Friday Watch

Late-Night Headlines
Bloomberg:
- Short interest on the NYSE surged 2.67% over the last two weeks of June to another new record of 18,125,000,000 shares. Short interest of the Nasdaq rose .29% over the last two weeks of June to another new record of 10,450,000,000 shares.
- New NYSE short-selling targets. Here are the 25 NYSE stocks with the largest percentage increase in short interest relative to their floats over the last two weeks of June:
- New Nasdaq short-selling targets. Here are the 25 Nasdaq stocks with the largest percentage increase in short interest relative to their floats over the last two weeks of June:
- The risk of intervention in the foreign exchange markets by central banks in the US, Europe and Japan has increased to 30%, according to a probability model developed by Morgan Stanley. “The model yields 78% accuracy,” said Sophia Drossos, a currency strategist in NY at Morgan Stanley.
- Yarn makers grew more pessimistic in the second quarter as the global pace of investment in mills that spin cotton slowed and rising costs squeezed profit, Cotlook Ltd. said. Of the 65 mills surveyed in China, the largest consumer of cotton, over two-thirds had idled capacity in the second quarter.
- Crude oil traded near $142 a barrel after rising more than $5 in the last hour of New York floor trading yesterday as prices breached a level that triggered computer-generated buying programs.
- Corn declined for a fifth day on favorable crop weather in the U.S. Midwest and speculation that higher grain prices will reduce demand to feed livestock and produce biofuel. Soybeans also fell, reversing an early gain.
- Apple Inc.'s(AAPL) new iPhone went on sale today with crowds lining up outside stores in Tokyo and Auckland, New Zealand, as Chief Executive Officer Steve Jobs takes aim at Research In Motion Ltd.'s(RIMM) BlackBerry.
- The risk to own Asian government bonds is the highest since at least 2003, when the region was rocked by slumping stock markets and the SARS epidemic, as record oil prices spur inflation and slow economic growth. The cost of protecting sovereign debt against default jumped this week to the highest since April 2003 for both Malaysian and South Korean investment-grade bonds, according to credit-default swap prices compiled by Bloomberg. The cost for Thai debt is at the highest level since October 2002 and Vietnam reached a record last week, the data show.
- Lehman Brothers Holdings Inc.(LEH), the securities firm that's lost 75 percent of its market value this year, whittled down its hardest-to-value assets by 2.7 percent in the second quarter.
- Fannie Mae(FNM) and Freddie Mac(FRE), the largest buyers of U.S. home loans, are too big for the government to let them fail, leading Republican and Democratic lawmakers said.
- Presumptive Republican presidential nominee John McCain raised $22 million last month and entered July with $26.7 million in the bank, campaign manager Rick Davis said today. It was the biggest fundraising month of his campaign.
- Manhattan apartment rents fell in the first half, led by declines of as much as 16 percent for three- bedroom units in new buildings with doormen, as Wall Street job cuts and rising fuel and food prices deterred renters from moving.
- Intel Corp.(INTC) Chief Executive Officer Paul Otellini said the chipmaker isn't suffering from a slowing U.S. economy and demand overseas remains steady. ``Seventy-five percent of our sales are not in the U.S. and global business seems very strong still,'' Otellini said in an interview at Allen & Co.'s media conference in Sun Valley, Idaho. ``There may be some patterns in the U.S. that may be concerning to some people, but we haven't seen them at this point.''
- Wynn Resorts Ltd.(WYNN), founded by billionaire Stephen Wynn, surged 15 percent in late U.S. trading after the casino company said second-quarter profit rose more than some analysts estimated and it would buy back as much as $500 million more in stock.
- Deckers Outdoor Corp.(DECK): The maker of Ugg boots and Teva sandals said it agreed to open retail stores for its Ugg brand in China through a venture with Stella International Holdings.

Wall Street Journal:
- Microsoft Corp.(MSFT), the world’s largest software maker, will cut the price of a model of its Xbox 360 games console to spur sales. The cost of the Xbox 360 Pro will drop to $299 from $349 starting as early as this weekend.

