BETWEEN THE HEDGES

Sunday, July 23, 2006

Monday Watch

Posted by Gary .....at 11:38 PM

Weekend Headlines
Bloomberg:
- Israeli Prime Minister Ehud Olmert said he might accept a multinational force stationed in Lebanon, where a UN force has been stationed since 1978, as a means of ending the conflict, so long as it is manned by European Union troops and monitors Lebanon’s border with Syria.
- Amvescap Plc(AVZ), manager of the Aim and Invesco funds, agreed to buy financier Wilbur Ross’s buyout company for as much as $375 million.
- China’s economic growth, which reached the fastest pace in a decade in the second quarter, may slow as the government takes steps to clamp down on lending.
- Currency traders are losing interest in the Canadian dollar.
- India’s central bank may increase its overnight borrowing rate for the third time this year as higher fuel prices and an expanding economy threaten to stoke inflation.
- Bill Gross, manager of the world’s biggest bond fund at PIMCO, has history on his side when he predicts the “bull market has begun” for US Treasuries.
- Gold in Asian trading declined amid signs cease-fire talks may be near in the 13-day-old conflict in Lebanon between Israeli and Iranian-backed Hezbollah forces, reducing the metal’s appeal as a haven.
- Copper prices in Shanghai and New York fell amid concerns that demand will slow in China and the US, the world’s biggest users of the metal.
- China’s stock indices slid after the central bank restricted the amount of funds available for lending to rein in economic growth.

Wall Street Journal:
- HCA Inc.(HCA) is in advanced talks to be sold to an investor group for about $21 billion, a deal that may be announced as early as tomorrow.

LA Times:
- Denver billionaire Philip Anschutz is pouring billions of dollars into building projects in Los Angeles, forever changing its face.

NY Times:
- Iranians are concerned about the potential risks of the country’s support for the Shiite terrorist group Hezbollah, and resent seeing the money going abroad.

Business Week:
- Experts weigh in on ways to revive growth at Dell Inc.(DELL). Some ideas: rethink retail and bring back Mike.

Washington Post:
- A Bush administration program to cut utility emissions through a “cap-and-trade” system will clean the air as well as a Clinton-era plan to make aging power plants install pollution controls, citing a study by an independent panel.
- Representatives from Iraq’s religious, ethnic and political factions voiced optimism yesterday in the first meeting of the nation’s reconciliation panel.

San Jose Mercury News:
- Businesses in the Silicon Valley area of northern California added 6,100 workers to their payrolls in June, a quarter of them from the hospitality industry as technology companies are spending more money.

Denver Post:
- The number of workers employed in Colorado reached 2.29 million, surpassing the previous record of 2.27 million in December 2000.

AP:
- A US subsidiary of Kawasaki Heavy Industries won a $522 million contract to build 210 railcars for the state of Connecticut.

Financial Times:
- Las Vegas Sands(LVS) plans to invest more than $8 billion in its Macau casino and convention development in the next four-to-six years, citing COO Weidner.
- Large US companies, analysts and fund managers want an end to quarterly earnings guidance, saying it damages shareholders and corporate governance, citing a report by the Business Roundtable Institute of Corporate Ethics.

Reuters:
- Earnings expectations for the second quarter have climbed recently as Reuters Estimates now projects S&P 500 earnings grew 10% in the second quarter, up from an expectation of 9.2% last week.

Frankfurter Allgemeine Zeitung:
- SAP AG(SAP) is on course to boost orders and sales even after the company said second-quarter software license sales missed analyst estimates, CEO Kagermann said.

Nihon Keizai:
- Honda Motor will spend $69 million building a plant to make electric motors and other parts for hybrid cars at is Suzuka factory in Japan by 2008.

Weekend Recommendations
Citigroup:
- Upgraded (DELL) to Buy, target $24.

Barron's:
- Had positive comments on (ASH), (EGN), (DOW), (CVX), (LEH) and (ITC).
- Had negative comments on (STN).

