Friday Watch

Late-Night Headlines
Bloomberg:
- Research In Motion Ltd.(RIMM), maker of the BlackBerry e-mail phone, said first quarter profit rose 73% on demand for new devices with cameras and music players. The company also announced a 3-for-1 stock spit. Shares soared 17% in after-hours trading.
- Some seafood imported to the US from China will be detained by regulators because of possible contamination with unsafe drugs, the latest health warning about products from that country.
- FedEx Corp.(FDX) truck drivers would be able to join unions more easily under US legislation approved by a House panel today, in a victory for organized labor.
- The yen headed for the biggest quarterly loss against the US dollar since 2001 before reports that are forecast to show falling prices and slowing consumption in Japan.
- North Korea’s pledge to close its Yongbyon reactor and dismantle its nuclear program may help establish a security agreement for northeast Asia, South Korean Foreign Minister Song Min Soon said.
- Japan’s consumer prices fell .1% in May, a pace of decline that’s unlikely to deter the central bank from raising its benchmark interest rate, the lowest among major economies.
- The US House of Representatives moved toward giving small companies an additional year to adhere to the Sarbanes-Oxley Act’s accounting rules, which are being revised by the SEC.
- Consideration of an energy package in the House of Representatives that had been scheduled for July may be delayed until September partly because of pending work on other legislation, Speak Nancy Pelosi said.
- The highest-rated collateralized debt obligations holding subprime mortgages may be worth buying if an abundance of selling causes prices to drop, according to Morgan Stanley.
- Members of the International Swaps and Derivatives Assoc. said they will not change trading contract language to address concerns raised by a group of hedge funds that banks who invest in derivatives tied to subprime mortgage bonds may try to suppress defaults by buying bad loans out of the deals.
- Apollo Group(APOL), the for-profit education company, reported profit excluding some items of 81 cents a share in the third quarter and said it plans to buy back as much as $500 million of its own stock. The stock rose 6.7% in after-hours trading.
- Komag(KOMG), the maker of computer disk-drive components, agreed to be bought by Western Digital(WDC) for $32.25 a share, or $1 billion, in cash. Komag rose 7.7% in after-hours trading.
- South Korea has accepted new labor and environment provisions for its free-trade agreement with the US, allowing it to be signed tomorrow, Kim Jong Hoon, the Asian country’s chief negotiator said.

Wall Street Journal:
- Apple Inc.(AAPL) may not be able to meet demand for its iPhone, Chief Executive Officer Steve Jobs said. The iPhone hasn’t had an effect on iPod sales, Jobs said.
- Ford Motor(F) plans to resume paying a dividend sometime in the future, citing a video of CEO Mulally talking to dealers.

LA Times:
- Doug Frantz, managing editor of the LA Times, will leave the paper, citing Editor James O’Shea.

Daily Mail:
- Russia wants to add oil reserves twice the size of Saudi Arabia’s by laying claim to untapped oil and natural gas fields beneath the North Pole.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (MON), target raised to $77.
- Rated (CMG) Buy, target $100.
- Reiterated Buy on (SNDK), target $52.

Needham & Co.:
- Rated (SNDK) Buy, target $55.

Business Week:
- Shares of USG Corp., the No. 1 maker of gypsum wallboard in the US, may rebound next year if the housing market turns around. The stock may rise 44% to $70 a share in the next year, citing Michael Metz, chief investment strategist at Oppenheimer Holdings.
- Shares of Kaydon Corp.(KDN) may rise as increased interest in wind energy will strengthen demand for the anti-friction bearings the company makes for turbines.
- United Retail Group(URGI), whose clothing caters to women wearing size 14 or larger, will benefit from summer sales.

Night Trading
Asian Indices are -.25% to +.75% on average.
S&P 500 indicated +.05%.
NASDAQ 100 indicated +.12%.

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Economic Releases
8:30 am EST
- Personal Income for May is estimated to rise .6% versus a -.1% decline in April.
- Personal Spending for May is estimated to rise .7% versus a .5% gain in April.
- PCE Core (MoM) for May is estimated to rise .1% versus a .1% gain in April.

9:45 am EST
- The Chicago Purchasing Manager Index for June is expected to fall to 58.0 versus a reading of 61.7 in May.

