Thursday Watch

Late-Night Headlines
Bloomberg:
- Peabody Energy Corp.(BTU) said it agreed to purchase Australia’s Excel Coal Ltd. for about $.134 billion in cash.
- Bisys Group(BSG) said personal details of 61,000 hedge fund investors were lost when an employee’s truck carrying the files was stolen.
- Andres Manuel Lopez Obrador led in a recount of Mexican election ballots that authorities say will determine the outcome of the nation’s closest ever presidential vote.
- Apple Computer(AAPL) and Creative Technology said in court papers they “remain open to the possibility” of ending their litigation battles over handheld music players.

Financial Times:
- Citigroup Inc.(C) saved over $500 million in 2005 by introducing a central computerized purchasing system and renegotiating contracts, citing an interview with Tim Tynan, head of the company’s business services unit.
- Republican Senators Bill Frist, John McCain and Democratic Senator Charles Schumer have written to President Bush saying that Russia should either let US hedge fund manager William Browder back into Russia or provide a credible explanation as to why it is denying entry to its largest foreign portfolio investor.

China Daily:
- China Petroleum & Chemical and Jiangsu Sanfangxiang Industry are among more than 100 Chinese polyester fiber makers facing dumping charges from the US.

Chosun Ilbo:
- North Korea may test-fire as many as four more short or medium-range missiles within the next five days.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are -1.25% to unch. on average.
S&P 500 indicated -.07%.
NASDAQ 100 indicated -.10%.

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Earnings of Note
Company/EPS Estimate
- (AYI)/.57
- (DLP)/1.34
- (LI)/.51
- (HI)/.02
- (TIBX)/.06

Upcoming Splits
- (INTU) 2-for-1
- (WOS) 2-for-1
- (HANS) 4-for-1
- (HP) 2-for-1
- (UBS) 2-for-1

Economic Releases
8:30 am EST
- Initial Jobless Claims for last week are estimated to rise to 315K versus 313K the prior week.
- Continuing Claims are estimated to fall to 2408K versus 2409K prior.

10:00 am EST
- ISM Non-Manufacturing for June is estimated to fall to 59.0 versus a reading of 60.1 in May.
- Pending Home Sales for May are estimated to fall .2% versus a 3.7% decline in April.

10:30 am EST
- Bloomberg consensus estimates call for a 2,000,000 barrel crude oil drawdown. Gasoline supplies are expected to fall by 800,000 barrels. Distillate supplies are estimated to rise by 1,650,000 barrels. Finally, refinery utilization is expected to rise 0.30%.

BOTTOM LINE: Asian indices are mostly lower, weighed down by exporting 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 Near Session Lows on Low Volume Pullback

Indices
S&P 500 1,270.91 -.72%
DJIA 11,151.82 -.68%
NASDAQ 2,153.54 -1.69%
Russell 2000 719.85 -1.50%
Wilshire 5000 12,799.00 -.83%
S&P Barra Growth 586.37 -.77%
S&P Barra Value 683.03 -.69%
Morgan Stanley Consumer 610.18 -.57%
Morgan Stanley Cyclical 824.76 -.85%
Morgan Stanley Technology 489.23 -1.85%
Transports 4,921.53 -1.07%
Utilities 415.69 -.66%
Put/Call 1.33 +49.44%
NYSE Arms 1.13 +16.44%
Volatility(VIX) 14.15 +8.43%
ISE Sentiment 166.00 +151.52%
US Dollar 85.61 +.54%
CRB 349.86 +.49%

Futures Spot Prices
Crude Oil 75.14 -.07%
Unleaded Gasoline 227.50 -.04%
Natural Gas 5.76 unch.
Heating Oil 206.26 +1.68%
Gold 630.70 +.16%
Base Metals 216.88 -1.45%
Copper 340.25 -.04%
10-year US Treasury Yield 5.22% +1.39%

Leading Sectors
Energy +.39%
REITs -.10%
Drugs -.43%

Lagging Sectors
Steel -2.07%
Gold & Silver -2.31%
Semis -3.16%

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Afternoon Recommendations
Susquehanna:
- Rated (ENTG) Positive.