Night Trading
Asian indices are -1.50% to -.50% on average.
S&P 500 indicated -.07%
NASDAQ 100 indicated unch.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Before the Bell CNBC Video(bottom right)
Global Commentary
Asian Indices
European Indices
Top 20 Business Stories
In Play
Bond Ticker
Daily Stock Events
Macro Calls
Rasmussen Consumer/Investor Daily Indices
CNBC Guest Schedule

Earnings of Note
Company/Estimate
- (ACL)/1.16
- (ALTR)/.21
- (AXP)/.74
- (AMLN)/-.45
- (AV)/.12
- (BLS)/.57
- (BRO)/.29
- (CVD)/.53
- (EXP)/1.16
- (HAS)/.07
- (KFT)/.48
- (MRK)/.65
- (PRE)/2.01
- (PBI)/.68
- (PCL)/.36
- (DGX)/.76
- (SNDK)/.44
- (SGP)/.17
- (SLAB)/.33
- (TXN)/.47

Upcoming Splits
- (MRVL) 2-for-1
- (TNC) 2-for-1

Economic Releases
- None of note

BOTTOM LINE: Asian Indices are lower, weighed down by commodity and exporting shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the week.

Weekly Outlook

Posted by Gary .....at 11:55 AM

Click here for The Week Ahead by Reuters

There are several economic reports of note and a number of significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. - None of note

Tues. - Consumer Confidence, Existing Home Sales, Richmond Fed Index

Wed. - Fed’s Beige Book

Thur. - Durable Goods Orders, Initial Jobless Claims, New Home Sales

Fri. - Advance 2Q GDP, Advance 2Q GDP Price Index, Advance 2Q Personal Consumption, Advance 2Q PCE Core, 2Q Employment Cost Index, Univ. of Mich. Consumer Confidence

Some of the more noteworthy companies that release quarterly earnings this week are:

Mon. - Alcon(ACL), Altera Corp.(ALTR), American Express(AXP), Avaya(AV), BellSouth(BLS), Hasbro(HAS), Kraft Foods(KFT), Merck(MRK), Pitney Bowes(PBI), Quest Diagnostics(DGX), SanDisk(SNDK), Schering-Plough(SGP), Texas Instuments(TXN), 3M Co.(MMM)

Tues. - Aflac Inc.(AFL), Altria Group(MO), Amazon.com(AMZN), AmerisourceBergen(ABC), AT&T(T), BJ Services(BJS), Boyd Gaming(BYD), Burlington Northern(BNI), Chicago Merc(CME), Chubb Corp.(CB), Colgate-Palmolive(CL), Corning Inc.(GLW), Countrywide Financial(CFC), Diebold(DBD), Energen(EGN), ENSCO(ESV), Flextronics(FLEX), Legg Mason(LM), Lexmark(LXK), Lincare(LNCR), Liner Tech(LLTC), Lockheed Martin(LMT), McDonald’s(MCD), Nabors Industries(NBR), Murphy Oil(MUR), Omnicom Group(OMC), Panera Bread(PNRA), QLogic(QLGC), Smith Intl.(SII), Stanley Works(SWK), United Parcel(UPS), Weyerhaeuser(WY), Whirlpool(WHR), Xilinx(XLNX)

Wed. - Allegheny Tech(ATI), Anheuser-Busch(BUD), Baidu.com(BIDU), Biogen Idec(BIIB), Black & Decker(BDK), Boeing(BA), Cadence Design(CDN), ConocoPhillips(COP), Diamond Offshore(DO), Express Scripts(ESRX), General Motors(GM), Intuitive Surgical(ISRG), Kimberly-Clark(KMB), Lucent Tech(LU), Norfolk Southern(NSC), PF Chang’s(PFCB), Phelps Dodge(PD), Pulte Homes(PHM), Ruth’s Chris(RUTH), Symantec(SYMC), Terex Corp.(TEX), Under Armour(UARM), Wellpoint(WLP), Zimmer Holdings(ZMH)

Thur. - Aetna(AET), American Power(APCC), Andarko Petroleum(APC), Apache Corp.(APA), Beazer Homes(BZH), Boston Scientific(BSX), Bowater(BOW), Bristol-Myers(BMY), CB Richard Ellis(CBG), Celgene(CELG), Chesapeake Energy(CHK), Cleveland-Cliffs(CLF), Comcast(CMCSA), Cummins(CMI), Deckers Outdoor(DECK), Dow Chemical(DOW), Ethan Allen(ETH), Exxon Mobil(XOM), F5 Networks(FFIV), Fortune Brands(FO), Garmin Ltd.(GRMN), Harrah’s(HET), Kellogg(K), Kerr-McGee(KMG), L-3 Communications(LLL), Lear Corp.(LEA), Massey Energy(MEE), MBIA Inc.(MBI), McAfee(MFE), McKesson Corp.(MCK), Monster Worldwide(MNST), Newmont Mining(NEM), Northrop Grumman(NOC), OfficeMax(OMX), OSI Pharma(OSIP), Rackable Systems(RACK), Raytheon(RTN), Royal Caribbean(RCL), Sohu.com(SOHU), Starwood Hotels(HOT), THQ Inc.(THQI), Tidewater(TDW), XM Satellite(XMSR)

