Stocks Mixed into Final Hour as Less Financial Sector Pessimism, Short-Covering, Lower Long-term Rates Offset Profit-Taking

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Financial longs, Retail longs, Biotech longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly negative as the advance/decline line is mildly lower, sector performance is mixed and volume is about average. Investor anxiety is high. Today’s overall market action is neutral. The VIX is rising .14% and is high at 28.08. The ISE Sentiment Index is above average at 177.0 and the total put/call is around average at .82. Finally, the NYSE Arms has been running about average most of the day, hitting 1.02 at its intraday peak, and is currently .91. The Euro Financial Sector Credit Default Swap Index is rising 3.38% today to 106.33 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 falling .36% to 124.49 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is rising .02% to 46 basis points. The TED spread is now down 417 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 3.2% to 42.56 basis points. The Libor-OIS spread is falling .73% to 41 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 7 basis points to 1.93%, which is down 71 basis points since July 7th. The 3-month T-Bill is yielding .17%, which is unch. today. Conflicting reports about the outcome of the Iranian election appear to be impacting trading today. The fact that US stocks rallied so easily on the news is a positive. REITs(IYR) have been leaders all day and the (XLF) trades well again on the decline in long-term rates. I still expect the (XLF) to convincingly break above its 200-day moving average over the coming days. As well, defense, utility, software, computer hardware, disk drive, telecom, medical equipment, biotech, drug, retail, restaurant, road & rail and airline shares are all higher on the day despite losses in the major averages. Barring an unexpected move back near the lows in the major averages, I plan to maintain my market exposure into the weekend. Nikkei futures indicate an +65 open in Japan and DAX futures indicate an +2 open in Germany on Monday. I expect US stocks to trade modestly higher into the close from current levels on short-covering, technical buying, lower long-term rates, diminishing financial sector pessimism, less economic fear and investment manager performance anxiety.

Today's Headlines

Bloomberg:

- Paulson & Co., the hedge fund that made more than $3 billion betting the U.S. housing market would collapse, is buying so-called distressed debt and mortgage- backed securities. John Paulson’s $28 billion company used borrowed assets to bet against housing prices amid the 2007 subprime crisis in a strategy known as shorting. Now it’s seeking to profit from the global financial crisis by picking assets that look cheap. “We’ve been adding pretty steadily to our long distressed positions,” Sandra Lee, a senior vice president at the New York-based fund, said at a Euromoney conference in Hong Kong yesterday. “Where we shorted the lower quality subprime securitizations, we’re now going long the better-quality jumbo, prime securitizations.”

- Credit-default swaps are “instruments of destruction” and should be “outlawed,” said George Soros, the billionaire hedge fund manager who made money last year while most peers posted losses. “Some derivatives ought not to be allowed to be traded at all,” Soros, 78, told a conference in Beijing today, citing credit-default swaps. “The more I hear about it, the more I realize that they’re truly toxic.” Derivatives should be as tightly regulated as stocks, he added.

- Yields on Fannie Mae and Freddie Mac mortgage securities fell for a second day from the highest level since the Fed announced plans to buy home-loan bonds in November, largely tracking declining Treasury rates. Yields on Washington-based Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds fell .09 percentage point to 4.85% as of 12:05 pm in NY. That is down from this year’s high of 5.07% on June 10, and up from 3.94% on May 20.

- European industrial production dropped by the most on record in April as the worldwide recession ravaged demand for goods. Production in the euro region plunged 21.6 percent from a year earlier, the most since the data series started in 1986, the European Union’s statistics office in Luxembourg said today. Economists expected a 19.8 percent decline, according to the median of 14 estimates in a Bloomberg News survey.

- Oil fell from a seven-month high after a record plunge in European industrial production prompted speculation that bets on an economic recovery are premature. Futures declined more than $1 a barrel after a report showed that output in the euro region dropped 21.6 percent from a year earlier. The dollar strengthened, undermining the attractiveness of commodities as an alternative investment. OPEC said members raised production in May for a second month, straying further from quotas.

- BlackRock Inc.(BLK) Chairman and Chief Executive Officer Laurence Fink said the worst of the financial crisis is over as he agreed to buy Barclays Global Investors for $13.5 billion and become the world’s largest money manager. “Armageddon is behind us,” Fink, 56, said in a Bloomberg television interview in New York today.

