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Thursday Watch

Late-Night Headlines
Bloomberg:
- China needs to “shock” the economy with more interest rate increases because it’s too late to use a stronger yuan to cool growth, said Jim Walker, chief economist at CLSA Asia-Pacific Markets.
- Duff & Phelps Corp., which provides valuations for mergers and acquisitions, filed for a $200 million IPO.
- US thrifts earned less while widening their profit margins in the first quarter, federal regulators reported.
- Imports of crude oil by Japan, the world’s largest consumer of oil after the US and China, fell 16% in April from a year earlier. Imports of oil products, which include gasoline and naphtha, dropped 18%.
- Alcoa Inc.(AA), seeking to acquire rival aluminum producer Alcan Inc.(AL) in a $27.6 billion hostile takeover, said its “full and fair” offer won’t be increased.
- The euro traded near a record high versus the yen before a report that’s likely to show business confidence in Germany rose to the highest since 1991.
- Jordin Sparks, a high school student from Glendale, Arizona, won the sixth season of “American Idol” on Fox television, defeating Blake Lewis of Bothell, Washington, in votes cast by telephone and text message. “Idol” enabled Fox network to win this year’s prime-time television ratings race in the 18-to-49 age group that sets national advertising rates.
- Congress branded yesterday’s US-China agreements on financial services and aviation inadequate and moved to consider new trade measures against China even as Vice Premier Wu Yi met with lawmakers.
- The yuan snapped a six-day rally after central bank Governor Zhou Ziaochuan said China gains in the currency are “already moving fast enough.

Financial Times:
- GE(GE) will reveal today that its sales of environmentally friendly products have doubled to $12 billion during the past two years, citing CEO Immelt.

South China Morning Post:
- Hedge funds have invested as much as $50 billion in China’s stock markets, according to a study by a government think tank. The amount is about a third of the $128 billion of assets managed by mutual funds in China, citing Zhang Yuewen, a researcher at the Chinese Academy of Social Sciences. China should enhance supervision of short-term capital flows and business between hedge funds and local investors, citing Zhang.

Securities News:
- A Shanghai-based bank told branches to increase scrutiny on fund transfers to prevent corporate customers using loans to fund investments in stocks, citing an internal document. The unidentified publicly traded bank also stopped offering loans that used stocks as collateral and stepped up monitoring of conglomerates with excess liquidity. The Chinese government is trying to shield the banking system from volatility created by the nation’s booming stock markets, where the total value of shares more than tripled in the past year to more than $2 trillion.

China Daily:
- China may introduce a rating system for online games, in a move that may ban younger players from titles with violent and sexual content, citing the Internet culture director of the Ministry of Culture.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (CIEN), target $35.
- Reiterated Buy (CRM), target $60.
- We are raising our price target on (DJ) to $55 to reflect the recent News Corp.(NWS/A) bid. We are assuming a 65% probability that the offer is raised to $65 and accepted, and a 35% probability that the offer is declined and the stock trades down to its pre-announcement price of $36. We still believe a bid from a third party is unlikely.

Think Equity:
- Rated (OSIP) Buy, target $50.

Night Trading
Asian Indices are -.75% to unch. on average.
S&P 500 indicated -.11%.
NASDAQ 100 indicated -.10%.

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Earnings of Note
Company/EPS Estimate
- (ARO)/.25
- (AMSC)/-.23
- (ANN)/.45
- (BKS)/.01
- (BWS)/.22
- (CHRS)/.20
- (CPWM)/-.58
- (GPS)/.24
- (HIBB)/.33
- (HRL)/.51
- (MM)/1.02
- (MYL)/.49
- (PDCO)/.45
- (RRGB)/.42
- (SAFM)/.29
- (SSI)/.18
- (SMRT)/.18
- (TBL)/.20
- (TTC)/1.68

Upcoming Splits
- (ATLS) 3-for-2
- (GIL) 2-for-1

Economic Releases
8:30 am EST
- Durable Goods Orders for April are estimated to rise 1.0% versus a 4.3% gain in March.
- Durables Ex Transports for April are estimated to rise .6% versus a 1.4% gain in March.
- Initial Jobless Claims for last week are estimated to rise to 305K versus 293K the prior week.
- Continuing Claims are estimated to rise to 2495K versus 2473K prior.

10:00 am EST
- New Home Sales for April are estimated to rise to 860K versus 858K in March.

