Thursday Watch

Late-Night Headlines
Bloomberg:
- The U.S. Securities and Exchange Commission subpoenaed Wall Street's biggest firms and hedge-fund advisers in a widening effort to crack down on suspected manipulation of Lehman Brothers Holdings Inc.(LEH) and Bear Stearns Cos.(BSC) shares, said three people with knowledge of the matter. The subpoenas mark a new front in the broadest U.S. investigation of Wall Street trading since state and federal regulators targeted mutual-fund abuses in 2003.
- Wells Fargo Leads Drop in Company Bond Risk After Profit Report. Credit-default swaps on the CDX North America Investment Grade Index, a benchmark gauge of credit risk tied to the bonds of 125 companies in the U.S. and Canada, fell 4.5 basis points to 139 basis points as of 3:31 p.m. in New York, according to broker Phoenix Partners Group.
- Cancer Patients in US Outlive Europeans on Technology, Costs. Death rates for all cancers in America continue to decline, according to the National Cancer Institute's Cancer Trends Report 2007. Cancer survival seems to be tied to a country's gross domestic product and its spending on technologies such as computed tomography scanners, the study found.
- Aluminum dropped in London as the biggest jump in inventories since August 2006 signaled demand may be weakening, and a slump in crude oil prices spurred sales of commodities. Stockpiles of aluminum in warehouses monitored by the London Metal Exchange jumped 24,825 metric tons to more than 1.1 million tons, bringing the gain this year to 20 percent.
- Crude oil futures were little changed in New York after a report of an unexpected gain in U.S. supplies pushed prices down more than $4 a barrel. ``Between the bearish DOE numbers and the price drop of the last two days it may be time to back up and re-evaluate whether the market is still bullish or now bearish,'' said Tim Evans, an energy analyst for Citi Futures Perspective in New York.
- EBay Inc.(EBAY), the world's largest Internet auctioneer, fell 6.6 percent in late U.S. trading after reporting that people are paying less for items on its retail sites.
- Barr Pharmaceuticals Inc.(BRL), the maker of contraceptive pills and generic drugs, surged in extended trading on a report it might be acquired by Israeli generic drugmaker Teva Pharmaceuticals Inc.(TEVA).
- Merrill Lynch & Co.(MER), the third- biggest U.S. securities firm, dropped efforts to sell a stake in BlackRock Inc.(BLK) and struck a deal to sell its 20 percent share of Bloomberg LP, according to people familiar with the decision.
- China's banking regulator told policy makers that forcing banks to increase reserves has hurt the industry's ability to repay debt, according to a person with knowledge of the matter.
- China’s economic expansion cooled, handing more ammunition to Chinese officials calling for reduced gains by the yuan as the outlook for exports dims. Gross domestic product grew 10.1% in the second quarter from a year earlier, down from 10.6% in the first. Consumer prices rose 7.1% in June, slowing from 7.7% in May.
- Asian currencies will fall in the second half of the year as faltering demand from Europe for the region’s exports adds to challenges from inflation and slowing domestic economic growth, according to Calyon. The Philippine peso, the Thai baht, and India’s rupee, the three worst performers this year among the 10 most-traded currencies in Asia outside Japan, will lead declines, said Sebastien Barbe, a Hong Kong-based strategist at Calyon, the investment banking unit of France’s Credit Argicole SA. “People focused a lot on the US but Europe is going to be a bigger problem for Asia,” said Barbe. Europe is the largest destination for China’s exports, buying $137.02 billion of its goods and services in the first half of the year compared with $116.82 billion sales to the US.

Wall Street Journal:
- With gas prices rising, California residents are softening their long-held opposition to offshore drilling, a new opinion polls suggests. The shift comes as Congress and the Bush administration are escalating a battle over whether to end a two-decade federal ban on drilling off the coasts of California, Florida and the Eastern seaboard.
- Goldman(GS) Is Queried About Bear’s Fall. Manipulation Talk Worried Schwartz; Lehman(LEH) Also Calls.
- The cost of protecting Japanese and Australian corporate bonds from default declined, according to traders of credit-default swaps. The Markit iTraxx Japan index fell 8 basis points to 132 as of 9:09 a.m. in Tokyo, according to prices from Morgan Stanley(MS). The Markit iTraxx Australia index fell 8 basis points to 148 compared with yesterday's close in Sydney, Westpac Banking Corp. prices show.
- Short-Selling Rules Loom for Firms. he federal crackdown on short selling is causing a scramble on Wall Street, with brokerage firms racing to implement new controls before the rules take effect on Monday. The unprecedented get-tough action by the Securities and Exchange Commission means that securities firms will have to fine-tune their back-office operations to comply with the requirements.

