Wednesday Watch

Late-Night Headlines
Bloomberg:
- Valero Energy(VLO), the largest US refiner, said it shut fluid catalytic cracking units for maintenance at refineries in Houston and Louisiana. The unit at the Houston plant will be shut for “approximately two weeks.” Gasoline production will drop by 40,000 barrels a day in Houston and 25,000 barrels a day at Krotz Springs during the maintenance period. A historical rash of refinery “problems” has been the driving force behind the recent surge in energy prices.
- China’s new securities account openings were the lowest in almost two months on June 4 as a stock-market rout, triggered by a tripling of the tax on share trades, deterred people from entering the market.
- Australia’s gross domestic product rose 1.6% from the fourth quarter, above estimates of a 1.2% gain.

Shanghai Securities News:
- China may further increase banks’ reserve requirement ratios by 27 basis points to 54 basis points this year, citing a researcher from the Chinese Academy of Social Science.

Economic Daily News:
- Taiwan Semiconductor Manufacturing, AU Optronics and Chunghwa Picture Tubes have postponed planned investments worth more than $20 billion, citing the Central Taiwan Science Park administration.

Late Buy/Sell Recommendations
Suntrust Robinson Humphrey:
- Rated (LOOP) Buy, target $31.

Night Trading
Asian Indices are unch. to +.25% on average.
S&P 500 indicated unch.
NASDAQ 100 indicated -.01%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Before the Bell CNBC Video(bottom right)
Global Commentary
Asian Indices
European Indices
Top 20 Business Stories
In Play
Bond Ticker
Conference Calendar
Daily Stock Events
Macro Calls
Rasmussen Business/Economy Polling
CNBC Guest Schedule

Earnings of Note
Company/EPS Estimate
- (ADCT)/.23
- (CMTL)/.53
- (DSW)/.47
- (GIII)/-.51
- (GOT)/-.33
- (IDT)/-.37
- (KFY)/.35
- (LZB)/.07
- (MATK)/.15

Upcoming Splits
- (EPIQ) 3-for-2
- (PFMG) 2-for-1
- (NGA) 3-for-2

Economic Releases
8:30 am EST
- Final 1Q Non-farm Productivity is estimated to rise 1.0% versus a 1.7% prior estimate.
- Final 1Q Unit Labor Costs are estimated to rise 1.3% versus a .6% prior estimate.

10:30 am EST
- Bloomberg consensus estimates call for a weekly 125,000 barrel crude oil supply increase versus a -1,956,000 barrel decline the prior week. Gasoline supplies are estimated to rise by 1,600,000 barrels versus a 1,361,000 barrel increase the prior week. Distillate inventories are estimated to rise by 900,000 barrels versus a 147,000 barrel build the prior week. Finally, Refinery Utilization is estimated to rise .5% versus a -.02% decline the prior week.

Other Potential Market Movers
- The Fed’s Pianalto speaking, Fed’s Lacker speaking, Fed’s Hoenig speaking, MBA mortgage applications report, Challenger Job Costs, Bank of England Policy Meeting, (NYX) Analyst Day, FTN Midwest Health Care Conference, Keybanc Industrial/Automotive Conference, Kaufman Brothers Digital Media Conference, Piper Jaffray Consumer Conference, Stephens Investment Conference, RBC Energy Conference and Lehman Brothers Global Services Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by technology stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Lower on Healthy Profit-taking and Higher Long-term Rates

Indices
S&P 500 1,530.95 -.53%
DJIA 13,595.46 -.59%
NASDAQ 2,611.23 -.27%
Russell 2000 848.27 -.80%
Wilshire 5000 15,443.42 -.55%
Russell 1000 Growth 605.68 -.49%
Russell 1000 Value 879.73 -.60%
Morgan Stanley Consumer 746.60 -.59%
Morgan Stanley Cyclical 1,087.26 -.34%
Morgan Stanley Technology 619.87 +.15%
Transports 5,251.54 -.74%
Utilities 510.56 -1.48%
MSCI Emerging Markets 128.85 -.36%

Sentiment/Internals
Total Put/Call .94 +5.62%
NYSE Arms 1.10 +10.12%
Volatility(VIX) 13.63 +2.56%
ISE Sentiment 154.0 -7.78%

Futures Spot Prices
Crude Oil 65.60 -.92%
Reformulated Gasoline 220.58 -1.44%
Natural Gas 8.03 -1.87%
Heating Oil 196.46 unch.
Gold 675.20 -.16%
Base Metals 269.06 +.46%
Copper 344.0 -.81%

Economy
10-year US Treasury Yield 4.98% +5 basis points
US Dollar 81.89 -.20%
CRB Index 314.64 -.29%

Leading Sectors
Internet +.24%
Gaming +.18%
Networking +.13%

Lagging Sectors
Gold -1.28%
Utilities -1.48%
Coal -1.54%

Evening Review
Market Performance Summary
Market Gauges
ETF Performance
Style Performance
Market Wrap CNBC Video(bottom right)
S&P 500 Gallery View
Economic Calendar
Timely Economic Charts
GuruFocus.com
PM Market Call
After-hours Movers
After-hours Stock Quote
In Play

Afternoon Recommendations
Piper Jaffray:
- Rated (CIEN) Outperform, target $40.

