Stocks Finish at Session Highs on Large Reversal Lower in Lont-term Rates and Positive Economic Data

Indices
S&P 500 1,515.67 +1.52%
DJIA 13,482.35 +1.41%
NASDAQ 2,582.31 +1.28%
Russell 2000 832.54 +1.32%
Wilshire 5000 15,259.05 +1.43%
Russell 1000 Growth 598.03 +1.36%
Russell 1000 Value 869.99 +1.51%
Morgan Stanley Consumer 737.42 +1.11%
Morgan Stanley Cyclical 1,076.04 +2.06%
Morgan Stanley Technology 612.05 +1.36%
Transports 5,080.45 +1.71%
Utilities 498.13 +2.04%
MSCI Emerging Markets 127.03 +1.18%

Sentiment/Internals
Total Put/Call .95 -13.64%
NYSE Arms .46 -61.29%
Volatility(VIX) 14.73 -11.64%
ISE Sentiment 137.0 +26.85%

Futures Spot Prices
Crude Oil 66.08 +1.12%
Reformulated Gasoline 215.08 +.74%
Natural Gas 7.61 -.90%
Heating Oil 196.05 +2.43%
Gold 655.20 +.32%
Base Metals 250.37 -.73%
Copper 330.70 +.61%

Economy
10-year US Treasury Yield 5.20% -9 basis points
US Dollar 83.04 +.18%
CRB Index 311.68 +.64%

Leading Sectors
Oil Service +2.94%
REITs +2.20%
Utilities +2.04%

Lagging Sectors
Gaming +.18%
Airlines -.06%
HMOs -.72%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Steel Dynamics(STLD) agreed to buy closely held galvanizing company The Techs for $360 million.
- US Energy Secretary Bodman said he has “concerns” about lower refinery output. Refinery Utilization fell .4% to 89.2% of US capacity last week. It was the lowest since May 4 and the lowest utilization rate in 15 years for the second week in June. This decline in utilization comes on top of a recent report that said refiners cut expansion plans by 500,000 barrels per day earlier this year partly due to worries over “demand.”
- Orange-juice futures fell to the lowest in almost 15 months on forecasts for rain in the biggest orange-growing county in Florida.
- A US Army Humvee explodes into a swirl of brown smoke. A tank catches fire in an anonymous urban neighborhood. Masked men yell “God is most great” as they fire mortars form a field at unseen targets.
- Sanofi-Aventis SA’s diet drug Acomplia shouldn’t be approved for sale in the US because the company hasn’t proved its benefits outweigh its risk, an advisory panel said.
- Hoku Materials, a wholly-owned subsidiary of Hoku Scientific(HOKU) established to manufacture polysilicon for the solar market, and Suntech Power(STP) today announced the signing of a definitive contract for Hoku’s sale and delivery of polysilicon to Suntech over a ten-year period. The stock soared 81% in after-hours trading.
- US 10-year Treasuries surged the most since February after yields at a five-year high convinced speculators that rising borrowing costs will curb the economy and inflation.
- The US SEC increased restrictions on naked short selling after companies accused traders of using the tactic to manipulate share prices.

BOTTOM LINE: The Portfolio finished higher today on gains in my Software longs, I-Banking longs, Medical longs, Biotech longs and Retail longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was very positive today as the advance/decline line finished substantially higher, almost every sector gained and volume was heavy. Measures of investor anxiety were slightly above average into the close. Today's overall market action was very bullish. Cyclicals were especially strong as investors cheered the Beige Book report, which painted a moderate growth/moderate inflation picture. Despite today's sharp jump in stocks and better-than-expected economic data, the 10-year yield finished near session lows, reversing 12 basis points from session highs. Google (GOOG) did not participate today, however, I suspect the stock made a bottom this morning. As for Apple (AAPL), the stock is 101% higher over the last 12 months. I suspect it will consolidate this gain for a bit longer, however, I still expect it to trade substantially higher than current levels before year-end. These two remain my two largest long positions. The S&P 500 successfully held its 50-day moving-average. I suspect that the recent garden-variety pullback we have had is over. The Nikkei futures are indicating an up 200 open in Japan. I expect U.S. stocks and bonds to build on today's gains tomorrow.

