Friday Watch

Late-Night Headlines
Bloomberg:
- Speculative-grade bonds, with yields an average of 801 basis points more than similar-maturity Treasuries, now offer a favorable risk-reward ratio, according to Martin Fridson, CEO of Fridson Investment Advisors. “It probably makes sense to at least be scaling into high yield at these levels,” he said. Fridson led Merrill’s(MER) high-yield strategy group until he left in 2003 and formed his own research firm. He was the top-ranked high-yield analyst in Institutional Investor magazine’s annual poll for nine years in a row.
- Pacific Investment Management Co., which runs the world’s largest bond fund, is increasing its holdings of Fannie Mae(FNM) and Freddie Mac(FRE) debt. The two biggest US mortgage lenders “remain fundamentally sound” even after the government proposed a plan this week to shore up the companies, said Jennifer Bridwell, a mortgage strategist and senior vp at Pimco. The fund manager told nearly 800 clients during a call that the company’s portfolio held more of the bonds than in the index that it uses to measure performance. The $128 billion Pimco Total Return Fund, run by Co-Chief Investment Officer Bill Gross, had 61% of its assets in mortgage securities as of June 30, compared with 53% a year earlier.
- U.S. Treasury Secretary Henry Paulson said he expects to reach ``a very acceptable result'' by next week in negotiations with lawmakers on his plan to aid mortgage buyers Fannie Mae and Freddie Mac.
- The US dollar gained, headed for a weekly advance against the euro, on signs Wall Street investment banks can weather credit-market losses following the U.S. subprime mortgage collapse.
- Soybeans fell the most in more than a week after legislators in Argentina, the third-biggest exporter of the oilseed, rejected a tax on international sales that had curbed shipments. Corn dropped the most in six months.
- Merrill Lynch & Co.(MER), the third- biggest U.S. securities firm, reported a wider-than-forecast quarterly loss as the credit contraction saddled the company with $9.7 billion of writedowns.
- Microsoft Corp.(MSFT), the world's biggest software maker, posted fourth-quarter profit that trailed analyst estimates and gave a disappointing forecast after a sluggish U.S. economy crimped sales, sending the shares down 6.4 percent.
- Google Inc.(GOOG) fell 7.6% in late trading after reporting earnings that missed analysts' estimates on a surge in spending on new projects and costs to defend YouTube in a copyright lawsuit. Google reported revenues of $5.37 billion for the quarter ended June 30, 2008, an increase of 39% compared to the second quarter of 2007 and an increase of 3% compared to the first quarter of 2008.
- International Business Machines Corp.(IBM), the world's largest computer-services provider, reported a 22 percent increase in second-quarter profit and boosted its full-year forecast as sales climbed in emerging markets.
- China’s Economic Fortunes Swing Toward Recession. Global developments may prove dangerous for a nation that needs to create millions of jobs to keep people from protesting on Tiananmen Square. The breakdown of China's GDP data may be a harbinger of a difficult year ahead.
- Tomatoes sold in the U.S. are safe to eat again, according to the Food and Drug Administration, which lifted its warning about the risk of salmonella contamination.

Wall Street Journal:
- Earnings reports from four technology giants suggest the tech sector is weathering the economic slowdown better than other industries -- though not always as well as Wall Street has hoped.
- Former Vice President Al Gore urged Congress not to overturn a federal ban on offshore drilling and complained that lawmakers are "being stampeded by lobbyists for special interests" eager to lift the moratorium.

MarketWatch.com:
- Shorts on the run. Rumor mongers and uptick rule wreck solid strategy. Shorting is essential to prevent excessive speculation and overhyping, but it does not deserve the level playing field its supporters claim. Financial markets exist to help companies raise money and to reward investors for taking risks by supporting companies, sectors and economies as they grow. Hedge funds convinced the SEC that short strategies were as important as long strategies and that they needed a level playing field. Almost overnight, financial stocks started getting punished. Short selling went from being a value play to a momentum play, with many more people in the game than the traditional crowd.

NY Times:
- Defrauded Fund Investors Sue Goldman Sachs(GS).

US News & World Report:
- Palestinians say peace talks with Israel are set for Washington this month. Palestinian officials, speaking on condition of anonymity because no announcement has been made, say chief Palestinian negotiator Ahmed Qureia and Israeli Foreign Minister Tzipi Livni will meet July 30 with Secretary of State Condoleezza Rice.

