Friday Watch

Late-Night Headlines
Bloomberg:
- New NYSE Short-Selling Targets. Here are the 25 NYSE stocks with the largest percentage increase in short interest relative to their float over the first two weeks of July:
- New Nasdaq Short-Selling Targets. Here are the 25 Nasdaq stocks with the largest percentage increase in short interest relative to their float over the first two weeks of July:
- Stephen Schork, president of the Schork Report, says oil may drop below $100 before October. (video)
- Platinum fell, extending the longest losing streak in more than a decade, and palladium slid on concern that an economic slowdown will cut demand for the metals. ``We suspect that the drift will be towards the downside in most metals,'' Edward Meir, an MF Global Ltd. analyst in Stamford, Connecticut, said today in a report. ``The uninspiring demand backdrop, high energy prices, and what seems to us to be a spreading global economic slowdown, have yet to be fully reflected in most metals prices.''
- Four New York state officials, including two top aides to former Governor Eliot Spitzer, unlawfully misused state police to discredit a political rival, the state Public Integrity Commission found.
- Short selling of Fannie Mae(FNM) and Freddie Mac(FRE) jumped in the first two weeks of July as the stocks fell on concern that shareholders would be wiped out even if the government bailed out the entities. Short interest on McLean, Virginia-based Freddie Mac rose 28 percent to 105.9 million shares between June 30 and July 15, according to data compiled by Bloomberg. Short interest on Washington-based Fannie Mae as of July 15 was 154.4 million shares, up 11 percent.
- French Mourn Lost Leisure Time as Sarkozy Ends 35-Hour Workweek.
- HIV-infected patients in North America and Europe are living at least 13 years longer on average as a result of combination drug therapies introduced in the mid-1990s, according to a study in the journal Lancet.
- Juniper Networks Inc.(JNPR), the second- largest maker of networking equipment, reported a 40 percent jump in profit and raised its forecasts for the year as phone companies boost spending. The shares surged 10.1 percent in after-hours trading.
- Western Digital Corp.(WDC) fell 10.7 percent in extended trading to $30.01. The world's second-largest maker of hard-disk drives forecast first-quarter profit that missed analysts' estimates after an industry glut put pressure on prices.

Wall Street Journal:
- Energy Is Top Economic Issue for Voters. Conservation Steps Increase, Poll Finds; Support for Drilling. Congress will likely break for the summer without passing legislation to curb high gasoline prices. But Americans are fashioning their own energy policy, founded on conservation and support for more production. By margins of 22 to 31 percentage points, voters in each of the states -- Michigan, Colorado, Minnesota and Wisconsin -- said they support offshore oil drilling, according to the polls, which were released Thursday. Overall, the polls also show Sen. John McCain closing in on Sen. Obama in each state. Prospects look dim for major changes in U.S. energy policy before Election Day.

MarketWatch.com:
- Coastal wind turbines have been common electricity generators in Europe for years. Now they may be coming to the U.S. The wind industry has plans for turbines on the outer continental shelf.
- Energy and the candidates. Senators Barack Obama and John McCain have different energy priorities, but no matter who wins the White House, it will take a huge national effort for either man to succeed.

CNBC.com:
- Morgan Stanley(MS) is in active negotiations with top Merrill Lynch(MER) brokers to bring them to Morgan Stanley.
- Officials at troubled brokerage firm Lehman Brothers

LEHMAN BROTHERS HLDGS INC LEH 18.52 -2.58 -12.23% NYSE

Quote | Chart | News | Profile

(LEH) have weighed the sale of at least part of its Neuberger Berman asset management unit, sources told CNBC.

IBD:
- Earnings A Shot In The Arm For Company That Keeps Hearts Beating.

CNNMoney.com:
- Gas prices fall for 7^th straight day. Gasoline at the pump hits levels not seen since June 9.

