Stocks Higher into Final Hour on Diminished Subprime Fears, Buyout Speculation, Short-Covering

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Software longs and Semi longs. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is slightly positive today as the advance/decline line is slightly lower, most sectors are rising and volume is above average. Tech stocks continue to trade very well. The Morgan Stanley Tech Index is now 12.1% higher year-to-date vs. a 7.7% gain in the S&P 500. As I said a couple of months ago when tech was being maligned on a daily basis, I think it will outperform through year-end. It still isn't too late to increase exposure to the group, in my opinion. I still plan to add to my Goldman Sachs (GS) long on any further significant weakness related to another spike in sub-prime fears. As I have said before, if housing results in a bear market, it will be the most telegraphed and obvious bear market catalyst in history. I continue to believe sub-prime problems will remain contained for the most part and that consumer spending will accelerate meaningfully into the fall as energy prices drop substantially, the job market remains healthy, inflation decelerates further, stocks rise more, home sales stabilize at relatively high levels and long-term rates move back down. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- The SEC’s top market-regulation official said Bear Stearns(BSC) probably will sell assets and reduce leverage in an “orderly fashion” at its two hedge funds that almost collapsed last month.
- The House Financial Services Committee will draft legislation requiring US hedge funds to keep copies of trading data.
- The US Treasury Dept.’s top domestic-finance official and a Federal Reserve governor said investor losses from subprime-mortgage delinquencies aren’t posting broader risks to the financial system.
- The SEC adopted new rules ensuring it can sue hedge funds for misleading investors, following a court ruling that put in doubt the regulator’s authority over the $1.6 trillion industry.
- Financial advisers’ pessimism about US stocks grew by the most since 2004 last week, according to a survey by Investors Intelligence, amid lingering concern the slump in housing will reduce corporate profit.
- Yahoo! Inc.(YHOO) lost the battle with Google Inc.(GOOG) in searching the Internet and now may have jeopardized its lead in display advertisements.

Wall Street Journal:
- Nuance Communications(NUAN) is poised to prosper from the widening use of speech-recognition technologies.
- Express Scripts(ESRX) became one of the first US companies to put its headquarters on a college campus by installing offices at the Univ. of Missouri in St. Louis. The university’s willingness to allow a corporation to move on to its premises underscores an effort by colleges located in urban areas to spur economic development and reclaim declining neighborhoods.
- Liz Claiborne(LIZ) plans selling or licensing 16 of its 36 brands as part of a plan to cut back after a slump in department-store sales.
- A SEC proposal to require shareholders who want to nominate candidates to corporate boards to own at least 5% of shares has been deemed too stringent by critics.

NY Times:
- NY State Governor Eliot Spitzer has asked two administration officials to draft a plan for providing all state residents with universal health coverage. The program would be phased in over several years and could cost $3 billion to $6 billion annually.

NY Daily News:
- Serious crime on the NYC subway has fallen to its lowest level since 1990 because of police surveillance and a restriction on walking and riding between train cars.

Economic Releases

- None of note

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- The Australian dollar dropped the most in two weeks against the yen as a drop in US stocks prompted investor to pare investments funded by loans in the Japanese currency.
- Democratic senators moved today to cut off funding for VP Dick Cheney’s office next fiscal year as part of a dispute over rules for handling sensitive documents.
- Pakistan must unite to defeat extremism, Prime Minister Shaukat Aziz said after an army raid on the capital’s Red Mosque left more than 50 militants dead.
- Bear Stearns(BSC) said one of the firm’s two hedge funds that flirted with collapse last month has since cut its debt in half to $600 million after finding buyers for more assets.
- Gerdau Ameristeel Corp., the US unit of Brazilian steelmaker Gerdau SA, will buy Chaparral Steel(CHAP) for $4.22 billion in cash to expand in North America. Chaparral shareholders will receive $86 a share. The stock closed trading yesterday at $75.69.

Wall Street Journal:
- The potential sale of the Wall Street Journal to News Corp.(NWS/A) has drawn together a pair of investors who had made separate proposals to keep the newspaper independent.
- Wal-Mart Stores(WMT) will be able to build supercenters in San Diego after city officials voted to override an ordinance designed to block the stores.
- Many Chinese corporations are putting piles of cash into local stocks, fueling the bull market and their own profits. But the enthusiasm in corporate boardrooms for stock investing creates the potential for a nasty fallout if the market turns sour.

Chosun Ilbo:
- South Korea may sign a formal peace agreement with North Korea and agreed to an inter-Korean summit because President Roh Moo Hyun sees progress is being made on denuclearization by the government in Pyongyang.

Shanghai Securities News:
- China’s central bank may raise interest rates twice more this year, with the first coming as soon as this month, according to a Bank of China research report.

Late Buy/Sell Recommendations
Citigroup:
- CY2Q global telecom equipment capital spending should be up more than 10% sequentially with roughly 25% increases in North America and Europe offsetting a seasonally normal 11% decline in Asia-Pacific. This overall capex increase should support generally solid results for the sector. Out Top Picks are Ciena(CIEN) and Finisar(FNSR).