Afternoon/Evening Headlines
Bloomberg:
- US IPOs backed by venture capital firms raised $2 billion in the second quarter, almost quadruple the first quarter’s total.
- Microsoft(MSFT) is planning to have a portable music and video player out by Christmas in a challenge to Apple Computer’s(AAPL) iPod.
- US states are “dumbing down” their grade-school tests, where high failure rates could bring penalties under the federal “No Child Left Behind” law, Univ. of California researchers reported.
- US 10-year Treasuries fell the most in three weeks after a private report estimated US companies in June added the most jobs since at least 2001, fueling speculation the Fed will raise rates next month.
- Boeing(BA) may win a $7.3 billion order for military aircraft from Canada’s government because it may be the only supplier that can meet the country’s requirements.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Semi longs and Retail 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, almost every sector fell and volume was below average. Measures of investor anxiety were mostly higher into the close. Overall, today's market performance was bearish. Breadth improved from this morning, but was still solidly negative. A $1.26 per barrel rise in oil to record highs couldn't boost most energy-related equities. On the positive side, the 10-year yield finished at 5.21%, off session highs. My intraday measures of investor angst were elevated throughout the day, and volume was below average. Moreover, many market leading stocks finished only slightly lower and in some cases higher. The underlying tone of this market is much improved from recent weeks, even on pullbacks. While the Nasdaq Biotech Index (NBI) traded about 1% lower today, many leading stocks in the sector traded well and held recent gains. Genentech (DNA), Celgene (CELG), Gilead Sciences (GILD), Imclone Systems (IMCL), Amylin Pharmaceuticals (AMLN) and Cephalon (CEPH) all traded well. GILD remains my favorite at current levels and I remain long the stock.

Stocks Lower into Final Hour on North Korea Worries and Rising Long-term Rates

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Semi longs and Retail longs. I added (IWM) and (QQQQ) shorts on the open and also added to my (TLT) long and a few existing shorts, thus leaving the Portfolio 75% 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 rise in the 10-year yield and North Korea's missile tests are pressuring stocks. The market's reaction appears overdone to me. North Korea's missile test was widely expected. ADP's(ADP) projection that 368,000 new jobs were created in June vs. estimates of 160,000 is suspect, in my opinion. I will be very surprised, based on my analysis, if the job market is that strong. I expect US stocks to trade modestly higher into the close from current levels on short-covering, stabilizing long-term rates and bargain hunting.

Today's Headlines

Bloomberg:
- Yale University’s handling of federal grants has come under scrutiny from three government agencies who have subpoenaed school documents going back 10 years.
- Atlantic City’s casinos shut down for the first time in their 28-year history today, casualties of a budget impasse in New Jersey’s state capitol.
- US Treasury notes fell after a private report estimated that US companies added 368,000 jobs last month, the most since at least 2001.
- Use of mercury in vaccines doesn’t cause autism among school-aged children, a study says.
- Ken Lay, who built Enron Corp. into the world’s largest energy trader and was convicted of the fraud that led to its collapse, died today near Aspen, Colorado at the age of 64.
- Marvell Tech’s(MRVL) accounting is being examined by the SEC, and Quest Software(QSFT) will restate six years of results.
- Natural gas is falling another 5% in NY on ample inventories and reduced demand for the power-plant fuel.

Wall Street Journal:
- US labor unions are taking longer to renegotiate contracts as their bargaining power has weakened and employer resistance has increased.
- Citigroup(C), Wachovia Corp.(WB) and other US banks are turning to hybrid capital to raise funds for mergers and acquisitions or stock buybacks.
- Caterpillar(CAT) plans to double the size of its engine refurbishing unit over the next four years to ease its cyclical earnings pattern.

NY Post:
- NYC may allow falshier and more creative advertising on trash cans, taxis, subways and bus shelters under a contract with CBS Outdoor.

NY Times:
- The UN ban on exporting most wild caviar that was put in place this year, effectively taking beluga caviar off restaurant menus, has proved to be a boon to California sturgeon farms.
- A NYC gem lab hopes to persuade dealers to use certificates it issues to track sales of individual diamonds and guarantee buyers aren’t getting gems traded to support wars or terrorism.

Financial Times:
- Western banks may generate little or no profit by 2010 in credit cards in China, citing a study by Lafferty Group.

Factory Orders Rise More Than Estimates

- Factory Orders for May rose .7% versus estimates of a .1% increase and a 2.0% fall in April.

BOTTOM LINE: Factory orders in the US rose more than forecast in May, led by demand for business equipment that may keep the economy from slowing too much, Bloomberg reported. Excluding aircraft and other transportation equipment, orders gained 1.2%. Orders for capital goods excluding aircraft, a gauge of future business spending, rose .5% versus a 2.1% decline in April. The inventory-to-shipments ratio fell to 1.15 months, matching the record low set in December. I expect factory orders to continue to decelerate to average levels over the intermediate-term.

Links of Interest

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