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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Asian stocks fell for the first time in three days after China tripled the tax on securities transactions. The Chinese benchmark CSI 300 Index fell 6.4% on the news.
- Gold supply will exceed demand by 250 metric tons this year, a bigger surplus than forecast in October, as increased prices deter jewelry buyers, London-based research company Virtual Metals said. Jewelry consumption will decline 2.5% to 2,218 tons, a second annual drop, Virtual Metals said.
- NBC Universal named producer Ben Silverman as co-chairman of television and entertainment with Marc Graboff in a reshuffle aimed at lifting the network out of last place.
- US Secretary of State Condoleezza Rice insisted Iran must suspend uranium enrichment, rebuffing a suggestion by the International Atomic Energy Agency’s chief that the US and its allies relax the demand.
- CDW Corp.(CDWC) agreed to be bought by Madison Dearborn Partners LLC for about $7.3 billion amid a surge of private-equity investments in technology.
- Japan’s industrial production unexpectedly fell for a second month as manufacturers reduced output.
- Australia’s retail sales in April gained less than economists forecast as rising gasoline prices crimped spending at department stores.
- Nippon Steel Corp., Asia’s largest steelmaker, doesn’t plan to buy rival producers, Nippon President Mimura said.
- Steel Dynamics(STLD) said second-quarter profit may fall to the low end of the per-share range of 95 cents to $1 forecast by the company in mid-April because of lower than expected shipments and pricing for flat-rolled steel.
- Gilead Sciences(GILD) said its experimental drug for cystic fibrosis, a fatal lung disease, met the main goal of a study.
- Japan’s birthrate rose in 2006 for the first time in six years, citing a Health Ministry report that will be released in the latter half of next week.
- Thailand’s Prime Minister Surayud Chulanont said he will order emergency rule in Bangkok if court rulings that may ban Thailand’s two main political parties spark violent protests.

Wall Street Journal:
- Cantor Fitzgerald LP, the firm that lost hundreds of employees during the Sept. 11, 2001, attacks, will combine two units in a $1.3 billion deal. The new company, to be known as BGC Partners, will comprise eSpeed Inc., a publicly-held electronic-trading company controlled by Cantor, and BGC Partners, Cantor’s closely-held bond-trading unit.

Financial Times:
- Microsoft Corp.(MSFT) will release information today about a coffee table-shaped “surface computer” that the company says will open up a multibillion dollar area of computing, citing a demonstration by Microsoft(MSFT).

Economic Times:
- India may increase the amount of money local mutual funds can invest in equity and debt abroad.

Securities Times:
- Some Chinese banks started internal probes to prevent customers from using loans to buy stocks as the benchmark index reaches new highs daily. Banks told branches to look more closely at loans for working capital and small business operations so they aren’t diverted into the stock market.

Late Buy/Sell Recommendations
Citigroup:
- Retailing-softlines short interest rose 8.5% in May to a record 257,000,000 shares short on the heels of a prior peak in April on lingering worries over consumer spending. Retailers with the most significant increases in short interest include ANN +38%, CHRS +35%, CTR +29%, MW&URGI +26%, ANF/CMRG/LTD +25%, CBK +24%, GPS +23%, TJX +22%, DBRN +20%, CHIC +21%, TUES&ARO +15%, HOTT +12% and BEBE/PLCE/ROST +11%.

Morgan Stanley:
- Reiterated Overweight on (GILD).

Night Trading
Asian Indices are -.75% to -1.0% on average.
S&P 500 indicated -.28%.
NASDAQ 100 indicated -.28%.

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Earnings of Note
Company/EPS Estimate
- (CHS)/.26
- (DAKT)/.08
- (DLTR)/.37
- (DBRN)/.31
- (JAS)/-.07
- (JOYG)/.72
- (NOVL)/.01
- (PSS)/.59
- (RL)/.62
- (SMTC)/.10
- (THO)/.41
- (WSM)/.13

Upcoming Splits
- (NRG) 2-for-1
- (SRCL) 2-for-1
- (GEO) 2-for-1

Economic Releases
2:00 pm EST
- The Minutes of May 9 FOMC Meeting

Other Potential Market Movers
- The weekly MBA Mortgage Applications report, weekly retail sales reports, ADP Employment Change, (SPAR) analyst meeting, (IRBT) analyst meeting, (GNW) strategic update, FBR Growth Conference, Merrill Lynch Small-cap Tech Healthcare Conference, Bank of American Healthcare Conference, Deutsche Bank Energy/Utilities Conference, Sanford Bernstein Strategic Decisions Conference, Cowen Tech Conference and Lehman Wireless/Wireline Conference could also impact trading today.

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 100% net long heading into the day.