Night Trading
Asian Indices are -1.0% to -.50% on average.
S&P 500 indicated +.13%.
NASDAQ 100 indicated +.13%.

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Earnings of Note
Company/EPS Estimate
- (AIR)/.41
- (CHAP)/1.37
- (DNA)/.72
- (RECN)/.31
- (RT)/.47
- (WWW)/.28
- (YUM)/.36

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- (TPL) 5-for-1

Economic Releases
10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -50,000 barrels versus a 3,151,000 barrel build the prior week. Gasoline supplies are expected to rise by 825,000 barrels versus a 1,851,000 barrel build the prior week. Distillate inventories are estimated to rise by 900,000 barrels versus a 1,162,000 barrel increase the prior week. Finally, Refinery Utilization is estimated to rise by .4% versus a .6% increase the prior week.

Other Potential Market Movers
- The Fed’s Plosser speaking, Fed’s Warsh speaking, weekly MBA Mortgage Applications report, (MSFT) financial analyst briefing at E3, (LIZ) analyst meeting, CE Unterberg Towbin Emerging Growth Conference and CIBC Consumer Growth 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 Near Session Lows on Another Bout of Subprime Fears

Indices
S&P 500 1,510.12 -1.42%
DJIA 13,501.70 -1.09%
NASDAQ 2,639.16 -1.16%
Russell 2000 837.48 -1.85%
Wilshire 5000 15,251.64 -1.42%
Russell 1000 Growth 602.35 -1.18%
Russell 1000 Value 858.48 -1.63%
Morgan Stanley Consumer 725.12 -1.29%
Morgan Stanley Cyclical 1,085.34 -1.73%
Morgan Stanley Technology 633.48 -.86%
Transports 5,198.15 -1.54%
Utilities 500.49 -1.18%
MSCI Emerging Markets 137.70 -1.08%

Sentiment/Internals
Total Put/Call .99 +22.22%
NYSE Arms 1.87 +64.50%
Volatility(VIX) 17.57 +15.90%
ISE Sentiment 157.0 -8.0%

Futures Spot Prices
Crude Oil 72.65 +.64%
Reformulated Gasoline 236.05 +.68%
Natural Gas 6.68 +4.26%
Heating Oil 211.84 +1.22%
Gold 664.50 +.30%
Base Metals 256.77 -1.38%
Copper 359.80 -.87%

Economy
10-year US Treasury Yield 5.02% -12 basis points
US Dollar 80.82 -.75%
CRB Index 323.04 +.56%

Leading Sectors
Computer Hardware -.63%
Alternative Energy -.79%
Drugs -.87%

Lagging Sectors
Homebuilders -2.65%
Retail -2.66%
I-Banks -2.88%

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Afternoon Recommendations
Bank of America:
- Rated (RPM) Buy, target $27.
- Rated (USG) Sell, target $42.

Afternoon/Evening Headlines
Bloomberg:
- Palestinian Authority President Mahmoud Abbas accused Hamas of allowing al-Qaeda into the Gaza Strip.
- Emerging-market bonds fell after Moody’s Investors Service lowered the credit ratings on $5.2 billion of bonds backed by subprime mortgages and S&P said it may cut ratings on $12 billion of the securities.
- Nasdaq Stock Market(NDAQ) gained approval for a new rule that will allow companies that it lures from rival exchanges to keep their three-letter trading symbols.
- Continental Resources(CLR) announced that it entered into fixed-price swap contracts covering 10,000 barrels of oil per day for the period from August 2007 through April 2008. During each month of the contract, Continental will get $72.90/bbl. and will pay counterparties the average of the NYMEX crude oil futures contract settlement prices for such month.

Financial Times:
- BHP Billiton(BHP) probably won’t team up with a private equity firm and bid for Alcoa Inc.(AA) and is in no rush to bid for Alcan(AL).

Die Welt:
- Adidas AG expects to have a “record year” in 2008 as the European soccer championship boosts sales, citing CEO Herbert Hainer.

BOTTOM LINE: The Portfolio finished higher today on gains in my (TLT) long, Biotech longs, Computer longs, Software longs, Semi longs and Commodity shorts. I added back to my (EEM) short and added (IWM)/(QQQQ) hedges in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was negative today as the advance/decline line finished substantially lower, every sector declined and volume was above average. Measures of investor anxiety were above average into the close. Today's overall market action was bearish. It appeared to me that Bernanke’s speech was more dovish than expected, thus leading traders to conclude that the Fed may be more worried about housing than before. This helped push the 10-year yield down 12 basis points to session lows. I suspect it will take more earnings reports from the brokers to really help lift some uncertainty, which should help push the I-banking sector higher from current levels. I will look to add to my Goldman Sachs (GS) long on any further significant weakness. On the positive side, many true “growth” stocks rose today, despite losses in the major averages. This is the best environment I have seen in years for truly good stockpickers to substantially outperform the broad market.