Stocks Finish Modestly Lower on Growth Concerns and a Rebound in Oil Prices

Indices
S&P 500 1,191.50 -.61%
DJIA 10,467.48 -.71%
NASDAQ 2,068.22 -.36%
Russell 2000 616.71 -.03%
DJ Wilshire 5000 11,778.43 -.47%
S&P Barra Growth 575.74 -.72%
S&P Barra Value 611.31 -.50%
Morgan Stanley Consumer 584.50 -.70%
Morgan Stanley Cyclical 720.28 -.75%
Morgan Stanley Technology 478.84 -.53%
Transports 3,599.58 -.65%
Utilities 363.33 +.23%
Put/Call .97 +19.75%
NYSE Arms 1.55 +25.94%
Volatility(VIX) 13.29 +9.38%
ISE Sentiment 192.00 +12.28%
US Dollar 87.76 +.94%
CRB 300.83 -.02%

Futures Spot Prices
Crude Oil 52.14 +.56%
Unleaded Gasoline 146.94 -.40%
Natural Gas 6.43 +.94%
Heating Oil 145.19 +.42%
Gold 419.10 -.85%
Base Metals 120.86 -.97%
Copper 145.10 +.52%
10-year US Treasury Yield 3.98% -2.16%

Leading Sectors
Airlines +1.11%
Hospitals +.88%
I-Banks +.78%

Lagging Sectors
Biotech -.98%
Computer Hardware -1.20%
Oil Tankers -1.71%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on DIS, BSX, MSFT and BC.

Afternoon/Evening Headlines
Bloomberg:
- United Airlines and the Machinists union reached an agreement on concessions from about 20,000 bad handlers, reservation agents and customer-service workers, the final labor accord the carrier sought to help exit bankruptcy.
- Walt Disney’s ABC broadcast television network said advance advertising sales for next season rose about 30% to $2.7 billion after ABC gained viewers with hits including “Desperate Housewives.”
- US Treasuries rose the most in three months after an index of Chicago-area business fell more than forecast and a reading of inflation fell, pushing 10-year yields below 4% for the first time since February.

Financial Times:
- Chinese publicly traded companies should prepare for the sale of unlisted, state-owned shares.

Nihon Keizai:
- Yahoo Japan Corp. will work with Nikko Cordial Securities and E*Trade Securities to begin brokerage business as early as August.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs and Base Metal and Energy-related shorts. I did not trade in the afternoon, thus leaving the Portfolio 50% net long. The tone of the market was mildly negative today as the advance/decline finished slightly lower, most sectors declined and volume was light. Measures of investor anxiety were mostly higher into the close. Overall, today’s market action was slightly negative. I expect economic data tomorrow to come in mixed, resulting in another mildly negative day for stocks. An ISM reading below 50, which I expect, would make it very hard for the Fed to continue raising rates at the current pace. I continue to expect 10-year T-note yields to test 04 lows over the coming weeks.

Stocks Quietly Lower Mid-day on Growth Worries

Indices
S&P 500 1,193.99 -.40%
DJIA 10,494.60 -.45%
NASDAQ 2,069.58 -.30%
Russell 2000 617.42 +.08%
DJ Wilshire 5000 11,797.58 -.31%
S&P Barra Growth 577.48 -.42%
S&P Barra Value 612.08 -.37%
Morgan Stanley Consumer 585.85 -.47%
Morgan Stanley Cyclical 721.34 -.60%
Morgan Stanley Technology 478.98 -.50%
Transports 3,607.96 -.42%
Utilities 365.35 +.08%
Put/Call 1.08 +33.33%
NYSE Arms 1.74 +41.34%
Volatility(VIX) 13.11 +7.82%
ISE Sentiment 209.00 +22.22%
US Dollar 87.65 +.82%
CRB 300.38 -.17%

Futures Spot Prices
Crude Oil 51.65 -.39%
Unleaded Gasoline 146.20 -.90%
Natural Gas 6.33 -.55%
Heating Oil 144.60 +.01%
Gold 418.40 -1.02%
Base Metals 120.86 -.97%
Copper 145.50 +.80%
10-year US Treasury Yield 4.00% -1.60%