- The U.S. Securities and Exchange Commission and Alabama regulators sued Aura Financial Services Inc. and six employees claiming they reaped $1 million in fees and commissions through “rampant churning” of client accounts.

- The scope of the stalled FutureGen “clean coal” project in Mattoon, Illinois, was scaled back by the Obama administration in an effort to revive the plans for a coal-fired power plant that spews fewer gases into the air. The U.S. Energy Department said today it will support a modified version of the FutureGen proposal, seeking to build a plant that can capture and bury 60 percent of its carbon emissions. The Bush administration had crafted the original idea for a plant that could trap almost 100 percent of emissions, and then canceled it after costs exceeded estimates.

- A lobbying group for computer companies such as Google Inc.(GOOG) and Oracle Corp.(ORCL) petitioned the U.S. government to push China at a trade summit to drop Internet censorship. It may be the first time China’s censorship policies would be discussed as part of trade negotiations between the two nations.

- NYSE Euronext(NYX) halted trading in 242 companies on the New York Stock Exchange floor for more than 40 minutes due to a computer malfunction.

Wall Street Journal:

- Effective health-care reform must meet two objectives: 1) It must secure coverage for all Americans, and 2) it must dramatically lower the cost of health care. Health-care spending has outpaced the rise in all other consumer spending by nearly a factor of three since 1980, increasing to 18% of GDP in 2009 from 9% of GDP. This disturbing trend will not change regardless of who pays these costs -- government or the private sector -- unless we can find a way to improve the health of our citizens. Failure to do so will make American companies less competitive in the global marketplace, increase taxes, and undermine our economy.

- CBS Corp.'s Simon & Schuster book publishing arm has struck a deal to sell nearly 5,000 digital e-books titles on Scribd Inc., a Web site that allows people to post and read documents online.

- YRC Worldwide Inc. (YRCW) has backed off plans to seek $1 billion in federal bailout money under the Troubled Asset Relief Program, or TARP, although the struggling trucker says it still wants government help with pension obligations.

- Healthy U.S. banks were strong-armed into participating in a $700 billion federal bailout of ailing financial firms, BB&T Corp. Chairman John Allison said in a speech late Thursday to the Competitive Enterprise Institute.

- The United Nations Security Council on Friday unanimously adopted a resolution expanding sanctions and inspections against North Korea in response to its test of a nuclear device on May 25.

- Iranians poured into voting stations Friday, the culmination of an unprecedented campaign season and perhaps the most hotly contested presidential race since the founding of the Islamic Republic 30 years ago.

CNBC:

- EMC Corp.(EMC) plans to boost its bid for Data Domain(DDUP) to match a rival offer from NetApp Inc.(NTAP). Both companies are offering about $30 a share for Data Domain.

MarketWatch:
- Swindlers, con men, and thieves could siphon off as much as $50 billion of the government's planned stimulus package as the money begins flooding the economy in coming months, according to David Williams, who runs Deloitte Financial Services Advisory and counsels clients on fraud prevention. Williams predicted that about $500 million of the total $787 billion stimulus would be channeled into the traditional procurement network for government contracts, while the rest will be spent directly by the government or outside the corporate network.

The Detroit News:

- More than half of Americans oppose the government aid given to General Motors and believe the government should have let the market decide GM's fate, rather than rescuing the automaker, a Fox News-Opinion Dynamics poll released Thursday shows. Fifty-eight percent opposed the $50 billion in federal loans given to GM, to just 38 percent who supported the decision. And 52 percent said it would have been in the country's best interests to let the market decide GM's fate, to 44 percent who said the country is better off having rescued the automaker. The survey is just the latest in a string of opinion polls showing President Barack Obama's decisions on the auto industry to be among the least popular of his presidency. The survey also measured favorability ratings for all three Detroit automakers, as well as Honda. Ford Motor Co. was rated highest, with 72 percent saying they had a favorable impression of the company, to just 19 percent unfavorable. GM and Chrysler each had had narrow positive ratings: 48 favorable to 44 percent unfavorable for GM, and 46-42 for Chrysler.

NY Post:

- With the Treasury's efforts to sell banks' toxic loans in shambles, well-heeled investors like Pacific Investment Management Co. and bank billionaire Gerald J. Ford are mulling the creation of publicly traded entities to snap up the problem loans. According to people familiar with the matter, Ford, Pimco and Legg Mason's Western Asset Management Co. are among a growing group of big-name investors looking at establishing vehicles similar to real-estate investment trusts that would sell shares to the public and use the proceeds to buy troubled residential mortgages and commercial real estate. Sources told The Post that Ford is said to be prowling around for battered assets and is contemplating forming a REIT-like company or private-equity-like entity to buy undervalued assets.