MarketWatch.com:
- Gartner says PC sales rose 16% in second quarter. Apple Inc.(AAPL) continued to add to its slice of the US PC sector, as Gartner said the company shipped 1.4 million PCs in the quarter, up 38% from last year, and good enough for 8.5% of the total US market.

CNBC.com:
- New Oil Vix Lets Investors Bet On Market’s Volatility.
- As global demand for oil slows, supply should build. Does that mean the energy bull has run its course? Basically, yes, according to Steve Cortes, founder of Veracruz Research. “The energy trade has really been sold to the investing world as a play on emerging markets due to supposedly insatiable demand for crude and other resources from Asia," Cortes tells Fast Money. "But India and China and other Asian markets are trading disastrously; down nearly 50% for the year. In my view that story doesn't hold water any longer!”

NY Times:
- Car Buyers Downsize, but Spend Big on Options.

paidContent.org:
- Amazon.com (AMZN) is launching its new streaming online movie and video service tomorrow...the new service is called, surprise surprise, Amazon Video on Demand.

Reuters:
- U.S. securities regulators' moves to curb short selling of financial sector stocks may give a boost to a handful of exchange-traded funds (ETFs) that are shorting the financial sector and producing sizzling returns. Funds such as the $2.1 billion UltraShort Financials Proshares, as well as the recently launched $11.8 million Short Financials Proshares and $9.5 million 2x S&P Select Sector Financials of Rydex Investments benefit when the financial sector is suffering. Unlike some hedge funds and other investors who short stocks, these funds take short positions through derivatives such as swaps and options. With the regulators' move set to hamper investors' ability to freely short financial stocks, these funds may see more demand.

Financial Times:
- The cost of borrowing shares for short sales on Wall Street has been rising steeply in recent weeks, hampering the ability of hedge funds and other sophisticated traders to profit from market declines. "It has become much tougher as the number of funds that want access to stock has gone up," says the head of prime brokerage at one Wall Street firm. "And stocks these days get hot much more quickly, which makes it even tougher." The rise in shorting has been largely caused by the growth of hedge funds, which account for most of the activity. Generally, hedge funds borrow shares from money managers such as Fidelity or Barclays Global Investors to make short sales. But even as the demand for shares to borrow has grown, money managers are cutting the number of shares they lend for fear of depressing the market and of not having enough shares on hand to meet their own needs. Hedge fund managers say they are worried about getting calls from brokers or money managers asking for their shares back, which could lead to a so-called "short squeeze" in which bearish investors have to buy stock to cover their short positions.

Guardian:
- US plans to station diplomats in Iran for first time since 1979. Washington move signals thaw in relations.
- The global biofuels sector has launched a ferocious attack on the Opec oil cartel by accusing it of deliberately "misleading" the public about who is responsible for soaring fuel prices. "Since you, as head of Opec, provide no explanation for what in our view constitutes a self-serving and misleading statement that goes counter to any independent analysis of the fuels market today, one can only conclude that Opec views competition with biofuels as a direct threat," says the letter signed by the European Bioethanol Fuel Association, the Renewable Fuels Association in the US, the Canadian Renewable Fuels Association and the Brazilian sugar-cane producers of Unica. The organisations point instead to a recent piece of research from the investment bank Merrill Lynch suggesting that biofuels push crude prices 15% lower than they otherwise would be. They note that petrol prices in Brazil have not risen in two years because of competition from sugar cane-derived ethanol.

The Australian:
- Home Sales in Major Australian Cities Decline 24% in 1Q.

Kyodo News:
- North Korea has removed half of the 8,000 nuclear fuel rods from its Yongbyon reactor as it disables the plant under an accord. The removal of the rods at the site 56 miles from the capital is one of the last steps being taken to render the reactor difficult to restart.

Late Buy/Sell Recommendations
Citigroup:
- Rated (DNA) Buy, target $91.
- Upgraded (ACE) to Buy, target $63.

Night Trading
Asian Indices are +.75% to +2.0% on average.
S&P 500 futures -.23%.
NASDAQ 100 futures -.31%.

