Stocks Finish Mostly Higher on Falling Energy Prices, More Economic Optimism

Indices
S&P 500 1,524.12 -.06%
DJIA 13,539.95 -.02%
NASDAQ 2,588.02 +.36%
Russell 2000 839.92 +.75%
Wilshire 5000 15,347.78 +.07%
Russell 1000 Growth 599.45 +.09%
Russell 1000 Value 879.65 -.08%
Morgan Stanley Consumer 744.64 +.06%
Morgan Stanley Cyclical 1,060.23 -.32%
Morgan Stanley Technology 616.32 +.42%
Transports 5,197.19 -.11%
Utilities 533.70 -.38%
MSCI Emerging Markets 127.05 +.28%

Sentiment/Internals
Total Put/Call 1.14 +22.58%
NYSE Arms 1.06 +17.96%
Volatility(VIX) 13.06 -1.80%
ISE Sentiment 148.0 -1.33%

Futures Spot Prices
Crude Oil 64.97 -1.96%
Reformulated Gasoline 230.77 -3.90%
Natural Gas 7.81 -1.28%
Heating Oil 190.98 -2.11%
Gold 659.20 -.69%
Base Metals 273.52 +1.29%
Copper 330.55 -2.79%

Economy
10-year US Treasury Yield 4.82% +4 basis points
US Dollar 82.41 +.06%
CRB Index 311.42 -1.60%

Leading Sectors
Gaming +4.83%
Airlines +2.59%
Homebuilders +2.04%

Lagging Sectors
Oil Service -1.51%
Steel -1.61%
Gold -1.72%

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Afternoon Recommendations
Needham:
- Upgraded (TECD) to Buy.

Afternoon/Evening Headlines
Bloomberg:
- Harbinger Capital Partners, owner of 13% of Openwave Systems(OPWV), offered $335 million in cash to gain control of the maker of mobile-phone software and replace its management and board.
- Copper futures fell 3% to the lowest in seven weeks in NY on speculation that demand may slow in China.
- Alcan Inc.(AL) rejected a $27.4 billion bid from Alcoa Inc.(AA) as “inadequate,” signaling a higher price may be needed to win acceptance for a takeover that would create the world’s largest aluminum company.
- Crude oil fell more than $1 barrel on signs that a government report tomorrow will show US gas supplies jumped.
- Corn in Chicago fell 3% after a government report showed that planting of the US crop had accelerated after a slow start and that plants were in better shape than last year.
- Valero Energy(VLO), the largest US gasoline refiner, projected a 57% increase this year in profit margins on oil processing at Gulf Coast plants.
- Gold fell $5/oz. on the decline in oil and rise in the US dollar.
- Wall Street’s largest bonus increases will probably go to bankers who specialize in the booming business of leveraged buyouts, where incentive pay may jump 20%, a survey by consultant Johnson Associates found.
- Medtronic(MDT) said fourth quarter profit rose 9.7% on higher sales of implantable defibrillators. The stock rose .80 to $51.61 in after-hours trading.
- Payless ShoeSource(PSS), the largest US shoe retailer by store count, agreed to buy Stride Rite(SRR) for $800 million in cash and will rename the combined company Collective Brands. SRR soared 31% on the news in after-hours trading.
- Analog Devices(ADI) said second-quarter earnings fell 14% on expenses to shut down a plant and a shift in orders to less-profitable products. The shares fell 4.9% in after-hours trading.
- Merrill Lynch’s Ben Watson, chief of its hedge-fund development and management group, resigned after two years at the firm.

AP:
- The manager of a Chinese toothpaste maker being probed in the deaths of at least 51 people in Panama said the product is safe.

Reuters:
- Barrick Gold Corp.(ABX) is in no rush to make new acquisitions, citing CEO Wilkins.

BOTTOM LINE: The Portfolio finished higher today on gains in my Computer longs, Biotech longs and Internet longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, sector performance was mostly positive and volume was above average. Measures of investor anxiety were above average into the close. Today's overall market action was bullish. The index everyone loves to hate, the Russell 2000, made another all-time high today and is up about 7% for the year. Many stocks I monitor posted 2%-4% gains. Today's action was more impressive considering the -1.5% losses in most commodity stocks. A gasoline build near or above tomorrow's 1.2 million barrel build estimate will likely result in further energy complex weakness. I have seen many negative articles written of late about the tech sector and how bad it is and how much it is underperforming. I'm not sure where this is coming from. The MS Tech Index is already 9% higher year-to-date vs. an 8.5% gain for the S&P 500. I expect tech shares' outperformance to accelerate in the second half of the year. The time to buy these shares is now, in my opinion, while perceptions are still negative. Three of my favorites are still Google (GOOG), Apple (AAPL) and Broadcom (BRCM). I remain long all three. As I said yesterday, I sense the Google train is leaving the station again right now. I still expect the stock to exceed $600 before year-end.