FINalternatives:

- Hedge fund managers need to step up their game in order to compete effectively in today’s era of increasingly savvy investors. Amid the backdrop of recent high profile frauds, historic market declines, and related fund closures, the hedge fund industry faces a new set of concerns emanating from the heightened emphasis on investor due diligence.

Rassmussen:

- Fifty-one percent (51%) of Americans favor an across-the-board tax cut for all Americans to stimulate the U.S. economy, according to a new Rasmussen Reports national telephone survey. Thirty-four percent (34%) oppose such a tax cut, and 15% are undecided.

Politico:

- A coalition of more than 100 moderate House Democrats is hoping to unify as they attempt to limit the size and scope of a government-sponsored health insurance option — a key sticking point as health reform enters a delicate phase of negotiations. Members of the New Democrat Coalition have organized a meeting with their counterparts in the Blue Dog Coalition on Friday morning in a bid to show some strength in numbers as they haggle with party leaders and the three chairmen drafting the bill. The discussion will focus on the so-called public option in health care.

Intrade.com:

- The % chance that Iran’s President Ahmadinejad wins re-election has plunged to 22.5%, according to intrade.com. The % chance that Mir Hussein Moussavi wins has risen to 70.0%, according to trading in the contracts.

Reuters:
- A gauge of future U.S. economic growth rose along with its yearly growth rate,

reaffirming hope that yearly growth will turn positive in the summer months, a research group said on Friday. The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to a 34-week high of 115.4 for the week ending June 5, from 113.5 the previous week. The index's annualized growth rate spiked to a one and a half year high of minus 4.7 percent from the prior week's rate of minus 7.1 percent. It was ECRI's highest yearly growth reading since the week ended December 7, 2007, when it stood at minus 3.9 percent. "With WLI growth rising to its best reading in a year and a half -- namely, since the recession began -- economic recovery prospects are brightening rapidly," said Lakshman Achuthan, managing director at ECRI.

- Freed from the grip of the U.S. Treasury's bailout program, Goldman Sachs Group Inc(GS) might seek to shed its commercial bank holding company status and reclaim its role as Wall Street's iconic investment bank, some investors believe.

- Hedge funds meeting for their annual get-together in Monaco next week are hoping recovering profits will help placate clients, after the industry was heavily culled and suffered its worst year on record. An exodus of investors followed a year in which hedge funds saw performance losses of 19 percent, a stark contrast to a decade in which people scrambled to get access to an industry that claimed it could make money in any market. Significantly, one entire session of the June 16-18 GAIM conference in the Mediterranean resort is titled "The Rise of Investor Power."

- The furious rise in bond yields will force the Federal Reserve to "engage again" in the purchases of U.S. Treasuries and mortgage-backed securities, Mohamed El-Erian, the chief executive of bond giant Pacific Investment Management Co., said Friday.

- Chief White House economic adviser Lawrence Summers on Friday vigorously defended the administration's aid for banks and carmakers as necessary, temporary measures rather than lasting market intrusions. "Our objective is not to supplant or replace markets," Summers told the Council on Foreign Relations in New York. "Rather, our objective is to save them from their own excesses and improve our market-based system going forward."

The Herald:

- Up to a third of the Scottish population will be infected by swine flu as the pandemic declared by the World Health Organization runs its course, according to official predictions. The Scottish Government last night predicted that 25% to 35% of those living in the country would be hit by the virus, with up to 1.7 million people at risk.

Yonhap News:

- South Korea deployed more marines to two islands near the maritime border with North Korea to defend against surprise landings by the communist regime’s forces, citing a South Korean military source. North Korean soldiers are holding landing drills on its western coast.

