March.

Morningstar.com:
- Sharp increases in commodity prices may be due to pension-fund investors, not speculators, NYSE Euronext(NYX) CEO Duncan Niederauer said. Pension funds have made commodities a part of their investment portfolios and are investing in them regularly, Niederauer said in response to questions after a speech to the National Press Club. "Frankly, that completely alters the supply and demand for these commodities," he commented. "I think that's what's driving it."

Advertising Age:
- Consumers will spend five hours a day watching videos on mobile phones, televisions and computers by 2013, an increase of 25% from 2008, citing a study by Forrester Research.

Reuters:
- The video game industry is expected to shoot from $41.9 billion in global sales last year to $68.3 billion in 2012, a compound annual growth rate of 10.3% and better than all other media sectors except for online advertising and access.

Ottawacitizen:
- Today we are told the era of cheap energy -- cheap oil in particular -- has passed. Again. And this time we are told it ain't ever coming back. The more excitable doomsayers foresee the end of the world as we know it -- whether due to gentle decline or apocalyptic collapse. I don't buy it. The history of civilization is the history of people running into walls and figuring out how to climb over, go around or tunnel under. We are an inventive species.

Xinhua:
- Inflation in Russia may reach 12% this year, some one percentage point higher than the previous official forecast, a Russian Central Bank Official said.

Khaleej Times:
- UAE’s inflation soared to a 20-year high of 11.1% in 2007, exceeding estimates made by various official sources and global research agencies. According to latest estimates, with no end sight for the easing of rents that had shot up 17.5 per cent last year, coupled with skyrocketing food and fuel prices, inflation would be headed for another record surge in 2008, even beyond 12 per cent despite serious efforts initiated by the Ministry of Economy to contain inflation at five per cent this year.

Bear Radar

Style Underperformer:

Mid-cap Value -1.58%

Sector Underperformers:

Airlinesirlind (-4.66%), Retail (-3.16%) and Banks (-2.86%)

Stocks Falling on Unusual Volume:

ERJ, FITB, CATY, ASBC, CINF, DISH, ZION, TRAK, LNN, VMI, CLC, STI, KMX, WXS, MI and BBT

Stocks With Unusual Put Option Activity:

1) KMX 2) CBS 3) USB 4) CMA 5) RF

Bull Radar

Style Outperformer:

Large-cap Growth (-.49%)

Sector Outperformers:

Steel (+2.23%), Airlines (+1.83%) and Energy (+1.64%)

Stocks Rising on Unusual Volume:

UNP, CSX, GSK, JRCC, PFE, SNP, ANW, PNRA, TLEO, YRCW, GROW, GMXR, VPRT, KNSY, CSIQ, IVGN, CRAI, MYGN and OTTR

Stocks With Unusual Call Option Activity:

1) RWT 2) DKS 3) INFY 4) ALL 5) MF