Stocks Mixed into Final Hour as Falling Energy Prices Offset Lingering Sub-Prime Worries

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Internet longs, Medical longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is slightly negative as the advance/decline line is mildly lower, sector performance is mildly negative and volume is above average. Merrill Lynch is reiterating its buy on Bear Stearns (BSC), stating that concerns over its hedge funds are overblown. As well, Reuters is reporting that the U.S. House Financial Panel Chair is saying BSC's hedge fund difficulties won't lead to serious financial market problems. It is interesting to note that, with the recent renewed spike in housing worries, the November home price futures remain firm at $215,000. This indicates only a 1.8% drop in home prices from current levels. Moreover, the November futures are up from about $211,250 in April. The Case-Shiller Housing Index is up about 125% over the last decade. I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower energy prices and bargain-hunting.

Today's Headlines

Bloomberg:
- BlackRock Inc., the largest publicly-traded US asset manager, said it agreed to buy the funds of funds arm of Quellos Group LLC for as much as $1.7 billion. The business includes funds investing in hedge funds and private-equity funds.
- Freddie Mac(FRE) Treasurer Timothy Bitsberger said the subprime mortgage slump is “severe but contained.”
- Bear Stearns Cos.’(BSC) bailout of two money-losing hedge funds won’t reduce earnings at the fifth-biggest US brokerage, Lehman Brothers(LEH) said.
- Apple’s(AAPL) iPhone customers, who will shell out as much as $600 for the handset this week, will pay less for service than other phone users.
- The SEC today announced settled enforcement actions against London-based hedge fund adviser GLG Partners, LP for illegal short selling in connection with 14 IPOs.
- Copper declined in NY on signs that consumption may be slowing in China, the world’s largest user of the metal, and the US, the second-biggest.
- BP Plc, Europe’s second-largest oil company, food maker Associated British Foods Plc and chemicals producer DuPont Co. will build a biofuels plant in England as demand for renewable energy jumps.
- Crude oil is falling $1.45/bbl. on forecasts that an EIA report will show US oil and fuel inventories rose again. US oil inventories are now at levels last seen in May 1998 when oil was around $10-$12/bbl.
- Gold is falling to a three-month low in NY, and silver tumbled to the lowest since January on speculation that investors will seek higher returns from US Treasury bonds.

Wall Street Journal:
- CEOs of US financial-services companies are looking for ways to save free-trade agreements by helping those who have lost jobs or are poorly paid because of the accords. The Financial Services Forum, which represents the executives, wants to head off protectionist legislation that could hurt the US economy.
- A high percentage of US oil refineries are idled for “maintenance,” which means industry profits and gasoline prices will be high in the country this summer.
- The American Bankers Assoc. and America’s Community Bankers announced yesterday that they’ve agreed to merge, citing the two organizations.
- Tyson Foods(TSN) might become more appealing to investors if its plan to change itself from a seller of unbranded chicken, beef and pork to a packaged-food company succeeds.
- Microsoft(MSFT) and VMware Inc., a US developer of so-called “virtualization” software, are gearing up for a battle that might give companies more freedom to choose alternatives to Microsoft’s products.

NY Times:
- The US Homeland Security Dept. is testing s so-called virtual border in southern Arizona made of 100-foot-tall towers with radar and camera equipment.
- The US’s Case Foundation is allowing the public to decide who should benefit from some of its money, to inspire new ideas for improving communities. The foundation, begun by America Online founder Steve Case and his wife Jean, is asking individuals and local not-for-profit bodies to submit ideas.
- The US Energy Department will announce today that it’s setting up three research centers charged with bringing to market fuels derived from plants, citing Raymond Orbach, the under secretary of energy for science.
- Andreas Bechtolsheim, a co-founder of Sun Microsystems(SUNW), plans to present today a supercomputer that may be the world’s fastest when it’s installed at the Texas Advanced Computer Center this year.
- AFL-CIO opposition to immigration reform legislation before the Senate outweighs support from nearly all other unions, which could pressure some Democrats to vote against it.

Washington Post:
- Latin Labor Solutions International, an American-founded company operating in Mexico, provides several thousand temporary Mexican workers with a legal passageway to the US every year.

CNBC:
- Dow Jones(DJ) and News Corp.(NWS/A) have reached an agreement on editorial board independence at the Wall Street Journal.

Financial Times:
- Franklin Resources(BEN) of the US, the world’s biggest fund manager by market capitalization, is planning a push in the UK, citing an interview with CEO Johnson.

