Today's Headlines

Bloomberg:
- Countrywide Financial Corp.(CFC) Chief Operating Officer David Sambol said the US subprime market is stabilizing.
- John Reade, an analyst at UBS AG, said he expects nickel prices to fall “quite sharply” and that he would “not be a buyer of any metals at current prices.”
- The House of Representatives approved legislation today that would make gasoline price gouging a federal crime, subjecting companies to as much as $150 million in fines.
- Marathon Oil(MRO) expects its crude oil and natural-gas output to soar as much as 42% within 3 years from its average last year.
- Ethanol consumption in the European Union may exceed that of biodiesel by 2020.
- The number of US vehicles that can run on ethanol and gasoline will rise 600% within 8 years, boosting demand for the alternative fuel and reducing the prospects of a glut, according to the Renewable Fuels Assoc.
- Microsoft Corp.(MSFT) played down a possible deal with Yahoo!(YHOO) and said its has everything needed to build its advertising business.
- Internet ad sales soared 35% to $16.9 billion in the US last year as marketers accelerated their pursuit of Web-site audiences.
- US Treasury Secretary Henry Paulson, ending a meeting with China’s top economic leaders, said the negotiations produced “tangible results” that will help build confidence in bilateral trade ties.
- Boeing Co.(BA) affirmed its profit forecasts for this year and next with an “upward bias” for 2008, CFO Bell said.
- Former Fed Chairman Greenspan said Chinese stocks may suffer a “dramatic contraction.”

Wall Street Journal:
- A unilateral withdrawal from Iraq would help al-Qaeda because Iraq is the “primary battleground” against “radical Islamists” who “declared war” on the US in the 1990s and carry out attacks today, said Bob Kerrey, a former Democratic senator from Nebraska.
- American Express(AXP) will today say that it is introducing a program to let customers put their monthly mortgage payments on charge cards, and let them earn rewards for doing so.
- Hedge funds have shown more of a bias towards energy, technology and small-company stocks than mutual funds recently, citing a report by Goldman Sachs(GS).
- The FBI’s success foiling a plot to attack the US Army base in New Jersey underscores how the agency has reverted to more methodical investigations before taking action.
- Coach’s(COH) stock does well when the luxury handbag maker’s chief executive scraps plans to sell his shares, as he’s done three times when he thought they were undervalued.

NY Times:
- US Democratic leaders in the House of Representatives are finding it difficult to get members of their party to agree on an overhaul of congressional ethics rules. Some Democrats are opposing a measure that would require lobbyists to make public the campaign contributions they collect on behalf of lawmakers.
- MGM Mirage(MGM) said it has formed an independent committee to study billionaire investor Kirk Kerkorian’s offer to purchase two Las Vegas properties and maybe restructure the company.

AP:
- The US House of Representatives passed a bill to crack down on spyware, software that uses the Internet to collect data on consumers and pass it on to third parties without consent.

Financial Times:
- The venture-capital market might be tempting some investors to take a fresh look to avoid the crowds chasing leveraged buyouts.

Toronto Globe and Mail:
- Alcan Inc.(AL) has started “early-stage” talks with BHP Billiton Ltd.(BHP) to help fend off a takeover bid by rival Alcoa(AA).

Al-Hayat:- Iraq’s debt was reduced by $140 billion as part of an agreement with the International Monetary Fund and countries including Saudi Arabia and China, citing Finance Minister Bayan al-Zubaidi.

Economic Releases

- None of note

Links of Interest

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Morgan Stanley(MS), the biggest real estate investor among Wall Street banks, agreed to buy Crescent Real Estate Equities(CEI), an investment trust founded by Texas billionaire Richard Rainwater, for $2.78 billion.
- Wyeth(WYE) won US approval for its contraceptive Lybrel, the first birth control pill designed to completely eliminate monthly periods.
- Nintendo Co. expects to sell as many as 35 million Wii video-game consoles in the US, close to the record 38.2 million PlayStation 2 players sold by Sony Corp.
- The yen weakened to a three-month low against the US dollar on speculation Japanese investors will snap up new investment trusts that buy higher-yielding overseas assets.
- Fletcher Building Ltd., New Zealand’s largest construction company, agreed to buy US-based Formica Corp. for $700 million, creating the world’s biggest maker of laminated board.
- A farm-bill plan that calls for $400 million a year in loan guarantees for ethanol plants that use crops other than corn got the backing of the House subcommittee that oversees Agriculture Department energy programs.
- The Fed’s Lacker said after a speech to the Money Marketeers of NYU tonight that the Fed’s benchmark rate “has us on track to achieve what we want.”

Financial Times:
- Google’s(GOOG) desire to make best use of the personal information it retains about users is such that the company sees a time when it may be able to advise people on careers or leisure activities, citing Google CEO Schmidt.
- The Bancroft family, which controls Dow Jones(DJ), plans to hold a private meeting to discuss its options following a $5 billion bid for the company from Rupert Murdoch’s News Corp.(NWS/A).
- US regulators are poised on Wednesday to approve the first changes to the implementations of the Sarbanes-Oxley law since its passage five years ago, hoping to make compliance with its controversial provisions easier for top company executives.

Xinhua News Agency:
- US labor unions agreed to cooperate with the All-China Federation of Trade Unions, ending a decades-long boycott.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (KYPH).
- Reiterated Buy on (PLCE), target $78.

Morgan Stanley:
- Reiterated Overweight on (ADI), target $48. With ADI significantly outperforming YTD we would buy the stock aggressively if some investor’s aggressive near-term expectations were not met and the stock comes under near-term pressure.

Night Trading
Asian Indices are +.25% to +.50% on average.
S&P 500 indicated +.08%.
NASDAQ 100 indicated -.03%.

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Earnings of Note
Company/EPS Estimate
- (ANF)/.65
- (CA)/.20
- (DKS)/.37
- (DDS)/.72
- (EV)/.16
- (FL)/.13
- (GME)/.16
- (GYMB)/.63
- (LTD)/.13
- (NTAP)/.29
- (ROST)/.47
- (SNPS)/.28
- (TLB)/.09
- (TGT)/.71
- (ZUMZ)/.06

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

Economic Releases
10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil build of 600,000 barrels versus a 1,061,000 barrel increase the prior week. Gasoline supplies are expected to rise by 1,200,000 barrels versus a 1,764,000 barrel build the prior week. Distillate inventories are expected to rise by 1,300,000 barrels versus a 992,000 barrel increase the prior week. Finally, Refinery Utilization is estimated to rise by .45% versus a .47% the prior week.

Other Potential Market Movers
- The Fed board meeting on Truth-in-Lending regulations, Fed’s Kroszner speaking, weekly EIA energy inventory report, weekly MBA Mortgage Applications report, Citigroup Healthcare Conference, Thomas Weisel RFID Conference, Robinson Humphrey Financial Services Conference, Goldman Sachs Internet 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.

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.