Stocks Finish Higher on Fall in Energy Prices, More Economic Optimism and Buyout Speculation

Indices
S&P 500 1,518.11 +.16%
DJIA 13,521.34 +.10%
NASDAQ 2,572.06 +.58%
Russell 2000 837.53 +.92%
Wilshire 5000 15,286.36 +.28%
Russell 1000 Growth 597.80 +.33%
Russell 1000 Value 874.88 +.15%
Morgan Stanley Consumer 744.76 +.11%
Morgan Stanley Cyclical 1,062.67 +.23%
Morgan Stanley Technology 610.87 +.40%
Transports 5,206.63 +1.15%
Utilities 515.86 +.63%
MSCI Emerging Markets 125.38 -.13%

Sentiment/Internals
Total Put/Call .93 -8.82%
NYSE Arms 1.20 +46.53%
Volatility(VIX) 13.53 +1.42%
ISE Sentiment 128.0 +9.4%

Futures Spot Prices
Crude Oil 63.37 -2.81%
Reformulated Gasoline 230.50 -4.11%
Natural Gas 7.59 -.64%
Heating Oil 187.80 -3.15%
Gold 663.20 +.27%
Base Metals 263.80 +.99%
Copper 330.0 -.62%

Economy
10-year US Treasury Yield 4.88% +3 basis points
US Dollar 82.31 -.02%
CRB Index 307.47 -1.80%

Leading Sectors
REITs +3.54%
Networking +3.12%
Internet +2.14%

Lagging Sectors
Gold -.42%
Oil Service -.73%
Energy -.76%

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Afternoon Recommendations
Bank of America:
- Rated (RNR) Buy.

Piper Jaffray:
- Rated (JMBA) Outperform.

Afternoon/Evening Headlines
Bloomberg:
- The private-equity boom will continue in the next few years as near-record-low borrowing costs keep buyouts affordable, KKR co-founder Henry Kravis said.
- Shares of Coldwater Creek(CWTR), the Idaho-based women’s clothing retailer, soared as much as 15% after-hours as first-quarter profit unexpectedly rose.
- Cotton futures declined 2.2% in NY on speculation the US may miss government export forecasts on cooling demand from China.
- Coffee had its biggest decline in six weeks, falling 2%, on expectations that favorable weather will aid crops in Brazil, the world’s largest producer.
- Corn fell 3% to a two-week low in Chicago and soybeans dropped 1.9% after rains boosted moisture levels in fields east of the Mississippi River, increasing yield potential for the two biggest US crops.
- Gasoline futures in NY plunged 4.4%, the most in seven months, on estimates that gasoline supplies rose for the fourth consecutive week, which curtailed investment fund speculation on the commodity.
- Robert Zoellick, the former US trade representative and an executive at Goldman Sachs Group(GS), will be nominated by President Bush to replace Paul Wolfowitz as head of the World Bank, a senior administration official said.
- Broadcom(BRCM) won a $19.6 million verdict after a California jury ruled rival Qualcomm(QCOM) intentionally infringed three patents for mobile-phone technology.
- Nationwide gasoline prices at the pump fell $.01/gallon, breaking a string of increases, to $3.21/gallon, a government report said.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs, I-Banking longs and Energy-related shorts. 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 below average. Measures of investor anxiety were about average into the close. Today's overall market action was mildly bullish. Small-caps and mid-caps outperformed throughout the day. The U.S. dollar recouped morning losses, finishing unchanged. The 10-year yield was up 3 basis points on the home price data and better-than-expected consumer confidence reading. Gasoline futures are near session lows, falling 4.4%. This is significant. It appears to me the gasoline crack spread is finally breaking down, as well. The iShares FTSE/Xinhua China 25 (FXI) finished off session lows, falling 1.2% on news of increased trading fees for investors in China. Google (GOOG) finished off session highs, rising $3.59, but it has broken out of its recent downtrend. I suspect another attack on $500 is imminent and I expect it to hold this time.

Stocks Mostly Higher into Final Hour as Buyouts and Falling Energy Prices offset China Bubble Worries

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, I-Banking longs and Energy-related shorts. 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 higher and volume is below-average. The Yale School of Management Crash Confidence Index is showing the individual (herd) is the most concerned about a stock market crash since December 2002, right near the trough of one of the worst bear markets in U.S. history. This is another amazing number and helps to illustrate how deep-seeded the herd's pessimism towards U.S. stocks really is, in my opinion. Notwithstanding any weekly or monthly blips higher in various measures of investor confidence, I continue to believe overall investor sentiment regarding U.S. stocks has never been worse in history with the DJIA just off fresh record highs. This has to be very disturbing to the many U.S. secular bears. I expect US stocks to trade modestly higher into the close from current levels on buyout speculation, lower energy prices and more economic optimism.

