Stocks Higher into Final Hour on Reveral Higher in Financial Shares, Less Economic Pessimism

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Internet longs, Computer longs, Biotech longs and Emerging Market shorts. I took profits in a long and a short today, thus leaving the Portfolio 100% net long. The tone of the market is mildly negative as the advance/decline line is slightly lower, sector performance is mixed and volume is heavy. Investor anxiety is above-average. Today’s overall market action is mildly bullish. The VIX is rising .42% and remains above average at 24.05. The ISE Sentiment Index is very low at 85.0 and the total put/call is above average at 1.01. Finally, the NYSE Arms has been running around average most of the day and is currently .86. The Euro Financial Sector Credit Default Swap Index is rising 5.16% today to 95.87 basis points. This index is up from a low of 52.66 on May 5^th, but down from 129.46 basis points on March 20^th. The North American Investment Grade Credit Default Swap Index is rising 3.05% today to 140.73, which is also a negative. However, the TED spread is falling 11.30% to .93. The heavily-shorted (XLF) is attempting to trim losses into the final hour again. At the very least, I suspect we have begun a tradable rally. However, a meaningful reversal lower in oil over the coming weeks may make today’s low more significant. Market leading growth stocks are exceptionally strong today. These types of stocks should lead the market through the remainder of the year. One of my longs, (AAPL), is surging 3.8% today. I think this stock has seen its lows for the year and will trade substantially higher by year-end. Nikkei futures indicate a -48 open in Japan and DAX futures indicate an +60 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, better economic data, a reversal in the financial sector and bargain-hunting.

Bear Radar

Style Underperformer:

Small-cap Value -1.39%

Sector Underperformers:

Airlines irlind (-6.22%), Gaming (-5.22%) and Steel (-4.60%)

Stocks Falling on Unusual Volume:

VIP, AKS, MT, RTP, MICC, CLF, UBS, JPM, TMTA, CBRL, MNST, ANSS, SFSF, AAUK, CAVM, ZEUS, FO and TKR

Stocks With Unusual Put Option Activity:

1) HRB 2) NLY 3) PMCS 4) GT 5) LM

Manufacturing Expanding Again, Construction Falls Less Than Estimates, Weekly Retail Sales Best Since Oct. 16, 2007

- ISM Manufacturing for June rose to 50.2 versus estimates of 48.5 and a reading of 49.6 in May.

- ISM Prices Paid for June rose to 91.5 versus estimates of 87.0 and a reading of 87.0 in May.

- Construction spending for May fell .4% versus estimates of a .6% decline and an upwardly revised .1% decline in April.

BOTTOM LINE: Manufacturing in the US unexpectedly expanded in June for the first time in five months, signaling tax rebate checks are helping companies weather the housing slump and rise in commodities, Bloomberg reported. The Export component of the index fell to 58.5 from 59.5 in May. The New Orders component fell to 49.6 from 49.7 the prior month. The Orders Backlog component rose to 47.5 from 46.0 in May. The Inventory component rose to 51.12 from 48.0 in May. The Employment component fell to 43.7 versus 45.5 in May. I expect the ISM Manufacturing Index to come in above 50.0, showing expansion, again this month.

Spending on US construction projects fell less than forecast in May as work on hotels, power plants and public hospitals helped cushion the slowdown in homebuilding, Bloomberg reported. Private residential projects fell 1.6% in May, the 25^th drop in the past 26 months, versus a 1.7% decline in April. Private non-residential construction rose .2%, reaching a record $405.3 billion and a fifth straight month of growth. Public projects also rose to an all-time high, climbing .4% in May. I still expect construction spending to remain muted over the intermediate-term as homebuilders work down inventories and commercial building slows. Weekly retail sales rose 2.5% this week versus 2.4% the prior week. This is the best weekly gain since the week of Oct. 16, 2007 and up from a .5% increase the week of March 4^th. This is a large positive, considering the consumer headwinds. The US Dollar Index is .29% lower and the 10-year yield is falling 3 basis points to 3.94% on today’s reports. The TED spread is dropping 12.2% to .92, which is down 18 basis points in 3 days.

Bull Radar

Style Outperformer:

Small-cap Value (-.17%)

Sector Outperformers:

Restaurants (+.98%), Wireless (+.88%) and Semis (+.71%)

Stocks Rising on Unusual Volume:

MFN, MYGN, RGLD, CELG, AAPL, CAM, BMY, MEG, SMG, AM, SCHN, TNH, GLNG, BCPC, TTES, CRMT, AMSG, IDXX, CTAS, HWCC, ATHR, BFIN, GMXR, OTTR, UTHR, CNQR, FLIR, UMBF, COST and RMD

Stocks With Unusual Call Option Activity:

1) RTN 2) VIA/B 3) XRX 4) SAP 5) TSN

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Corn fell the maximum permitted by the Chicago Board of Trade and wheat dropped the most in 13 weeks after the government said US farmers planted more of both crops than previously expected.
- Hogs fell to a two-month low after a government report showed the U.S. herd on June 1 was the largest for that date since at least 1964, signaling ample supplies for pork processors.
- Venezuelan President Hugo Chavez was personally involved in covering up his nation's role in an Argentine election scandal, according to an FBI statement by a Venezuelan witness who may testify at a criminal trial in Miami.
- David Bensimon, managing director at Polar Pacific, says oil prices are ‘peaking’. (video)
- Confidence among Japan's largest manufacturers fell to a four-year low and companies expect earnings to decline for the first time since the 2001 recession.
- The Bank of Korea said inflation will accelerate to the fastest pace in a decade this year, propelled by record fuel and food prices that will also hinder household spending and business investment.