Fri. - American Tower(AMT), Baker Hughes(BHI), Centex(CTX), Chevron(CVX), Dolby Labs(DLB), Ingersoll-Rand(IR), Ingram Micro(IM), Multimedia Games(MGAM), Office Depot, Western Digital(WDC), Whole Foods(WFMI)

Other events that have market-moving potential this week include:

Mon. - None of note

Tue. - None of note

Wed. - None of note

Thur. - None of note

Fri. - None of note

BOTTOM LINE: I expect US stocks to finish the week higher on mostly positive earnings reports, increased speculation for a Fed “pause”, a calming in Middle Eastern tensions, short-covering and bargain hunting. My trading indicators are giving mostly bearish signals and the Portfolio is 75% net long heading into the week.

Saturday, July 22, 2006

Chart of Interest

Posted by Gary .....at 9:12 PM

Market Week in Review

Posted by Gary .....at 8:59 PM

S&P 500 1,240.29 +.33%*

Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was neutral. The advance/decline line fell slightly, sector performance was mixed and volume was above average on the week. Measures of investor anxiety were higher. The AAII % Bulls plunged to 23.85% this week from 36.50% the prior week. This reading is now at depressed levels. The AAII % Bears soared to 57.80% from 39.42% the prior week. This reading is now at elevated levels. Moreover, the 10-week moving average of the % Bears is 43.01%, the highest since the bear market bottom in October 2002. The % Bears has only been this high during two other periods in history since the survey began in 1987. During the 1990 recession and Gulf War the % Bears reached 67.0% and during the 2002-03 recession and tail end of one of the greatest stock market collapses in U.S. history the % Bears reached 57.89%. Many other measures of investor sentiment are also at levels associated with meaningful market bottoms.

The average 30-year mortgage rate fell to 6.80%, which is 159 basis points above all-time lows set in June 2003. I still believe housing is in the process of slowing to more healthy sustainable levels. Mortgage rates should begin an intermediate-term move lower next week.

The benchmark 10-year T-note yield fell 4 basis points on the week as economic data were mixed, commodity prices declined and the Fed made dovish comments. I still believe inflation concerns have peaked for the year as investors continue to anticipate slower economic growth, unit labor costs remain subdued and the mania for commodities continues to reverse course. The fact that commodities fell sharply on the week despite a report of soaring growth in China, rising Middle East tensions, dovish Fed commentary and a weaker US dollar is telling.

The EIA reported this week that gasoline supplies rose more than expectations as refinery utilization increased. Unleaded Gasoline futures rose slightly, but are still 21.0% below September 2005 highs even as refinery utilization remains below normal as a result of the hurricanes last year, some Gulf of Mexico oil production remains shut-in and fears over future production disruptions persist. According to TradeSports.com, the percent chance of a US and/or Israeli strike on Iran this year has fallen to 20.8% from 36% late last year. I continue to believe the elevated level of gas prices related to crude oil production disruption speculation will further dampen fuel demand over the coming months, sending gas prices back to reasonable levels.

US oil inventories are at 7-year highs. Since December 2003, global oil demand is down 1.19%, while global supplies have increased 5.19%. Moreover, worldwide inventories are poised to begin increasing at an accelerated rate over the next year. I continue to believe oil is priced at extremely elevated levels on fear and record speculation by investment funds, not fundamentals. Escalating violence in the Middle East and the onslaught of hurricane season will likely lead to a major top in oil over the next few months as demand destruction further accelerates. As the fear premium in oil dissipates back to more reasonable levels, global growth slows and supplies continue to rise, crude oil should head meaningfully lower over the intermediate-term.

Natural gas inventories rose slightly less than expectations this week. Supplies are now 25.5% above the 5-year average, near an all-time record high for this time of year, even as some daily Gulf of Mexico production remains shut-in. Natural gas prices have plunged 61.08% since December 2005 highs. At this time last year, 5 tropical storms and 3 hurricanes had already threatened Gulf of Mexico production. There is still little evidence of a pick-up in industrial demand for the commodity despite the collapse in price. Natural gas has likely made an intermediate-term bottom before moving to new cycle lows in November or December.