Today's Headlines

Bloomberg:
- China’s Ministry of Public Security warned investors not to fall for scams aimed at capitalizing on enthusiasm over a rapidly rising stock market, such as false initial share offerings or fake investment funds.
- Crude oil is dropping $2.03/bbl. in NY as investment fund speculation subsided after an end to a strike in Nigeria and on expectations that supplies are adequate.
- Stephen Schork, an energy investor and president of Schork Group sees lower gas prices during the summer driving season.
- Venezuelan President Hugo Chavez threatened to shut down the country’s last opposition television station as students took to the streets for a third day protesting what they say is a crackdown on free speech.
- The Bank of Canada said for the first time in a year that it’s ready to increase interest rates because inflation is accelerating faster than it expected.
- Trading in options to buy shares of Commerce Bancorp(CBH) surged ninefold to a six-week high after the largest bank based in NJ canceled an appearance tomorrow at a Sanford C. Bernstein conference.
- President Bush imposed economic sanctions against Sudan in a bid to curb the violence in Darfur and he called on the UN to step up financial pressure on a leader who hasn’t stopped genocide in the war-torn African country.

Wall Street Journal:
- CDW Corp.(CDWC), one of the biggest US resellers of computers, software and related equipment, may be bought by a private-equity firm.
- The World Bank said direct foreign investment in emerging markets was a record $325 billion last year, yet cautioned that there are still concerns over the stability of some banks in such countries.
- Cutbacks in merchandise at Wal-Mart(WMT) are starting to trim orders to some of the company’s suppliers in China.
- Morgan Stanley(MS) Chairman John Mack is directing the investment bank’s business toward propriety trading and advisory services in a bid to boost profit.
- Florida plans to cut property taxes to promote economic growth slowed by a drop in real estate sales.
- US investors in mutual and hedge funds may benefit in coming years as more and more managers depend on third-party providers for internal monitoring and risk management.

NY Times:
- US lawmakers are pushing to subsidize coal as an alternative fuel. Democrat and Republican lawmakers are proposing to guarantee billions of dollars in construction loans for coal-to-liquid production plants, guarantee prices and future government purchases.

AP:
- Sony Corp.(SNE) will introduce its first HD radio tuners in July, as prices for radios that detect AM and FM signals that broadcast digitally fall from their $800 debut more than two years ago.

Efe:
- The Venezuelan lawmaker deported form Colombia yesterday for allegedly interfering in domestic politics, called Colombian President Alvaro Uribe the country’s “biggest terrorist.”

Xinhua News Agency:
- China tripled the stamp tax on securities trading to help promote a “healthy” stock market, citing the Ministry of Finance. The government boosted the stock trading fee from .1% to .3%.

Consumer Confidence Rebounds, % Planning to Buy "Major Appliance" at 9-year High

- Consumer Confidence for May rose to 108.0 versus estimates of 105.0 and an upwardly revised 106.3 in April.

BOTTOM LINE: An index of consumer confidence in the US jumped more than forecast in May as rising stock prices and a resilient labor market put Americans in a mood to spend. Better consumer sentiment raises the odds that the Fed’s forecast for accelerating economic activity will come to fruition. The Present Conditions component of the index rose to 136.1 from 133.5 the prior month. The Expectations component rose to 89.2 from 88.2 prior. The percentage of Americans that said jobs are hard to get fell to 19.9% from 20.4% in April. A 2.9% surge in the S&P 500 from the last week in April through May 22 also buoyed confidence. A $3.22/gallon nationwide average gas price on May 22 likely prevented an even greater jump in the reading.

34.4% of consumer said they plan to purchase a “major appliance,” the highest since May 1998 and up 10% from April. Moreover, this number has only been higher during 2 other months(March and May of 1998) over the last 19 years. This is very significant considering the percent that plan to purchase a major appliance is higher now than at any time during the peak of the recent housing boom. This is likely due to the fact that Americans’ net worth is at an all-time high as a result of the 106% gain in the stock market since the October 2002 bottom, a healthy job market, low interest rates, below average inflation and a 127.3% gain(Case-Shiller Home Price Index) in home prices over the last decade. These facts continue to be ignored by those that have expected consumer spending to fall off a cliff over the last couple of years as a result of housing.

The gain in the overall reading was spurred by a 19.2% jump in the Northeast Central region. However, the overall gauge continues to be skewed negatively by depressed confidence in the northern part of the country where most investment funds and major media outlets are located. Here is a breakdown of today’s Consumer Confidence reading by region:

Northeast Central 69.5 +19.2%

New England 74.6 -7.9%

Mid Atlantic 90.2 -8.3%

Northwest Central 99.5 -1.9%

Southeast Central 115.8 -.7%

South Atlantic 116.9 +.3%

Pacific 127.7 +7.7%

Southwest Central 130.5 +2.1%

Mountain 138.20 +1.5%