Forbes.com:
- Blood in the Financial Streets. Think your job is tough? Try working right now as a mutual fund manager that concentrates on financial-services stocks.

CNNMoney.com:
- Mexico may have contracted to deliver oil “several years” into the future at current prices, a sign that it believes crude has peaked, citing energy traders and analysts. An unidentified analyst confirmed that the Mexican government had signed the contracts. "This is a smart move," said Phil Flynn, senior market analyst at Alaron Trading in Chicago, who also thinks there's a good chance prices have peaked. "If I were an oil producer, I'd want to lock in these prices." Analysts say if other oil producers follow suit and lock in future contracts, that could be one thing that would cause oil prices to fall, far and fast. "I don't know who else is doing it," said Nauman Barakat, an energy trader at Macquarie Futures, and one of the traders who mentioned the Mexico news in a research note. "There's been a lot of talk, but it's kept very confidential." When the price of oil falls OPEC likes to pump less oil to keep prices up. If producers sign long term contracts, they're obligated to pump that oil making it more difficult for OPEC to control prices.

Reuters:
- Yahoo Inc (YHOO) is unlikely to get into a bidding war over AOL with Microsoft Corp (MSFT) because if Microsoft gets in the way, Yahoo could instead renew talks over News Corp's (NWSa) Web properties, a person with knowledge of the plans said on Thursday.

Financial Times:
- Josef Ackermann, Deutsche Bank's chief executive, yesterday said the credit crunch was at "the beginning of the end" because banks and regulators had taken action to deal with the crisis and many businesses were slowly returning to normal.
- Conservative fund management firms and custody banks are making billions of dollars from short-selling by lending stocks to facilitate such trades in exchange for lucrative fees. US prime brokerage firms, most of which are owned by big Wall St banks, will reap revenue of $11bn this year, according to a recent study by Tabb Group, a research business.
- Central and eastern Europe's recent rapid economic growth could be thwarted in "a number of countries" by rising inflation, the new president of the European Bank for Reconstruction and Development warned on Thursday. "We must realise that inflation has the potential to destroy part of the progress that has been made in many of these societies - inflation which is double-digit or which is even above 20 per cent," Thomas Mirow told the Financial Times in his first interview since taking up the job at the beginning of the month.
- Emerging economies must make the fight against inflation their "top priority", the International Monetary Fund said on Thursday as it sharply raised its forecast for price increases in the developing world this year and next. Many emerging markets had to raise interest rates, cut government deficits and let currencies appreciate more to contain the inflation risk, the IMF said.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (ONNN), target $14.
- Reiterated Buy on (NUE), target $90.

Morgan Stanley:
- Rated (CE) Outperform, target $66.
- Rated (ACE) Outperform, target $62.
- Rated (CB) Underperform, target $51.

Caris & Co.:
- Rated (SNDK) Above Average, target $20.50.

RBC Capital:
- Rated (PTNR) Outperform, target $30.

Night Trading
Asian Indices are -1.0% to +.25% on average.
S&P 500 futures -.80%.
NASDAQ 100 futures -.73%.

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Earnings of Note
Company/EPS Estimate
- (C)/-.61
- (HON)/.94
- (LAB)/.04
- (MAN)/1.50
- (MAT)/.02
- (OSTK)/-.28
- (SLB)/1.12
- (BMI)/.43
- (GAP)/-.41

Upcoming Splits
- None of note

Economic Releases
- None of note

Other Potential Market Movers
- The (DELL) annual meeting could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by energy and steekmaking shares in the region. I expect US equities to open modestly lower and to maintain losses into the afternoon. The Portfolio is 100% net long heading into the day.