Bear Radar

Style Underperformer:
Small-cap Value (+1.19%)

Sector Underperformers:
Oil Tankers (-4.12%), Coal (-3.93%) and Gold (-3.21%)

Stocks Falling on Unusual Volume:
NSM, BBL, DNR, COP, CBT, AMP, EZPW, FUQI and STEC

Stocks With Unusual Put Option Activity:
1) IVN 2) SVNT 3) HON 4) ADS 5) ATHR

Bull Radar

Style Outperformer:
Large-cap Value (-.02%)

Sector Outperformers:
Drugs (+1.80%), Road & Rail (+1.23%) and REITs (+.95%)

Stocks Rising on Unusual Volume:
SQNM, GSK, BAC, BAX, AMLN, AZN, KG, PMTI, KSU, CSX, RMBS, CGV, IPGP, TNDM, LULU, IPSU, DNEX, CCMP, PMTI, VMC, MFW and MR

Stocks With Unusual Call Option Activity:
1) ATHR 2) CAL 3) RMBS 4) ELX 5) AMD

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Friday Watch

Late-Night Headlines
Bloomberg:

- Most Senate Finance Committee members are “inclined” to support creation of member-run health cooperatives to bridge a partisan divide over revamping the nation’s health-care system, the panel’s chairman said. Chairman Max Baucus said lawmakers in both parties may embrace cooperatives as an alternative to a government-run health plan, supported by Democrats, to compete with private insurers. Most Republicans say a public plan threatens to undermine insurance companies. “I am inclined, and I think the committee is inclined, toward it,” Baucus told reporters today after a closed-door meeting of his panel to discuss the idea. He said lawmakers don’t want a broad effort to overhaul the U.S. health-care system to “crash” under partisan disputes as it did in 1994 under President Bill Clinton.

- President Barack Obama’s proposal to boost taxes on U.S. companies’ foreign profits would generate $55.5 billion less revenue over the next decade than the Treasury Department projected, a nonpartisan congressional panel said. Obama’s overall tax plan would add $2.9 trillion to the federal budget deficit over the next decade, the tax committee estimated.

- Japanese Finance Minister Kaoru Yosano said his government is confident about the outlook for U.S. Treasuries, signaling the second-biggest foreign holder of the securities will keep buying them amid record sales. “We have complete trust in the fact that the U.S. views its strong-dollar policy as fundamental,” Yosano, 70, said in an interview in Tokyo on June 10 before attending a Group of Eight meeting of finance ministers starting today in Italy. “So our trust in U.S. Treasuries is absolutely unshakable.”

- Washington Post Co. union members approved a new two-year contract today that will protect 25 percent of newspaper employees from future job cuts without taking their seniority into account. The Washington-based publisher may identify 25 percent of employees it wants to protect from job cuts without regard to length of tenure, a switch from contracts that stipulated the newest hires must be let go first, according to the union’s Web site. “It seems that the Washington Post is trying to chip away at seniority rules,” said Gary Chaison, a professor of industrial relations at Clark University in Worcester, Massachusetts. “The newspaper could protect only the lower paid employees, for instance.”

- The U.S. House passed legislation to triple economic and development aid to Pakistan and increase military assistance as part of a plan to stabilize a nation vital to the U.S. war in neighboring Afghanistan. The measures, which provide the legal authority and rules for $1.5 billion a year of aid, are dependent on separate budget legislation for the actual amounts.

- Mexican Central Bank Governor Guillermo Ortiz said Latin America’s second-largest economy will maintain its pace of decline in the second quarter and inflation will slow at a “rapid rate.” A recent rise in global commodities prices is “less threatening” than when those costs reached their peak, Ortiz said in an interview in Montreal. Gross domestic product will shrink in the second quarter by about the same amount as it did in the first quarter, when it contracted 8.2 percent, he said.

- European governments have approved $5.3 trillion of aid, more than the annual gross domestic product of Germany, to support banks during the credit crunch, according to a European Union document.

- China’s anti-pornography software that will be loaded in all personal computers sold in the country blocks anti-government Web sites and restricts users from typing in keywords unrelated to sex, a researcher said.

- Iranian President Mahmoud Ahmadinejad faces a serious challenge in tomorrow’s election as two rivals favoring better relations with the West and a former Revolutionary Guards commander try to deny him a second term.

Wall Street Journal:

- It was a sobering breakfast with one of the smartest Republicans on Capitol Hill. We can fix a lot of bad stuff President Barack Obama might do, he told me. But if Mr. Obama signs into law a "public option," government-run insurance program as part of health-care reform we won't be able to undo the damage. I'd go the Republican member of Congress one further: If Democrats enact a public-option health-insurance program, America is on the way to becoming a European-style welfare state. To prevent this from happening, there are five arguments Republicans must make.

