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Friday Watch

Late-Night Headlines
Bloomberg:

- The cost of protecting Asia-Pacific bonds from default declined, according to traders of credit-default swaps. The Markit iTraxx Japan was quoted 7 basis points lower at 177.5 as of 9:11 am in Tokyo, Morgan Stanley prices show. The Markit iTraxx Australia index dropped 5.5 basis points to 201.5 as of 9:27 am in Sydney, according to Citigroup Inc.

- Japan’s industrial output rose the most in at least six years in April as companies replenished inventories amid evidence the global recession is easing. Factory production climbed 5.2 percent from March, when it gained 1.6 percent, the Trade Ministry said today in Tokyo. The increase was faster than the 3.3 percent expected by economists. Companies said they planned to increase output in May and June as well, the report showed.

- Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said endowments managed by Yale University and Harvard University may have to cut their investments in hedge funds and other hard-to-sell assets because their risks outweigh the possible rewards. “The Yale and Harvard portfolios, which have succeeded enormously over the past 10 or 20 years in terms of the emphasis on illiquidity and private investments and risk-taking -- you have to question that model,” Gross said today at an industry conference in Chicago.

- South Korea’s defense ministry confirmed a Yonhap News report that Chinese fishing boats are leaving the waters near the maritime border between North Korea and South Korea. More than half the boats have left, and South Korea’s military is closely monitoring troop movements in North Korea for signs of provocation, Won Tae Jae, defense ministry spokesman, told reporters.

- Dell Inc.(DELL), the world’s second-largest maker of personal computers, topped profit estimates after cost cuts helped overcome a steeper-than-anticipated slump in sales. Dell, based in Round Rock, Texas, rose as much as 27 cents, or 2.4 percent, in extended trading to $11.75.

- J.Crew Group Inc.(JCG), the U.S. clothing retailer run by a former Gap Inc. chief executive officer, rose 18 percent in late trading after first-quarter profit exceeded analysts’ estimates.

Wall Street Journal:

- The president of the Federal Reserve's Dallas branch rejected the idea that U.S. Treasurys would lose their triple-A credit rating due to the country's worsening fiscal outlook. The specter of a downgrade has been raised by some in the bond market, including Pacific Investment Management Co.'s bond guru Bill Gross. "I don't believe it will happen to the United States," Richard Fisher told reporters late Thursday after a speech in Washington. Fisher said he believed the steeper yield curve was due, in part, to the surge in issuance of Treasurys, but also to an uptick in confidence about the U.S. economy. "I think we've been pulled back from the abyss," he said.

- Free or low-priced online services have squeezed profits from many businesses. But John Riccitiello is placing a big bet that the practice can make money in videogames. Two years into his stint as chief executive of Electronic Arts Inc., the videogame publisher on Friday is unveiling plans for an online Tiger Woods golf game -- one of its first such offerings in the U.S. based on a popular game for consoles -- that could be subscription based. It will be available in the fall.

- Obama administration officials are debating whether to pare some of their more ambitious ideas to revamp oversight of financial markets, in a nod to the political difficulties of pushing through sweeping changes, people familiar with the process say. At issue is whether officials want to reorganize the basic structure of oversight, or whether they will settle for new rules at existing agencies that would accomplish the same goal. Many of the ideas under consideration could trigger a turf war on Capitol Hill and among government agencies. People involved in the process said that as a result, the plan could still break in several different directions.

- The Obama administration plans to usher General Motors Corp. into bankruptcy court Monday and push through a restructuring that will cost taxpayers billions of dollars more than previously envisioned, turning what once was one of the most profitable companies in the world into a government ward.

- U.S. officials recently concluded that the Afghan Taliban may receive as much money from foreign donors as it does from opium sales, potentially hindering the Obama administration's strategy to rehabilitate Afghanistan by stopping the country's drug trade. Gen. David Petraeus, who oversees the wars in Iraq and Afghanistan, said in a recent interview that the Taliban has three main sources of funding: drug revenue; payments from legitimate businesses that are secretly owned by the armed group or that pay it kickbacks; and donations from foreign charitable foundations and individuals.

CNBC.com:
- The Obama administration estimates that a General Motors bankruptcy would take at least 60 to 90 days and perhaps longer to complete, a senior official said Thursday. The official, who spoke on the condition of anonymity because he was not authorized to discuss the matter publicly, would not confirm a specific bankruptcy scenario, but the government's deadline for any filing is on Monday.

