Thursday Watch

Late-Night Headlines
Bloomberg:
- The AFL-CIO is calling for a crackdown on hedge funds and buyout firms, urging lawmakers to raise taxes on the companies’ executives and asking pension funds to limit their investments in the private pools of capital.
- The risk of owning corporate bonds fell as concerns eased that losses from subprime mortgages will slow the US economy.
- Areva SA, the world’s largest maker of nuclear power stations, and General Electric(GE) are among four companies poised to share $14 billion of orders from India as nations prepare to lift a 33-year ban.
- Mark Zandi, chief economist at Moody’s Economy.com, says the US is not in a “credit crunch.”
- Samsung Electronics and Sony Corp.(SNE) executives visited flat-panel display makers in Taiwan seeking to ensure sufficient supply in a peak season for electronics exports. Taiwan’s production of flat panels for computers can only meet as much as 85% of demand.
- South Korea’s central bank unexpectedly raised its benchmark interest rate for a second time in as many months to reduce the risk that higher borrowing by households and small businesses will fuel asset-price bubbles.
- S&P analysts Tanya Azarchs, Rodrigo Quintanilla, Victoria Wagner, Scott Sprinzen said banking industry margins are at high levels.

Wall Street Journal:
- Computers don't always work. That was the lesson so far this month for many so-called quant hedge funds, whose trading is dictated by complex computer programs.
- Google Inc. began allowing participants in news stories to post comments about the articles through the Google News service, a move that is raising questions in the media industry.
- Movie-rental chain Blockbuster Inc.(BBI) secured a foothold in the small but potentially significant online movie downloading business by acquiring Movielink LLC, a downloading service owned by the major Hollywood studios.

MarketWatch.com:
- Publix Super Markets, a grocery chain in the Southeast, this week joined a growing group of retailers cutting prices on commonly prescribed generic drugs available at their stores' pharmacies. But Publix is taking it one step further by not just discounting but giving away some medicines for free.
- Is a bottom in place? Commentary: Indicator that has a good track record is close to a buy signal.

Boston Globe:
- Deal makers in the so-called clean technology business are mostly brushing aside recent market weakness and forecasting a healthy flow of venture capital and other transactions in the solar, biofuel and wind energy sectors for the remainder of the year.

CNNMoney.com:
- Leon Cooperman: Why I’m a bull. A hedge fund superstar explains in Fortune magazine why stocks are on track for solid gains – despite the market’s sudden selloff.
- Bear Stearns Cos. (BSC) this week began sending letters to clients reassuring them the firm was financially sound, in an effort to keep people from withdrawing their business.
- Retail stocks: Don’t bail out just yet. Despite high gas prices, housing slump and a credit crunch, Americans are still shopping. Could this boost retail stocks in the months ahead?

DigiTimes:
- Samsung Electronics raised prices of some flash memory chips by 19% after a power outage disrupted the company’s semiconductor production.

Financial Times:
- Rupert Murdoch on Wednesday said he had been willing to endure “criticism normally leveled at a genocide tyrant” during his three-month battle to acquire Dow Jones because he was so convinced that Dow Jones and News Corp. were a “perfect fit” for a digital age.
- Blackstone(BX) on Wednesday closed the world’s biggest private equity fund at $21.7 billion, setting a high-water mark for fundraising in the buy-out industry even as turmoil in global credit markets has raised questions about its future. In spite of the turmoil in corporate debt markets – whose previous health had fuelled an extraordinary dealmaking spree by buy-out groups – there has been no sign that credit conditions have also brought a slowdown in private equity fundraising.