- The European Union and the U.S. will jointly file suit against China at the World Trade Organization this month in a bid to stop the Asian giant from hoarding key minerals and to set a precedent for other big producers of raw materials, people familiar with the issue said Thursday. For more than two years, China has been using tariffs on exports to keep important industrial ingredients like zinc, tin and silicon for use at home. At the same time, Beijing has aggressively bought up large quantities of minerals from resource-rich African countries. Western governments say the policy gives Chinese chemical firms, steelmakers and other producers an unfair advantage. EU and U.S. trade negotiators have prepared a list of 20 materials, mainly chemicals and metals, they believe are subject to illegal export restrictions, though it is unclear how many of these will be part of the WTO complaint, a European diplomat said. One restriction that has provoked strong objections from the EU and the U.S. is an export duty on yellow phosphorous, the diplomat said. China imposes a 95% duty on the material, which is used to make numerous industrial chemicals, far above limits on such duties that China accepted when it joined the WTO, the diplomat said. China also places quotas on the amount of certain raw materials that can be exported, another potential violation of WTO rules, the diplomat said.

- Is the carry trade back on? Back in the days before the financial crisis, investors made fortunes borrowing in low-interest-rate currencies such as the yen and investing the proceeds in higher yielding foreign currencies and assets. Indeed, the trade played a key role in fuelling the boom, helping to drive down the cost of borrowing around the world. Now some investors think that with interest rates in most developed countries at record low levels it is time to put on the carry trade again.

- EBay Inc.(EBAY) Chief Executive John Donahoe said he sees stability in the economy, with the company not experiencing further growth declines since February. In an interview Thursday, the head of the online retailer said that he didn't have any "statistically significant" data to share about an overall recovery, but he is "cautiously optimistic" about the economy. Mr. Donahoe said he watched growth in the business decline from this past August through February but that it has since stabilized.

- Big banks are expected to start repaying government bailout funds next Wednesday, according to people familiar with the matter. J.P. Morgan Chase & Co., Morgan Stanley and American Express Co. are among the firms that are expected to repay the funds that they received from the Troubled Asset Relief Program, these people said. The firms received $25 billion, $10 billion and $3.4 billion, respectively.

- The White House is gearing up to launch a Spanish-language version of its Web site, whitehouse.gov, by the end of the year.

- Economists expect U.S. unemployment to remain above 9% through the end of 2010, and most believe the Federal Reserve won't raise interest rates until next spring at the earliest. The latest Wall Street Journal forecasting survey found the 52 economists, on average, foresee economic growth returning in the third quarter of this year, with the recession ending in August.

- The Obama administration is being drawn into the drama over Bank of America Corp. because of notes taken by bank executives suggesting Treasury Secretary Timothy Geithner and Lawrence Summers, the president's top economic adviser, supported efforts last year to pressure the bank to consummate its merger with Merrill Lynch & Co.

- Farm Belt lawmakers said Thursday that the climate legislation in the House may not get the votes to pass unless it is made more farm-friendly. The warning, sounded by Agriculture Committee Chairman Collin Peterson (D., Minn.), presents a new obstacle to the White House's effort to get a bill passed this year.

- There is one idea for fixing the health-care system that lawmakers in both parties agree on: a bigger government role in disease prevention. Yet previous government prevention efforts aimed at costly chronic diseases have had little success in reducing illness or costs. "It is not going to cut costs," said Louise Russell, a research professor in the Institute for Health at Rutgers University who has studied the issue. "We already do a lot more prevention than other countries. We are not healthier."

MarketWatch.com:
- BlackRock Inc.(BLK) said late Thursday it has agreed to acquire Barclays Global Investors, including its iShares division, in a cash-and-stock deal that would create the world's largest fund manager, with over $2.7 trillion in assets, and drastically alter the financial industry.

CNBC.com:
- Anthony Polini, bank analyst of Raymond James & Associates, said the hearing is more of a clearing of grievances—and recommended investors buy BofA stock. “I’ve been following banks for more than 20 years and I’ve never seen a company come out of a recession with so much core earnings power and so much strength,” Polini told CNBC. “Bank of America(BAC) looks like an easy double in a year and it looks like a triple in 2 years from this level.”

NY Times:

- Responding to remarks by Defense Secretary Robert M. Gates, a top Russian diplomat said Thursday that Russia would not collaborate with the United States on missile defense unless Washington scrapped plans to deploy elements of the shield in Poland and the Czech Republic.