IBD:

- Ameristar Casinos (ASCA) has weathered the storm that's dampened business at Las Vegas and Atlantic City casinos by operating in the right places at the right time — with the right team.

Business Week:
- For years pension funds, university endowments, and other big investors essentially wrote blank checks to hedge funds and private equity firms. They readily paid stiff fees and agreed to onerous restrictions. Investors had no choice if they wanted access to the money managers and outsize gains. All that is changing. With returns dismal and cash scarce, investors are demanding—and winning—concessions on everything from cost to oversight. "The balance of power has shifted," says a private equity executive.

Trader’s Narrative:

- Hedge funds and large institutional traders are, once again, returning to commodities in a big way. Below is a chart of the large speculators’ net long positions according to the US Commodity Futures Trading Commission:

Politico:

- Some Democrats and political analysts are urging the White House to shift course and concede that Supreme Court nominee Sonia Sotomayor made an error when she suggested in 2001 that Hispanic women would make better judges than white men.

Reuters:

- Rewarding employees for hard work, and not just for showing up, has become a key tenet of good corporate compensation policy. So why are some Wall Street firms sending a very different message? Wall Street has long showered lucrative annual bonuses on bankers and traders who delivered big profits. But the dozens of big banks that accepted bailout funds from the $700 billion Troubled Asset Relief Program must now rethink how they reward top performers, as the government caps what they can dole out, and taxpayers and politicians demand greater accountability. "It's kind of ironic in a way, because over the last 10 years everybody has been pushing for pay for performance," said Michael Melbinger, who runs the employment benefits and executive compensation practice at Chicago law firm Winston & Strawn LLP. "Now, with TARP, it is 180 degrees the other way."

- U.S. President Barack Obama said on Thursday he would discuss oil costs when he meets with Saudi Arabia's King Abdullah next week and plans to say that big price rises are not in Riyadh's interests. Saudi Oil Minister Ali al-Naimi said on Wednesday he believed the global economy had strengthened enough to cope with oil at $75-$80 a barrel. He attributed the recent rises in oil prices to economic optimism. White House spokesman Robert Gibbs, asked for reaction to Naimi's comment, said Obama was "concerned about anything that raises the cost of living in a fragile economic time."

Financial Times:

- International oil companies will be invited to bid for concessions in Brazil’s enormous “pre-salt” oil fields as early as next year, Edson Lobão, mines and energy minister, has told the Financial Times. Brazil stopped selling concessions in the offshore pre-salt area, which oil industry executives say will rival the North Sea in size and importance, soon after their discovery in 2007.

NHK:

- Toshiba Corp. plans to increase output of flash memory chips at its plant in Mie, central Japan, in July because of recovering demand. The increase will reverse a 30% production cut by the Tokyo-based electronics company in January.

Late Buy/Sell Recommendations
Citigroup:

- Reiterated Buy on (GLW), raised estimates, boosted target to $20.

- Reiterated Buy on (IR), target $26.

- Reiterated Buy on (EXPE), target $19.

- Reiterated Buy on (ONN), raised estimates, boosted target to $12.

Night Trading
Asian Indices are +.25 to +1.25% on average.
S&P 500 futures -.12%.
NASDAQ 100 futures -.09%.

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Earnings of Note
Company/EPS Estimate
- (QSII)/.47

- (TIF)/.20

Economic Releases

8:30 am EST

- Preliminary 1Q GDP is estimated to fall -5.5% versus a prior estimate of a -6.1% decline.

- Preliminary 1Q Personal Consumption is estimated to rise 2.0% versus a prior estimate of a 2.2% gain.

- Preliminary 1Q GDP Price Index is estimated to rise 2.9% versus a prior estimate of a 2.9% increase.

- Preliminary 1Q Core PCE is estimated to rise 1.5% versus a prior estimate of a 1.5% gain.

9:45 am EST

- The Chicago Purchasing Manger report for May is estimated to rise to 42.0 versus 40.1 in April.

10:00 am EST

- Final Univ. of Mich. Consumer Confidence for May is estimated to rise to 68.0 versus a prior estimate of 67.9.

Upcoming Splits
- None of note

Other Potential Market Movers
- The NAPM-Milwaukee report, (LOW) shareholders meeting and the ASCO annual meeting could also impact trading today.