Stocks Higher into Final Hour on Falling Energy Prices and More Economic Optimism

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Internet longs, Semi longs and Biotech 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 higher, most sectors are gaining and volume is about average. The NYSE reported after the close yesterday that short interest on the exchange, from mid-April through mid-May, rose from 10,989,500,000 shares to 11,761,000,000 shares, which is another all-time high. Moreover, this 7.03% increase leaves NYSE short interest up a whopping 22.6% since mid February, the largest three-month jump since at least 1991 when Bloomberg began tracking. This is even more remarkable considering the DJIA gained about 6.4% from mid April through mid May and was hitting one record after another. The largest overall short on the NYSE remains the iShares Russell 2000 (IWM) at 237,133,225 shares, up from 218,547,492 the prior month. The many bears remain stunningly complacent and continue to party like it's 2000-03, despite the S&P 500's 107% gain from that periods' lows. I continue to believe the current "U.S. negativity bubble" will eventually burst, thus spurring the "mother of all short-covering rallies."

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

1) LUM +20.9%
2) MZ +16.4%
3) XJT +15.0%
4) PPS +12.1%
5) MNI +8.9%
6) MWA +8.7%
7) AXR +8.0%
8) BOW +7.7%
9) MEG +7.7%
10) EAT +7.4%
11) HZO +7.2%
12) SHS +6.9%
13) STZ +6.9%
14) VLO +6.7%
15) DVR +6.5%
16) GDP +6.5%
17) AOS +6.0%
18) HOS +5.8%
19) ORA +5.5%
20) ABD +5.3%
21) ARP +5.2%
22) AMD +5.1%
23) MNT +5.1%
24) BLG +4.9%
25) NCS +4.8%

I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower energy prices, investment manager performance anxiety, buyout speculation and more economic optimism.

Today's Headlines

Bloomberg:
- Hedge funds are “extremely willing” to heed requests for better systems to prevent worldwide financial shocks, provided regulators are specific in their demands, an executive director at the Alternative Investment Management Association said.
- Copper futures are falling 3% in NY on speculation that demand is slowing in China, the world’s biggest consumer of the metal.
- Crude oil is falling $1.24/bbl. to $65.03 on speculation that US refineries will increase gasoline production from current unusually low levels.
- Gold and silver prices are falling in NY on speculation that the US dollar will continue rising.
- Bonds backed by subprime US mortgages are rallying as lenders tighten their underwriting standards and demand increases from managers needing the securities to fill collateralized debt obligations.
- Shares of US homebuilders, led by Standard Pacific(SPF) jumped on expectations that housing demand may rebound after US Treasury Secretary Henry Paulson said the slump in demand was largely over.
- Fremont General(FMT) will sell its commercial real-estate unit for $1.9 billion and bring in new managers led by billionaire banker Gerald J. Ford.
- OSI Restaurant Partners(OSI), owner of the Outback Steakhouse chain, agreed to a sweetened $3.1 billion takeover offer from a group led by Bain Capital Partners LLC and Catterton Partners.
- Robert Zoellick, a former US trade representative, is the favorite to succeed Paul Wolfowitz as president of the World Bank, says Irish bookmaker Paddy Power.
- US Treasury Secretary Henry Paulson, kicking off talks with China’s economic leaders, said the meeting must yield results to damp “anti-China” sentiment.
- Treasuries fell, pushing the benchmark 10-year yield to a three-month high, as traders speculated the US economy is gathering momentum.
- Intel Corp.(INTC) and STMicroelectronics NV plan to combine their unprofitable flash-memory businesses into a new company, creating the world’s largest maker of chips that store software in mobile phones.
- HSBC Holdings Plc, Europe’s biggest bank by market value, has “contained” a deterioration of its US mortgage loan portfolio, said CEO Geoghegan.

Wall Street Journal:
- AstraZeneca Plc, the UK’s second-largest drugmaker, Pfizer Inc., Novartis AG, Sanofi-Aventis SA and other drug companies are making a major push to develop biological drugs.
- CNN will probably announce an agreement by which it will be able to offer local news on its Web site, in a bid to gain a share of the rapidly expanding market for local online advertising.
- US food banks that distribute soup, cereals and other products to needy families are running short of donations as manufacturers and retailers cut down on damaged and mislabeled goods.
- Intel Corp.(INTC) is seeking to add new features to make personal computers better tools for calling and holding business conferences, citing the company’s director of business-client architecture, Steve Grobman.
- China has been urged to take steps to improve product safety, citing Nancy Nord, a US safety organization executive.