10:00 am EST
- Construction Spending for May is estimated to rise .1% versus a .1% gain in April.
- Final University of Michigan Consumer Confidence for June is estimated to rise to 84.0 versus a prior estimate of 83.7.

Other Potential Market Movers
- The JPMorgan Global Tobacco Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by automaker 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.

Stocks Finish Mixed on Quarter-end Profit-taking

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Stocks Higher into Final Hour as Fed Says Core Inflation is Moderating, Leaves Benchmark Rate at 5.25%

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Software longs and Networking longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is mildly higher, almost every sector is rising and volume is above average. The Fed left the benchmark rate unchanged at 5.25%. They made both hawkish and dovish comments in the ensuing policy statement. They said core inflation has improved modestly, but that it may not be sustained. The other statements were about the same as prior ones. They did not stress a focus on headline inflation rather than core, as some investors had feared. Natural gas has broken down again technically, which seems to be weighing on oil service stocks despite today’s rise in oil. As well, corn has plunged 19% in nine days, even as oil has risen and talk of alternative energy has grown louder. Nasdaq reported that short interest on the exchange surged another 9.2% to 9,170,000,000 shares, from mid May through mid June, hitting another all-time high. Moreover, as on the NYSE, the last four months have seen Nasdaq short interest soar an astounding 30.2%, the largest four-month percentage increase since at least 1991, according to Bloomberg data.

Here are the 25 Nasdaq stocks with the largest percentage increase in their short interest relative to their float from mid May through mid June:

1) USNA +20.6%
2) SMTC +18.0%
3) BBND +13.7%
4) PODD +11.6%
5) GMTN +10.9%
6) OATS +9.4%
7) TRMP +8.6%
8) KLIC +8.4%
9) TRGL +7.6%
10) MCHX +7.5%
11) LPHI +7.2%
12) GMET +7.0%
13) SNTA +7.0%
14) AGEN +6.9%
15) GLBC +6.6%
16) MNKD +6.6%
17) PALM +6.4%
18) ENTG +6.3%
19) SIRO +6.2%
20) MALL +6.1%
21) UHAL +6.1%
22) CHIP +5.9%
23) COMV +5.7%
24) SHFL +5.6%
25) TSCM +5.6%

The S&P 500 also reported short interest data. Here are the five industries in the S&P 500 with the largest percentage increase in their short interest from mid May through mid June:

1) Utilities +16.3%
2) Information Technology +12.8%
3) Health Care +8.3%
4) Financials +7.9%
5) Telecom Services +3.5%

Here are the 20 S&P 500 stocks with the largest percentage increase in their short interest relative to their float from mid-May through mid-June:

1) NSM +13.8%
2) PNW +5.6%
3) KLAC +5.2%
4) RSH +4.8%
5) HAS +4.7%
6) CIEN +4.0%
7) MBI +3.3%
8) TRB +3.0%
9) WFMI +3.0%
10) EQR +2.8%
11) NVDA +2.6%
12) GNW +2.4%
13) IBM +2.1%
14) LIZ +2.1%
15) SSP +1.9%
16) MU +1.9%
17) HBAN +1.9%
18) DTE +1.9%
19) MYL +1.8%
20) DCT +1.8%

I expect US stocks to trade modestly higher into the close from current levels on short-covering, diminishing sub-prime angst and bargain-hunting.

