Stocks Lower into Final Hour on Rate Hike Worries

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Retail longs, Networking longs and Semi longs. I added to my (EEM), (IWM) and (QQQQ) shorts, thus leaving the Portfolio 50% net long. The tone of the market is negative as the advance/decline line is substantially lower, almost every sector is lower and volume is below average. The Johnson Redbook same-store sales index rose 3.3% year over year last week vs. a 3.2% rise the prior week. The long-term average is again of around 2.6%. I continue to see little evidence that a significant decline in consumer spending is on the horizon. I do, however, still expect to see retail sales decelerate back to average levels by next month. I expect US stocks to trade mixed into the close from current levels as short-covering and bargain hunting offset Fed worries.

Today's Headlines

Bloomberg:
- Barr Pharmaceuticals(BRL) agreed to buy Pliva d.d., eastern Europe’s biggest drugmaker, for $2.2 billion in cash, topping a bid from Iceland’s Actavis Group hf.
- The Hamas and Fatah movements, which share control of the Palestinian Authority, today agreed to back a document that implicitly recognizes Israel’s right to exist.
- Intel Corp.(INTC) agreed to sell a unit that builds chips for devices such as the BlackBerry to Marvell Technology Group.(MRVL) for $600 million as the company slashes costs and seeks to regain market share in its bigger businesses.
- Copper is falling 4% on mounting concern that the world’s central banks will continue to boost interest rates to combat inflation, slowing the economy and demand for metals.
- Henry Paulson, President Bush’s nominee for US Treasury Secretary, said “low” tax rates and fixing the Social Security and Medicare programs are key to a stronger economy.

Wall Street Journal:
- General Electric’s(GE) NBC Universal today plans to announce it will offer YouTube Inc. promotional video clips for some of its shows including “The Office” and “Saturday Night Live.”
- The US House of Representatives this week will probably cancel a 25-year restriction on oil and gas exploration along portions of the US coast.
- Google(GOOG) will introduce a test version of its GBuy online-payment service as early as this week to challenge EBay’s(EBAY) PayPal online-payment service.
- Time Warner’s(TWX) Warner Bros. will distribute movies and television shows over the Internet under an agreement to use Guba’s search engine and video-sharing network.
- US investors have been playing it safe, opting for multi-cap or all-cap mutual funds rather than large-cap or small-cap funds.
- Sony’s(SNE) personal music player is still struggling to compete with Apple Computer’s(AAPL) iPod, citing Sony president Ryoji Chubachi.
- A Coca-Cola bottler and MasterCard Intl. plan to site 1,000 vending machines in the Philadelphia area which will be able to accept credit and debit cards.

Washington Post:
- President Bush asked US Homeland Security Secretary Michael Chertoff to overhaul the nation’s Emergency Alert System because of weaknesses revealed after the Sept. 11, 2001, terrorist attacks and Hurricane Katrina in 2005.

Miami Herald:
- “Full-house” generators have become an important feature for high-priced South Florida homes after six major hurricanes in two years.

NY Times:
- Univision Communications(UVN) may accept a bid worth about $36.25 a share, or $11 billion, from a group led by billionaire Haim Saban.

USA Today:
- Real estate in more than 30 major metro areas, including Washington, Atlantic City, New York, Las Vegas, Phoenix, Sacramento and San Diego, more than doubled since 2000. Home prices will rise another 5% this year, according to the paper.

Handelsblatt:
- Kohlberg Kravis Roberts raised $15.5 billion for the biggest ever private equity fund.

Xinhua News:
- China’s government may fine media organizations as much as $12,501 for unauthorized reporting of emergencies under a draft law legislators started debating yesterday.

Existing Home Sales Fall Slightly, Consumer Confidence Rises

- Existing Home Sales for May fell to 6.67M versus estimates of 6.6M and 6.75M in April.
- Consumer Confidence for June rose to 105.7 versus estimates of 103.8 and 104.7 in May.

BOTTOM LINE: Sales of previously owned homes in the US fell in May to the lowest since January as higher mortgage rates sapped demand, Bloomberg said. The supply of homes for sale is now up to May 1997 levels. The median price of an existing home rose 6% in May from a year earlier to $230,000. Sales fell 4.2% in the Northeast and 3.8% in the Midwest. They rose .4% in the South and rose .7% in the West. This is more evidence of a “soft-landing” in housing.