Stocks Sharply Higher into Final Hour on Big Reversal Lower in Rates and Strong Economic Data

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Software longs, Medical longs and Retail longs. I covered my remaining (IWM)/(QQQQ) hedge this morning, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, almost every sector is rising and volume is above average. Mortgage applications surged 6.6% this week, with a 7.2% spike in purchase applications even with higher mortgage rates. Notwithstanding today’s strong economic data and a higher-than-expected import price index, the 10-year yield is falling 13 basis points from session highs, to 5.19%. This is the type of action I would expect to see near a top in yield. Gasoline supplies rose less than estimates as refinery utilization remains at historically low levels as a result of a rash of refinery “problems” and the cancellation of a planned 500,000-barrel-per-day increase in refinery capacity earlier this year on "worries over demand." The Fed just released its Beige Book report. Here is a summary via Bloomberg:

1. Some districts reported a stronger economy.
2. Consumer spending was generally up in late April/May.
3. There is continued weakness in residential real estate.
4. The committee saw increasing strength in commercial real estate.
5. Hiring picked up in late April/May.
6. Wage pressures do not seem to have increased.
7. Four districts reported disappointing retail sales.
8. Most areas didn't see a rise in overall price pressures.
9. Most districts reported that manufacturing was up.

Overall, this report paints a picture of moderate growth and inflation, which boosted stocks further. I expect US stocks to trade mixed-to-higher into the close from current levels on falling long-term rates, short-covering and bargain-hunting.

Today's Headlines

Bloomberg:
- The Fed will eventually cut borrowing costs, rather than raise them, having held its target interest rate at 5.25%, said Bill Gross, manager of the PIMCO Total Return fund.
- A group of hedge funds is tell the SEC to be on the lookout for manipulation of bonds backed by subprime mortgages.
- Bank of Canada Governor David Dodge said the dollar’s rise since April to a 30-year high outpaced demand for the country’s products compared with past moves, and repeated he may raise interest rates to cool the economy.
- The Federal Reserve gave a more upbeat assessment of US regional economies, as manufacturing and job growth picked up.
- US 10-year Treasuries surged the most since February as speculators bet that yields at a five-year high will curb the economy and inflation. The 10-year yield is falling 12 basis points from session highs.
- Ihop Corp.(IHP) offered to buy Applebee’s Intl(APPB).
- The yen is falling to the lowest against the US dollar since December 2002 and declined against the euro as Treasury yields near the highest in five years encouraged investment outside Japan.
- Crude oil is rising $.80/bbl. after a government report showed refiners cut production again during driving season.

Wall Street Journal:
- International Lease Finance Corp. may announce next week an agreement to buy at least 50 of Boeing’s(BA) Dreamliners, which would be worth $10 billion at list price.
- Computer “widget” makers may be able to earn more advertising revenue from their applications due to new data to be published today by Web tracking firm comScore Inc.
- Ceridian Corp.’s(CEN) largest stockholder may say he’s opposed to the $5.3 billion sale of the US payroll and human-resources provider and that he’s hired bankers to find a higher bid.

NY Times:
- ConAgra Foods(CAG), which owns brands including Hunt’s, Manwich, Reddi-wip and Slim Jim, is trying to strengthen its product line by making small changes.

NY Post:
- Jones Apparel Group(JNY) is in the final stages of talks to sell its Barneys NY luxury department store chain to Dubai-owned investment company Istithmar PJSC.

Dow Jones:
- European Central Bank Council member Nicholas Garganas said future interest-rate decisions will be based on economic data.

Washington Post:
- Former NY Mayor Rudi Giuliani said that he would make good on 12 campaign promises if elected president in 2008.

LA Times:
- The Los Angeles Police Dept. plans to upgrade its 911 system to accept text messages, photographs and video from mobile phones within the next few years.

Nikkei English News:
- Sony Corp.(SNE), Matsushita Electric Industrial and three other Japan-based consumer electronics companies will start an Internet video-on-demand service to be used on flat-panel televisions.

Import Prices Rise, Retail Sales Jump, Business Inventories Rise as Sales Increase

- The Import Price Index for May rose .9% versus estimates of a .3% gain and a 1.4% increase in April.

- Advance Retail Sales for May rose 1.4% versus estimates of a .6% gain and a -.1% decline in April.