DenverPost.com:
- 6 things you didn’t know about oil shale:

Reuters:
- The top U.S. securities regulator remains steadfast in a plan to broaden an emergency rule to curb abusive short selling despite opposition from the hedge fund industry and other short sellers. U.S. Securities and Exchange Commission Chairman Christopher Cox told lawmakers on Thursday the agency would soon propose expanding the rule covering the shares of 19 major financial firms to the entire market. The SEC is also considering other remedies to short selling abuses, such as requiring the reporting of substantial short positions, Cox told reporters after the hearing. Groups representing short sellers have urged the SEC not to extend the emergency order past July 29, nor beyond the current list of companies. Cox said the idea of using a price test or some sort of circuit breaker to regulate manipulative short selling is a "subject currently under consideration by the commission staff."
- Short interest jumped 7 percent on the Nasdaq in mid-July and rose 2.7 percent on the New York Stock Exchange to an all-time high, as investors continued to make bearish bets on the stock market. Short interest on the Nasdaq saw its biggest percentage increase since January, rising to 11.18 billion shares as of July 15, compared to 10.45 billion shares as of June 30. On the NYSE, short interest rose to about 18.61 billion shares as of July 15, topping the previous record of 18.13 billion shares as of June 30. "More and more people seem to be resting into the thought that a downside move in the market is the way of the future," said Dylan Wetherill, president and founder of short interest tracking Web site ShortSqueeze.com. "The shorts continue to sell shares at an erratic pace," he added. Short interest as of July 15 was equal to a record 4.86 percent of the total shares outstanding on the NYSE.
- U.S. private equity firm Lone Star Funds has raised two funds totaling $10 billion, significantly above a $6.5 billion target, a source familiar with the situation said on Thursday. Three-quarters of that is for one fund that will be for general investment purposes, and the other quarter is for real estate investments, the source said.
- US Senate on course to vote Sat. on housing bill.
- Newly merged media conglomerate Thomson Reuters is preparing to launch a business television news channel to rival that of Bloomberg and CNBC. The Daily Telegraph understands that the plan is for the channel to appear on both the internet and some form of cable or digital platform. The launch could be as early as January but may be pushed back as the company is conscious of Reuters' earlier unsuccessful foray into television.

Financial Times:
- The eurozone economy is fast running out of steam with growth prospects collapsing across the 15-country region, closely watched surveys indicated on Thursday.

Telegraph:
- JPMorgan Chase(JPM) is in talks with banks and private equity firms to acquire and break up HBOS Plc, the biggest UK mortgage lender.

China Daily:
- China’s Energy Subsidies Are Unsustainable.
- China Farmers Incomes Hit by Rising Prices.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (LLL), target $127.

CSFB:
- Reiterated Outperform on (CELG), raised target to $84.

Night Trading
Asian Indices are -2.0% to -1.0% on average.
S&P 500 futures -.05%.
NASDAQ 100 futures unch.

Morning Preview
US AM Market Call
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Earnings of Note
Company/EPS Estimate
- (ACI)/.64
- (B)/.60
- (BEC)/.87
- (BDK)/1.42
- (FSS)/.18
- (FO)/1.20
- (IDXX)/.456
- (ITT)/1.10
- (LM)/.13
- (TROW)/.60
- (NFLX)/.40

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Durables Goods Orders for June are estimated to fall .3% versus unch. in May.
- Durables Ex Transports for June are estimated to fall .2% versus a .8% decline in May.

10:00 am EST
- Final July Univ. of Mich. Consumer Confidence is estimated to fall to 56.4 versus a prior estimate of 56.6.
- New Home Sales for June are estimated to fall to 503K versus 512K in May.

Other Potential Market Movers
- None of note.

