Tuesday Watch

Late-Night Headlines
Bloomberg:
- Billionaire investors Nelson Peltz said he might pay as much as $41 a share for hamburger chain Wendy’s Intl.(WEN).
- Japan’s households increased spending for a sixth month in June and the jobless rate fell, suggesting consumer spending will help extend the economy’s longest postwar expansion.
- The yen fell for a second day against the euro as a rebound in US stocks gave investors confidence to buy higher-yielding assets funded by loans in Japan.
- Nicolas Sarkozy is rolling out the welcome mat for thousands of rich French people who fled one of Europe’s most onerous tax regimes. Few may heed his call.
- The US aims to reach agreements with China on food and drug safety by December as a US delegation started the first of a series of talks with the Chinese government in Beijing.
- Confidence among South Korean manufacturers for August increased for the first time in four months, suggesting companies may ramp up production and spur growth in Asia’s third-largest economy.
- MySpace.com co-founder Brad Greenspan made a new proposal to invest $600 million in cash and stock in three joint ventures with Dow Jones(DJ) and said he has received interest from five “credible” investor groups.
- Northrop Grumman Corp.(NOC) won satellite system-modification work from the US Air Force valued at as much as $2.34 billion.
- Smoking one marijuana joint has the same detrimental effects as smoking as many as five cigarettes, a study said.

Wall Street Journal:
- Marathon Asset Management LLC is starting a new fund that will buy mortgage-related assets in an effort to capitalize on problems in the sub-prime lending market. Marathon, a $9 billion hedge-fund focuses on debt markets, will start taking orders from investors for the Marathon Distressed Sub-Prime Fund in August, citing a letter sent to clients by Marathon President Bruce Richards.
- With deal-related financing markets in disarray, private-equity buyouts are being delayed around the world, giving corporate buyers an advantage over the cash-rich private-equity firms for the first time in years.
- News Corp.(NWS/A) and Dow Jones(DJ) edged closer to a final agreement on the sale of the publisher to the media giant late yesterday, as Dow Jones negotiated on an unusual deal for the company to cover advisory fees for its majority owners, the Bancrofts, in exchange for some holdout family members supporting the deal.

MarketWatch.com:
- Commentary: Why gold didn't profit more from the stock market's difficulties.

Late Buy/Sell Recommendations
Citigroup:
- Upgraded (CE) to Buy, target $45.
- Reiterated Buy on (CBG), target $47.
- Downgraded (RSH) to Sell, target $20.
- Reiterated Buy on (WMB), target raised to $40.
- Reiterated Buy on (HUM), target $88.
- Reiterated Buy on (AXP), target $78. We believe the recent weakness in AXP’s shares, which appears driven by broader market concerns about credit is significantly overdone. We believe the macro economic environment should continue to support AXP’s above average growth and returns. Citi’s economists/strategists are sanguine about the broader economy and view the high-end consumer as a source of relative strength. We see AXP’s premium brand, products, and customers as key drivers of its premium pricing relative to its network competitors over the foreseeable future. AXP’s pricing power is supported by its rewards programs and network partnerships. We think the market’s recent valuation of AXP’s shares(15 times our 2008 EPS estimate) significantly overestimates the company’s exposure to broader market credit issues and significantly underestimates the benefits of its positioning, strategy and processing-heavy mix of business.
- Added (WB), (EMN) and (JWN) to Recommended List; Removed (JCP).

Morgan Stanley:
- Reiterated Buy on (VZ), target raised to $45.

Night Trading
Asian Indices are unch. to +1.25% on average.
S&P 500 futures +.02%.
NASDAQ 100 futures -.11%.

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Earnings of Note
Company/EPS Estimate
- (AG)/.52
- (AEP)/.57
- (ADP)/.36
- (AVP)/.45
- (BEAV)/.38
- (BWLD)/.22
- (CBS)/.51
- (CEPH)/1.01
- (CMG)/.45
- (COH)/.41
- (CVH)/.95
- (DBD)/.37
- (DWA)/.33
- (FSLR)/.03
- (GM)/1.10
- (GMR)/.40
- (HLT)/.33
- (IACI)/.33
- (IMCL)/.31
- (LIZ)/.24
- (MRO)/2.14
- (MAS)/.47
- (MET)/1.33
- (NCR)/.58
- (NMX)/.58
- (PPC)/.62
- (RUTH)/.24
- (SAF)/1.54
- (SGR)/-.01
- (JOE)/.16
- (UA)/.03
- (VLO)/3.75

Upcoming Splits
- (SJR) 2-for-1

Economic Releases
8:30 am EST
- Personal Income for June is estimated to rise .5% versus a .4% gain in May.
- Personal Spending for June is estimated to rise .1% versus a .5% gain in May.
- The PCE Core for June is estimated to rise .2% versus a .1% rise in May.
- The 2Q Employment Cost Index is estimated to rise .9% versus a .8% gain in 1Q.