Reuters:
- Forget exchanging letters, phone calls or e-mails. This year, Wal-Mart Stores Inc.(WMT) wants students heading to college to log on to Facebook to design their dorm room with their roommate.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (ABK), target $103, and (MBI), target $74. Guarantors are finally recovering, but valuations are still compelling. Ambac(ABK) is trading at 1.12x year-end 2007 book value and MBIA(MBI) at 1.14x (75% and 83% of adjusted book, respectively). Last week the stocks were trading as though they were in distress; this week there isn’t enough stock to go around. Given the rapid change in director of the shares, we would allow further volatility, but would view current levels as very attractive. Guarantors are built to be a “port in a storm:” Bond exposures are diversified. Guarantors do not have to post collateral for mark-to-market losses. They are paid handsomely in times of market distress to get deals done. They exist despite the function of rating agencies tracking bonds. In 2001-2002- the worst credit environment seen in decades – and on the heels of less-than-perfect underwriting, they still did not incur losses. Since 2004, Ambac and MBIA have curtailed new business as a “lack of fear” undermined pricing and covenants. They have been waiting for wider spreads. While the stocks are trading off trough valuations, the guarantors are ramping up healthy new business.

Morgan Stanley:
- Reiterated Overweight on (RL), target $105.

Night Trading
Asian Indices are +.50% to +1.25% on average.
S&P 500 futures +.01%.
NASDAQ 100 futures +.01%

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Earnings of Note
Company/EPS Estimate
- (NDN)/.06
- (AMSC)/-.20
- (AIT)/.47
- (ASN)/.16
- (BDY)/.17
- (BGG)/.68
- (EAT)/.48
- (CPKI)/.23
- (CAH)/.86
- (CUZ)/.26
- (DBD)/.37
- (DDS)/.02
- (DTV)/.36
- (DYN)/.05
- (EIX)/.63
- (ELX)/.28
- (GLBC)/-2.58
- (HB)/.68
- (HOC)/2.43
- (LLNW)/.00
- (MIR)/.42
- (NVDA)/.42
- (STP)/.23
- (URBN)/.19

Upcoming Splits
- (HCSG) 3-for-2

Economic Releases
8:30 am EST
- Initial Jobless Claims are estimated to rise to 310K versus 307K the prior week.
- Continuing Claims are estimated to fall to 2520K versus 2525K prior.

Other Potential Market Movers
- The monthly ICSC Chain Store Sales report, Fed’s Stern speaking, (BBY) Investor and Analyst Day, Leerlink Swann Emerging Life Science Tools Conference, CSFB Electric Equipment & Multi-Industry Conference, RBC Technology Conference and Canaccord Adams Global Growth 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 modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.

Stocks Soar on Heavy Volume as Economic Pessimism Diminishes

Indices
S&P 500 1,497.49 +1.41%
DJIA 13,657.86 +1.14%
NASDAQ 2,612.98 +2.01%
Russell 2000 795.64 +2.78%
Wilshire 5000 15,006.42 +1.48%
Russell 1000 Growth 601.30 +1.44%
Russell 1000 Value 839.08 +1.33%
Morgan Stanley Consumer 727.48 +1.08%
Morgan Stanley Cyclical 1,043.75 +1.27%
Morgan Stanley Technology 638.34 +1.58%
Transports 5,079.39 +1.44%
Utilities 506.73 +.70%
MSCI Emerging Markets 134.69 +2.8%

Sentiment/Internals
Total Put/Call .98 -4.85%
NYSE Arms .79 +9.21%
Volatility(VIX) 21.45 -.51%
ISE Sentiment 121.0 +137.25%

Futures Spot Prices
Crude Oil 72.25 -.23%
Reformulated Gasoline 193.42 -.51%
Natural Gas 6.25 +.85%
Heating Oil 197.24 +.42%
Gold 685.40 +.45%
Base Metals 247.55 -1.17%
Copper 344.80 -1.67%

Economy
10-year US Treasury Yield 4.86% +10 basis points
US Dollar 80.34 -.18%
CRB Index 313.05 +.09%

Leading Sectors
Homebuilders +5.0%
REITs +4.06%
Internet +3.37%

Lagging Sectors
Defense -.31%
Tobacco -.60%
HMOs -3.13%

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Afternoon Recommendations
Bank of America:
- Rated (PCLN) Buy, target $96.
- Rated (EXPE) Buy, target $35.