Leading Sectors
Airlines +1.86%
Hospitals +.82%
I-Banks +.38%

Lagging Sectors
Steel -.90%
Oil Service -.93%
Oil Tankers -1.44%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Internet longs and Base Metal and Energy-related shorts. I have not traded today and the Portfolio is still 50% net long. The tone of the market is slightly negative as the advance/decline line is modestly lower, sector performance is mixed and volume is very light. Measures of investor anxiety are mostly higher. Today’s overall market action is neutral, given last week’s gains, global growth concerns and mixed US economic data. I expect US stocks to trade mixed-to-higher into the close as slowing growth concerns are offset by lower-long term interest rates and better consumer sentiment. NYSE short interest as a percentage of total shares reached 2.4% as of today, an all-time high. I continue to see a "negativity bubble." Morgan Stanley's Stephen Roach, who has been predicting interest rates would soar for several years, is now changing his tune. He is now saying the 10-year T-note yield will hit 3.5% within the next 12 months. Roach seems to agree with my view of a continuing fall in commodity prices as a result of slowing global demand. As I stated a few months ago, I believe the new breed of "perma bears" will begin switching arguments from inflation to deflation over the coming months.

Today's Headlines

Bloomberg:
- Russia isn’t ready to join the WTO, US Commerce Secretary Carlos Gutierrez said.
- A provision added to a federal bill that would reform government-sponsored enterprises could lead to as much as $1.6 billion of tax-exempt debt for affordable-housing and community-development projects, the Bond Buyer reported.
- Iraqi President Jalal Talabani said today that the trial of ousted dictator Saddam Hussein for crimes against humanity may begin in two months.
- Frontline Ltd., the world’s biggest oil-tanker company by capacity, reported its smallest profit gain in three quarters as sales growth barely increased, raising concern that global shipping markets have peaked.
- French Prime Minister Jean-Pierre Raffarin quit as President Jacques Chirac moves to win back confidence in this government after losing a referendum on the European Union’s constitution two days ago.
- AIG lowered five years of profit by $3.9 billion to correct improper accounting.
- The US Supreme Court unanimously overturned accounting firm Arthur Andersen’s conviction for obstructing an investigation into energy trader Enron Corp.
- W. Mark Felt, the second in command at the FBI in the early 1970s, has revealed in the July 2005 issue of Vanity Fair magazine that he was “Deep Throat,” the source who helped Washington Post reporters Bob Woodward and Carl Bernstein uncover the Watergate break-in.
- Morgan Stanley Chief Economist Stephen Roach said he is no longer bearish on bonds, and that yields on 10-year Treasuries may fall to 3.5% over the next year.
- The euro fell to a seven-month low against the US dollar on concern France’s rejection of the EU constitution will slow the region’s economic integration.
- US Treasuries are rallying, commodities are dropping and the US dollar is rising on France’s rejection of the EU constitution.

Wall Street Journal:
- DreamWorks Animation SKG miscalculated sales for “Shrek 2” because the company didn’t understand the fast changing pace of the DVD market.
- Shares of Bed Bath & Beyond are being snapped up by hedge funds that know a bargain when they see one.
- US doctors are testing whether so-called smart drugs such as Novartis AG’s Gleevec and Genentech’s Avastin will help children fight cancer as well as adults.
- UnitedHealth Group, Aetna and other US health insurers are marketing policies for the 45 million Americans without insurance offering cheaper programs with fewer benefits.
- Purdue Pharma LP, which makes the OxyContin painkiller, and wholesaler HD Smith plan to use radio-frequency identification tags to record the movement of drugs.
- The US housing market isn’t in a “bubble” destined to burst, according to Brian Wesbury, chief investment strategist at Claymore Advisors.
- Wal-Mart caters to a growing number of Hispanic shoppers at its stores by offering a free magazine called Viviendo and printing monthly ad circulars in English and Spanish.
- GM and Ford are focusing on building sales in India, the world’s fastest growing auto market.

Chicago Sun-Times:
- Illinois lawmakers are poised to limit the awards from medical lawsuits over concerns that rising costs for malpractice insurance are prompting doctors to leave the state.

Dow Jones Newswires:
- Samsung Electronics raised its forecast for 2005 worldwide handset sales because of “robust” shipments during the first quarter.

USA Today:
- More US states are increasing their minimum wages, pushing hourly rates above $7 in some and reducing the role of the federal minimum wage.

