Today's Headlines

Bloomberg:
- Bank of America(BAC) CEO Kenneth Lewis said private-equity firms will enjoy “unprecedented” access to financing for at least a few more years before a deal “goes bad.”
- The US government should quadruple spending on coal research to $190 million annually to ensure long-term supply and use of the nation’s primary power-plant fuel, said the private, nonprofit National Research Council.
- Transactions in the renewable energy and emissions-reduction industries rose 25% to a record $100 billion in 2006, driven by high oil prices and government support, the UN said.
- Canadian wholesale sales unexpectedly fell 3.1% in April, the biggest decline in almost four years, as car shipments plunged.
- Altinex ASA, a Norwegian oil and gas company, said a test showed the Huntington field in the US North Sea is a “significant” oil discovery. “We will now push for fast-track appraisal and development of this new North Sea find.”
- Crude oil is falling $1.64/bbl. to $67.64/bbl. after a government report showed US oil inventories soared to a nine-year high. However, refinery utilization dropped again substantially on ongoing refinery “problems” and the cancellation of plans earlier in the year to increase production by 500,000 barrels per day due to concerns over weak demand and rising costs.
- Nuveen Investments(JNC), the largest US closed-end fund company, agreed to be acquired by Madison Dearborn Partners for $5.75 billion in the biggest leveraged buyout in the asset-management industry.
- Morgan Stanley raised $8 billion to crate the world’s largest global property fund.
- CarMax(KMX), the biggest US used car retailer, posted a 15% gain in first-quarter profit on rising sales of late-model used vehicles, sending the shares to their biggest increase in more than a year.
- Bristol-Myers Squibb(BMY) won a court ruling upholding the patent on its best-selling drug Plavix, renewing speculation the company may be a takeover target.
- US Treasuries fell for the first time in four days on concern a slowdown in housing may not slow the US economy.
- Microsoft Corp.(MSFT) agreed to change the Vista operating system after Google Inc.(GOOG) complained the software violates a 2001 antitrust settlement.

Wall Street Journal:
- MGM Mirage(MGM) and South African casino operator Sol Kerzner’s Kerzner Intl. will say today they are negotiating to develop a multibillion dollar casino resort on the north end of the Las Vegas Strip.
- Wal-Mart Stores(WMT) plans to announce today that it will sell a Visa debit card under its own name at the company’s retail outlets.
- Acquisitions in the software industry are likely to maintain their rapid pace for the remainder of this year, citing the 451 Group, a technology-industry consulting firm and analysts.
- The pace of acquisitions in the US hotel industry is likely to increase even if purchases of commercial real estate slow, citing data from SNL Financial.
- Verizon Wireless, a unit of Verizon Communications(VZ), may announce an agreement today with Obopay Inc. mobile-payment company to let subscribers transfer funds and make purchases over mobile phones.

CNBC:
- JPMorgan Chase(JPM) and other companies have begun selling assets in a Bear Stearns Cos. hedge fund that’s based on subprime mortgage securities.

NY Times:
- President Bush will issue an executive order today that directs federal health agencies to promote research into making stem cells that don’t require the destruction of an embryo.
- A White House report found that immigration has a positive effect on the US economy and the income of native-born US workers.

GamesIndustry.biz:
- Take-Two Interactive Software’s(TTWO) video game “Manhunt 2” received a preliminary “Adults Only” rating from the US Entertainment Software Rating Board.

USA Today:
- The US military has reached agreements with more than 10 Iraqi tribes around Baghdad to fight the al-Qaeda terrorist organization.

Financial Times:
- Commodity-trading groups plan to lobby against proposals to tighten industry regulation under the oversight of the European Union’s Market in Financial Instruments Directive, or Mifid. Trading groups say stricter rules and increased capital requirements may reduce liquidity.

China Daily:
- The use of embezzled public funds to buy shares has become a “major threat” to China’s stock markets, citing Zou Bihua, a judge with the Shanghai High People’s Court.

Economic Releases

- None of note

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Is Israel the new South Africa? A determined group of British academics thinks it might be. They couldn’t be more wrong.
- PetroChina Co., the country’s biggest oil company, plans to sell as many as 4 billion shares in Shanghai, which may raise $5.6 billion, based on the company’s share price in Hong Kong.
- Microsoft Corp.(MSFT) reached an agreement with state and federal antitrust officials to make competing desktop search programs run more easily through the software maker’s Windows Vista operating system.
- New Zealand’s Finance Minister Michael Cullen said there’s a risk of a “significant downturn” in housing after the central bank raised its benchmark interest rate to a record to cool demand.
- The Bank of Japan’s policy board retained its commitment to gradually raise the country’s interest rates, the lowest among major economies, according to the minutes published today in Tokyo.
- China’s annual inflation rate may climb to about 3.3% in 2007 from a year earlier, citing a government agency.