Afternoon/Evening Headlines
Bloomberg:
- US stocks continued their recovery from a three-week rout after Cisco Systems(CSCO) raised its sales forecast and speculation increased that banks and homebuilders may have weathered the worst of a subprime mortgage shakeout.
- Volume on the Nasdaq exchange hit 3.67 billion shares today, the second highest volume day on record.
- President Bush and Treasury Secretary Paulson played down gyrations in financial markets and said the US economy is “strong”, requiring no change in government policy.
- William Dunkelberg, chief economist at the National Federation of Independent Business sees “no major threat” in credit markets.
- The risk of owning corporate bonds fell again as concerns eased that losses from subprime mortgages will slow the US economy.
- US Housing and Urban Development Secretary Alphonso Jackson said the government may raise the limit on purchases of home loans by Fannie Mae(FNM) and Freddie Mac(FRE) in order to increase liquidity in the mortgage market.
- Crude oil fell again in NY, reversing earlier gains, after a report showed declining US gasoline consumption as US oil inventories remain near decade highs.
- Honda Motor(HM) said its FCX fuel-cell car is the first hydrogen-powered auto to qualify for a US tax credit aimed at promoting vehicles that don’t use petroleum-based fuels.
- American International Group(AIG), the world’s largest insurer, said second-quarter profit rose 34%.
- France has increased security controls on trains in the east of the country after receiving a tip about a terrorist threat.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs, Semi longs, Retail longs, Biotech longs and Medical 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, most sectors rose and volume was very heavy. Measures of investor anxiety were high into the close despite gains. Today's overall market action was very bullish. The Nasdaq and small-caps were especially strong. Nasdaq volume hit the second-highest on record today at 3.67 billion shares. I continue to believe the Nasdaq will substantially outperform the other major averages through year-end. As I said a couple of months ago, cyclical tech has joined growth tech in leadership, which is making for a lethally bullish combination. The Morgan Stanley Tech Index is 12.8% higher year-to-date. Growth outperformed value again today, with small-cap growth leading the way as it soared 3.6%. While the Russell 2000 is lagging for the year, it is solely a function of the weakness in small-cap value shares, which are down 3.9% year-to-date. Small-cap growth is 7.7% higher so far this year, outperforming the S&P 500. In my opinion, the argument over whether growth or value investing is a better long-term strategy isn't really the question. The question is where we are in the cycle. I continue to believe a major shift is beginning to take place into growth and away from value and that this new trend will last for several years at least. Despite better energy inventory data and less global economic pessimism today, oil was unable to rally, which is another bearish sign for the commodity. I suspect it will head into the $60s/bbl. within two weeks, barring a hurricane fear spike. I continue to believe a natural gas long hedge for a short crude position will work well for a few weeks. Today's late afternoon swoon likely left more bulls underinvested and more bears even more short. There are so many signs of investor skepticism regarding the huge surge from Monday's lows that I doubt a retest of those lows will occur. Headlines are still scary, and anxiety is still high. Too many bulls are still underinvested, and too many bears are still too short. Moreover, and most importantly, many market-leading stocks are breaking out on very large volume. That doesn't mean we can't pull back or rest for a bit, but I think a retest of the lows is unlikely.

Stocks Higher into Final Hour, Led by High Volume Surge in Tech Shares

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Biotech longs, Semi longs and Internet longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is very positive today as the advance/decline line is substantially higher, most sectors are higher and volume is very heavy. My intraday gauge of investor angst is still high. The financials surging higher in the face of ongoing negative news and a strong breadth breakout today leads me to conclude that the bottom for this pullback was seen on Monday, as I speculated that morning. It is also positive that today's rally is still being met with skepticism. The ISE Sentiment Index, after hitting a record low yesterday, is still a low 100.0. The CBOE total put/call hit a high 1.17 this morning, and its 10-day moving average remains near record levels. The VIX is jumping 6% today and remains near levels last seen in 2003. S&P is saying that it expects i-bank ratings to remain stable despite the fact that third-quarter results will be negatively impacted by recent issues, according to Reuters. The i-banking index remains 1.7% higher on the day. On Monday, the S&P 500 surged +2.4%. However, the average market-neutral fund fell -.67% that day, according to Dow Jones. It is also interesting to note that the long/short strategy, which has the ability to be more opportunistic, was flat on Monday. I think the extreme popularity of the market-neutral strategy since the bubble burst in 2000 has helped to pump air into the current "U.S. negativity bubble" and has played a significant role in the recent parabolic rise in short interest. I think it's very poor risk-adjusted return of 2.8% annualized over the last three years may indicate that these funds are being run in a more net short manner than market-neutral. I continue to believe this strategy will begin to see substantial redemptions very soon and that some of this money will find its way into more positively correlated U.S. stock strategies, which could lead to the "mother of all short-covering rallies." I expect US stocks to trade modestly higher into the close from current levels on short-covering, less economic pessimism and bargain hunting.