BOTTOM LINE: Asian indices are lower, weighed down by technology and financial shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Finish at Session Lows, Weighed Down by Airline, Homebuilding, Gaming, Financial, REIT and Steel Shares

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In Play

Stocks Falling into Final Hour on Financial Sector Pessimsim, Global Growth Worries, Profit-Taking

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Alternative Energy longs, Gaming longs, Software longs and Computer longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, sector performance is mostly negative and volume is above-average. Investor anxiety is slightly above average. Today’s overall market action is bearish. The VIX is rising 7.6% and is still above-average at 22.93. The ISE Sentiment Index is low at 92.0 and the total put/call is above average at 1.03. Finally, the NYSE Arms has been running above average most of the day and is currently 1.26. The Euro Financial Sector Credit Default Swap Index is rising .26% today to 78.50 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 +.48% today to 133.57 basis points. The TED spread is falling another 7.73% to 1.16. The 10-year TIPS spread, a good gauge of inflation expectations, has dropped 32 basis points in 13 days to 2.32% on the fall in commodities. This remains a large positive. Former Treasury Secretary Lawrence Summers was on CNBC today. He said that the “worldwide commodity price environment is troubling.” However, he is proposing a massive US infrastructure spending plan to stimulate the economy. I agree that infrastructure spending should be increased, but not “massively.” A massive infrastructure spending increase would boost commodities further, send interest rates/inflation higher, pressure the US dollar, result in another down-leg in housing and increase job losses, in my opinion. I believe the number one threat to the global economy now is the bubble in commodities and that we should be looking for ways to burst that bubble, not inflate it further. Today’s market action is somewhat puzzling. Stocks like BIDU, QCOM, AMZN, CELG and STRA are sporting massive gains even as the Naz falls 1.6%. Breadth isn’t too bad considering the losses in the headline averages. The biotech, drug, medical equipment, wireless, computer service and energy sectors are all holding up well. Investors are worried that the global economy is slowing too much. We need to see stabilizing economic data overseas or another large decline in commodities to get the major averages moving higher again. Nikkei futures indicate a -160 open in Japan and DAX futures indicate an +12 open in Germany tomorrow. I expect US stocks to trade modestly lower into the close from current levels on profit-taking, more shorting, global growth worries and financial sector pessimism.

Today's Headlines

Bloomberg:
- Optiver Holding BV, a Dutch trading fund, allegedly manipulated and attempted to manipulate energy markets on the New York Mercantile Exchange, the U.S. Commodity Futures Trading Commission said today. The commission's complaint alleges the company tried to ``bully the market'' by buying large volumes of futures contracts to influence prices. The alleged scheme resulted in a $1 million profit to the defendants, the commission said. The commission alleged Optiver, based in Amsterdam, along with two of its subsidiaries and three employees, tried on 19 separate instances to manipulate energy futures markets, specifically New York Mercantile Exchange light sweet crude oil, New York Harbor heating oil and New York Harbor gasoline markets. At least five of those attempts were successful, ``causing artificial prices,'' the commission said. Since December 2002, the commission, before today, had filed 41 enforcement actions charging a total of 66 defendants with energy market violations. Civil penalties to settle the actions have totaled almost $500 million, the CFTC said earlier in a statement.
- An effort to scale down the $62 trillion credit-default swap market by eliminating duplicate trades may cut the amount of some outstanding contracts between banks by as much as 75 percent.
- The cost of protecting Credit Suisse Group AG from default fell to the lowest in almost two months after Switzerland's second-biggest bank posted earnings that beat analysts' forecasts.
- The Federal Reserve, looking to spur investment in banks hit by credit losses, is weighing three measures to ease regulatory constraints on private-equity funds that buy stakes in lenders, people with knowledge of the deliberations said.
- The U.S. Senate plans to consider the housing legislation designed to shore up confidence in Fannie Mae(FNM) and Freddie Mac(FRE) and stem record mortgage foreclosures after the House of Representatives approved it yesterday.
- Nickel fell the most in two months in London as stainless-steel producers reduced usage of the metal. Copper, aluminum and tin also dropped. Shanxi Taigang Stainless Steel Co., China's biggest maker of the rust-resistant alloy, said today it plans to produce more goods with a low nickel content. Outokumpu Oyj, the world's fourth largest, said distributors postponed purchases because of the nickel price decline and softening demand in construction. ``Demand for nickel is weak in China, the U.S. and Europe.'' Nickel has slumped 28 percent this year, the most among the LME's six industrial metals.
- German business confidence fell the most since the Sept. 11 terrorist attacks in 2001, signaling growth is faltering in Europe's biggest economy. The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, dropped to 97.5 from 101.2 in June. That's the weakest reading since September 2005.
- Tokyo overtook London to be the world's second-most expensive city, and living expenses in Indian cities leapt as the dollar weakened and inflation surged, a survey by Mercer LLC said.
- The euro fell to the lowest level against the dollar in more than two weeks as a drop in business confidence in Germany reduced speculation that the European Central Bank will raise interest rates again this year.
- U.K. retail sales dropped in June by the most since at least 1986 as accelerating inflation and the slowdown in economic growth prompted consumers to cut spending.

