Friday Watch

Late-Night Headlines
Bloomberg:
- The US will pursue diplomacy to ease tensions with North Korea over a possible North Korean long-range missile test, the US State Dept. said.
- Emerging-market stock funds suffered withdrawals for a fifth straight week after investors pulled out a further $2 billion in the period ended June 21, according to Emerging Portfolio Fund Research.

AP:
- US authorities arrested seven people today in connection with a plot to attack Chicago’s Sears Tower and other buildings in the country.

Wall Street Journal Asia:
- Merrill Lynch(MER) has expanded its debt team by more than 40% since January to prepare for the Bank of Japan’s move to increase interest rates.

Digitimes:
- Advanced Micro Devices(AMD) will cut chip prices as much as 46% on July 24 in a “price war” with larger rival Intel Corp.(INTC).

Late Buy/Sell Recommendations
Business Week:
- Sealed Air(SEE), the maker of Bubble Wrap and Jiffy Mailer packaging products, could see its margins boosted as the company unveils a range of new products, citing Ghansham Panjabi, analyst at Wachovia Securities.
- Shares of Advanced Life Sciences Holdings(ADLS) may more than double in the next year, citing Lazard Capital Markets’ Matthew Osborne.
- Lowe’s(LOW) may rise as much as 64% because of the stock’s recent decline and the company’s increasing earnings, citing Piedmont Select Value Fund’s David Clark.

Night Trading
Asian Indices are -1.5% to -.50% on average.
S&P 500 indicated -.10%.
NASDAQ 100 indicated -.10%.

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Earnings of Note
Company/EPS Estimate
- None of note

Upcoming Splits
- (EXPD) 2-for-1
- (TROW) 2-for-1
- (FTO) 2-for-1

Economic Releases
8:30 am EST
- Durable Goods Orders for May are estimated to rise .4% versus a 4.4% decline in April.
- Durables Ex Transportation for May are estimated to rise .6% versus a 1.0% decline in April.

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

Stocks Finish Lower on Light Volume

Indices
S&P 500 1,245.60 -.53%
DJIA 11,019.11 -.54%
NASDAQ 2,122.98 -.85%
Russell 2000 688.04 -.38%
Wilshire 5000 12,504.22 -.50%
S&P Barra Growth 577.23 -.61%
S&P Barra Value 666.55 -.45%
Morgan Stanley Consumer 602.45 -.34%
Morgan Stanley Cyclical 802.54 -.48%
Morgan Stanley Technology 486.51 -1.34%
Transports 4,737.88 -.58%
Utilities 404.33 -.52%
Put/Call 1.10 +23.60%
NYSE Arms 1.05 +64.72%
Volatility(VIX) 15.88 +2.32%
ISE Sentiment 173.00 +54.46%
US Dollar 86.42 +.75%
CRB 336.13 -.18%

Futures Spot Prices
Crude Oil 71.0 +.23%
Unleaded Gasoline 212.50 +.33%
Natural Gas 6.42 -.22%
Heating Oil 197.19 +.01%
Gold 584.00 -.24%
Base Metals 201.75 -.81%
Copper 307.00 +.71%
10-year US Treasury Yield 5.21% +1.07%

Leading Sectors
Airlines +1.37%
Tobacco +.45%
Energy +.44%

Lagging Sectors
Networking -1.42%
Internet -1.60%
Wireless -2.33%

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Afternoon Recommendations
Sanford Berstein:
- Upgraded (MCHP) to Outperform, target $40.

Banc of America:
- Rated (TSCO) Buy, target $66.

Deutsche Bank:
- Rated (HGSI) Buy, target $19.

Afternoon/Evening Headlines
Bloomberg:
- Google(GOOG) sold its 2.6% stake in China’s Baidu.com(BIDU) and said it will focus on developing its own business in the country.
- Iran is providing weapons and training to Shiite extremist groups in Iraq who are attacking US troops and Iraqi security forces, said General George Casey, the top American military commander in Iraq.
- Oracle Corp.(ORCL) said fourth-quarter profit gained 27% and forecast earnings and sales will rise again this period.
- The House of Representatives voted to give President Bush a form of the line-item veto in what supporters said was a bid to help reduce wasteful spending.

London-based Times:
- The Iraqi government will announce a 28-point peace agreement as early as June 25 that would include an amnesty for prisoners who renounce violence to bring an end to the country’s Sunni insurgency.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Medical longs, Computer longs and Semi longs. I did not trade 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, most sectors fell and volume was below average. Measures of investor anxiety were mostly higher into the close. Overall, today's market performance was mildly bearish. Weakness in tech and bonds was disappointing for the bulls. There were some bright spots, however. There are some very encouraging signs in the growth stock arena. Volume was light on today’s decline and breadth closed well off session lows. The dollar index maintained gains throughout the day, finishing 0.73% higher. I expect US stocks to turn in a better performance tomorrow.