Financial Times:
- A “poisonous” regulatory environment in the US played a part in the fall of the value of mergers and acquisitions in the financial services industry.
- Ameritrade Holding is in “advanced talks” to buy Toronto-Dominion Bank’s TD Waterhouse brokerage.

Hurriyet:
-Turkey’s probable entry into the European Union was the fifth most-cited reason by French voters who rejected the EU constitution in the May 29 referendum.

Confidence Rebounds, Chicago-area Weaker

- Consumer Confidence for May rose to 102.2 versus estimates of 96.1 and a reading of 97.5 in April.
- Chicago Purchasing Manager for May fell to 54.1 versus estimates of 61.4 and a reading of 65.6 in April.

BOTTOM LINE: US consumer sentiment unexpectedly rose in May for the first time in four months. Rising stock prices, a booming housing market, lower long-term interest rates, lower gas prices and an improving labor market boosted confidence. The present situation component of the index rose to 116.7 from 113.8. The % of consumers who saw jobs as plentiful rose to 22.6% from 20.4% in April. The percentage expecting more jobs to be available six months from now increased to 14.9% from 14.0%. Those expecting fewer jobs fell to 15.9% from 18.4%. The percentage expecting to buy a home in the next six months dropped to 3.5% from 4.1%. However, those expecting to purchase an auto increased to 7.6% from 5.8%. Confidence in New England experienced the greatest regional gain, rising 24.2% to 92.40 from 74.40. We have likely seen the lows in sentiment for the year.

The Chicago PMI fell in May to the lowest level in almost two years. The employment component of the index fell to 54.7 from 62.3, while the new orders index declined to 57.9 from 71.0. On the positive side, the prices paid component fell to 54.3 from 66.1. The prices paid index has now plunged by 38.9% since November 30, 2004. I expect the ISM Manufacturing Index to fall below expectations tomorrow, as well.

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Monday Watch

Weekend Headlines
Bloomberg:
- France rejected the European Union's constitution in a national referendum, dealing a blow to President Jacques Chirac and European integration.
- China said it canceled export tariffs on 81 textile products amid a growing row with the US and the European Union over a surge in shipments since global quotas ended on Jan. 1.
- UK Prime Minister Tony Blair signaled he may scrap plans for a referendum on adopting the European Union constitution after French voters rejected the treaty.
- The US trade representative's office said it will ask the WTO to rule that European government loans to airplane maker Airbus SAS are illegal, setting up the biggest-ever dispute in WTO history.
- Crude oil is falling for the first time in six days on speculation US inventories will be sufficient to meet demand from refiners during the second half of the year.
- American International Group plans to restate five years of earnings today, and its correction of accounting flaws may make it easier for the company to settle a lawsuit with NY AG Spitzer.
- The Russian government will probably seize the rest of OAO Yukos Oil's assets, regardless of who is elected to the company's board.
- Norwegian support for joining the European Union fell to the lowest since 2001 in May, dropping for a third consecutive month, according to a poll by Sentio-Norsk Statistikk.
- Saudi Arabia's King Fahd Bin Abdul Aziz al-Saud is "doing well" and his medical tests are proceeding in a "normal way" a day after he was admitted to a hospital.
- Wal-Mart Stores said May sales at US stores open at least one year rose about 2.5% as shoppers spent more on groceries.
- Walt Disney's ESPN has told the NHL it won't exercise a contract option to televise games for the 2005-06 season.
- The European Central Bank may lower its 2005 growth forecast for the third time in six months and leave its key interest rate unchanged as business confidence slumps, surveys of economists showed.
- The euro fell to a seven-month low in Asia and had its biggest fluctuation of any currency on concern the rejection of the EU Constitution will slow the region's economic integration.

Wall Street Journal:
- Deutsche Bank AG, Royal Bank of Scotland Group Plc, BNP Paribas SA and Societe Generale SA are among European banks considering an offer for Germany's Commerzbank AG.
- Oil companies in Canada are racing to build pipelines between northern Alberta and the Pacific Coast amid increasing demand for the country's oil from China and the US.
- Hewlett-Packard will use Intel's Itanium chip in its NonStop computer line.

Barron's:
- The $1 trillion hedge-fund industry may face slowing investments and smaller fees as performance declines because there are too few investment opportunities and a shortage of talented fund managers.