NY Times:
- Chinese government investigators are examining whether two Chinese companies exported contaminated toothpaste.
- Corporate directors last year fired or forced out failing executives at a higher rate than a decade ago, a study by consulting firm Booz Allen Hamilton found.
- Google Inc.(GOOG) urged the FCC to let companies resell radio spectrum in a real-time auction, the same way it sells advertisements.

AP:
- NYC mayor Republican Michael Bloomberg ordered all city cabs to be hybrid vehicles within five years.

Financial Times:
- China’s agreement to buy a $3 billion stake in Blackstone Group LP buyout fund is a “political masterstroke” that will simultaneously please both Wall Street and Washington, DC.

El Nacional:
- Nine of every ten Venezuelans are frightened of crime, suggesting that rising homicide and robbery rates are affecting people in all social classes, citing a survey by a non-government research group.

Toronto Globe and Mail:
- Royal Dutch Shell Plc may be the main customer for a nuclear power plant proposed for northeastern Alberta as the oil company tries to tap multibillion-barrel limestone-trapped reserves.

Dagens Industri:
- Oil prospectors and mining companies are flocking to the stock market to sell shares on the Nordic exchange.

Shanghai Securities News:
- China needs to raise deposit rates by a “relatively big margin” to help correct an “excessively loose” money supply that helped push up stock prices, a government researcher wrote.

Tehran Times:
- China and Iran completed talks to develop the North Pars gas field that may produce as much as 20 million metric tons of liquefied natural gas a year.

Economic Releases

- None of note

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Medtronic Inc.(MDT) will report today that its stent for preventing heart attacks didn’t cause blood clots in test, increasing the cardiac-device maker’s chances of expanding its share of the $5.4 billion-a-year worldwide market.
- Chevron USA, a wholly owned subsidiary of Chevron Corp.(CVX), has agreed to sell all 96,891,014 of its shares of Class A common stock of Dynegy Inc.(DYN) in an underwritten public offering.
- Shares of NEC Corp., Japan’s largest personal-computer maker, surged 6.6% after the company said profit will triple this year.

Nightly Business Report:
- Federal Reserve Bank of Chicago President Michael Moskow said US inflation is likely to slow from a pace he considers too fast, while economic growth quickens. “I see the economy improving as we move through this year,” Moskow said. “Our expectation is that inflation rates will continue to come down as well during this period and I would expect the unemployment rate will not go up a great deal.”

Financial Times:
- An association representing hedge funds will publish today modernized principles on how hedge funds should operate but reject calls from Germany for a full voluntary code of conduct for the industry.

China Daily:
- China will make food and consumer-product safety its top priority, citing a vice minister in charge of quality inspection.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (ONNN), target $13.
- Reiterated Buy on (FNSR), target $5.
- Rated (SNPS) Buy, target $34.
- (TGT) sales are off to a solid start, based on results for the first two weeks of May. The arrival of warmer weather at the start of May likely drove sales of seasonal items, such as apparel. However, the expected arrival of cooler weather for Memorial Day weekend, combined with a tough weather comparison from last year, could challenge sales in the back half of the month.
- Added (CMCSK) to Recommended List, target $33.

CSFB:
- We believe the April crude steel production data supports our view the recent round of price increases in the US have now come to an end, and we continue to expect US pricing to plateau in the coming months. Without additional price increases, we believe the shares of the US steel producers are near fair-value, supported by consolidation speculation, but constrained by valuations.

Night Trading
Asian Indices are unch. to +.75% on average.
S&P 500 indicated -.04%.
NASDAQ 100 indicated -.01%.

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Earnings of Note
Company/EPS Estimate
- (AEO)/.35
- (ADI)/.37
- (AZO)/2.16
- (BJ)/.20
- (PLCE)/.42
- (CSC)/1.48
- (DY)/.27
- (FRE)/1.09
- (MDT)/.62
- (MW)/.63
- (PBY)/.06
- (SNDA)/.31
- (SPLS)/.29
- (TECD)/.39
- (UNFI)/.35
- (ZLC)/-.05

Upcoming Splits
- (ATLS) 3-for-2
- (GIL) 2-for-1

Economic Releases
- None of note

Other Potential Market Movers
- The Fed’s Bernanke speaking, Fed’s Lacker speaking, weekly retail sales reports, Richmond Fed Manufacturing Index, Citigroup Healthcare Conference, Morgan Keegan Homeland Security Conference, JPMorgan Tech Conference and UBS Oil&Gas Conference could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by technology and financial 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.