Other Potential Market Movers
- The Fed’s Mishkin speaking, Fed’s Fisher speaking, weekly EIA natural gas inventory report, (AFL) financial analyst meeting, (TEX) analyst meeting, (ELX) analyst day, (RX) analyst meeting, Robinson Humphrey Financial Services Conference, Goldman Sachs Internet Conference, UBS Oil & Gas Conference and Citigroup Healthcare Conference could also impact trading today.

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

Stocks Finish Slightly Lower on Profit-taking, China Bubble Worries and Higher Long-term Rates

Indices
S&P 500 1,522.28 -.12%
DJIA 13,525.65 -.11%
NASDAQ 2,577.05 -.42%
Russell 2000 836.54 -.40%
Wilshire 5000 15,323.55 -.16%
Russell 1000 Growth 598.65 -.13%
Russell 1000 Value 878.09 -.18%
Morgan Stanley Consumer 745.48 +.11%
Morgan Stanley Cyclical 1,063.06 +.27%
Morgan Stanley Technology 613.81 -.41%
Transports 5,199.73 +.05%
Utilities 527.84 -1.10%
MSCI Emerging Markets 127.22 +.07%

Sentiment/Internals
Total Put/Call .97 -14.91%
NYSE Arms .74 -33.52%
Volatility(VIX) 13.24 +1.38%
ISE Sentiment 140.0 +6.87%

Futures Spot Prices
Crude Oil 65.85 +.52%
Reformulated Gasoline 230.55 -.03%
Natural Gas 7.76 -.55%
Heating Oil 193.34 +1.37%
Gold 662.30 +.35%
Base Metals 262.56 -4.01%
Copper 330.75 +.15%

Economy
10-year US Treasury Yield 4.85% +3 basis points
US Dollar 82.28 -.13%
CRB Index 311.62 +.06%

Leading Sectors
Gold +1.62%
Medical Equipment +.92%
Oil Service +.81%

Lagging Sectors
Restaurants -1.25%
Semis -1.55%
Airlines -1.59%

Evening Review
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In Play

Afternoon Recommendations
Bank of America:
- Rated (TYL) Buy, target $15.

Afternoon/Evening Headlines
Bloomberg:
- Former SEC Chairman Arthur Levitt said that private equity buyout are “not a bad trend.”
- The US will seek greater pressure on Iran to abandon its nuclear ambitions than Europeans want, diplomats said after the UN nuclear watchdog agency said existing sanctions aren’t working.
- The SEC approved rules that will make it easier for additional credit-rating companies to gain federal recognition and compete with S&P’s and Moody’s Investors Service.
- Chinese stocks fell in US trading after Former Federal Reserve Chairman Alan Greenspan said he was concerned that equities in China might undergo a “dramatic contraction.”
- Treasury 10-year note yields rose to the highest level since January as traders reduced the odds of an interest rate cut by the Federal Reserve this year on improving US economic prospects.
- Network Appliance(NTAP) forecast sales and profit for the first quarter that fell short of analysts’ estimates, prompting shares to tumble 19% after-hours.
- CA Inc.(CA) posted an unexpected fourth-quarter loss because of a decline in orders. The shares fell 6% in extended trading as forecasts fell short of analysts’ predictions.
- The Gymboree Corp.(GYMB) today reported earnings for the first fiscal quarter ended May 5, 2007, of $20.9 million versus $18.6 million the prior year. The shares surged 7% in after-hours trading.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Semi longs and Medical 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 mildly negative today as the advance/decline line finished lower, sector performance was mostly negative and volume was above average. Measures of investor anxiety were about average into the close. Today's overall market action was bearish. The 10-year yield is moving modestly higher as investors continue to price out a U.S. recession, in my opinion. Inflation worries have subsided to an extent. Gold continues to trade very poorly considering all of the potential positive catalysts it has had of late. The percent chance of a recession beginning this year has plunged to 13.5% on Intrade.com. Moreover, the 10-year yield is still very low by historical standards. Furthermore, housing will likely prevent any significant moves higher in yield from current levels as mortgage rates rise modestly. I continue to believe it would take a convincing move above 5% on the 10-year yield to impact U.S. stocks in any meaningfully negative way. I still don't expect that to occur and still believe the 10-year yield will average about 4.75% for the year. In the current U.S. negativity bubble, most investors continue to focus on any short-term negatives, while the big picture remains very positive. The iShares FTSE/Xinhua China 25 Index (FXI) finished at session lows, falling 0.8% on Greenspan's China bubble comments. Given how extended China is, these comments might provide the catalyst for at the very least a short-term dip in the Shanghai. As well, April new home sales may very well be weaker than expected, which could also lead to some more weakness here in the morning.