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

Stocks Finish Higher, Boosted by Commodity, REIT, Insurance, Financial and Technology Shares

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In Play

Stocks Higher into Final Hour on Lower Long-Term Rates, Short-Covering, Less Financial Sector Pessimism

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Technology longs, Financial longs and Biotech Longs. I covered all my (IWM)/(QQQQ) hedges and added to my (QSII) long today, thus leaving the Portfolio 100% net long. The tone of the market is mildly positive as the advance/decline line is slightly higher, most sectors are rising and volume is around average. Investor anxiety is above average. Today’s overall market action is mildly bullish. The VIX is falling 1.58% and is very high at 31.85. The ISE Sentiment Index is slightly below average at 134.0 and the total put/call is slightly below average at .79. Finally, the NYSE Arms has been running above average most of the day, hitting 2.62 at its intraday peak, and is currently .85. The Euro Financial Sector Credit Default Swap Index is rising 1.37% today to 120.67 basis points. This index is down from its record March 10th high of 208.75. The North American Investment Grade Credit Default Swap Index is rising 1.64% to 145.61 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is rising 2.32% to 53 basis points. The TED spread is now down 410 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 1.18% to 42.0 basis points. The Libor-OIS spread is falling 2.88% to 46 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 8 basis points to 1.84%, which is down 80 basis points since July 7th. The 3-month T-Bill is yielding .14%, which is down 2 basis points today. Breadth is disappointing today, despite headline gains. Commodity stocks are especially strong today with more US dollar weakness. However, I suspect the recent interest rate rise, euro strength and gas price surge will slow Europe’s recovery, which should boost the US dollar from current levels over the coming months. As well, I believe the 10-Year T-Note made a tradable low today, which is a positive for stocks. The AAII % Bulls rose to 40.4% this week, while the % Bears rose to 48.6%. Overall, sentiment remains a broad market positive. I expect stocks to build on today’s gains tomorrow. Nikkei futures indicate an +94 open in Japan and DAX futures indicate an +41 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, less financial sector pessimism and lower long-term rates.

Today's Headlines

Bloomberg:

- U.S. stocks will rally “for another couple of years” while producing gains that will be less broad- based than in the rebound since March, Laszlo Birinyi said.

- Billionaire investors Sam Zell says home affordability is "going up" and sees the market stabilizing this summer. (video)

- Crude oil rose to a six-month high after OPEC decided today to leave production quotas unchanged and a report showed that U.S. inventories declined.

- General Motors Corp.(GM), the world’s largest automaker until its 77-year reign ended in 2008, plans to file for bankruptcy protection on June 1 and sell most of its assets to a new company, people familiar with the matter said.

- The yen fell the most in eight weeks against the dollar after a report showed demand for overseas assets among Japanese investors is growing and U.S. data added to evidence the global recession is moderating.

- Martin Whitman’s Third Avenue Management LLC increased its stake in Forest City Enterprises Inc., the property developer whose shares have tumbled 83 percent in the past year, and is investing in distressed debt while avoiding most stocks.

- The Federal Reserve may step up asset purchases to prevent its balance sheet from contracting until policy makers are convinced an economic recovery has taken hold, Fed officials and analysts said.

- European retail sales declined at a faster pace in May as rising unemployment prompted consumers to hold back spending, the Bloomberg purchasing managers index showed.

- Malaysia’s government said the economy may shrink as much as 5 percent this year, slashing its forecast as the nation nears the first recession in a decade.

- Visa Inc.(V) and First Solar Inc.(FSLR) are among the five likely candidates to replace General Motors Corp. should the automaker be dropped from the Standard & Poor’s 500 Index, Goldman Sachs Group Inc. said.

Wall Street Journal:

- Tucker Carlson announced plans to launch DailyCaller.com, a conservative-leaning news site that will aim to be an answer to the Huffington Post. Mr. Carlson told reporters and bloggers at the Heritage Foundation in Washington, D.C., that the site would focus on coverage of President Barack Obama’s administration. “There just aren’t enough people covering this administration and telling the people what’s going on,” he said. The site will take on the form of a general interest newspaper, he said, and will even attempt to be faster than the popular and speedy Drudge Report.

- While there were reports that the Time Warner board was meeting today to approve the spinoff of its AOL online unit, it actually gave the move an “enthusiastic endorsement” last night, according to sources.