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Earnings of Note
Company/EPS Estimate
- (MMR)/1.05
- (BAX)/.82
- (CCE)/.53
- (KO)/.95
- (CMA)/.54
- (AMTD)/.32
- (BLK)/1.98
- (GPC)/.79
- (HOG)/.76
- (IGT)/.36
- (JCI)/.73
- (SWY)/.52
- (MTG)/-.61
- (NUE)/1.81
- (PNC)/1.16
- (PPG)/1.55
- (SHW)/1.39
- (BBT)/.70
- (TXT)/.96
- (UTX)/1.31
- (CIT)/-2.07
- (SPWR)/.50
- (CHB)/.11
- (FCS)/.17
- (APH)/.58
- (DHR)/1.06
- (JPM)/.44
- (BK)/.75
- (CAL)/-.49
- (ITW)/.97
- (RS)/2.10
- (SYK)/.72
- (MER)/-1.91
- (COF)/1.31
- (GILD)/.51
- (AMD)/-.54
- (IBM)/1.82
- (GOOG)/4.73
- (BXS)/.42
- (MSFT)/.47

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Housing Starts for June are estimated to fall to 960K versus 975K in May.
- Building Permits for June are estimated to fall to 965K versus 978K in May.
- Initial Jobless Claims for this week are estimated to rise to 380K versus 346K the prior week.
- Continuing Claims are estimated to fall to 3180K versus 3202K prior.

10:00 am EST
- The Philly Fed for July is estimated to rise to -15.0 versus -17.1 in June.

Other Potential Market Movers
- The weekly EIA natural gas inventory report could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by financial and airline shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.

Stocks Finish at Session Highs, Boosted by Financial, Airline, Homebuilding, REIT, Retail, Road & Rail Shares

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In Play

Stocks Soaring into Final Hour on Plunge in Oil, Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Software longs, Internet longs, Alternative Energy longs, Medical longs and Commodity shorts. I covered all of my (IWM)/(QQQQ) hedges and some of my (EEM) short this morning, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, most sectors are rising and volume is heavy. Investor anxiety remains high. Today’s overall market action is very bullish. The VIX is falling 10.0% and is still high at 25.65. The ISE Sentiment Index is low at 97.0 and the total put/call is above-average at .98. Finally, the NYSE Arms has been running below average most of the day and is currently .81. The Euro Financial Sector Credit Default Swap Index is falling 2.71% today to 89.83 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 declining 2.6% today to 139.81. The TED spread is falling 2.4% to 142.0. Yesterday, I said I believed the market had made a tradable low that morning. Today’s action makes me more confident of further upside, after some backing and filling. Bear complacency had become higher than at any time I have ever seen as evidenced by the parabolic rise in short interest, notwithstanding recent sharp broad market losses. Shorting the financials was viewed as free money. Today, at the very least, 15%+ moves in stocks such as FNM, FRE, LEH, WFC, WM and ZION will at least give the many bears pause. The US Dollar Index is trading at session highs and the weekly energy inventory data was very bearish for the price of crude. If the oil bubble is finally bursting, I suspect recent market lows will hold and stocks will see far greater upside through year-end. Nikkei futures indicate an +185 open in Japan and DAX futures indicate an +90 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, falling energy prices, diminishing credit market angst, less financial sector pessimism and bargain-hunting.

Today's Headlines

Bloomberg:
- Wells Fargo & Co.(WFC), the second-biggest U.S. mortgage lender, rose the most since at least 1980 after reporting profit that topped analysts' estimates and raising its dividend.
- Mortgage applications in the U.S. rose for a third week, led by a gain in refinance applications as mortgage rates dropped.
- Industrial production in the U.S. rose more than forecast in June, led by a jump in production of autos and parts after the end of a supplier strike.
- Cleveland-Cliffs Inc.(CLF), North America's largest producer of iron ore, agreed to buy coal-mining company Alpha Natural Resources Inc. for $10 billion as demand surges for the ingredients used to make steel.
- Crude oil futures fell more than $4 a barrel in New York after a surprise increase in U.S. inventories and as a slowing U.S. economy sapped demand for energy. Supplies rose 2.95 million barrels to 296.9 million barrels last week, an Energy Department report showed. Stockpiles were forecast to drop 2.2 million barrels, according a Bloomberg News survey. Fuel demand averaged 20.3 million barrels a day in the past four weeks, down 2 percent from 2007, the department said. ``This report is very bearish both in the absolute numbers and in light of the expectations,'' said Kyle Cooper, an analyst at IAF Advisors in Houston.
- Some Federal Reserve policy makers in June said an increase in the benchmark U.S. lending rate ``would be appropriate very soon,'' minutes released in Washington today showed.
- The dollar increased the most against the euro in almost two weeks as declining crude oil prices and better-than-estimated earnings at Wells Fargo & Co. pushed U.S. equities higher.
- U.K. unemployment jumped the most in June since the aftermath of the last recession in 1992 as the economic slowdown forced housebuilders and banks to cut jobs and stop hiring.
- Lehman Brothers Holdings Inc.(LEH), the securities firm shaken by speculation it's losing clients, ranked highest among fixed-income dealers by market share and service quality, according to a Greenwich Associates survey.
- China needs to stick with a “tight” monetary policy and a “prudent” fiscal policy to cool excessive price increases, state radio reported, citing the legislature’s Financial and Economic Affairs Committee. Inflation is still a prominent problem, China National Radio reported, citing a statement by the committee after it met with the central bank, the statistics bureau and the top economic planning agency.
- William Ackman, the activist hedge- fund manager, increased his $2 billion bet on Target Corp.(TGT) as shares of the second-largest U.S. discount retailer declined 38 percent in the past year, according to two people with knowledge of the matter.

