Stocks Sharply Higher into Final Hour on Falling Energy Prices, Reversal Lower in Long-term Rates

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my I-Banking longs, Medical longs, Semi longs and Retail longs. I added to my (TLT) long, added to a couple of commodity shorts, covered my (IWM/QQQQ) hedges and covered some of my (EEM) short today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is lower, every sector is rising and volume is above average. A recent long addition, Akamai Technologies (AKAM), was upgraded today by Hambrecht, and the stock is rising 7.2%. I do not believe it is too late to buy this stock around current levels. The AAII percentage of bulls rose to 40.59% this week from 33.33% the prior week. This reading is still below average levels. The AAII percentage of bears fell to 42.57% this week from 44.79% the prior week. This reading is still at a high level. These pessimistic readings come even as the DJIA is just off one of its most prolific winning streaks in history and is fresh off a new all-time high six days ago. Moreover, the 10-week moving average of the percentage of bears is currently 40.5%, also a high level. The 10-week moving average of the percentage of bears peaked at 43.0% at the major bear-market low during 2002. Moreover, the 50-week moving average of the percentage of bears is currently 37.3%, a very high level seen during only two other periods since tracking began in the 1980s. Those periods were October 1990-July 1991 and March-May 2003, both of which were near major market bottoms. The extreme readings in the 50-week moving average of the percentage of bears, during those periods, peaked at 41.6% on Jan. 31, 1991, and 38.1% on April 10, 2003. We are still very close to eclipsing the peak in bearish sentiment during the 2000-03 market meltdown, which is astonishing considering the macro backdrop now and then. I expect US stocks to trade mixed-to-higher into the close from current levels on bargain hunting, lower long-term rates, lower energy prices and short-covering.

Today's Headlines

Bloomberg:
- Bill Gross, manager of the world’s largest bond fund, said on CNBC that this week’s slump in Treasuries may push mortgage rates higher and slow housing, prompting the Fed to lower interest rates.
- China, the world’s second-biggest energy consumer, approved a plan to develop renewable energy sources to reduce pollution and cut a reliance on oil and coal. China plans to spend $196 billion over the next 13 years to increase the use of renewable energy sources to account for 16% of total supply.
- Ethanol in Chicago fell to a four-month low amid concern that supply is outpacing demand.
- White sugar had its biggest weekly decline in six months in London as speculators sold contracts amid forecasts of a global surplus this year.
- Crude oil is falling more than $2/bbl. in NY on concern that rising global interest rates may lead to lower demand.
- Copper futures in NY tumbles the most in four months on expectations that rising borrowing costs in major economies will slow growth and limit demand for metals.
- Gold is falling over $13/oz. to a two-month low in NY on speculation that higher global interest rates will reduce demand for the precious metal.
- MasterCard Inc.(MA) said it won a court decision against rival Visa USA Inc. over a fee that prevented merchants from using its network to process debit transactions.
- Fidelity National Information Services(FIS) and Fiserv Inc.(FISV) each bid more than $1.5 billion for rival EFunds Corp.(EFD), which put itself up for sale last month.
- Shares of US Steel Corp.(X) soared the most since November after Interfax said ThyssenKrupp AG is in talks to buy the company.
- Shares of Limelight Networks(LLNW) jumped as much as 62% after its IPO, as investors bet demand will grow for its business delivering video for Web sites including ABC.com and Netflix.
- The US dollar surged to a more than two-month high versus the euro and rose against the yen as benchmark Treasury yields attracted international investors, boosting the currency’s appeal.
- Microsoft(MSFT) has won over 20-year-old gamers, who spend hours a day launching rockets and firing plasma guns on the company’s Xbox 360. Now it wants their moms.
- Hewlett-Packard(HPQ) plans to follow Dell Inc.(DELL) and Sony(SNE) by introducing a laptop that uses chips instead of a hard drive to store data.

Wall Street Journal:
- NYSE Euronext(NYX) the NYSE’s parent company, may remove the “NY” from its name if it enters into more global mergers, citing Deputy Chairman Marshall Carter.

NY Times:
- Senior Democrats in the US House of Representatives may subpoena the Justice Department over documents related to the domestic terrorism surveillance program run by the National Security Agency.
- All Democrats at a debate in New Hampshire earlier this week said they would support repealing the so-called don’t ask-don’t tell policy, regarding gays in the military, first implemented under former Democratic President Bill Clinton.
- Hedge funds are 87% correlated to unhedged emerging market equities, according to a recent analysis by Bridgewater Associates.

Washington Post:
- Samuel Berger, former President Bill Clinton’s national security adviser, was disbarred from the practice of law by the DC Court of Appeals. Berger yesterday agreed to relinquish his law license rather than submit to an investigation by the DC Bar into his removal of classified documents from the National Archives. Berger pleaded guilty in April 2005 to stealing classified material without authorization. The material was related to warnings received the by Clinton administration about possible terrorist activity.

Business Week:
- Apple’s(AAPL) iPhone may generate $10 billion in annual sales within a few years of its introduction.

Financial Times:
- Three quarters of US CFOs who responded to a study by Duke University and CFO magazine say Sarbanes-Oxley corporate-governance rules should be repealed or reformed, because the costs of implementing them have exceeded the benefits.
- The growth of biofuels over the next 10 years won’t threaten oil production by OPEC, citing IEA stats.

Market News International:
- China’s inflation rate rose 3.6%, a more than two-year high last month, citing people familiar with the data, which has yet to be released.

Trade Deficit Shrinks Most in 6 Months

- The Trade Deficit for April shrank to -$58.5 billion versus estimates of -$63.5 billion and a downwardly revised -$62.4 billion in March.