MarketWatch.com:
- Grid spending money up for grabs. As utilities boost electrical supply to feed population growth as well as today's crop of power-hungry air conditioners and flat screen TVs and computer monitors, the sector is expected to boost grid infrastructure spending by $17 billion from 2007-2010, according to the Edison Institute.
- Power firms grasp new tech for aging grid.

NY Times:
- US Considers Takeover of Two Mortgage Giants.
- For Short Sellers, It Doesn’t Get Much Better. As shareholders of Fannie Mae(FNM) and Freddie Mac(FRE) watched their investments plunge in value Thursday, short sellers, who bet against stocks, could count their winnings. In a climate where members of Congress rail against short sellers, and chief executives like James Dimon of JPMorgan Chase say that those who start and pass on rumors should go to jail, it is not surprising that hedge fund executives are choosing to remain silent.

CNNMoney.com:
- Warren Buffett gets busy. For the second time in the past few months, the Oracle of Omaha’s Berkshire Hathaway is helping to finance a big deal. That’s an encouraging sign.

Financial Times:
- Steep falls in eurozone industrial production on Thursday highlighted the economic slowdown under way across the 15-country region, raising the risk of technical recessions in at least some member countries.

Daily Telegraph:
- Legendary fund manager Anthony Bolton believes the bear market is nearer the end than the beginning and has called time on commodity stocks, advising investors to transfer their money into the banking sector. In an interview with The Daily Telegraph, Mr. Bolton admitted his advice was "controversial" but said the commodity sector would be the next to suffer after downturns in the banking, retail and construction.

China Business News:
- China’s Guangdong province plans to accelerate wage increases to boost household incomes and push exporters to move up the value chain, citing a proposal drafted by the local government. The southern province, China’s main export hub for textiles, electronics and hoes, plans to increase wages by at least 14 percent a year between 2008-2012.
- Overseas funds investing in China’s stock market posted average losses of 42% in the first half of this year, citing Lipper & Co. data.

Late Buy/Sell Recommendations
Citigroup:
- Upgraded (CMC) and (STLD) to Buy.

Deutsche Bank:
- Rated (GOOG) Buy, target $635.

Caris:
- Rated (FSLR) Buy, target $350.

Night Trading
Asian Indices are -.50% to +.25% on average.
S&P 500 futures -.21%.
NASDAQ 100 futures -.08%.

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Company/EPS Estimate
- (FAST)/.50
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Upcoming Splits
- (FLR) 2-for-1

Economic Releases
8:30 am EST
- The Trade Deficit for May is estimated at -$62.5 billion versus -$60.9 billion in April.
- The Import Price Index for May is estimated to rise 2.0% versus a 2.3% gain in April.

10:00 am EST
- Preliminary Univ. of Mich. Consumer Confidence for July is estimated to fall to 55.5 versus 56.4 in June.

2:00 pm EST
- The Monthly Budget Surplus for June is estimated at $30.0 billion versus $27.5 billion in May.

Other Potential Market Movers
- The (MRVL) shareholders meeting, (RMA) shareholders meeting and (PEFF) shareholders meeting 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 75% net long heading into the day.

Stocks Finish Higher, Boosted by Construction, Commodity and REIT Shares

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In Play

Stocks Mostly Higher into Final Hour on Short-Covering, Bargain Hunting, Positive Intel Comments

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Software longs, Alternative Energy longs and Biotech longs. I added to my (QQQQ)/(IWM) hedges and then took some of them off today, thus leaving the Portfolio 75% net long. The tone of the market is mildly positive as the advance/decline line is slightly higher, sector performance is mixed and volume is above average. Investor anxiety is high. Today’s overall market action is bullish. The VIX is rising 3.1% and is high at 26.07. The ISE Sentiment Index is very low at 73.0 and the total put/call is high at 1.09. Finally, the NYSE Arms has been running above average most of the day and is currently 1.0. The Euro Financial Sector Credit Default Swap Index is rising 5.3% today to 92.56 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 .35% today to 143.50. The TED spread is rising 12.93% to 1.13. The AAII % Bulls came in at 22.2% this week, while the % Bears rose to 55.2%. Both professional and individual investor sentiment remains historically depressed. Growth stocks are substantially outperforming value stocks again today. Given the action in certain financial shares, sharp losses in Europe, a $5 spike in oil and deafeningly scary rhetoric from the financial press, today’s market action is more impressive. While I continue to believe a hard reversal lower in commodities is necessary for a sustainable market bottom, today’s whippy market rise in the face of numerous headwinds is the type of action I would expect to see near a sustainable low in equities. Intel(INTC) said over the last hour that that global business is still very strong, which is also a big positive. Nikkei futures indicate an +28 open in Japan and DAX futures indicate an +61 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain-hunting.

