Stocks Surging into Final Hour on Buyout Activity/Speculation and Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Retail longs, Medical longs and Computer longs. I covered some of my (EEM) short, all of my (IWM)/(QQQQ) hedges, added (AMSC) long and added to a few shorts this morning, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are higher and volume is light. Dow Jones is reporting that the April Comscore data shows that Google (GOOG) has 49.7% share of the search engine market vs. 48.3% in March. As well, Yahoo!'s (YHOO) share fell to 26.8% vs. 27.5% in March. Microsoft's (MSFT) share fell to 10.3% from 10.9% in March. In my opinion, it is beyond comprehension why investors are willing to pay 50x forward earnings estimates for YHOO and only 32x conservative forward estimates for GOOG. I continue to believe that investors dramatically underestimate how long GOOG can grow at relatively high rates. I still expect the stock to rise substantially from current levels as it exceeds conservative long-term estimates and the P/E multiple expands significantly. Google remains my largest long position, just ahead of Apple Inc.(AAPL). Yesterday after the close, the Nasdaq reported that short interest on the exchange surged another 5.1% to 8,400,000,000 shares, from mid April through mid May, hitting another all-time high. Moreover, like the NYSE, the last three months have see Nasdaq short interest soar 22%, the largest three-month percentage increase since at least 1991, according to Bloomberg data. The bullish implications of such a large surge in short interest are severely underestimated, in my opinion.

Here are the 20 Nasdaq stocks with the largest percentage increase in their short interest relative to their float from mid-April through mid-May:

1. USNA +32.6%
2. INWK +21.1%
3. CPLP +21.1%
4. CCRT +16.6%
5. IDMI +13.2%
6. OUTD +10.8%
7. MOVI +10.2%
8. IDSA +9.9%
9. SCRX +8.9%
10. MNTA +8.6%
11. MDTL +8.5%
12. NRMX +7.7%
13. DNDN +7.7%
14. UTHR +7.6%
15. MDII +7.5%
16. AVTR +7.4%
17. HERO +7.4%
18. PPCO +7.3%
19. ILMN +7.2%
20. TZIX +7.0%

The S&P 500 also reported data. Here are the five industries in the S&P 500 with the largest percentage increase in their short interest from mid April through mid May:

1. Telcom Services +25.6%
2. Consumer Services +23.2%
3. Food & Staples Retailing +23.0%
4. Insurance +21.8%
5. Real Estate +20.1%

Here are the 20 S&P 500 stocks with the largest percentage increase in their short interest relative to their float from mid April through mid May:

1. STZ + 6.9%
2. VLO +6.7%
3. AMD +5.1%
4. BOL +4.1%
5. WFMI +3.2%
6. FDO +3.1%
7. CVS +3.0%
8. JDSU +2.6%
9. BIG +2.6%
10. ABK +2.6%
11. VMC +2.5%
12. RF +2.5%
13. HCR +2.4%
14. JNS +2.3%
15. CMCSA +2.3%
16. MMC +2.3%
17. RDC +2.2%
18. NVLS +2.2%
19. BTU +2.1%
20. AMZN +2.0%

I expect US stocks to trade modestly higher into the close from current levels on buyout speculation, short-covering and more economic optimism ahead of the three-day weekend.

Today's Headlines

Bloomberg:
- Coca-Cola Co.(KO) agreed to buy the maker of Glaceau Vitaminwater for $4.1 billion to narrow the gap with PepsiCo Inc. in sales of noncarbonated drinks.
- A plan to screen every American for HIV is set to receive $45 million in funding, raising hopes of improved AIDS prevention and boosting the outlook of testing companies.
- Venezuelan President Hugo Chavez’s pledge to withdraw from the International Monetary Fund may violate terms of the country’s foreign bonds, allowing investors to demand their money back.
- Shares of Archstone-Smith Trust(ASN), the second-largest US apartment REIT, surged as much as 11% after investment bank UBS AG(UBS) said the company may be a takeover candidate.
- GM and Delphi Corp. management and investors are nearing an agreement with the United Auto Workers that would defuse a strike threat at the former GM auto-parts unit.
- The US dollar headed for a fourth straight weekly gain versus the euro as signs of a recovery in the US housing market prompted traders to scale back expectations for a rate cut.
- China’s oil imports from Sudan soared over 600% in April amid increased international pressure to cut economic support for the African nation, accused by the US of supporting genocide.

Wall Street Journal:
- A proposed US Senate bill would require utilities to generate 15% of their power from wind, the sun, and other cleaner energy sources by 2020. The amount compares with about 2% currently. The measure has bipartisan support and is backed by environmental groups.
- Chinese imports of copper slowed in April from the previous month’s record pace amid concern that the world’ biggest consumer of the metal may be oversupplied.

Washington Post:
- Two new books about Senator Hillary Rodham Clinton depict a tortured relationship with her husband and challenge the image she has presented on the presidential campaign trail. The books were both written by longtime Washington journalists, and include a number of assertions and anecdotes that could challenge the NY Democrat’s presidential campaign with unwanted questions. Carl Bernstein wrote, “A Woman in Charge: The Life of Hillary Rodham Clinton,” which says that Clinton, as First Lady, was terrified she would be prosecuted and personally took over her own legal and political defense. “Her Way: The Hopes and Ambitions of Hillary Rodham Clinton,” written by Jeff Gerth and Don Van Natta, reports that during the 1992 presidential campaign, she hired a private investigator to undermine Gennifer Flowers, who said she had an affair with Bill Clinton.