Wall Street Journal:
- Spain Girds for More Pain as Housing Stalls. Supply Glut Coupled With Recession Fears Prolong Slowdown.

NY Times:
- A US envoy will attend a meeting where an Iranian negotiator will give his country’s formal response to economic and diplomatic incentives six countries offered for the suspension of its uranium-enrichment program. William Burns, the undersecretary of state for political affairs, will attend a July 19 meeting in Geneva arranged by the EU with Iran’s nuclear negotiator. Burns will be the highest level official to meet with an Iranian official since the Islamic Revolution of 1979.
- Massachusetts officials expect to gain millions of dollars in revenue as gay couples come to the state to marry. About 32,200 couples will travel to Massachusetts to wed over the next three years, creating 330 permanent jobs and adding $111 million to the economy from weddings and tourism.

CNNMoney.com:
- Goldman Sachs (GS) has kept its hands clean the credit crisis, but now the firm may have to wallow in the mud with the rest of its peers. The Wall Street Journal reports that some pointed questions are being asked of Goldman chief executive Lloyd Blankfien by none other than Alan Schwartz, who was at the helm of Bear Stearns when it died in March. Schwartz would like to know whether there is any truth to talk that in the days preceding Bear’s fall, Goldman traders in London were manipulating the struggling firm’s stock. Back in 1998, the firm’s traders were accused of hammering positions taken by hedge fund Long Term Capital Management as it went belly up. Lehman Bros. (LEH) CEO Dick Fuld piled on too. “You’re not going to like this conversation,” Fuld told Blankfein, according to the Journal. Fuld was reportedly hearing “a lot of noise” about Goldman traders allegedly spreading negative rumors about Lehman, whose stock has been dropping like a stone. Fuld has reportedly spent the last few months contacting traders he thinks may have been bad-mouthing Lehman. Goldman Sachs was one of the most active parties in trading securities known as credit default swaps that it had bought from or sold to Bear Stearns — more than most other Bear trading partners.

Houston Chronicle:
- While home prices in other big cities continue to take their lumps, the Houston area is holding its own. The median home price reached a high point in June, rising 1.3 percent to a record $162,000, according to the Houston Association of Realtors.

MilitaryTimes:
- Iraq surge over, evaluation period begins.

Reuters:
- AOL talks with Microsoft(MSFT) and Yahoo(YHOO) heat up.

Die Zeit:
- The US Treasury will continue to “monitor markets very closely and do all that’s necessary” to ensure financial-market stability, Deputy Treasury Secretary Robert Kimmitt said.

La Repubblica:
- King Abdullah of Saudi Arabia said oil prices are too high and that price stability should be a shared objective of consumers and producers, citing an interview with the monarch. “When the price of oil rose above $100 a barrel, we were already contrary, let alone now that there’s talk of $200 a barrel,” he said.

Bear Radar

Style Underperformer:

Large-cap Growth +.98%

Sector Underperformers:

Coal irlind (-4.84%), Energy (-2.63%) and Oil Service (-2.18%)

Stocks Falling on Unusual Volume:

NITE, DRL, TWTC, CLF, ERES, ADTN, NAVG, CSGS, CBI, ESE, STX and BPT

Stocks With Unusual Put Option Activity:

1) MGG 2) MDTL 3) FDRY 4) CCU 5) TSN

Bull Radar

Style Outperformer:

Small-cap Value (+2.77%)

Sector Outperformers:

Airlines (+12.27%), Banks (+8.73%) and Retail (+3.87%)

Stocks Rising on Unusual Volume:

WFC, FMBI, NPBC, ALTR, BAC, TSL, SMG, CLMT, NLC, TSO, CSGP, LUFK, ODFL, BAGL, PFCB, MBFI, NTRS, TFSL, EURX, JBHT, IBOC, KNXA, SCHW, PRSP, NPBC, WERN, ONXX, ZION, STJ, VFC and VLY

Stocks With Unusual Call Option Activity:

1) IMCL 2) BRL 3) STJ 4) WFC 5) LUV