Gold fell on the week despite a lower US dollar, rising Middle East tensions and dovish Fed commentary. The US Dollar fell slightly on dovish Fed commentary.

Commodity and cyclical stocks underperformed for the week on continuing worries over slower global growth. Despite a 65.9% total return for the S&P 500 since the October 2002 bottom, its forward p/e has contracted relentlessly and now stands at a very reasonable 14.4. The average US stock, as measured by the Value Line Geometric Index(VGY), is down 3.8% this year. The Russell 2000 Index is still up .44% year-to-date, notwithstanding the recent correction. In my opinion, the current pullback is still providing longer-term investors very attractive opportunities in many stocks that have been punished indiscriminately. In my entire investment career, I have never seen the best “growth” companies in the world priced as cheaply as they are now relative to the broad market. By contrast, “value” stocks are quite expensive in many cases. Moreover, the most overvalued economically sensitive and emerging market stocks should continue to underperform over the intermediate-term as the manias for those shares subside. I continue to believe a chain reaction of events has begun that will eventually result in a substantial increase in demand for US stocks.

In my opinion, the market is still factoring in way too much bad news at current levels. Problematic inflation, substantially higher long-term rates, a significant US dollar decline, a “hard-landing” in housing, a plunge in consumer spending and ever higher oil prices appear to be mostly factored into stock prices at this point. I view any one of these as unlikely and the occurrence of all as highly unlikely.

Over the coming months, an end to the Fed rate hikes, lower commodity prices, decelerating inflation readings, lower long-term rates, increased consumer confidence, rising demand for US stocks and the realization that economic growth is only slowing to around average levels should provide the catalysts for another substantial push higher in the major averages through year-end as p/e multiples begin to expand. I still believe the S&P 500 will return a total of around 15% for the year. The ECRI Weekly Leading Index was unchanged this week and is forecasting healthy, but decelerating, US economic activity.

*5-day % Change

Friday, July 21, 2006

Weekly Scoreboard*

Posted by Gary .....at 6:06 PM

Indices
S&P 500 1,240.29 +.33%
DJIA 10,868.38 +1.20%
NASDAQ 2,020.39 -.83%
Russell 2000 671.94 -1.36%
Wilshire 5000 12,390.32 -.11%
S&P Equity Long/Short Index 1,137.66 unch.
S&P Barra Growth 572.18 +.26%
S&P Barra Value 666.65 +.40%
Morgan Stanley Consumer 608.83 +1.26%
Morgan Stanley Cyclical 760.41 -1.94%
Morgan Stanley Technology 451.17 -1.70%
Transports 4,456.29 -2.93%
Utilities 428.02 +2.37%
S&P Emerging Markets 777.12 +1.10%
S&P 500 Cum A/D Line 5,818.0 -1.0%
Bloomberg Oil % Bulls 50.0 -15.0%
CFTC Oil Large Speculative Longs 191,819 -1.0%
Put/Call 1.25 +.81%
NYSE Arms 1.81 +54.7%
Volatility(VIX) 17.40 -3.60%
ISE Sentiment 125.00 -1.57%
AAII % Bulls 23.85 -34.66%
AAII % Bears 57.80 +46.63%
US Dollar 85.93 -.20%
CRB 339.61 -4.93%
ECRI Weekly Leading Index 136.90 unch.

Futures Spot Prices
Crude Oil 74.57 -2.97%
Unleaded Gasoline 229.40 +.61%
Natural Gas 6.14 +6.95%
Heating Oil 195.85 -3.12%
Gold 621.0 -4.65%
Base Metals 212.43 -10.25%
Copper 332.50 -7.43%
10-year US Treasury Yield 5.03% -.79%
Average 30-year Mortgage Rate 6.80% +.89%

Leading Sectors
Foods +5.86%
Drugs +3.28%
Banks +2.84%
Utilities +2.36%
Hospitals +2.39%

Lagging Sectors
Semis -5.90%
Energy -6.02%
Coal -7.63%
Gold & Silver -8.0%
Oil Service -10.53%

One-Week High-Volume Gainers
One-Week High-Volume Losers

*5-Day % Change