Wall Street Journal:
- Banks are increasingly turning to the credit-default “swap” market to price rainy-day loans they offer to big corporate customers.

MarketWatch.com:
- Paying back need-based federal student loans will get easier starting Tuesday as interest rates take their first dip in a series of declines that will eventually cut rates in half.

CNBC.com:
- The dramatic rise in oil prices is a bubble, famous turnaround investor Wilbur Ross told CNBC Monday, noting that there is no apparent supply problem with crude. "Remember when oil went to $70 a barrel in the so-called 'Arab Oil Crisis,' there was a shortage. There were lines at gas stations, talking about rationing. There isn't a line at any gas station anywhere in the world, so there's clearly not a physical shortage," he said. The U.S. Energy Information Administration revised down U.S. April oil demand by 863,000 barrels per day (bpd) to 19.77 million bpd — 3.9 percent below year-ago levels — as surging fuel costs erode demand in the world's top consumer.

BusinessWeek.com:
- Commodities: The Tipping Point? Some players may think the boom in energy, metals and food is rewriting the rules of investing. Don’t bet your portfolio on it. pension funds, hedge funds, and individuals began to pour money into the commodities market, first in a trickle, then in a steady stream, and now in a torrent. One favored vehicle: exchange-traded funds (ETFs) that track a broad array of commodities. According to TrimTabs Investment Research, more than $38 billion is now held in commodity ETFs, up more than 30% in the past five months.
- As appealing as it may be to hipsters, the iPhone 3G was designed with business users in mind as well. Software developers are all too happy to design applications for business. Salesforce.com (CRM) was part of Apple's(AAPL) initial software development kit launch in March. The iPhone and its applications will have "huge ramifications for how people conduct business," says Chuck Dietrich, vice-president of Salesforce Mobile. "The ability to run sophisticated applications on a handheld will change how people conduct life and business." Salesforce will have a version of its customer relationship management software available for the new iPhone, though it hasn't said when or at what price.

IBD:
- Varian Medical(VAR) Cuts Radiation Treatment Time.

USA Today.com:
- Ex-Intel head Grove: Electric transportation ‘has to be done’

EE Times:
- National Semiconductor(NSM) has entered the photovoltaic market with new technology designed to increase the overall energy output of solar electric power generating systems.

Reuters:
- JPMorgan Chase & Co (JPM) reigned supreme across global debt and equity underwriting for the last quarter.
- The Iraqi government sued dozens of companies, including oil giant Chevron Corp.(CVX), for more than $10 billion on Monday, saying they paid kickbacks to former Iraqi leader Saddam Hussein's government under the U.N. oil-for-food program.

China Securities Journal:
- China’s 2008 economic growth may slow to 10.3% from 11.9% in 2007, citing Fan Jianping, chief economist with a government research institute. Inflation is unlikely to be less than 7% this year, citing Fan.

Japan Times:
- The Group of Eight leaders will agree at their summit next week on a new initiative to expand civilian use of atomic power to curb global warming with the principles of ensuring nonproliferation, safety and nuclear security, according to a draft of a postsummit statement.

Late Buy/Sell Recommendations
Morgan Stanley:
- Rated (LEH) Overweight.
- Rated (GS) Overweight.
- Rated (TROW) Underweight.
- Rated (BEN) Overweight.

Keefe, Bruyette and Woods:
- Upgraded (CMA) to Outperform, target $32.

Night Trading
Asian Indices are -1.25% to +.25% on average.
S&P 500 futures +.30%.
NASDAQ 100 futures +.27%.

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Earnings of Note
Company/EPS Estimate
- (MSM)/.78
- (STZ)/.32
- (OSK)/1.13
- (SCHN)/1.87
- (SMSC)/.21
- (APOL)/.77

Upcoming Splits
- (PDO) 5-for-4

Economic Releases
10:00 am EST
- ISM Manufacturing for June is estimated to fall to 48.5 from 49.6 the prior month.
- ISM Prices Paid for June is estimated at 87.0 versus 87.0 the prior month.
- Construction Spending for May is estimated to fall .6% versus a .4% decline in April.

Afternoon:
- Total Vehicle Sales for June are estimated to fall to 14.0M versus 14.3M in May.

Other Potential Market Movers
- The weekly retail sales report, (TDG) analyst day and (CPB) analyst presentation could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by financial 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.