Stocks Lower into Final Hour on Rise in Long-Rates and Geopolitical Concerns

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Medical longs, Computer longs and Semi longs. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are falling and volume is below average. I am seeing some encouraging action in growth stocks recently despite today's market losses. I expect this is just the beginning of a period of growth stock outperformance. Google (GOOG), Apple (AAPL), Intuitive Surgical (ISRG) and SanDisk (SNDK) are four of my favorites at current levels. I am long all four. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering and bargain hunting.

Today's Headlines

Bloomberg:
- The US and other major powers that pay most of the United Nations’ budget are on a collision course with developing nations over selecting a successor to Secretary-General Kofi Annan.
- Fed Bank of Atlanta President Guynn announced he will retire on Oct.1.
- The US Senate rejected two measures proposed by Democrats calling on President Bush to withdraw US troops from Iraq.
- Three-time champion Italy and Ghana reached the second round of soccer’s World Cup, as the US and the Czech Republic failed to get the wins that would have kept them in the tournament.
- US Treasuries fell a seventh day, the longest losing streak since March 2002, as traders push yields to where they expect the Fed will lift its benchmark lending rate.

Wall Street Journal:
- Iranian President Mahmoud Ahmadinejad is enjoying popularity at home, even as he is denounced abroad, because of his stance of economic populism.
- Stock market volatility of the last two months has resulted in a handful of hedge funds closing down, prompting some concern that a rough period could cause havoc on a scale comparable to that seen when Long-term Capital collapsed in 1998.
- An arrangement by Mount Sinai hospital in NY to have staff visit patients at home helps the state cut Medicaid bills and could serve as a model for the rest of the country.
- The SEC unveiled new rules for hedge “fund of funds” aimed at giving investors clearer information on fees.
- Federated Dept. Stores(FD) is close to agreeing to sell its Lord & Taylor department-store chain to private equity firm Apollo Real Estate Advisers and shopping mall developer NRDC Real Estate Advisors LLC for about $1.2 billion.
- Teenagers are increasingly choosing sports drinks, bottled teas and energy drinks over carbonated soft-drinks.

SparkSpread:
- Citadel Investment Group’s chief operating officer for energy trading resigned.

NY Post:
- Sales of higher octane gasoline have declined 46% in volume in recent months as US drivers shift to cheaper grades, citing EIA data released in March.
- Michael’s Stores(MIK) has received two bids at about $40 a share, or $5 billion.

NY Times:
- Gannett(GCI) and Tribune(TRB) have spoken to newspaper publishers about the possible sale of a stake in the job recruitment site CareerBuilder.
- Wal-Mart Stores is developing a program to teach its 1.3 million US workers to take better care of the environment and their health.

Financial Times:
- The hedge-fund practice of negotiating “side letters” with some clients could favor those customers at the expense of others.

Nihon Keizai:
- Sanyo Electric will cancel plans to set up a mobile phone venture with Nodia Oyj(NOK) of Finland after failing to agree on the details of the venture.

Financial Mail:
- Gold exploration companies seeking to revive idled gold mines in South Africa sell shares in Johannesburg and London.

Job Market Still Healthy, Leading Indicators Fall Again

- Initial Jobless Claims for last week rose to 308K versus estimates of 306K and 297K the prior week.
- Continuing Claims rose to 2439K versus estimates of 2415K and 2421K prior.
- Leading Indicators for May fell .6% versus estimates of a .5% decline and a .1% fall in April.

BOTTOM LINE: First-time claims for unemployment benefits in the US rose last week from a four-month low to a level that suggests strength in the labor market, Bloomberg said. The four-week moving average of claims fell to 311,250 from 316,250 the prior week. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, held at 1.9%. I continue to believe the labor market will remain relatively healthy over the intermediate-term without generating substantial unit labor cost increases, which account for two-thirds of inflation.

An index of US leading economic indicators fell in May by the most in nine months, signaling the robust pace of growth earlier this year will give way to a slower expansion, Bloomberg said. According to a recent survey by Bloomberg, economists expect US growth to average about 3% from this quarter through the first quarter of 2007. Building permits subtracted .06 percentage points from the index. I continue to expect US growth to slow to around average levels through year-end. Another period of concern that the economy is slowing too much is likely over the next 6 weeks. I continue to expect the Fed to hike rates only one more time before a “pause.”

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