New Home Sales Fall Slighty, Confidence Declines on Gas Price Rise

- New Home Sales for May fell to 915K versus estimates of 924K and a downwardly revised 930K in April.

- Consumer Confidence for June fell to 103.9 versus estimates of 105.0 and 108.5 in May.

BOTTOM LINE: Purchases of new homes in the US dropped in May, Bloomberg reported. The median price of a new home fell slightly in May to $236,100 from $238,200 a year earlier. The supply of new homes at the current sales pace rose to 7.1 months’ worth from 7 months in April. Sales fell 11% in the Northeast, 7.3% in the South and 1.9% in the West. Sales soared 31% in the Midwest. I continue to believe overall home sales are stabilizing at relatively high levels by historic standards. However, new home construction will remain muted through year-end as homebuilders work down inventories.

An index of consumer confidence in the US fell this month as gasoline prices remained elevated. The present conditions component of the index fell to 127.9 from 136.1 the prior month. The expectations component fell to 87.9 from 90.1. The proportion of Americans that expect their incomes to rise over the next six months rose to 18.7% from 18.5% the prior month. As well, those expecting more jobs in six months rose to 14% from 13.6% the prior month. Gasoline prices are 28% higher that at the beginning of the year. Depressed sentiment in the northern part of the country is still skewing the overall gauge. Confidence in the Northeast Central region(70.7) remains at levels last seen during the major bear market lows of 2002-2003. I still expect confidence to make new cycle highs later this year as gas prices fall substantially, interest rates move back down, stocks rise further, home sales stabilizes at relatively high levels, wages continue to significantly outpace inflation and unemployment remains historically low.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- What Bubble? China’s Stock Pickers Are More Bullish Than Ever. Analysts who cover Chinese companies, such as steel analyst Zhang Shibao of China Merchants Securities, are the most bullish they’ve been at any time in the past decade. “We are still in the middle of the bull market and the uptrend is irreversible,” said Zhang. By contrast, analysts in the US have never been so bearish.
- The use of heroin, cocaine and other illegal drugs has been “contained,” the UN said in a report that documents a leveling off in the global supply and demand for narcotics. “The runaway train of drug addiction is being slowed down,” Antonio Maria Costa, executive director of the Vienna-based UN Office on Drugs and Crime, said in a statement.
- Shares of China Cosco Holdings, Asia’s largest container line, as much as doubled on their Shanghai trading debut after the company’s $1.98 billion stock sale attracted record demand.

Financial News:
- Larger hedge fund managers seek independence from prime brokers.

GlobeSt.com:
- The Las Vegas City Council approved plans for a $9.5 billion casino and retail development project on 85 acres of land near the Las Vegas Strip.

Automotive News:
- General Motors(GM) is combining advertising for its Buick, Pontiac and GMC brands within the Leo Burnett advertising agency.

London-based Times:
- The SEC and the UK Financial Services Authority plan to collaborate more closely in order to tackle insider trading, citing Linda Thomsen, the SEC’s head of enforcement.
- Citadel Investment Group LLC may be the next hedge fund to reveal plans for a listing.

Commercial Times:
- Quanta Computer Inc. will likely deliver more than seven million laptop computers to its clients in the current quarter, fueled by rising demand for Apple Inc.(AAPL) Macbooks.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (ADM), target $44.
- Reiterated Buy on (SNDK), target $52.

Night Trading
Asian Indices are -.75% to unch. on average.
S&P 500 indicated -.09%.
NASDAQ 100 indicated -.18%.

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Earnings of Note
Company/EPS Estimate
- (APOG)/.22
- (FUL)/.40
- (KR)/.48
- (NKE)/.86
- (ORCL)/.34
- (SCS)/.20
- (SRR)/.38

Upcoming Splits
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Economic Releases
10:00 am EST
- New Home Sales for May are estimated to fall to 922K versus 981K in April.
- Consumer Confidence for June is estimated to fall to 105.0 versus a reading of 108.0 in May.