Today's Headlines

Bloomberg:
- US Senate Banking Committee Chairman Christopher Dodd said it’s unlikely Fannie Mae(FNM) and Freddie Mac(FRE) will fail.
- Man Group Plc, the world's largest publicly traded hedge fund manager, said assets under management rose 6.6 percent to a record in the past three months as clients added money and investments gained.
- Dow Chemical Co.(DOW), under pressure from record oil prices, agreed to buy Rohm & Haas Co.(ROH) for about $18.8 billion to increase sales of more lucrative electronics materials and adhesives in its biggest acquisition ever.
- U.S. Treasury Secretary Henry Paulson said he's been assured by the regulator for Fannie Mae and Freddie Mac that the two government-chartered mortgage companies have enough capital.
- General Motors Corp.(GM), the biggest U.S. automaker, has ``no thoughts whatsoever'' of bankruptcy, Chief Executive Officer Rick Wagoner said.
- Toyota Motor Corp. will build its Prius gasoline-electric car in the U.S., responding to a weakened dollar by producing the world's best-selling hybrid where there's most demand.
- Crude oil rose more than $5 a barrel after Iran test-fired more missiles in the Persian Gulf and a Nigerian militant group said it will end a cease-fire this week.

Wall Street Journal:
- Merck & Co.(MRK), Eli Lilly & Co.(LLY) and Pfizer Inc.(PFE) are teaming up to create new drug-discovery methods, which the companies say could save them large sums by reducing the failure rate of clinical trials.
- A Bipartisan Fix for the Oil Crisis.

NY Times:
- Spy Cases Raise Concern on China’s Intentions.
- Apple(AAPL) Moves to Dominate Internet Mobile Devices.

International Herald Tribune:
- The AFL-CIO is mobilizing union members who are military veterans to work against Republican presidential candidate John McCain and other office seekers it opposes, officials said Thursday. The union also launched an ad that will air Thursday that features a Vietnam combat veteran criticizing McCain's stance on the war in Iraq and on veterans issues. The ad will air for three weeks on national cable and in Michigan, Minnesota, Ohio, Pennsylvania, Virginia and Wisconsin, union officials said.

Bear Radar

Style Underperformer:

Large-cap Value +.42%

Sector Underperformers:

HMOs irlind (-3.37%), Gaming (-2.84%) and Retail (-1.24%)

Stocks Falling on Unusual Volume:

LFG, COLB, FCSX, ZUMZ, ROCK, RRGB, CHTT, WYNN, SFSF and GYMB

Stocks With Unusual Put Option Activity:

1) NLY 2) CNX 3) DOW 4) GILD 5) BIG

Initial Jobless Claims Plunge, Retail Sales Above Long-term Average

- Initial Jobless Claims for this week fell to 346K versus estimates of 395K and 404K the prior week.

- Continuing Claims rose to 3202K versus estimates of 3140K and 3111K prior.

- ICSC Chain Store Sales for June rose 4.3% versus estimates of a 3.3% gain and a 2.9% increase in May.

BOTTOM LINE: The number of Americans filing initial claims for unemployment fell substantially this week, Bloomberg reported. The four-week moving-average for initial claims fell to 380,500 from 390,500 the prior week. During the last recession in 2001, which was one of the mildest on record, jobless claims averaged about 415,000. The unemployment rate among those eligible to collect benefits, which tracks the US unemployment rate, rose to 2.4% from 2.3% the prior week. This is still well below the long-term average of 2.9% and the 3.0% seen in 2002. I expect jobless claims to tick up next week, but continue to trend lower through year-end. Chain Store Sales for June rose 4.3%, which is above the long-term average of 4.1% and up from a .5% decline in March of this year. This is also a large positive.