- More than four decades after the surgeon general declared smoking a health hazard, the Senate on Thursday cleared the final hurdle to empowering federal officials to regulate cigarettes and other forms of tobacco for the first time.

- There was more evidence Thursday that the United States economy might be stabilizing, if not rebounding, even as economic reports in Europe remained gloomy. The American news — showing slight growth in retail sales and a dip in first-time jobless claims, as well as rising stocks — was not enough to end the disagreement between bulls and bears over how soon the economy would improve. But the apparent divergence of fortunes between America and Europe highlighted the different approaches to solving the financial crisis, and why some economists say the more aggressive American strategy may be working better, at least for now.

- With about 2,000 Chrysler and General Motors dealers losing their franchises as the companies retrench, the dealers are pressing Congress to reverse what they see as an unfair process forcing some profitable businesses to close or stop selling new autos, with no explanation from the manufacturers of why they were singled out. “We have never gotten one,” said Rick Shaub, the owner of Montrose Dodge in Germantown, Md. He was with fellow dealers outside the office of the House majority leader, Steny H. Hoyer, on Wednesday, the day after his family’s three-generation relationship with Chrysler came to an end. As they lobby Congress, angry dealers are finding an increasingly receptive audience in the House and Senate, where lawmakers say the mass termination of franchises by the bankrupt car companies is threatening tens of thousands of jobs, not to mention the civic fabric of communities where car dealerships are often a chief local institution.

Business Week:
- Chrysler won't be liable for product defect claims on vehicles sold before it emerged from bankruptcy. Will the "new" GM win the same protection?

CNN:

- Gas Prices Menace Battered Economy. The national average is up 28% over the last month and a half, straining wallets and threatening the economic recovery.

Fox News:

- U.S. intelligence officials have warned President Obama and other senior American officials that North Korea intends to respond to the looming passage of a U.N. Security Council resolution this week -- condemning the communist country for its recent nuclear and ballistic missile tests -- with another nuclear test, FOX News has learned.

Politico:

- A group of senators called on President Barack Obama to issue an executive order prohibiting torture photos from being made public, just as House and Senate negotiators were set to remove language from a war funding bill that would have blocked the photos' from being released. “The president should be publicly speaking out now,” Sen. John McCain (R-Ariz.) told reporters this afternoon. “He’s been strangely quiet.”

- House Minority Whip Eric Cantor (R-Va.) suggested Thursday that President Obama's handling of the auto industry resembled the corrupt, oligarchic government of Vladimir Putin's Russia, AP reports. AP: "The House Republican whip, Rep. Eric Cantor of Virginia, tells The Associated Press that Obama is micromanaging the auto industry to win points with Democratic allies and labor unions. "Cantor said Thursday that Obama's plans for the auto industry are, in his words, 'almost like looking at Putin's Russia.' "Cantor says the normal rights of secured creditors have been taken away and given to political cronies and the auto workers unions."

Economist Intelligence Unit:

