DJIA Surging Near Another Record into Final Hour, Despite 6.5% Plunge in Chinese Shares, on FOMC Minutes

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, I-Banking longs, Retail longs and Computer longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly positive as the advance/decline line is about even, most sectors are higher and volume is above average. Why is the myth that there is no oil demand destruction continuously perpetuated? Over the last three years global oil demand has only risen a total of 2.4% to 83.9 million barrels per day (OPCBRTOT Index on Bloomberg), while global economic growth has been the highest in over three decades, averaging near 5% annually. Global supplies (OPCBTSUP Index on Bloomberg) have risen 5.0% during that period to 85.6 million barrels per day. Just last year, global oil demand rose a paltry 0.9% while global growth boomed 5.3%. Moreover, oil consumption in the 30 OECD (Organization for Economic Co-operation and Development)countries actually fell 0.6% in the last year for the first time in over 20 years! These facts aren't possible without significant and pervasive global demand destruction. I believe the reason why the "no demand destruction" myth goes unchallenged in the media is that there has never been a time in U.S. history that more investors, analysts and pundits perceived that they benefit from high oil prices and they are positioned accordingly. Commercial hedgers, historically the smart money, remain net short crude despite record crack spreads and the onset of driving season. I continue to believe we have already seen the highs for the year in oil and gasoline prices. I expect US stocks to trade mixed into the close from current levels as buyout speculation, short-covering and investment manager performance anxiety offsets China bubble worries.

Today's Headlines

Bloomberg:
- Clashes between Venezuelan police and marchers protesting the government’s shutdown of Radio Caracas Television left dozens detained or injured across the country.
- Goldman Sachs Group’s(GS) Global Alpha hedge fund fell -3.4% in the first four months of this year, according to a report sent to investors last week. Global Alpha has declined -12% since 2005. The $10 billion fund struggled in a 16-month stretch when the S&P 500 rose 22%.
- Gold is falling another $4.70/oz. on speculation the US economy does not need a Fed rate cut, thus boosting the dollar and reducing demand for the precious metal.
- Federal Reserve officials acknowledged they underestimated to length of the US housing slowdown, while continuing to view inflation as the biggest threat to the economy, the release of the FOMC minutes showed.
- CBS Corp.(CBS) bought the music-focused social-networking site Last.fm for $280 million in cash.
- News Corp.(NWS/A) agreed to buy Web site owners Photobucket Inc. and Flektor Inc. to add digital picture services that let users store, edit and share images.
- Palm Inc.(PALM) will start selling a portable computer in a bid to increase sales as its Treo mobile phone and e-mail device loses ground to the BlackBerry.
- China’s stocks plunged 6.8% last night, the most in three months, after the government tripled the tax on securities transactions to cool a rally that’s drawing more than 300,000 new investors a day.

Wall Street Journal:
- The SEC intends to review so-called 12b-1 fees, charged by mutual funds to compensate intermediaries such as brokers.
- Pizza chains in the US are losing market share as consumers seek more innovative products.
- Navistar International(NAVZ), the delisted parent of International Truck & Engine Co., may be a buyout target and its stock has risen as a result.

Politico:
- Former Tennessee Senator Fred Thompson is expected to announce his candidacy for the 2008 Republican presidential nomination in Nashville over the Fourth of July holiday, citing unidentified Thompson advisers.

CNBC:
- The NYSE will close one of four trading rooms later this year because of a drop in activity.

Economic Releases

- None of note

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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

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- (NRG) 2-for-1
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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.