Stocks Lower into Final Hour on Weakness in Asia and Profit-taking

BOTTOM LINE: The Portfolio is about even into the final hour as losses in my Networking longs and Biotech longs are offsetting gains in my Commodity shorts and Internet longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, sector performance is negative and volume is about average. Despite the losses in the major averages, tech shares are displaying substantial relative strength. The Morgan Stanley Tech Index is now 10.7% higher ytd versus 7.6% for the S&P 500. I continue to believe it can rise at least 20% by year-end as the cyclical tech laggards join the growth tech leaders in the second half. Moreover, Google (GOOG) is up 1.7% today as Bernstein initiated the stock with an outperform rating and said it expects 50% profit growth this year. As well, comScore data for May released yesterday showed Google with 50.7% of the U.S. search market vs. 26.4% share for Yahoo! (YHOO), its lowest since 2003. Given Google's fundamentals, the stock remains cheap relative to the broad market and especially vs. its Internet peers. I continue to believe that the company can grow at relatively high levels for much longer than analysts expect. The stock remains my single largest equity long position. Natural gas continues to weaken on little new news and is breaking down through its 200-day moving average for the first time in five months. Inventories are poised to hit all-time record highs again this year, while industrial demand continues to weaken. In my opinion, prices anywhere near current levels are absurd and purely a function of the mania for commodities by investment funds, not fundamentals. Despite the massive infusion of capital into commodity funds over the last few years, I see technical weakness in many commodities. I expect US stocks to trade modestly higher into the close from current levels on stabilizing long-term rates, buyout speculation, short-covering and bargain-hunting.

Links of Interest

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Friday Watch

Late-Night Headlines
Bloomberg:
- The yen traded near the weakest level in more than four years against the US dollar on speculation Japan’s lowest interest rate among major economies spurred investment funded by loans in the currency.
- Nelson Peltz, the investor who waged successful battles to raise share prices at HJ Heinz(HNZ) and Wendy’s Intl.(WEN), bought a 3% stake in Kraft Foods.
- Blackstone Group LP, the buyout firm that made almost $200 billion of acquisitions in the past two decades, raised $4.13 billion in the largest US IPO in five years.
- Chinese and Russian sovereign wealth funds intend to invest primarily in corporate bonds and stocks, said Clay Lowery, the US Treasury’s top international official, citing feedback from the government of both countries.
- Bear Stearns(BSC) may take over about $3.2 billion of loans that banks and securities firms made to one of its money-losing hedge funds to prevent creditors from seizing more assets.

Wall Street Journal:
- Kohlberg Kravis Roberts may go public after rival buyout firm Blackstone Group LP’s offering priced at the high end of its range, citing an unidentified person close to KKR.

Financial Times:
- Moves to change the taxation of private equity firms could be “very dangerous” and prompt the industry to move to more favorable tax locations, citing an interview with Lloyd Blankfein, CEO of Goldman Sachs(GS).
- The creation of the world’s first derivatives contracts linked to diamond prices is at the center of two initiatives by bankers and diamond experts in the coming days.

Late Buy/Sell Recommendations
Citigroup:
- comScore released its US May internet search query data today. Google(GOOG) continued to gain share. Google’s query share increased 100 basis points M/M to a record high 50.7% of the US market. This market share gain continues a very consistent trend for Google and highlights a potential gating factor to Yahoo!(YHOO)’s attempts to gain search revenue share. Yahoo!’s(YHOO) share dropped 40 basis points M/M to 26.4%, its lowest share since at least 2003.

Business Week:
- Cleveland Biolabs(CBLI), the maker of a radiation protection compound, could secure a $200 million US Defense Dept. contract by the end of the summer. Based on that possibility, Stephen Brozak of WBB Securities rated the stock a “buy” and said no other product protects as much from radiation exposure.
- Shares of Deere & Co.(DE) will continue to rise even after increasing almost 80% since August. William Harnisch of the hedge fund Peconic Partners said global demand for human and animal food and corn-derived ethanol will send the shares to $150 each in a year to 15 months.
- Document Security Systems(DSC) is attracting investors as counterfeiting rises. The company has the top technology against counterfeiting and should have sales of $200 million in five years, citing Vincent Carrino, president of Brookhaven Capital Management.

Night Trading
Asian Indices are -.75% to unch. on average.
S&P 500 indicated -.10%.
NASDAQ 100 indicated -.09%.

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Earnings of Note
Company/EPS Estimate
- None of note

Upcoming Splits
- (GILD) 2-for-1
- (OMC) 2-for-1
- (YUM) 2-for-1
- (CCF) 2-for-1

Economic Releases
- None of note

Other Potential Market Movers
- The Fed’s Pianalto speaking could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by financial 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 Finish at Session Highs on More Economic Optimism

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Links of Interest

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Today in IBD
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***Alert***

Blogging will be light through tomorrow due to a scheduling conflict. Sorry for the inconvenience. Thanks for reading!