9:45 am EST
- The Chicago Purchasing Manager Index for July is estimated to fall to 58.4 versus 60.2 in June.

10:00 am EST
- Consumer Confidence for July is estimated to rise to 105.0 versus 103.9 in June.
- Construction Spending for June is estimated to rise .2% versus a .9% gain in May.

Other Potential Market Movers
- The Keefe Bruyette & Woods Community Bank Conference, S&P/CS Home Price Composite, weekly retail sales reports and (LSI) Analyst Day could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by technology and mining 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 Near Session Highs on Diminished Credit Fears, Bargain-Hunting, Short-Covering

Indices
S&P 500 1,473.91 +1.03%
DJIA 13,358.31 +.70%
NASDAQ 2,583.28 +.82%
Russell 2000 784.23 +.82%
Wilshire 5000 14,806.47 +.97%
Russell 1000 Growth 593.15 +1.08%
Russell 1000 Value 827.26 +.97%
Morgan Stanley Consumer 707.93 +.78%
Morgan Stanley Cyclical 1,046.76 +2.03%
Morgan Stanley Technology 639.23 +.89%
Transports 5,094.67 +1.10%
Utilities 478.42 +.76%
MSCI Emerging Markets 134.99 +1.49%

Sentiment/Internals
Total Put/Call 1.15 -11.54%
NYSE Arms .55 -60.02%
Volatility(VIX) 20.87 -13.65%
ISE Sentiment 133.0 +.76%

Futures Spot Prices
Crude Oil 76.69 -.43%
Reformulated Gasoline 208.56 -.77%
Natural Gas 6.54 +5.2%
Heating Oil 206.55 -.37%
Gold 676.80 +.67%
Base Metals 252.50 -.46%
Copper 358.90 +1.18%

Economy
10-year US Treasury Yield 4.80% +4 basis points
US Dollar 80.85 -.12%
CRB Index 320.99 +.43%

Leading Sectors
Alternative Energy +3.03%
Engineering & Construction +2.81%
Steel +2.08%

Lagging Sectors
Tobacco -.39%
Computer Services -.47%
Biotech -.81%

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In Play

Afternoon Recommendations
Piper Jaffray:
- Upgraded (VCLK) to Outperform.

Afternoon/Evening Headlines
Bloomberg:
- US stocks rebounded after the worst two-day skid since 2003 after Wall Street’s biggest securities firms, led by Citigroup(C), Goldman Sachs(GS) and Bank of America(BAC), said the sell-off made banks, homebuilders and retailers relative bargains.
- Sun Microsystems(SUNW), the world’s fourth largest maker of server computers, reported net income of $329 million, exceeding analysts’ estimates. The shares surged 9.8% in after-hours trading.
- Banks led by Bank of America(BAC) agreed to provide as much as $21 billion of debt financing to fund Blackstone Group’s(BX) leveraged buyout of Hilton Hotels(HLT), the second-largest US hotel chain.
- Treasuries declined the most in two weeks as US stocks rebounded, suggesting investors were becoming more comfortable with risk after last week’s global equity sell-off.
- CB Richard Ellis(CBG) today reported second quarter revenue increased 64.9% and raised 2007 guidance. The shares jumped 9.4% in after-hours trading.
- Ethanol in Chicago fell to a three-week low on concern there is an oversupply of the grain-based additive and as gasoline declined.
- The average US pump price for regular gasoline fell 8.2 cents to $2.88 a gallon in the week ended today, the government said.

BOTTOM LINE: The Portfolio finished higher today on gains in my Retail longs, I-Banking longs, Semi 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 positive today as the advance/decline line finished mildly higher, most sectors rose and volume was heavy. Measures of investor anxiety were above average into the close. Today's overall market action was bullish. Many quality growth stocks posted gains substantially above those in the major averages once again. These stocks held up much better during the sell-off and are now leading to the upside. This is significant and continues to be ignored. Cyclicals were also outperformers today as extreme economic pessimism subsided slightly. The 10-year yield rose 4 basis points, finishing near session highs, as well. Recent worries over the advance/decline line seem overdone to me. The NYSE cumulative advance/decline line isn't even below its 50-week moving average yet, which is where it has found support a couple of times over the last five years since the 100% gain in the S&P 500 began. The CBOE total put/call finished at an above average 1.15. My intraday gauge of investor angst also finished at an above-average level, despite today's gains. I still suspect we will see some gains in Asia and Europe before the open tomorrow here that could further boost U.S. stocks. It is quite telling, in my opinion, that once again insider selling was very muted last week and remains near levels more associated with market bottoms than market tops. Why aren't I-banking execs selling if they know their firms' or clients' problems will lead to a systemic crisis that will result in a negative economic event? In fact, the banking, investment and savings/loan sectors saw the greatest insider buying last week. This is a key development that is also being ignored.