Confidence among US consumers rose more than forecast in June as Americans’ outlook for the job market improved, Bloomberg said. The expectations component of the index rose to 87.6 from 85.1 the prior month. The employment component of the index rose to 15.6%, the highest since August. 3% of consumers said they plan to buy a home, up from 2.9% the prior month. I continue to expect consumer confidence to make new cycle highs over the intermediate-term as stocks rise, energy prices fall, irrational pessimism lifts further, Iraq improves, the job market remains healthy, long-term rates remain low by historic standards and inflation decelerates.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- General Motors(GM) persuaded about 35,000 US union workers to retire, a move aimed at helping return the company’s financial health.
- Merrill Lynch(MER), Morgan Stanley(MS) and Lehman Brothers(LEH), three of the world’s biggest securities firms, sued Theflyonthewall.com Web site, claiming it “pirated” their equity research.
- Take-Two(TTWO) said it received requests from the NY District Attorney for documents related to statements about earnings and hidden sex scenes in its “Grand Theft Auto” video game.
- Seven present and former pro football players sued the NFL and the NFL Players Assoc., saying the organizations recommended unfit financial advisers and caused them to lose $20 million.
- South Korea’s government said it will take “measures” against North Korea in the event the country tests a long-range missile, as President Bush told North Korea to refrain from such a “provocative” act.
- Japan will start receiving its first shipments from the $13 billion Sakhalin-1 oil and natural gas project this year, helping the world’s second-largest economy ease dependence on imports from the Middle East.

Financial Times:
- A US proposal to tighten restrictions on exports of technology products to China is expected to draw criticism from Beijing and protests from US industry groups.

Security Times:
- China should raise interest rates further to curb lending, citing Chen Dongqi, deputy director of the Academy of Macroeconomic Research, a government-affiliated body.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are +.25% to +1.0% on average.
S&P 500 indicated +.05%.
NASDAQ 100 indicated +.10%.

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Earnings of Note
Company/EPS Estimate
- (FLS)/.49
- (FRE)/1.21
- (FUL)/.69
- (NKE)/1.40

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- Existing Home Sales for May are estimated to fall to 6.6M versus 6.76M in April.
- Consumer Confidence for June is estimated to rise to 103.8 versus a reading of 103.2 in May.

BOTTOM LINE: Asian indices are higher, boosted by commodity and technology stocks in the region. I expect US equities to open modestly higher and to maintain gains into the afternoon. The Portfolio is 75% net long heading into the day.

Stocks Finish at Session Highs on Light Volume ahead of Fed Hike

Indices
S&P 500 1,250.56 +.49%
DJIA 11,045.28 +.51%
NASDAQ 2,133.67 +.58%
Russell 2000 698.64 +1.23%
Wilshire 5000 12,580.73 +.54%
S&P Barra Growth 578.82 +.35%
S&P Barra Value 670.0 +.62%
Morgan Stanley Consumer 603.61 +.42%
Morgan Stanley Cyclical 809.61 +.37%
Morgan Stanley Technology 487.04 +.14%
Transports 4,772.36 -.01%
Utilities 407.99 +.45%
Put/Call .74 -25.25%
NYSE Arms .75 +.79%
Volatility(VIX) 15.61 -1.76%
ISE Sentiment 208.00 +55.22%
US Dollar 86.52 -.41%
CRB 337.37 +.70%

Futures Spot Prices
Crude Oil 71.64 -.22%
Unleaded Gasoline 217.88 +2.41%
Natural Gas 5.98 +.34%
Heating Oil 197.50 -.20%
Gold 587.90 +.03%
Base Metals 207.99 +3.55%
Copper 322.15 -.36%
10-year US Treasury Yield 5.23% +.28%

Leading Sectors
Homebuilders +1.80%
Gold & Silver +1.12%
Energy +1.11%

Lagging Sectors
Airlines -.52%
Gaming -.60%
Disk Drives -.64%

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Afternoon Recommendations
Banc of America:
- Rated (COST) Buy, target $63.

Piper Jaffray:
- Rated (OPTN) Outperform, target $14.

Lehman Brothers:
- Upgraded IT Consulting & Computer Services Sector to Positive.

Afternoon/Evening Headlines
Bloomberg:
- US Treasury 10-year notes fell a ninth consecutive day as the prospect of a 17th straight interest-rate hike by the Fed this week prompted investors to demand higher returns.
- US stocks rose as companies’ plans for $88 billion in takeovers outweighed concern that the Fed will hike rates further.
- Natural gas fell to the lowest closing price in a month in NY as moderate temperatures limited demand for the power-plant fuel.

BOTTOM LINE: The Portfolio finished higher today on gains in my Semi longs, Retail longs and Biotech longs. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was positive today as the advance/decline line finished higher, most sectors rose and volume was very light. Measures of investor anxiety were mostly lower into the close. Overall, today's market performance was mildly bullish. A substantial amount of market uncertainty revolves around housing and inflation. We had one very positive data point on housing today and we get another one tomorrow. Personal incomes and spending are released Friday, which are related to the housing slowdown. At this point, most expect the Fed to raise 25 basis points and make hawkish statements in their ensuing policy statement. While I am very certain that a 25 basis-point hike is in the offing, I am not as certain of the tone of the policy statement. I wouldn't be surprised to see more dovish statements than most expect. Finally, the PCE Core, the Fed's favorite inflation gauge, is released on Friday. Bottom line, the market hates uncertainty and some very key releases are on tap this week. The lifting of this uncertainty, combined with depressed investor sentiment and substantial losses in many stocks this quarter will likely lead to short profit-taking and long bargain-hunting on Thursday and Friday. Thus, I expect stocks to finish the week on a positive note.