BOTTOM LINE: The US trade deficit narrowed more than forecast in April as exports rose to a record and imports dropped, Bloomberg reported. The 6.2% decline in the trade gap was the most in six months. In April, exports rose .2% to a record $129.5 billion, as sales of foods, plastics and consumer goods such as jewelry rose. I continue to believe the trade deficit will only improve mildly over the intermediate-term as a decline in commodity prices more than offsets stronger relative US growth.

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Friday Watch

Late-Night Headlines
Bloomberg:
- BNP Paribas SA, France’s largest bank by value, cut its forecast for the yen as rising global interest rates make it more lucrative to borrow and sell Japan’s currency to purchase higher-yielding assets.
- Crude oil may fall next week on rising fuel stockpiles and reduced concern about disruption of oil shipments from the Persian Gulf after cyclone Gonu, according to a Bloomberg survey of 44 analysts and traders.
- National Semi(NSM) said profit dropped less that expected as it recovered from an industry glut. The shares jumped 10.3% in after-hours trading.
- Broadcom(BRCM) won a trade agency ruling that would ban imports of mobile phones run on the newest types of chips made by Qualcomm Inc.(QCOM), a decision that could alter the US market for wireless service.
- The benchmark 10-year US Treasury note fell the most in more than three years after New Zealand Yields on inflation-protected Treasuries also rose, indicating that expectations of faster economic growth, rather than accelerating inflation, were the main reason for the sell-off. unexpectedly raised interest rates, igniting concern other central banks will respond to faster global growth.
- The Senate’s proposed overhaul of US immigration law failed a critical test vote as Democrats urged President Bush to rally Republicans to rescue the legislation.
- Bill Gross, manager of the world’s biggest bond fund, said he continues to expect a “mild bull market” for the next year. “We do like bond markets from this point forward for the next six months,” Gross said on PIMCO’s web site. “But we do suggest in 2008, 2009 and 2010 that interest rates will be moving mildly higher.” Gross reiterated that housing would slow the US economy and the Federal Reserve will cut interest rates in the “latter part of 2007.” Pimco’s $103 billion Total Return fund had trailed the performance of about 75% of comparable funds in the past year.
- North American steel producers including Ipsco Inc. filed petitions with US regulators alleging China is unfairly subsidizing and dumping steel products worth as much as $500 million a year.
- The judge in Representative William Jefferson’s bribery case issued an order freezing millions of shares of stock and hundreds of thousands of dollars in cash belonging to the Louisiana Democrat.
- The Bank of England, which left interest rates unchanged yesterday, may have to move faster to curb the UK’s worst bout of inflation in a decade.
- The yen is falling for the first day this week after Japan’s top currency official said there is no risk of a sudden carry trade unwinding.
- Edison Intl(EIX), the Rosemead California-based power producer, said it agreed to purchase $698 million worth of wind power turbines from India’s Suzlon Energy Ltd.
- Ethanol in Chicago fell to a 14-week low as supplies of the corn-based additive exceed demand.
- A Goldman Sachs Group(GS) unit and the buyout firm Kelso & Co. raised their estimate for a share sale in a Kansas refinery by 25% as surging gasoline profits spur demand for oil-processing plants.
- Nickel fell to a 10-week low, erasing its leading position this year on the London Metal Exchange, as stockpiles rose and the bourse imposed new rules to curb what one analyst described as “collusive” trading. Two or more companies, each holding 25% or more of LME-monitored nickel stockpiles, now need to make more metal available to other buyers.
- Copper prices fell for a third day in Shanghai on concern that buying by China, the world’s biggest consumer of the metal, may slow following a surge in imports this year and on expectations of weaker demand.
- China Petroleum, Asia’s biggest refiner, had its share-price target raised at Lehman Brothers because of the company’s oil and gas discoveries and improved chemical business performance. Sinopec, as Beijing-based China Petroleum is known, discovered an oil field in northwestern China’s Xinjiang region that holds geological reserves of as much as 1.47 billion barrels.
- Tata Motors Ltd., India’s third-largest vehicle market, has cut passenger car production by 20% as demand has slowed.
- Indonesia’s rupiah dropped the most since May 2006 on speculation declines in global equity markets will encourage investors to sell riskier assets.

London-based Times:
- Sysco Corp.(SYY), the largest US distributor of food to restaurants, has submitted a preliminary bid for UK food distributor Brake Bros Ltd.
- Florida Democratic congressman Robert Wexler yesterday introduced a Bill calling for the exclusion of so-called “skill games” from the US ban on Internet gambling.

Late Buy/Sell Recommendations
Citigroup:
- We view (CIEN), (JDSU), (ECIL), and (FNSR) as best positioned to benefit from our bullish view on optical spending. Other beneficiaries include (SCMR) and (TLAB). (CSCO) will also benefit from a healthy optical market, but with limited financial impact as optical accounts for less than 2% of total revenues.

Morgan Stanley:
- Reiterated Overweight on (EBAY).

Business Week:
- Inventors can capitalize on growth in southeastern Europe with shares of National Bank of Greece SA(NBG), the country’s largest bank, citing John Maloney, president of M&R Capital Management.
- MCF Corp.(MEM), an investment banking firm that provides financial services for small public companies, could have its sales almost double to $100 million in a year or two.

Night Trading
Asian Indices are -1.75% to -1.0% on average.
S&P 500 indicated +.09%.
NASDAQ 100 indicated +.08%.

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8:30 am EST
- The trade deficit for April is estimated to shrink to -$63.5 billion versus -$63.9 billion in March.

Other Potential Market Movers
- The Citi Power/Gas/Utilities Conference and Sandler O’Neil eBrokerage/Global Exchange Conference could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by automaker and commodity 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 at Session Lows on Worries Over European Equities, Rise in Oil and Long-term Rates

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