Stocks Slightly Lower into Final Hour on Profit-taking, China Bubble Worries and Higher Long-term Rates

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi 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 above average. The major averages and breadth have pulled back from session highs. Traders are pointing to Alan Greenspan's comments on China as the negative catalyst. Greenspan basically said the recent parabolic move higher in Chinese stocks is unsustainable and there will be a dramatic decline at some point. Here is an updated chart of the Shanghai Stock Exchange Composite. Predicting that this move is unsustainable isn't a bold prediction, in my opinion. While momentum traders may continue to profit from this in the short run, longer-term investors should prepare now for the eventual bursting of the bubble in Chinese shares and its ramifications. Commodity and deep cyclical stocks that are trading at valuations associated with "new era" thinking are the most at risk in the U.S. The largest beneficiary of a substantial decline in Chinese shares will be true U.S. "growth" stocks. I expect US stocks to trade mixed into the close from current levels as investment manager performance anxiety, buyout speculation and more economic optimism offset worries over China’s bubble and higher long-term rates.

Today's Headlines

Bloomberg:
- Countrywide Financial Corp.(CFC) Chief Operating Officer David Sambol said the US subprime market is stabilizing.
- John Reade, an analyst at UBS AG, said he expects nickel prices to fall “quite sharply” and that he would “not be a buyer of any metals at current prices.”
- The House of Representatives approved legislation today that would make gasoline price gouging a federal crime, subjecting companies to as much as $150 million in fines.
- Marathon Oil(MRO) expects its crude oil and natural-gas output to soar as much as 42% within 3 years from its average last year.
- Ethanol consumption in the European Union may exceed that of biodiesel by 2020.
- The number of US vehicles that can run on ethanol and gasoline will rise 600% within 8 years, boosting demand for the alternative fuel and reducing the prospects of a glut, according to the Renewable Fuels Assoc.
- Microsoft Corp.(MSFT) played down a possible deal with Yahoo!(YHOO) and said its has everything needed to build its advertising business.
- Internet ad sales soared 35% to $16.9 billion in the US last year as marketers accelerated their pursuit of Web-site audiences.
- US Treasury Secretary Henry Paulson, ending a meeting with China’s top economic leaders, said the negotiations produced “tangible results” that will help build confidence in bilateral trade ties.
- Boeing Co.(BA) affirmed its profit forecasts for this year and next with an “upward bias” for 2008, CFO Bell said.
- Former Fed Chairman Greenspan said Chinese stocks may suffer a “dramatic contraction.”

Wall Street Journal:
- A unilateral withdrawal from Iraq would help al-Qaeda because Iraq is the “primary battleground” against “radical Islamists” who “declared war” on the US in the 1990s and carry out attacks today, said Bob Kerrey, a former Democratic senator from Nebraska.
- American Express(AXP) will today say that it is introducing a program to let customers put their monthly mortgage payments on charge cards, and let them earn rewards for doing so.
- Hedge funds have shown more of a bias towards energy, technology and small-company stocks than mutual funds recently, citing a report by Goldman Sachs(GS).
- The FBI’s success foiling a plot to attack the US Army base in New Jersey underscores how the agency has reverted to more methodical investigations before taking action.
- Coach’s(COH) stock does well when the luxury handbag maker’s chief executive scraps plans to sell his shares, as he’s done three times when he thought they were undervalued.

NY Times:
- US Democratic leaders in the House of Representatives are finding it difficult to get members of their party to agree on an overhaul of congressional ethics rules. Some Democrats are opposing a measure that would require lobbyists to make public the campaign contributions they collect on behalf of lawmakers.
- MGM Mirage(MGM) said it has formed an independent committee to study billionaire investor Kirk Kerkorian’s offer to purchase two Las Vegas properties and maybe restructure the company.

AP:
- The US House of Representatives passed a bill to crack down on spyware, software that uses the Internet to collect data on consumers and pass it on to third parties without consent.

Financial Times:
- The venture-capital market might be tempting some investors to take a fresh look to avoid the crowds chasing leveraged buyouts.

Toronto Globe and Mail:
- Alcan Inc.(AL) has started “early-stage” talks with BHP Billiton Ltd.(BHP) to help fend off a takeover bid by rival Alcoa(AA).

Al-Hayat:- Iraq’s debt was reduced by $140 billion as part of an agreement with the International Monetary Fund and countries including Saudi Arabia and China, citing Finance Minister Bayan al-Zubaidi.

Economic Releases

- None of note