New York Times:
- BAE Systems Plc and Northrop Grumman are vying to win a contract to supply US commercial airliners with systems designed to foil heat-seeking missiles.
- The US Chamber of Commerce, the Heritage Foundation, Families USA, Johnson & Johnson, Pfizer and 19 other groups are working together to devise a way for uninsured Americans to get health coverage.
- Companies such as closely held Winergy are seeking permission to build wind-turbine farms off the New Jersey coast as an alternative to energy from coal-fired power plants.
- ABC's "Good Morning America," the No. 2 US morning news show, is stealing viewers and forcing changes at rival NBC's "Today" show, the most profitable program on television.
- US FBI agents are making a bigger effort to go undercover to find terrorists and disturb their plans.

San Francisco Chronicle:
- Mobile-phone sales rose 17% to 180.6 million units worldwide in the first quarter from the year-earlier period, driven by consumer demand for camera phones and special offers.

Charlotte Observer:
- US Airways Group said Wellington Management agreed to invest $150 million in the airline after it acquires America West Holdings Corp.

Detroit Free Press:
- General Motors is expected next week to announce the expansion of its employee discounts to all consumers as the automaker seeks to winnow the number of unsold vehicles on dealers' lots.

Star-Ledger:
- The perception that New Jersey is steeped in political corruption is more widespread than at any time in recent memory.

New York Post:
- New York Police Commissioner Ray Kelly wants the city to install about 400 surveillance cameras on high-crime streets.
- Zoom Systems, a San Francisco technology company, is marketing vending machines that can dispense consumer items including cell phones, Apple Computer iPods and portable DVD players.

AP:
- A Florida physician and a martial-arts expert in New York have been arrested for conspiring to aid terrorists.
- Wines prices at $11 and higher are selling better than less expensive bottles.

Financial Times:
- Advanced Micro Devices may introduce its first processors operating with two cores for desktop PCs tomorrow to compete with Intel.
- RadioShack's mobile phone products business is "a very long-term, sustainable" part of the No. 3 US electronics chain's future, citing an interview with CEO Edmondson.

Sunday Times:
- French rejection of the European Union constitution may see investors sell the euro and could lead to low economic growth and high inflation, or stagflation, for the region, citing economists.

AFP:
- Polling booths opened today in Beirut as Lebanon began its first general election since Syria withdrew its soldiers after a 29-year military presence.
- Al-Qaeda leader in Iraq Abu Musab al-Zarqawi has been "lightly" wounded, citing a voice message attributed to Zarqawi and posted on the Internet.

Korea Herald:
- GE's finance unit is in final talks to invest $399 million in Hyundai Card Co., becoming the second-largest shareholder in the South Korean card issuer.

Economic Observer:
- China will scrap a 20% tax on stock dividends from June 1 as part of an attempt to bolster the nation's share markets.

Yomiuri newspaper:
- A regional Japanese government will ban sales to minors of the video game "Grand Theft Auto III," made by a US company Rockstar North and distributed in Japan by Capcom Co.

Weekend Recommendations
Bulls and Bears:
- Had guests that were positive on FDO, WCI, SLR, AIG, mixed on LPNT, TSO, CREE, XOM, NSS and negative on DUK, VLO.

Forbes on Fox:
- Had guests that were positive on XLE and mixed on SBUX, CSCO, DPZ, NKE, CI.

Cashin' In:
- Had guests that were positive on PTR, BIIB, HLT, mixed on OEH, PSD, DO and negative on ELN, GG, GT.

Cavuto on Business:
- Had guests that were positive on DELL, FL and mixed on BA.

Business Week:
- Named its Top 100 Small Companies.

Barron's:
- Had positive comments on PLT, GS and AZR.
- Had negative comments on AMLN, RHAT, CNWK, DJTE, PSUN, HLF, NUS, GS and A.

Goldman Sachs:
- Reiterated Outperform on FRNT, EBAY and LIZ.
- Reiterated Underperform on CVH and HRB.

Night Trading
Asian indices are unch. to +.25% on average.
S&P 500 indicated -.02%.
NASDAQ 100 indicated +.06%.