Avian:
- Our contacts indicate that spot DRAM pricing exceeds contract for the first time in several months. We view this as positive and note that when spot exceeds contract, it frequently exerts further upward price pressure.

Afternoon/Evening Headlines
Bloomberg:
- A Guyanese man wanted in the alleged plot to blow up jet-fuel tanks at New York’s JFK International AirportTrinidad. surrendered today in
- The private-equity arm of Tudor Jones, raised $262 million for a new venture-capital fund to invest in technology and media companies.
- Sugar tumbled 4% to a two-year low on speculation that cane harvests in Brazil and India will add to a global glut.
- Gasoline futures fell 1.4% before a report tomorrow from the US Energy Dept. that may show inventories grew for a fifth consecutive week.
- TD Ameritrade Holding Corp.(AMTD) should consider a combination with E*Trade Financial Corp. or Charles Schwab Corp., said hedge funds Jana Partners LLC and SAC Capital Advisors LLC. The stocks is surging 6.7% in after-hours trading.
- Whole Foods Market(WFMI) and Wild Oats(OATS) said the US FTC will file a lawsuit to block their merger.
- Dell Inc.(DELL) will stop making televisions and focus on personal computers.

Wall Street Journal:
- Anheuser-Busch Cos.(BUD) agreed to distribute singer Jimmy Buffett’s Margaritaville Tequila in Massachusetts.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs, Networking longs and Computer longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was negative today as the advance/decline line finished lower, sector performance was mostly negative and volume was heavy. Measures of investor anxiety were above average into the close. Today's overall market action was mildly bearish. However, I view it as a healthy pullback after recent gains. Underneath the surface, there were some positives. The Morgan Stanley Tech Index finished slightly higher on the day. The MS Tech Index is now 9.2% higher for the year, slightly outperforming the S&P 500. I expect it to perform even better in the second half of the year as many “deadweight” tech companies gain upside traction as inventories come down significantly. As well, many market-leading growth stocks finished with meaningful gains today despite losses in the major averages. The 10-year yield finished 5 basis points higher. I continue to believe it would take a meaningful move above 5%, somewhere around 5.15%, to impact equities in a substantially negative way. I still believe that type of move is unlikely as the recent rise in rates mutes the rebound in housing and thus slows recent strong economic data, to an extent, over the next couple of months. As well, the substantial inventory rebuilding that is currently taking place will likely run its course by then. Several well-known US stock market bears were pointing today to the fact that the 10-year yield just broke out of a 30-year downtrend. However, if you look at that long-term chart and adjust the trendline down to the top in early 2000, you will see that it also broke out of a 23-year downtrend in 2004. Since then, the S&P 500 has rallied about 40%. I continue to believe the secular trend of disinflation remains firmly in tact and that during the next meaningful global economic slowdown, we will experience a mild bout of deflation, which will likely send long-term rates significantly lower from current levels. I still believe the Fed will remain on hold through year-end while making both hawkish and dovish statements, depending on the strength or weakness of the prevailing data at the time. The NYSE Arms traded at above-average levels throughout the day today. I suspect stocks will rise tomorrow.

Stocks Lower into Final Hour on Profit-taking and Higher Long-term Rates

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Networking longs and Computer longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, every sector is declining and volume is above average. Google (GOOG) is rising another 1.7% today and is making a new all-time high at $515.79. So far, my long additions to Google into the weakness a few months ago are paying off. Even at a new record high, I view the stock as undervalued and believe it will prove a devastating mistake for global technology fund managers to exclude this company from their portfolios. I continue to believe it is beyond comprehension why investors are willing to pay 50x forward estimates for Yahoo! (YHOO) and only around 30x conservative forward estimates for GOOG, which is arguably the most dominant growth stock in the world. My $600 per share target on Google before year-end is now looking conservative as numerous upside catalysts are coming to the fore more quickly than I had anticipated. It still isn't too late to board the Google train, in my opinion. My largest long position remains Google, with Apple (AAPL) a close second. I expect US stocks to trade modestly higher into the close from current levels on buyout speculation, more economic optimism, lower energy prices, short-covering and investment manager performance anxiety.