Wall Street Journal:
- Iraq will ask China to invest in the Middle East nation’s oil fields in a visit by Iraqi President Jalal Talabani to Beijing.

AP:
- North Carolina lawmakers passed a bill that would allow Governor Mike Easley to immediately remove suspended Durham County District Attorney Mike Nifong from office.

London-based Times:
- News Corp.(NWS/A) discussed swapping its Internet social-network unit, MySpace, with Yahoo!(YHOO) Inc. for a 25% share in the combined group to gain more Net exposure.

Guardian:
- China has passed the United States to become the world’s biggest producer of carbon dioxide, figures released yesterday reveal, citing the Netherlands Environmental Assessment Agency.

Shanghai Securities News:
- China Vanke Co. Chairman Wang Shi said bubbles in the country’s property market will burst in two to three years, or earlier. Vanke is the country’s largest publicly traded real estate developer.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (BBY), target lowered to $57.
- We continue to expect record natural gas storage levels by the end of the 2007 injection season. We expect ending inventory this year to be 3,617 Bcf, 5% above last year’s record of 3,461 Bcf and 1% above our prior estimates. Higher storage vs. previous estimates is due to our reduced industrial demand forecast.

Night Trading
Asian Indices are unch. to +.75% on average.
S&P 500 indicated +.01%.
NASDAQ 100 indicated -.03%.

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Earnings of Note
Company/EPS Estimate
- (KMX)/.30
- (CC)/-.32
- (CMC)/.79
- (CMVT)/.17
- (FDX)/1.97
- (MS)/2.00
- (SONC)/.31

Upcoming Splits
- (SEIC) 2-for-1
- (AGN) 2-for-1
- (ESRX) 2-for-1

Economic Releases
10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -50,000 barrels versus an 87,000 barrel build the prior week. Gasoline supplies are estimated to rise by 1,190,000 barrels versus a 3,000 barrel rise the prior week. Distillate inventories are expected to increase by 870,000 barrels versus a 287,000 barrel gain the prior week. Finally, Refinery Utilization is expected to rise by .75% versus a -.40% decline the prior week.

Other Potential Market Movers
- The Fed's Geithner speaking, Fed's Fisher speaking, Fed's Yellen speaking, weekly MBA Mortgage Applications report, (NVDA) analyst meeting, (MDT) analyst meeting, Jeffries Financial Services Conference, NXTcomm 2007, William Blair Growth Stock Conference and Merrill Lynch Financial Services Conference could also impact trading today.

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

Stocks Finish Slightly Higher as 10-year Yield Plunges 24 Basis Ponints in 5 Trading Days

Indices
S&P 500 1,533.70 +.17%
DJIA 13,635.42 +.16%
NASDAQ 2,626.76 +.01%
Russell 2000 848.34 +.24%
Wilshire 5000 15,451.28 +.18%
Russell 1000 Growth 605.19 +.11%
Russell 1000 Value 879.84 +.22%
Morgan Stanley Consumer 738.11 -.17%
Morgan Stanley Cyclical 1,089.29 -.07%
Morgan Stanley Technology 624.56 -.20%
Transports 5,132.50 -.06%
Utilities 503.10 +.06%
MSCI Emerging Markets 132.50 +.14%

Sentiment/Internals
Total Put/Call .87 -4.40%
NYSE Arms 1.09 -4.37%
Volatility(VIX) 12.85 -4.25%
ISE Sentiment 151.0 +6.3%

Futures Spot Prices
Crude Oil 69.09 unch.
Reformulated Gasoline 223.65 -1.23%
Natural Gas 7.53 -2.16%
Heating Oil 202.50 -.45%
Gold 664.50 +.70%
Base Metals 252.61 -2.83%
Copper 341.30 -.20%

Economy
10-year US Treasury Yield 5.08% -5 basis points
US Dollar 82.54 -.21%
CRB Index 317.82 -.96%

Leading Sectors
Airlines +2.08%
Disk Drives +1.89%
Networking +.62%

Lagging Sectors
Energy -.19%
Retail -.40%
Semis -.60%

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Afternoon Recommendations
Piper Jaffray:
- Rated (SPNC) Outperform, target $13.