Stocks Finish Near Session Highs, Boosted by Airline, Retail, HMO and Financial Shares

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In Play

Stocks Higher into Final Hour on Plunging Oil, Diminshing Financial Sector Fears, Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Software longs, Alternative Energy longs, Retail longs, Semi longs and Commodity shorts. 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 substantially higher, most sectors are rising and volume is above average. Investor anxiety is above-average. Today’s overall market action is very bullish. The VIX is falling 2.87% and is still above-average at 24.38. The ISE Sentiment Index is low at 102.0 and the total put/call is around average at .87. Finally, the NYSE Arms has been running above average most of the day and is currently 1.15. The Euro Financial Sector Credit Default Swap Index is falling 2.56% today to 87.29 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 unch. today to 138.18. The TED spread is falling 3.47% to 138.0. The AAII % Bulls rose to 25.0% this week, while the % Bears rose to 58.14%. This survey continues to register extraordinarily high bearishness, which bodes well for an extension of recent broad market gains. Oil continues to trade as if a significant top is now in place, however I want to see a convincing close below $120 to confirm the downtrend. I still think a bursting of the commodity bubble would mean substantially higher US stock prices over the intermediate-term. The commodity bubble has been the driving force behind the current "US negativity bubble." Google Inc.(GOOG), one of my longs, reports after the close. The set-up on the long side looks pretty good again. eBay(EBAY) and ValueClick(VCLK) just disappointed. Google’s short interest ratio is 1.23, up from .45 in January. As well, its open interest put/call ratio is currently .7, up from .35 in Mid-March. The stock is down 28% from its record high and down 10% since May. Finally, the majority of pundits seem very cautious on the shares ahead of the report. I suspect that we will see an initial knee-jerk sell-off in the stock, followed by a rally from current levels tomorrow. Over the intermediate-term, I still see significant upside and suspect its current forward p/e multiple of 26.4 will expand meaningfully as investors pay up for a true growth company that can execute in today’s sluggish macro environment. Nikkei futures indicate an +278 open in Japan and DAX futures indicate an +80 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:
- The cost of protecting banks from default fell to the lowest in a month on speculation losses and asset writedowns will slow after JPMorgan Chase & Co.(JPM) reported better-than-expected profit. Credit-default swaps on JPMorgan fell 8 basis points to 117 as of 8:23 a.m. in New York, according to CMA Datavision. Contracts on the 25 European banks and insurers in the Markit iTraxx Financial index of senior debt fell 3.5 basis points to 85.5, the lowest since June 20, according to JPMorgan prices.
- Crude oil fell more than $4 a barrel, the third straight daily decline, as natural gas futures tumbled and on signs slower global economic growth is curbing fuel use. Natural gas dropped more than 7 percent after a government report showed that U.S. supplies rose a greater-than-forecast 104 billion cubic feet last week. ``Any sign of a slowdown in China or India will have a major impact on prices. If there are more signs of a BRIC slowdown prices could be headed for $100.''
- Europe's top trade official urged Democratic presidential candidate Barack Obama to abandon ``crowd- pleasing'' rhetoric that casts doubt on the U.S. commitment to unfettered markets.
- JPMorgan Chase & Co.(JPM), the largest U.S. bank by market value, reported second-quarter earnings that exceeded analysts' estimates, helped by higher investment banking fees and revenue from the consumer business.
- United Technologies Corp.(UTX) said second-quarter profit rose 11 percent and full-year profit and sales will exceed its forecasts on demand for Otis elevators and Sikorsky helicopters. The company's shares rose the most in more than five years.
- PPG Industries Inc.(PPG), the world's second-largest paint maker, rose the most in five years in New York trading after second-quarter profit topped analyst estimates because of a European acquisition and price gains.
- Fannie Mae(FNM) and Freddie Mac(FRE) rose for a second day in New York trading and their debt yields over benchmark rates narrowed as improved earnings at other financial firms eased concern that the mortgage companies need a government bailout.

Wall Street Journal:
- US Fears Threat of Cyberspying at Beijing Olympics.
- GM Gives a Lift to Ohio Town’s Fortunes.
- McCain Surrogate Carly Fiorina Meets With Clinton Supporters.

NY Times:
- Boeing(BA), Airbus Build Environmentally-Friendly Planes.

CNBC.com:
- Nokia Oyj(NOK), the world’s biggest maker of mobile phones, turned in a “solid performance” with second-quarter earnings, said CEO Olli-Pekka Kallasvuo. “It was a solid performance overall,” Kallasvuo said. “We met the expectations of the market, even beat them.” The company said it now expects mobile device unit sales to rise 10% or more this year, versus a previous prediction of approximately 10%.

USA Today:
- Only 14% of Americans approve of the job Congress is doing, the lowest rating in 30 years, according to a July 10-13 Gallup Poll.

Fox 5:
- Three major auto manufacturers are promising to reserve 300 new hybrid vehicles each month exclusively for NYC as it replaces its entire fleet of yellow cabs.