Stocks Surging into Final Hour on Bargain-Hunting, Short-Covering, Diminished Credit Fears

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Medical longs, Semi longs and Retail longs. I covered my (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 100% net long. The overall tone of the market is positive today as the advance/decline line is higher, most sectors are rising and volume is heavy. My intraday gauge of investor angst is at an above-average level. I continue to believe recent credit fears are way overdone. We have been hearing for a couple of years now that a recession was imminent as consumer spending plunged as a result of housing. Second-quarter GDP came in at a very healthy 3.4%. As well, the core PCE showed a substantial deceleration, even with $70 oil. Inflation readings are already below long-term average rates. If oil falls meaningfully from current levels, as I suspect, inflation readings will actually reach low rates. Even if stocks stabilize and begin moving higher over the coming weeks, as I expect, I do not believe the 10-year yield will move anywhere near the 5.32% seen six weeks ago as a result of the substantial deceleration in inflation I foresee. As well, GDP growth should average around 3% through year-end, which will provide a very positive backdrop for investing as earnings continue to exceed estimates. I also see the Nasdaq outperforming the other major averages as growth stocks, specifically technology growth stocks, lead the broad market substantially higher. Growth stock outperformance last week was incredible, which will likely result in more large investors increasing exposure to these types of stocks that can grow meaningfully, even if global growth slows from recent booming levels. Again today, many quality growth stocks I monitor are posting huge gains, substantially outperforming the major averages. As well, several indicators I monitor are exceeding the extreme levels seen at the March market lows. Odd-lot short-selling soared last week, easily eclipsing levels seen during the previous fear spike in March. As well, the CBOE total put/call surged near March levels, and NYSE Advancing-Declining Volume surpassed March levels last week. Finally, the Rydex Nova/Ursa Ratio and NYSE Ticks exceeded levels seen during the March lows. These are several of the indicators I follow that are around levels normally associated with meaningful market bottoms. While there could be more near-term turbulence, I still expect stocks to rise substantially from current levels as credit/housing fears subside, interest rates remain low, M&A activity surges into the fall, energy prices fall meaningfully, inflation decelerates further, consumer/investor sentiment rises, consumer spending accelerates, the U.S. dollar firms, earnings continue to exceed estimates, unemployment remains historically low, wages continue to substantially outpace inflation, and technology spending accelerates. I still expect the S&P 500 to return about 17% for the year. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, diminishing credit fears and short-covering.

Today's Headlines

Bloomberg:
- Citadel Investment Group LLC took over Sowood Capital Management’s credit holdings after the Boston-based hedge-fund manager suffered losses on corporate bonds and loans.
- Morgan Stanley’s(MS) credit rating was raised one level to AA- from A+ by S&P, which said improvements in the firm’s “competitive position” will enable it to ride out market declines.
- HSBC Holdings(HBC), the world’s fourth-largest bank and one of the first to warn of sub-prime problems, said first-half profit rose 25%, beating analysts’ estimates.
- Gasoline futures fell again before a weekly Energy Dept. supply report that may show a second consecutive inventory increase during the heart of driving season.
- Rupert Murdoch’s News Corp.(NWS/A) said it is “highly unlikely” to proceed with a $5 billion bid for Dow Jones(DJ) without more support from the publisher’s controlling Bancroft family. Dow Jones shares plunged as much as 9.1%.
- China’s government curbed bank lending for a sixth time this year to cool the economy after the fastest expansion since 1994.

Wall Street Journal:
- The US Pension Protection Act of 2006, which allows automatic enrollment of workers into 401(k) retirement plans, will greatly expand the pool of investors, Charles Schwab, CEO at Charles Schwab(SCHW) said.
- The Sierra Club notified Target Corp.(TGT), Dollar General(DG) and RC2 Corp.(RCRC) and seven other US companies they are required to file reports with the US Environmental Protection Agency over lead contamination in toys and other products from China.
- Global energy shares may not be a good place for investors seeking to weather a clampdown on credit because the industry’s profit may have peaked.
- LS9 Inc., a renewable petroleum company based in Silicon Valley, California, maintains it has developed a new way to extract energy from plant sugars.
- Goldman Sachs(GS) is boosting the size of a corporate debt fund it is starting to $20 billion take advantage of the turmoil in credit markets.
- Whirlpool Corp.(WHR) is using cardboard, Styrofoam and computers to eliminate dents, dings and scrapes that add millions to production costs annually.

Forbes.com:
- Gasoline prices could decline by 2010 amid a “potential oversupply” of oil products, even though US refining capacity will be expanded less than previously thought, according to a new report by Edinburgh, Scotland-based consultancy Wood Mackenzie LTD.

NY Post:
- NY Democratic Governor Eliot Spitzer’s administration prevented investigators from questioning two top aides in a probe of the governor’s use of state police to collect records on a political rival.

Financial News:
- World issuance of investment-grade bonds is at nearly a three-year low, citing Thomson Financial.

Economic Releases

- None of note

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