- Nuclear power proponents are ratcheting up their rhetoric. Tennessee Sen. Lamar Alexander yesterday repeated his call for the U.S. to build 100 new nuclear plants by 2030, a proposal he says he’ll take to the Senate floor next week. It’s not the first time the Republican senator has argued for a big nuclear buildup; he’s been talking about 100 new reactors all spring. Last month he drew a lot of attention by contrasting France’s embrace of nuclear power with the U.S.

- U.S. Treasury Secretary Timothy Geithner heads to Beijing this weekend to urge Chinese leaders to fundamentally alter the export-oriented economy that has created years of trans-Pacific trade tensions.

- California's median price for existing homes rose 1.4% in April from March, marking the second-consecutive monthly increase and prompting some industry officials to declare the state's long swoon in housing values could be at or near the bottom.

- They're back. We refer to the global investors once known as the bond vigilantes, who demanded higher Treasury bond yields from the late 1970s through the 1990s whenever inflation fears popped up, and as a result disciplined U.S. policy makers. The vigilantes vanished earlier this decade amid the credit mania, but they appear to be returning with a vengeance now that Congress and the Federal Reserve have flooded the world with dollars to beat the recession.

NY Times:

- In the rarefied world of hedge funds, he is one of the greats — a stock-picker who managed to make money, bull market or bear, for more than two decades. But on Wednesday, Arthur J. Samberg told his investors that his long, successful run was over. Mr. Samberg, 68, said he had reached a “painful conclusion” to wind down his $3 billion investment firm, Pequot Capital Management, because a long-simmering investigation into insider trading at the fund was heating up once again.

- The stock market is again taking its cues from the bond market. Stocks turned higher Thursday after solid demand at a Treasury auction eased fears that demand for United States debt would dry up and force the government to pay higher interest rates to entice buyers. Higher rates could choke the economy’s recovery by making loans on everything from homes to cars more expensive.

NY Post:

- As Steve Rattner races to jumpstart the ailing automotive sector, the car czar's connection to a hedge fund heavily invested in the car business is raising eyebrows as a potential conflict of interest. According to sources familiar with the matter, Rattner has financial ties to Monarch Alternative Capital, a hedge fund that has made distressed investments in the auto industry, including car-parts manufacturer Delphi. A person familiar with the matter told The Post that Rattner made "a good-faith effort" to resolve his ties to Monarch before joining President Barack Obama's auto task force in February, but that he has not given up those ties thus far. The stake in question is in the form of deferred compensation that sources described as non-transferable and difficult to unwind because of the potential tax hit to Rattner as well as the difficulties Monarch has in valuing Rattner's compensation. Rattner, who has a net worth reported to be as much as $600 million, could have worked out a fix for the deferred comp issue but wanted to arrange one that didn't slam him with taxes, one source noted.

- Smart-money investors are betting that the Obama administration will start leaning more on Fannie Mae and Freddie Mac to kick-start the housing market by giving them the OK to buy mortgages worth up to $1 million. Current law prohibits the two government-run mortgage giants from buying home loans valued at more than $417,000 nationally, or up to $729,000 in areas where home prices are high. But some mortgage traders and analysts think that could soon change.

Economist:

- “LUCK”, James Simons, the founder of Renaissance Technologies, a hedge fund, once said, “plays a meaningful role in everyone’s lives.” Mr Simons, a 71-year-old former university professor and a celebrated mathematician, has been blessed with the stuff. His flagship fund, Medallion, has had average annual gains of more than 35% for 20 years. Last year he was named the best-paid hedge-fund manager in America by Alpha, a hedge-fund magazine, reportedly earning $2.5 billion. Medallion gained 80% last year, and this year is up a further 12%. But Medallion is 98% employee owned and has not accepted new money for 15 years. So to cater to outside investors, Renaissance has since 2005 marketed another “mega fund” known as the Renaissance Institutional Equities Fund (RIEF). The problem is that this has not proved anything like as successful as Medallion. Before its launch a small army of Renaissance PhDs—there are more than 70 on the payroll—back-tested RIEF’s performance with a simulated portfolio of $100 billion. From 1992 to 2005, its theoretical return was more than double that of the S&P 500, with less than two-thirds of the volatility. Investors queued up like Trekkies waiting for tickets to the new film. In the first two years RIEF raised more than $1 billion a month. With new money coming in faster than it could be invested, monthly contributions were capped at $1.5 billion. By August 2007 the fund was managing almost $28 billion. But in 2008 RIEF lost 16% and investors withdrew $12 billion from Renaissance, which was the largest prime-brokerage client of both Bear Stearns and Lehman Brothers, two investment banks that failed. The downward spiral has continued this year, with RIEF losing 17% so far. It now has less than $10 billion of assets under management. Though investors may think they are seduced by the wizardry of Renaissance’s computer-driven models, what they are really betting on is the magic touch of the man himself.