- Retail Sales Less Autos for May rose 1.3% versus estimates of a .7% increase and a .1% gain in April.

- Business Inventories for April rose .4% versus estimates of a .3% gain and unch. in March.

BOTTOM LINE: Prices of goods imported into the US rose more than forecast in May on higher prices for oil and industrial supplies, Bloomberg said. Compared with a year earlier, prices of imported goods rose 1.1% in May versus a 2.1% year-over-year increase in April. The price of imported petroleum and petroleum products rose 2.7% in May versus a 6.6% increase the prior month. Prices of goods from China rose .3% in May. I continue to believe inflation measures will further decelerate through year-end.

Retail sales in the US rose by the most in more than a year in May, easing concern that record gas prices and a slowdown in housing would damage consumer spending, Bloomberg reported. More jobs, higher stock prices and wages rising more than inflation are helping to boost spending. The increase in sales was the largest since January 2006. As well, sales excluding gas rose the most since July of last year and sales at dept. stores jumped 1.3%, the most since October 2005. I continue to believe consumer spending will bounce back to above-average levels before year-end as gas prices fall, interest rates head back down, inflation decelerates further, stocks rise more, unemployment remains historically low, housing sales stabilize at relatively high levels and wages continue to outpace inflation.

Inventories at US businesses rose more than forecast in April as sales increased, signaling companies will probably ramp up orders as demand improves, Bloomberg reported. At the current sales pace, the amount of goods on hand fell to 1.27 months’ worth, the lowest since August of last year, from 1.28 months in March. Inventory de-stocking subtracted 1 percentage point from 1Q gdp growth. I suspect inventory rebuilding will help boost economic growth back around 3% this quarter.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Copper prices fell in Asia on speculation interest rates will increase in China, curbing demand in the world’s largest user of the metal.
- Asian currencies slid, paced by the Indonesian rupiah, the Malaysian ringgit and the Philippine peso, after former Fed Chairman Greenspan predicted a slump in emerging-market debt.
- The US dollar traded at an 11-week high against the euro as speculation the Federal Reserve won’t cut interest rates helped push US bond yields to a five-year high.

Wall Street Journal:
- The Bush administration will reject demand that it name China a manipulator of its currency.

Financial Times:
- Apple Inc.(AAPL) will today announce a deal to embed its iTunes internet music download service into the Bebo social networking website.

Commercial Times:
- AU Optronics Corp.(AUO) received more third-quarter orders than it can meet, a trend that may extend into the final three months of the year.

Late Buy/Sell Recommendations
Citigroup:
- The Global Tech team is introducing a new product that represents a dynamic compilation of its highest conviction ideas from around the world. US tech high conviction buys include (ADBE), (AKAM), (CTSH), (DST), (FNSR), (GOOG), (HPQ), (INTC), (ISIL), (KLAC), (QLGC) and (SNPS).

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Asian Indices are -.75% to -.25% on average.
S&P 500 indicated -.01%.
NASDAQ 100 indicated -.04%.

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Earnings of Note
Company/EPS Estimate
- (DRL)/-.13
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Economic Releases
8:30 am EST
- The Import Price Index for May is estimated to rise .3% versus a 1.3% gain in April.
- Advance Retail Sales for May are estimated to rise .6% versus a -.2% decline in April.
- Retail Sales Less Autos for May are estimated to rise .7% versus unch. in April.

10:00 am EST
- Business Inventories for April are estimated to rise .3% versus a -.1% decline in March.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -275,000 barrels versus an 112,000 barrel build the prior week. Gasoline supplies are expected to rise by 1,500,000 barrels versus a 3,510,000 barrel build the prior week. Distillate inventories are estimated to rise by 1,650,000 barrels versus a 1,864,000 increase the prior week. Finally, Refinery Utilization is estimated to rise .7%.

2:00 pm EST
- The Fed’s Beige Book report.

Other Potential Market Movers
- The weekly MBA Mortgage Applications report, (APA) Investor Conference, Needham Biotech/Medical Tech Conference, CSFB Software Conference, Merrill Lynch Global Transport Conference, Thomas Weisel Alternative Energy Conference and Goldman Sachs Global Healthcare 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 modestly higher. The Portfolio is 75% net long heading into the day.