- Saudi Arabia economy: Oil to spare. Saudi Arabia has just announced the start of production at the giant Khurais oilfield, which will push up OPEC's total spare capacity to about 8% of world oil consumption. The Khurais field has the capacity to produce 1.2m b/d of Arabian Light crude, and is the final element in Saudi Aramco's plan to increase its capacity to 12.5m b/d by end-2009. The company's next big oilfield development is Manifa, a mainly offshore field that is scheduled to start up producing about 1m b/d in 2013. The completion of Saudi Aramco's oil capacity expansion programme more or less on schedule, and the progress being made with both the Jubail refinery and the multibillion dollar Karan gasfield seem to belie the concerns that have been expressed about a slowdown in investment. Indeed, the fall in prices of equipment and services required for such projects appears to have prompted something of a revival in investment, at least in the Middle East and North Africa—the first tenders have just been issued for an estimated US$10bn sour gas development in Abu Dhabi, Algeria's Sonatrach and its international partners have reeled off half-a-dozen major oil and gas contract awards over the part two months, and Egypt had a notably strong response to its latest exploration bid round in May. At end-April, according to Oil Market Intelligence, and industry newsletter, around 130m barrels of oil was being stored at sea, in tankers. The contango in the market has since flattened somewhat (removing the incentive to store), but there is still a considerable amount of oil "at sea"; if a large amount of this oil were to be released at one time, it could lead to a very sharp drop in the spot price. The IEA reckons that OPEC's total spare capacity in May was just over 6m b/d, based on an assumption of Saudi total capacity of 11m b/d. Taking into account Khurais and two other fields that have recently started up at a rate of 350,000 b/d in total, OPEC's current spare capacity is over 7m b/d. The IEA has made a small upward revision to its demand forecast for 2009, but it still envisages a 2.9% year-on-year contraction to 83.3m b/d, compared with 85.8m b/d last year and 86m b/d in 2007. OECD stocks are now sufficient to cover 62 days of consumption, compared with 55 days this time last year. The oil market is still oversupplied, and prices are vulnerable to any fraying of OPEC discipline and to a shift in the pattern of crude storage. There is no sign of the kind of vigorous recovery in global economic activity that would be needed to push up demand significantly in the medium term. The BP reserve figures also have to be looked at in their proper context: the end-2008 figure for proved oil reserves is 1,258bn barrels; this is just 0.2% down in the previous year, and follows more than two decades of continuous increases in reserves, from just under 1,000bn barrels in 1986. The global reserves-to-production ratio actually increased slightly in 2008 to 42 years, according to BP. The Economist Intelligence Unit does not expect the recent oil price rally to continue in the second half of the year, although we have increased our forecasts for the average price of Dated Brent to US$59/b in 2009 and US$65/b in 2010.

MSNBC:

- It seems like a paradox: Demand for oil, which almost always rises, is likely to drop by 3 percent in 2009 — the worst decline in almost 30 years. Stockpiles are so high that an ocean of oil is building up around the world in tankers or in depots. Yet since hitting a low of $34 per barrel on Feb. 12, the price of light, sweet U.S. crude has more than doubled, to $71 per barrel. Why are prices soaring? "Hedge funds and asset managers who have been sitting on cash now feel it's time to buy (oil)" says Göran Trapp, head of global oil trading at Morgan Stanley in London. Some $3.8 billion has flowed into oil and gas exchange traded funds this year, vs. $1.4 billion in the first half of 2008. Worries about the falling dollar and rising inflation are also a driving force. Commodities like oil, along with currencies such as the euro and British pound, are seen as good hedges against a possible collapse of the greenback under the weight of mushrooming U.S. debt. Prices could fall if the bullish mood fades. And many observers think prices are ahead of where they should be. Even some OPEC officials believe a price closer to $50 is realistic in today's economic climate. The current price "is all based on perception," said a senior delegate at the recent OPEC meeting in Vienna.

Reuters:

- U.S. consumers fell further behind on their debts last month, and consumer bankruptcies continue to increase at a double-digit rate, but the rate of mortgage and credit card delinquencies may have peaked, a top credit bureau executive told Reuters on Thursday.

Commercial Times:

- AU Optronics Corp. will raise the monthly capacity of its so-called 8.5-generation flat-panel plant to more than 60,000 units by year’s end, citing CEO Chen Lai-Juh. The central Taiwan factory, which can cut glass screens measuring 50 inches, currently has a monthly capacity of 10,000 units, the island’s largest maker of LCDs said. Seperately, Chunghwa Picture Tubes Ltd. may start operation of its second 4.5-generation plant in the third quarter due to increasing orders, citing CFO James Wu.

Late Buy/Sell Recommendations
Citigroup:

- Reiterated Buy on (RIMM), target $100.

- Reiterated Buy on (QCOM), raised estimates, boosted target to $56.

- Reiterated Buy on (MSFT), boosted target to $28.

Night Trading
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NASDAQ 100 futures unch.

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Today in IBD
In Play
Bond Ticker
Economic Preview/Calendar
Earnings Calendar

Conference Calendar

Who’s Speaking?
Upgrades/Downgrades
Rasmussen Business/Economy Polling

Earnings of Note
Company/EPS Estimate
- None of note

Economic Releases

8:30 am EST

- The Import Price Index for May is estimated to rise 1.4% versus a 1.6% gain in April.

10:00 am EST

- The Preliminary Univ. of Mich. Consumer Confidence reading for June is estimated to rise to 69.5 from 68.7 in May.

Upcoming Splits
- None of note

Other Potential Market Movers
- The Treasury’s Geithner speaking at the G-8 Meeting could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by financial and technology 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.