Today's Headlines

Bloomberg:
- US stocks rallied for a third day on diminishing concern that mortgage losses will hurt earnings at homebuilders and banks and after Cisco Systems(CSCO) increased its sales forecast.
- Citigroup(C), the largest US bank, and food maker Kraft Foods(KFT) led at least 13 companies taking advantage of a renewed appetite for debt in the busiest day in a month.
- Lehman Brothers(LEH) led the biggest increase in the Amex Securities Broker/Dealer Index since June 2006, as investors bought beaten down shares.
- President Bush said the US economy is “thriving” and he criticized congressional Democrats for crafting tax-and-spend programs that he said may derail growth or disrupt the path to a balanced federal budget.
- Blackstone Group LP(BX) raised $21.7 billion for the world’s biggest private-equity fund, just as a global credit crunch slows leveraged buyouts.
- Nokia Oyj(NOK) will retreat from most development of chips in handsets and put four semiconductor makers including Texas Instruments(TXN) in charge of the designs to help cut costs.
- Mortgage applications in the US rose last week by the most since January, as cheaper borrowing costs encouraged more Americans to seek loans for home purchases and refinancing.
- Copper is falling in NY to the lowest in six weeks as global inventories of the metal jumped the most since 2005, easing supply concerns.
- Sugar is falling to a three-week low in NY on speculation that supplies from Brazil and India, the world’s biggest producers, will expand a glut of the sweetener.
- Uranium prices, which have plunged by 20% in the past 10 weeks, may fall as low as $95 a pound in the “next few months,” said Troika Dialog, Russia’s oldest investment bank.

Wall Street Journal:
- Walt Disney’s(DIS) ESPN may say today that it will revamp its ESPN360.com all-video Internet site, aiming to draw new viewers with more live programming.

NY Times:
- Roadside bombs supplied by Iran caused 23 of 69 combat deaths suffered by US-led forces in Iraq last month, citing Lieutenant General Raymond Odierno, the No. 2 US commander in Iraq.

NY Post:
- Democratic Governor Eliot Spitzer wants illegal immigrants to have access to protective services without facing the risk of deportation.

Washington Post:
- The US and Mexico are close to reaching an agreement for an aid package aimed at combating drug cartels in Mexico, citing US lawmakers, congressional aides and Mexican officials.

CNBC:
- Bear Stearns(BSC) CEO Cayne is planning to go to China in the next few weeks to look for a joint-venture partner or a partnership that would lead to a strategic investment in the company, Charles Gasparino reported.

Chronicle of Higher Education:
- An English-language university in North Korea is nearing completion and its backers hope it will open next spring.

Daily Telegraph:
- China suggested it will sell holdings of Treasuries should the US congress impose trade sanctions to force a yuan revaluation, citing two Chinese officials.

Wholesale Inventories at Record Lows, Sales Rise Again

- Wholesale Inventories for June rose .5% versus estimates of a .4% gain and a .5% increase in May.

BOTTOM LINE: Sales at US wholesalers rose faster than inventories in June, making it likely companies will continue to rebuild stocks, Bloomberg reported. Sales rose .6% versus a 1.3% gain in May. Distributors had 1.1 months worth of goods on hand at the current sales pace, matching the all-time low. Computer and hardware distributors showed the biggest gains in sales versus inventories. Sales of computer equipment jumped 5.4% in June. Sales of petroleum products fell 1.0%. I still believe inventory rebuilding will continue to help boost overall US economic growth over the intermediate-term as companies gain confidence in the sustainability of the current expansion.

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