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HOV/1.61
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10:00 a.m. EST
- Chicago Purchasing Manager for May is estimated to fall to 61.8 versus a reading of 65.6 in April.
- Consumer Confidence for May is estimated to fall to 96.0 versus 97.7 in April.

BOTTOM LINE: Asian Indices are mostly higher on strength in exporting shares in the region. I expect US stocks to open mixed as profit-taking offsets a rising dollar and lower long-term interest rates. The Portfolio is 50% net long heading into the week.

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Weekly Outlook

There are some important economic reports and a few significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. - US Markets Closed
Tues. - Chicago Purchasing Manager, Consumer Confidence
Wed. - Construction Spending, ISM Manufacturing, ISM Prices Paid, Vehicle Sales
Thur. - Final 1Q Non-farm Productivity, Final 1Q Unit Labor Costs, Initial Jobless Claims, Factory Orders
Fri. - Unemployment Rate, Average Hourly Earnings, Change in Non-farm Payrolls, ISM Non-Manufacturing

Some of the more noteworthy companies that release quarterly earnings this week are:

Mon. - US Market Closed
Tues. - Hovnanian Enterprises(HOV), Sear Holdings(SHLD)
Wed. - ADC Telecommunications(ADCTD), Comverse Technology(CMVT), Copart Inc.(CPRT), Neiman-Marcus Group(NMG/A)
Thur. - Take-Two Interactive(TTWO)
Fri. - None of note

Other events that have market-moving potential this week include:

Mon. - US Markets Closed
Tue. - ALTR Business Update, NVLS Mid-Quarter Update
Wed. - Friedman Billings Growth Conference, CSFB Supply Chain Conference, Smith Barney Semi Conference, Sanford C. Bernstein Strategic Decisions Conference, Goldman Sachs Power and Utility Conference, SG Cowen Tech Conference, Lehman Brothers Wireless/Wireline Conference
Thur. - Lehman Brothers Wireless/Wireline Conference, Sanford C. Bernstein Strategic Decisions Conference, Goldman Sachs Power and Utility Conference, SG Cowen Tech Conference, Smith Barney Semi Conference, Friedman Billings Growth Conference, Fed's Stern speaks
Fri. - Lehman Brothers Wireless/Wireline Conference, Goldman Sachs Power and Utility Conference, Sanford C. Bernstein Strategic Decisions Conference, Friedman Billings Growth Conference

BOTTOM LINE: I expect US stocks to finish the week mixed as profit-taking, global growth concerns and mixed economic data offset more optimism for a Fed "pause," a rising US dollar and lower inflation readings. As I expected, the French voted "no" to the EU Constitution. The ramifications of this are vastly underestimated in my opinion. This will likely spur further gains in the US dollar, boost demand for US Assets, dampen European growth and pressure commodity prices over the coming months. My trading indicators are still giving bullish signals and the Portfolio is 50% net long heading into the week.

Economic Week in Review

ECRI Weekly Leading Index 132.90 -.15%

Existing Home Sales for April rose 4.5% to 7.18M, an all-time record, versus estimates of 6.9M and 6.87M in March. The median price of a previously owned US home topped $200,000 for the first time ever in April, capping the biggest increase in a quarter century, Bloomberg reported. A healthy job market and 30-year mortgage rates of less than 6% are fueling demand. During the last five years, the median sales price of an existing single family home has risen at an 8.1% annual rate. Federal Reserve Chairman Greenspan said the housing market has "a lot of local bubbles" and "a little froth." Investors' increased confidence that the Fed is keeping inflation at bay is holding down long-term rates, Bloomberg said. "Consumers are still apparently confident enough about their personal financial situations to undertake the housing investment despite the recent softness of confidence surveys," said Lynn Reaser, chief economist at Banc of America Capital.

"Most Fed members regarded the recent slower growth of economic activity as likely to be transitory," according to the Fed Minutes from the May 3rd meeting. "All members regarded the stance of policy as accommodative and judged that the current level of short-term rates remained too low to be consistent with sustainable growth and stable prices in the long run." "Members agreed that they should continue along the course of removing policy accommodation at a measured pace conditional on the outlook for inflation and economic growth," the minutes said. Fed members suggested that "greater uncertainty called for eliminating or paring back forward-looking language from the statement – if not at this meeting then fairly soon," the statement said. Other members countered that the language did not preclude the Fed from raising rates or taking a pause, and that view prevailed at the meeting. Eventually, all members decided to keep the "measured pace" language.