Wall Street Journal:
- Intel Corp.(INTC) Wednesday unveiled the first fruits of a new effort to make multifunction chips, a strategy that could accelerate a longtime goal to diversify beyond computers.
- Microsoft Corp.(MSFT) will announce plans to bring its Web search and search ads to social-networking site Facebook Inc., according to people familiar with the matter.

NY Times:
- China Pays Parents for Silence Over Earthquake Deaths.
- Waste-to-Fuel Attracts Investments as Oil Prices Rise.

StarTribune.com:
- Poll: McCain closes in on Obama in some states.

CNNMoney.com:
- Securities and Exchange Commission Chairman Christopher Cox said U.S. regulators intend to extend restrictions on short- sales to the entire market.

Scotsman.com:
- BUSINESS confidence among Scottish manufacturers has slumped to its lowest level for almost three decades, a survey has revealed. Confidence north of the Border is at a 28-year low, driven downwards by rising costs combined with expectations of a slowdown, according to the latest Scottish Industrial Trends Survey published by CBI Scotland.

La Repubblica:
- European Union Economic and Monetary Affairs Commissioner Joaquin Alumina said the euro’s strength against other currencies is a “real problem” that should be addressed by speaking with a “single voice.” “The euro is overvalued while other currencies with a an official exchange rate, like the Chinese yuan, are clearly undervalued,” Alumina said.

Bear Radar

Style Underperformer:

Mid-cap Value -2.22%

Sector Underperformers:

Airlines irlind (-10.31%), Homebuilders (-7.04%) and Gaming (-6.30%)

Stocks Falling on Unusual Volume:

SWIR, EZPW, ARG, SLV, ILF, PCU, VARI, ZOLL, CPTS, OMTR, WIRE, ZBRA, FDRY, MKSI, CHIC, AIRM, EXBD, AVAV, SCHL, NCTY, MTL, GDI, WFR, LH, KAI, BHE, CMG, AFL, CGX and BEZ

Stocks With Unusual Put Option Activity:

1) BMC 2) SPG 3) XTO 4) FDRY 5) GGP

Jobless Claims Rise, Unemployment Steady, Existing Home Sales Fall

- Initial Jobless Claims for this week rose to 406K versus estimates of 380K and 372K the prior week.

- Continuing Claims fell to 3107K versus estimates of 3160K and 3116K prior.

- Existing Home Sales for June fell to 4.86M versus estimates of 4.94M and 4.99M in May.

BOTTOM LINE: The number of Americans filing first-time claims for unemployment benefits rose last week, Bloomberg reported. Weekly jobless claims can be hard to gauge in July as automakers temporarily trim staff to upgrade factories in anticipation of new car models. The four-week moving average of claims rose to 382,500 from 378,000. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, held steady at a historically low 2.3%. 16 states reported a decrease in claims. I except jobless claims to tick lower next week and trend modestly lower through year-end.

Sales of previously owned US homes fell in June, Bloomberg reported. The median existing home price fell 6.1% year-over-year to $215,100. The number of previously owned unsold homes on the market at the end of June represented 11.1 months’ supply at the current sales pace. Purchases of condos and co-ops rose 1.7% to a 590,000 pace. Purchases fell in three of four regions, paced by a 6.6% decline in the Northeast. Sale gained 1% in the West. While sales fell to new lows just slightly, I still think they are stabilizing around current levels and will tick higher into year-end, which should make a meaningful dent in inventories.