Today's Headlines

Bloomberg:
- Venezuelan President Hugo Chavez attacked US dominance as he visiting Russia looking to secure a deal for eight Russian submarines and greater energy cooperation.
- A US District Court froze the assets of Lake Shore Asset Management, a hedge funds run by a former chairman of the Chicago Mercantile Exchange, after misrepresentations in the fund’s financial statements were uncovered by the Commodity Futures Exchange Commission. Chicago-based Lake Shore purported to manage $1 billion for investors and traded in US commodities futures contracts with a 13-year profitability record. A review later showed the fund had about $466 million. Lake Shore barred regulators from inspecting its accounts on June 14, a violation of the Commodity Exchange Act.
- Jeremy Siegel, a professor at the University of Pennsylvania’s Wharton School of Business doesn’t see “excessive leverage” in the economy.
- Corn in Chicago fell for a third session this week as rains revive crops in the US Midwest threatened by unusually hot, dry weather earlier this month. Corn has plunged 19% in 9 trading days.
- Natural gas is plunging 5% to a five-month low after a weekly government report showed inventories are 18% above the five-year average for this time of the year as industrial demand falters.
- The Fed kept the benchmark US interest rate at 5.25% and said that core inflation has moderated, but that the moderation may not be sustainable.
- Petro-Canada, the third-largest oil company in Canada, and its partners will spend $24.6 billion on an oil-sands project in northern Alberta that’s one of the world’s most costly energy developments.
- A bald eagle swept above a crowd at the Jefferson Memorial in Washington as the Interior Department declared that the national bird is no longer threatened with extinction after four decades as an endangered species.
- GM(GM) agreed to sell its Allison Transmission unit to buyout firms Carlyle Group and Onex for $5.6 billion.
- Robert Steel, the US Treasury’s top finance official, said concerns that the near failure of two money-losing hedge funds run by Bear Stearns(BSC) might spark a financial crisis or hurt the economy are unfounded.
- Shares of Build-A-Bear Workshop(BBW) rose the most in almost three years after the maker of stuffed animals hired Lehman Brothers(LEH) to explore a sale, following a forecast of declining profit.
- The US Senate again blocked passage of comprehensive immigration legislation, almost certainly ending chances Congress will act this year on it.
- Ford Motor(F) said it’s offering three-year, no-interest loans on all 2007 Ford, Lincoln and Mercury vehicles to start making room at dealerships for next year’s models.
- Intel Corp.(INTC) was upgraded to “overweight” from “equal weight” at Lehman Brothers, which said a new series of semiconductors designed for laptop computers may boost revenue and earnings growth.

Wall Street Journal:
- Visa International Inc. will pay $170 million to sponsor soccer’s World Cup for eight years, citing FIFA President Sepp Blatter.
- Enterprise Rent-A-Car is opening a branch in Washington DC where customers will be offered vehicles that run on E85, a fuel comprising 85% ethanol and 15% gasoline.
- Chipotle Mexican Grill(CMG), the Chicago Tribune(TRB) and Visa will sponsor the first Windy City Cornhole Classic on July 28 at Soldier Field in Chicago. The bag-tossing game known as cornhole, Bags, and Baggo has become the latest fad in the US Midwest at bars, parties and church picnics.
- Some US House Republicans have aligned with Wall Street in an attempt to halt a congressional proposal that would raises taxes substantially on financial firms.

AP:
- The Democrat-controlled House of Representatives endorsed a $4,000 pay raise that would increase their salaries to almost $170,000.

Expansion:
- Acciona SA has acquired the rights to develop wind parks in the US from EcoEnergy LLC. EcoEnergy has the rights to develop 1,300 megawatts of wind power. Acciona plans to invest $1.75 billion before 2009 in wind energy in the US.

Final GDP and GDP Price Index Revised Slightly Higher, Job Market Still Healthy

- Final 1Q GDP rose .7% versus estimates of a .8% gain and a prior estimate of a .6% gain.

- Final 1Q Personal Consumption rose 4.2% versus estimates of a 4.4% gain and a prior estimate of a 4.4% increase.

- Final 1Q GDP Price Index rose 4.2% versus estimates of a 4.2% gain and a prior estimate of a 4.0% increase.

- Final 1Q Core PCE QoQ rose 2.4% versus estimates of a 2.2% gain and a prior estimate of a 2.2% increase.

- Initial Jobless Claims for last week fell to 313K versus estimates of 315K and 326K the prior week.

- Continuing Claims fell to 2490K versus estimates of 2500K and 2517K prior.

BOTTOM LINE: The US economy expanded at an annual pace of .7 percent in the first quarter, Bloomberg reported. According to economists, this quarter was the low point for the year as the trade deficit narrows and corporate spending accelerates. Spending on residential construction fell at a 15.8% annual pace last quarter versus a 19.8% pace in the fourth quarter. The decline subtracted .9 percentage point from growth. I continue to believe US growth will come in at 3%+ this quarter before decelerating modestly below trend in 3Q.

Fewer Americans filed first-time claims for unemployment benefits last week, signaling the labor market remains healthy, Bloomberg said. The four-week moving average of jobless claims rose to 316,000 from 315,000 the prior week. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, held steady at 1.9% for the ninth consecutive week. The unemployment rate is currently a historically low 4.5%. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor costs increases.

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