Oppenheimer:
- Rated (BABY) Buy, target $20.
- Rated (ASVI) Buy, target $26.

RBC:
- Reiterated Outperform on (BBY).

Afternoon/Evening Headlines
Bloomberg:
- Nickel plunged 7.2% today, the most in nine months, on speculation that stainless steel makers will continue to cut use of the metal.
- US Senate lawmakers rejected proposals to increase the production of transportation fuel from coal. The fuel process, known as coal-to-liquids, aims to reduce US consumption of oil by creating diesel from coal. The US has the world’s largest known reserves of coal, according to the EIA, with enough supply for about 236 years at current usage levels.
- Merrill Lynch(MER) will proceed with a plan to sell about $800 million of bonds from a money-losing hedge fund run by Bear Stearns(BSC), a day after delaying a similar auction.
- NYC Mayor Bloomberg said today he would leave the Republican Party and switch his voter registration to independent.
- Most members in a group of US liberal arts colleges plan to stop participating in US News & World Report’s higher-education rankings, saying the magazine’s yearly survey misleads students.
- A US Senate panel approved almost $11 billion in new taxes on oil and natural gas drilling in the Gulf of Mexico.
- General Electric(GE) share surged the most since January 2004 amid expectations that profit from selling commercial jet engines will increase because of plane orders announced this week at the Paris Air Show.
- Home Depot(HD) agreed to sell its contractor-supplies unit to three buyout firms for $10.3 billion and may purchase a record $22.5 billion of its stock. The stock surged 5.4% in after-hours trading.

AP:
- Cerberus Capital Management’s planned purchase of DaimlerChrysler’s(DCX) Chrysler Group has been approved by US antitrust regulators.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my I-banking longs, Biotech longs and (TLT) long. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was mildly positive today as the advance/decline line finished slightly higher, sector performance was mostly positive and volume was about average. Measures of investor anxiety were slightly above average into the close. Today's overall market action was mildly bullish. As the many U.S. stock market "fearleaders" were talking about the probability of a 6% yield on the 10-year due to the runaway inflation they see all around them, the bond was putting in a meaningful bottom. Their scary inflation rhetoric came even as gold was falling, the U.S. dollar was rising, and Treasury Inflation Protected Securities(TIPS) were dropping. The 10-year yield has now plunged 24 basis points in five trading days. Investors should never forget that there has never been a time in U.S. history when this many market participants perceive that they personally benefit from a declining or stagnant U.S. economy and stock market. While bonds are getting overbought short-term, I still suspect we will see 4.75% on the 10-year yield during the third quarter. Natural gas dropped another 1.9% today and continues to trade poorly on little news even as oil has headed higher. As well, the Bloomberg Base Metals spot index is weakening noticeably and getting close to a technical breakdown. Agricultural commodities took a beating today with the Goldman Sachs Agricultural Index Spot falling 3.2%. Meteorlogix is forecasting above-average rain for the Midwest over the next 10 days, which should help newly planted crops. Corn closed down 4.7%, soybeans down 2.9% and wheat down 3.2%. There is also speculation that China will announce plans to restrict ethanol production. I suspect corn has put in place another meaningful top. This could further boost the 10-year as inflation expectations ratchet even lower.

Stocks Slightly Higher into Final Hour as Long-term Rates Continue to Plunge

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Medical longs, I-Banking longs and Biotech 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 slightly higher, sector performance is mostly positive and volume is about average. A recent JPMorgan client survey shows bullishness on US Treasuries, which some well-known US stock market bears are pointing to as evidence that yields are heading higher. I follow that survey, but don't find it that useful. It showed bullishness on treasuries in September 2003, right before the 10-year yield dropped from 4.47% in mid-October 2003 to 3.68% in mid-March 2004. Moreover, there are many other gauges that show very muted sentiment toward long-term US treasuries. For example, the put/call open interest ratio on the 10-year futures is a very high 1.47, the highest in at least a year. As well, 10-year large specs have trimmed their long positions in half over the last couple of months, while commercial hedgers have cut their short positions in half. I continue to believe that long-term yields have peaked for this year as growth slows again in the third quarter and inflation measures decelerate further before year-end. As well, an emerging markets sell-off could fuel increased demand for U.S. treasuries. Weekly retail sales rose 1.9% this week vs. a 1.7% gain the prior week, however, they remain below average levels. Once again, there are many true growth stocks rising meaningfully today, despite the mixed performance of the major averages. I expect US stocks to trade mixed-to-higher into the close from current levels on falling long-term rates, short-covering and investment manager performance anxiety.