Wealth-Bulletin:
- Investors withdrew $14.6bn from US and European equity hedge funds for the year through May, according to research provider Morningstar.

Miami Herald:
- Secretary of State Condoleezza Rice said Thursday the decision to break with past policy and send a top U.S. diplomat to talks with an Iranian envoy shows that the world is united in trying to eliminate threats from Iran's nuclear program. "The point that we're making is the United States is firmly behind this diplomacy, firmly behind and unified with our allies and hopefully the Iranians will take that message," Rice told reporters at the State Department. "It's going to be very clear to them that the international community and P5-plus-1 are completely united."

Bild:
- Allianz AG Chief Financial Officer Paul Achleitner said the possibility of Germany going into a recession “is real and not to be underestimated,” according to an interview. The effect of a recession may be lessened because German companies have positioned themselves well in the past five years, he added.

Financial Times Deutschland:
- Apple Inc.’s(AAPL) new iPhone was sold out in Germany after less than week. Deutsche Telekom AG’s T-Mobile division, which has the exclusive rights for the iPhone in the country, sold 15,000 of the new model on the first day.

The Scotsman:
- Scotland’s economy in clear slowdown. AN ECONOMIC slowdown is "more evident" now in Scotland than it was three months ago, according to the latest business survey by the Scottish Chambers of Commerce (SCC).

Gulf News:
- Dubai arrested 40 cross-dressing tourists in the emirate’s shopping malls as part of a campaign against transvestism, citing police chief Lieutenant General Dahi Khalfan Tamim. All 40 have been referred to public prosecutors and will be deported. Dressing and behaving like the opposite gender is against the UAE’s traditions and social values, he said.

Business Standard:
- India’s inflation accelerated to 11.9% in the week ended July 5^th.

Bear Radar

Style Underperformer:

Mid-cap Growth +.13%

Sector Underperformers:

Coal (-8.05%), Steel (-4.20%) and Energy (-2.09%)irlind

Stocks Falling on Unusual Volume:

PLCM, TCBI, TXT, BK, CWEI, CRK, MTL, NUE, CLF, CMC, RRI, CPL, HES, TTEC, EBAY, VCLK, VIVO, IIIN, LSTR, AREX, CSIQ, SPWR, SCHN, XLNX and IEO

Stocks With Unusual Put Option Activity:

1) BRL 2) CREE 3) EXC 4) ACE 5) EBAY

Housing Starts Rise, Jobless Claims Increase, Philly Fed Improves

- Housing Starts for June rose to 1066K versus estimates of 960K and 977K in May.

- Building Permits for June rose to 1091K versus estimates of 965K and 978K in May.

- Initial Jobless Claims for this week rose to 366K versus estimates of 380K and 348K the prior week.

- Continuing Claims fell to 3122K versus estimates of 3180K and 3203K prior.

- Philly Fed for July fell to -16.3 versus estimates of -15.0 and -17.1 in June.

BOTTOM LINE: US housing starts unexpectedly surged the most in more than two years in June because of a change in NYC’s building code that overshadowed a slide in single-family home construction, Bloomberg said. Excluding a jump in construction of multifamily units in the Northeast, starts would have dropped 4%. Single-family home starts were the slowest in 17 years. Residential construction fell at a 24.6% pace in the first quarter and subtracted 1.1 percentage points from growth. Housing Starts will remain muted over the intermediate as homebuilders pare down inventories.

The number of Americans filing first-time claims for unemployment benefits rose last week, Bloomberg reported. The four-week moving average of claims fell to 376,500 from 381,000 the prior week. During the 2001 recession, which was one of the mildest on record, jobless claims averaged around 415,000. The unemployment rate among those eligible for benefits, which tracks the US This is still well below the long-term average of 2.9%. I expect the job market to continue to improve modestly through year-end. unemployment rate, fell to 2.3% from 2.4% the prior week.

Manufacturing in the Philly region improved slightly in July, Bloomberg reported. The New Orders component rose to -12.1 from -12.4 the prior month. The Prices Paid component rose to 75.6 versus 69.3 prior. The Prices Received component fell to 28.8 versus 29.7 in June. The Outlook component, for the next six months, fell to +18 versus +21.3 in June. I expect the Philly Fed to improve slightly again next month.