Other Potential Market Movers
- The Fed’s Moskow speaking, Richmond Fed Manufacturing Index, Wachovia Equity Conference, (EYE) Conference Call, (FEIC) Analyst Meeting and Jeffries Healthcare Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by automaker and technology stocks 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 Mildly Lower on Lingering Hedge Fund Worries

Indices
S&P 500 1,497.74 -.32%
DJIA 13,352.05 -.06%
NASDAQ 2,577.08 -.46%
Russell 2000 827.46 -.87%
Wilshire 5000 15,094.40 -.43%
Russell 1000 Growth 592.71 -.45%
Russell 1000 Value 855.11 -.33%
Morgan Stanley Consumer 725.87 -.03%
Morgan Stanley Cyclical 1,075.28 -.70%
Morgan Stanley Technology 619.42 -.65%
Transports 5,124.84 +.33%
Utilities 488.49 +.64%
MSCI Emerging Markets 130.45 -.91%

Sentiment/Internals
Total Put/Call 1.11 +7.77%
NYSE Arms 1.34 +53.25%
Volatility(VIX) 16.65 +5.71%
ISE Sentiment 132.0 +3.94%

Futures Spot Prices
Crude Oil 69.15 unch.
Reformulated Gasoline 229.89 +.54%
Natural Gas 6.93 -2.73%
Heating Oil 204.10 +.15%
Gold 653.80 -.49%
Base Metals 248.18 -1.29%
Copper 337.70 -.19%

Economy
10-year US Treasury Yield 5.08% -5 basis points
US Dollar 82.35 +.02%
CRB Index 313.24 -.48%

Leading Sectors
Restaurants +.77%
Utilities +.64%
Telecom +.15%

Lagging Sectors
Gold -1.91%
Coal -2.31%
Oil Service -2.36%

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Afternoon Recommendations
Oppenheimer:
- Rated (GOOG) Buy, target $625.
- Rated (VCLK) Buy, target $36.
- Rated (YHOO) Buy, target $34.

Bank of America:
- Rated (JEF) Buy, target $34.

American Technology Research:
- Reiterated Buy on (ORCL).

Afternoon/Evening Headlines
Bloomberg:
- Bear Stearns(BSC) may put up only $1.6 billion to rescue one of its money-losing hedge funds, half as much as it offered last week. The size of the bailout dropped after the Bear Stearns High-Grade Structured Credit Fund found buyers for some assets and creditors sold others.
- The average US pump price for regular gasoline fell 2.7 cents to $2.98 a galloon in the week ended today, the government said.
- Natural gas in NY fell for a sixth consecutive session, closing at a three-month low, on forecasts for mild weather in key demand areas and near record supplies in storage.
- Roche Holding AG, the world’s biggest maker of diagnostic tests, offered to buy Ventana Medical Systems(VMSI) for about $3 billion as part of a push into wider use of screening to match patients with drugs. The stock soared 52% in after-hours trading.
- The SEC has made it easier for investors to find out whether companies do business in nations identified as supporting terrorism. The SEC said it’s added a search tool to its Web site that lets shareholders search annual reports for “business interests in countries the US Secretary of State has designated state sponsors of terrorism.”
- US Treasuries extended a week-long advance fueled by concern hedge fund losses on bets linked to subprime mortgages will become more widespread and falling commodity prices.

Business Week:
- The SEC opened a preliminary probe into why Bear Stearns(BSC) restated one of its failing hedge funds’ April losses.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my I-banking longs and Semi longs. I added to my (EEM) short and added (IWM)/(QQQQ) hedges in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was negative today as the advance/decline line finished lower, sector performance was mostly negative and volume was above average. Measures of investor anxiety were above average into the close. Today's overall market action was mildly bearish. Uncertainty over the ramifications of the housing downturn continues to allow the many market bears to paint a worst-case scenario for U.S. equities and the economy. There remains little evidence that these real estate-related issues are having an overall negative impact on the broad economy, but in the U.S. negativity bubble, the worst is always assumed and promptly priced in. Another meaningful push higher in U.S. stocks will likely commence as the 10-year yield falls back below 5% and the Broker/Dealer Index stabilizes. I suspect this will begin to happen over the coming weeks. Natural gas fell another 2.7% and broke below $7 for the first time since the beginning of the year. As well, the Bloomberg Base Metals Spot Index fell another 1.3% today and is poised to test its 200-day moving average. Furthermore, corn fell another 2.7% today and is breaking below its 200-day moving average for the first time since first quarter 2006. The Goldman Sachs Agricultural Commodity Sub-Index is down about 6% in the last week. It is also noteworthy that today's worst-performing equity sector was oil service, notwithstanding the afternoon rise in the price of oil. In my opinion, the oil service sector is the most loved and most over-owned sector in the entire market and poses the greatest risk to investors through year-end.