LA Times:

- The FBI and Justice Department plan to significantly expand their role in global counter-terrorism operations, part of a U.S. policy shift that will replace a CIA-dominated system of clandestine detentions and interrogations with one built around transparent investigations and prosecutions. Under the "global justice" initiative, which has been in the works for several months, FBI agents will have a central role in overseas counter-terrorism cases. They will expand their questioning of suspects and evidence-gathering to try to ensure that criminal prosecutions are an option, officials familiar with the effort said. The approach effectively reverses a mainstay of the Bush administration's war on terrorism, in which global counter-terrorism was treated primarily as an intelligence and military problem, not a law enforcement one. Behind the scenes, some intelligence officials are resisting a broader criminal justice role overseas for the FBI, contending that it could inhibit the flow of intelligence if their own agents, or foreign governments, believe top-secret sources and methods might be disclosed during criminal prosecutions.

USAToday:

- Federal tax revenue plunged $138 billion, or 34%, in April vs. a year ago — the biggest April drop since 1981, a study released Tuesday by the American Institute for Economic Research says.

Politico:

- President Obama exhorted his supporters on a conference call Thursday to help lobby for his health care plan, warning, “If we don’t get it done this year we’re not going to get it done.”

webmonkey:

- Google(GOOG) has set out to re-wire the e-mail inbox with a new product called Wave. Wave is a web-based application that marries multiple forms of communication and collaboration, including chat, mail and wikis, into a unified interface. Everything inside Wave happens in real time — you can even see a comment being made as the person is typing it, character-by-character. Google Wave, which was demonstrated Thursday at the Google I/O developer conference taking place here this week, is now live as a private developer preview. Conference attendees can start playing with it now, but Google has its eye on a public beta launch within a few months.

Reuters:
- Hedge fund manager David Einhorn, who questioned the health of Lehman Brothers four months before its collapse, is betting that shares of Moody's Corp (MCO) will fall because he believes the market no longer gives its ratings any credit. Einhorn, whose Greenlight Capital managed $5 billion, said on Wednesday the parent of Moody's Investors Service squandered the value of its business after giving perfect AAA ratings to now-fallen giants like struggling insurer AIG (AIG), nationalized mortgage banker Fannie Mae (FNM) and bond insurer MBIA Inc (MBI). Moody's largest shareholder, Warren Buffett of Berkshire Hathaway Inc, has said he does not rely on credit ratings, Einhorn said. Yet Einhorn noted equity investors still believe in the agencies. Moody's shares trade at 19 times estimated earnings, he said, though he said the company has a negative net worth of $900 million.

- Bill Gross, the manager of top bond fund Pimco, said he expects 1 percent to 2 percent growth in the U.S. economy in the next few years, and at the moment he only saw "green shoots, but not much more" of a recovery.

Financial Times:
- Best Buy(BBY), the largest US consumer electronics retailer, will launch an investment fund managed by former and current News Corp internet veterans that will focus on digital media as it seeks to expand beyond brick and mortar stores. The retailer, which invested $2.1bn to launch a joint venture with the UK’s Carphone Warehouse last year, purchased the Napster online music subscription service in 2008 for $121m and aims to invest deeper into the music, video, games and “personal media management” businesses.

Bear Radar

Style Underperformer:
Small-cap Value (-.15%)

Sector Underperformers:
Homebuilders (-3.77%), Education (-2.63%) and Retail (-.99%)

Stocks Falling on Unusual Volume:
RBA, RYL, DSW, KBH, FRED, MDVN, LEAP, BCSI, SIGM, UNFI, NETL, CBT, TEX, FAF and DOM

Stocks With Unusual Put Option Activity:
1) MCO 2) TEX 3) AU 4) ACH 5) ELN