AP:
- The US Institute of Medicine called yesterday for tobacco to be regulated by the FDA, with nicotine levels to be reduced.
- Drivers in New Jersey have the lowest gasoline prices in the US, citing the American Automobile Association.

National Post:
- A group of Canadian senators consulted with US billionaire investor Warren Buffett to get his views on hedge-fund regulation. Canada’s senate banking committee has been studying whether hedge funds are a threat to the economy and if there is a need for increased regulation.

Existing Home Sales Fall

- Existing Home Sales for April fell to 5.99M versus estimates of 6.12M and an upwardly revised 6.15M in March.

BOTTOM LINE: Sales of previously owned homes in the US unexpectedly fell in April, Bloomberg reported. The number of existing homes on the market at the current sales pace climbed to 8.4 months’ worth. Purchases fell 8.8% in the Northeast and fell .7% in the Midwest. They fell 1.2% in the South and fell 1.7% in the West. The median price of an existing home fell .8% from a year earlier to $220,900. Economists view new home sales as a more timely barometer because they are recorded when a contract is signed. New home sales, reported yesterday, rose the most in 14 years and inventories fell the most in 26 years. I expect existing home sales to bounce back nicely next month. I continue to believe home sales are stabilizing at relatively high levels by historic standards.

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Friday Watch

Late-Night Headlines
Bloomberg:
- Dow Jones’(DJ) owners and directors were sued by a shareholder seeking to compel acceptance of a $5 billion buyout offer by News Corp.(NWS/A) Chairman Rupert Murdoch.
- US Senator Hillary Rodham Clinton, laying out her first presidential health-policy agenda since the failed attempt during her husband’s administration, said she would bar insurers from “cherry picking” profitable enrollees.
- Rational decision makers would normally quake at warnings about the casino mentality in Shanghai. Greenspan, after all, is a very cautious fellow who doesn’t utter a word before considering what damage it might do. So when the former Fed chairman said May 23 that stocks in China face a “dramatic contraction,” he’s probably far more concerned than he lets on.
- President Bush said war funding legislation moving through Congress sets out a “clear road map” for progress by the Iraqi government and that the next few months will be a crucial period in the conflict.
- Nasdaq Stock Market(NDAQ), trailing NYSE Euronext in the race to expand into Europe, may say as early as today that it’s buying Sweden’s OMX AB for more than $3 billion.
- A “large” appreciation of the yuan would hurt China’s economy, Vice Premier Wu Yi said, signaling the nation won’t cave in to US demands for faster gains to ease the US trade deficit.
- Japan’s core consumer prices fell .1% in April versus a .3% decline in March that was the steepest decline in two years, the government statistics bureau said in Tokyo.
- Congress approved $120 billion in emergency spending for military operations and domestic projects after dropping Iraq troop withdrawal timelines.
- Pakistan’s economic progress is being threatened by terrorism and extremism that may force the country to reverts to backwardness, said President Pervez Musharraf.
- World sugar output will rise by 1.2% to 163.3 million metric tons during the 2007-2008 crop year, pushing the stocks-to-use ratio to a 25-year high, the US Foreign Agricultural Service said.

NY Times:
- The number of eighth graders in NY who passed an annual English test increase for the first time since 1999.

CNBC:
- Apple’s(AAPL) iPhone will be available June 20, citing an unidentified AT&T phone store. Apple spokesman Steve Dowling declined to comment on the report. The device will be available in late June, Dowling said, reiterating earlier comments from Apple.

Shanghai Securities News:
- Stock brokers in Beijing shut their offices and evicted customers before closing time yesterday in an effort to prevent a rampage and cool China’s stock market. Many brokerages are encouraging customers to open online accounts rather than come to their offices, which are mostly too small to accommodate big crowds.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (SNDK), target $52.
- Reiterated Buy on (KYPH), target $54.
- Reiterated Buy on (VAR), target $52

Morgan Stanley:
- Demand for LCD-TVs seems stronger than we had expected. 6G lines are being stretched to capacity as large models penetrate further, and 32” LCD panels are in serious shortage. Panel prices are rising at a 2% MoM clip.

Business Week:
- Billionaire investor George Soros acquired a 12% stake in Bioenvision Inc.(BIVN), a biopharmaceutical company focused on certain types of cancer. SCO Financial CEO Steven Rouhandeh said share of the company could reach $20 a share if its clofarabine drug is approved for adult use in Europe.
- YRC Worldwide(YRCW), the largest US trucking company, is a potential buyout target. Justin Yagerman, an analyst with Wachovia Securities, expects the shares to hit $53 in a year.
- Shares of Amgen Inc.(AMGN) will rise 17% in a year, citing chief investment officer at Ryan Beck & Co.

Night Trading
Asian Indices are -1.25% to -.50% on average.
S&P 500 indicated +.04%.
NASDAQ 100 indicated +.09%.

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- Existing Home Sales for April are estimated at 6.12M versus 6.12M in March.

BOTTOM LINE: Asian indices are lower, weighed down by commodity and automaker 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 Profit-taking and Emerging Market Worries

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