Today's Headlines

Bloomberg:
- European Central Bank President Jean-Claude Trichet and US Federal Reserve Chairman Ben S. Bernanke said they are concerned that investors are underestimating the amount of risk they are taking on in global markets.
- Rick Wagoner, CEO of GM(GM) says the company is making “major progress” in its recovery plan.
- Billionaire investor George Soros plans to invest a “significant amount” in Brazil’s ethanol industry.
- Crude oil is falling $.70/bbl. on speculation that a government report will show US refineries increased fuel output after a historical rash of nationwide “outages” recently pushed down gasoline supplies and boosted prices.
- White sugar dropped 3.4% in London on concern sales by producer countries are exacerbating an oversupply of the commodity.
- Goldman Sachs(GS) dropped its forecast for the Fed to reduce borrowing costs this year because of a resilient labor market and a reacceleration of growth in the industrial sector of the economy.
- NYC won its highest credit rating by S&P as surging Wall Street profits and a buoyant real estate market boost revenue, and as surplus funds are set aside to help pay for future costs.
- Fed Chairman Ben Bernanke said “tighter” lending standards for mortgages will “restrain” housing demand for longer than policy makers anticipated.
- A US agency today called a Chinese-made all-terrain vehicle unsafe, just weeks after regulators questioned the quality of products such as pet food and toothpaste that also bear the label “Made in China.”
- Al-Qaeda leader Osama bin Laden is alive and is still issuing instructions to his commanders in the field, a leading Taliban member said.
- Treasuries are falling, and the benchmark 10-year note’s yield touched a nine-month high, as an unexpected increase in a gauge of service industries prompted traders to undo bets that the Fed will cut interest rates.
- Exxon Mobil(XOM) and pipeline owner Enbridge Inc. said they’ve begun discussions with shippers to build a conduit capable of delivering Canadian crude oil to Houston refineries.
- UK broadcaster Channel 4 said it will air pictures of the aftermath of the car crash that killed Diana, Princess of Wales, rejecting a last minute plea for restraint from her sons Princes William and Harry.

Wall Street Journal:
- SAP AG(SAP) of Germany and California-based Oracle Corp.(ORCL) are competing to win software orders from small and medium-sized companies, and Oracle seems to be getting better reviews from customers, citing a survey by Nucleus Research.
- Vodafone Group Plc could be worth more split into parts than whole, leading to speculation that AT&T Inc.(T) or a group of hedge funds could be interested in a takeover.
- Genentech Inc.(DNA) is under increased pressure in Congress and from Medicare to cut the prices it charges for new drugs. The company’s strategy is to develop drugs needed and otherwise unavailable and to charge enough to recover research and development spending, which reached $1.8 billion last year. CEO Levinson says the company needs “healthy” margins on Avastin because the drug is a success and many others aren’t.
- Ron Burkle, the billionaire supermarket investor who tried to buy Tribune Co.(TRB), joined an effort by a Dow Jones(DJ) employees union to seek alternatives to Rupert Murdoch’s bid for the company.

NY Times:
- P. Schoenfeld Asset Management LLC, an investor in Biomet Inc.(BMET), plans to vote against the $10.9 billion bid for the maker of artificial hips and knees by a private equity group.
- Apple Inc.(AAPL) and Microsoft Corp.(MSFT), makers of the operating systems that power 750 million computers, are working on new systems that will integrate Internet-based programs.
- New Haven, Connecticut, officials voted yesterday to provide municipal identification cards for city residents, including illegal immigrants.

Washington Post:
- Some Democratic leaders are concerned that Representative William’s Jefferson’s indictment yesterday on racketeering and bribery charges could rekindle a smoldering dispute between House Speaker Nancy Pelosi and black lawmakers. Pelosi didn’t indicate what action she may take against Jefferson, instead calling the charges “extremely serious” and, if true, “an egregious and unacceptable abuse of public trust and power.”

NY Post:
- William Ackman, general partner of Pershing Square Capital Management, has raised $2 billion to buy a controlling interest in a company with a market capitalization of $30 billion to $40 billion. The target is an “iconic American company,” though Ackerman won’t identify the company.

Star-Ledger of Newark:
- Trump Entertainment Resorts(TRMP) may receive bids from an Atlantic City executive and a private equity firm.

Financial Times:
- A Chinese market slump may not lead to disaster if investors grow more discerning and stock values get more realistic.

BBC:
- Basque separatist group ETA has said it plans to end its ceasefire with the Spanish government tomorrow.

Bilan:
- UBS AG plans more acquisitions of banks that oversee rich people’s assets as the largest Swiss lender aims to expand its share of the global wealth management market, Chairman Marcel Ospel said.

Arab News:
- The Saudi Arabian General Investment Authority, or SAGIA, traveled to the US to promote $500 billion in new investment opportunities in the kingdom.

ISM Non-Manufacturing Highest in Over a Year

- ISM Non-Manufacturing for May rose to 59.7 versus estimates of 55.8 and a reading of 56.0 in April.

BOTTOM LINE: Service industries expansion in the US unexpectedly accelerated last month to the highest level in more than a year, a sign the economy is strengthening, Bloomberg said. The New Orders component of the index rose to 57.4 from 55.5 the prior month. The Prices Paid component rose to 66.4 from 63.5 the prior month. The Employment Component of the index rose to 54.9 from 51.9 the prior month. I continue to believe US economic growth is accelerating substantially this quarter to around 3% or slightly higher, however growth is likely to decelerate back below 3% in 3Q as the effects of higher long-term rates take hold. This should push the 10-year yield back down to around 4.75%.

Market Snapshot
Detailed Market Summary
Quick Summary
Economic Commentary
Movers & Shakers
Today in IBD
NYSE OrderTrac
I-Watch Sector Overview
NYSE Unusual Volume
NASDAQ Unusual Volume
Hot Spots
NASDAQ 100 Heatmap
DJIA Quick Charts
Chart Toppers
Option Dragon
Intraday Chart/Quote