Durable Goods Orders for April rose 1.9% versus estimates of a 1.3% gain and an upwardly revised 1.6% decline in March. Durables Ex Transportation for April fell .2% versus estimates of a 1.0% gain and an upwardly revised .2% rise in March. The rise in bookings for items made to last at least three years was the biggest since November and was spurred by demand for machinery, computers and aircraft. With consumers still spending and interest rates low, businesses are likely to keep replacing trucks, machinery and computers to meet demand. Orders for transportation equipment rose 8.2% after declining 6.5% in March. Bookings for vehicles increased 3.4% and aircraft orders surged 28% after slumping 22% the previous month. Machinery orders increased 2.2% last month after declining 4.9% in March. Orders for computers rose 16% last month after falling 5.3%. Orders for defense hardware fell 15% last month, following an 8.3% increase. Excluding defense, orders ex transportation in April rose 2.3%, the most since November 2004. Finally, bookings for non-defense capital goods excluding aircraft, a proxy for future business investment, gained 1.6% last month, the most since January. "We still have good support from consumers and I think businesses will be investing actively," said Michael Moran, chief economist at Daiwa Securities America.

New Home Sales for April rose to 1316K versus estimates of 1325K and a downwardly revised 1313K in March. US new home sales increased in April to a record pace as historically low interest rates and job gains spurred sales. New home sales so far this year have averaged a 1.27M rate versus last year’s record 1.2M. Sales rose in two of the four regions in April. Sales surged 37.2% in the Northeast and rose 2.8% in the West. Sales fell 5.3% in the South and declined .5% in the Midwest. The median price rose to $230,800, a 3.8% rise from the same month last year. "Housing is not quite tapped out as a source of incremental growth, though we don't expect sales to rise much further through the second half," said Ian Shepherdson, chief US economist at High Frequency Economics.

Preliminary 1Q GDP rose 3.5% versus estimates of a 3.6% gain and a 3.1% prior estimate. Preliminary 1Q Personal Consumption rose 3.6% versus estimates of a 3.5% increase and a prior estimate of 3.5%. The US economy expanded at a greater rate in the first quarter than the government originally expected. "Energy prices may have contributed to caution in business spending, but consumer spending is still quite strong and real estate is through the roof," said Mike Englund, chief economist at Action Economics. Investment in housing accelerated. Residential housing construction rose at an 8.8% annual rate in the quarter, the best since mid-2004. The prior estimate was 5.7%, and it compares with 3.4% for the fourth quarter. The personal consumption expenditures prices index rose 2.1%, slower than the 2.7% in the fourth quarter. Corporate earnings adjusted for the value of inventories and depreciation of capital expenditures rose 4.5%, compared with a 13.5% rise in the fourth quarter of 2004.

Initial Jobless Claims for last week rose to 323K versus estimates of 325K and 322K the prior week. Continuing Claims fell to 2574K versus estimates of 2582K and 2596K prior. The Help Wanted Index for April stayed at 39 versus estimates of 40 and a reading of 39 in March. The four-week moving average of jobless claims rose to 330,500 from 330,000. The four-week moving-average of continuing claims rose to 2.587M, from 2.582M, which was a four-year low. The insured unemployment rate, which tends to move with the US unemployment rate, held at 2%. "These figures imply that this year is likely to continue with a pace of healthy job gains," said Richard DeKaser, chief economist at National City Corp.

Personal Income for April rose .7% versus estimates of a .7% increase and a .5% gain in March. Personal Spending for April rose .6% versus estimates of a .8% gain and an upwardly revised .9% increase in March. The PCE Deflator(YoY) for April rose 2.7% versus a 2.4% gain in March. The PCE Core(YoY) for April rose 1.6% versus a 1.7% gain in March. US personal spending rose for a third consecutive month, spurred by rising incomes as hiring accelerated. "The increase in incomes is completely under-appreciated as a driver of the expansion," said Steven Wieting, an economist at Citigroup Capital Markets

The Final Univ. of Mich. Consumer Confidence reading for May rose to 86.9 versus estimates of 86.0 and a prior estimate of 85.3. The current conditions index, which reflects whether it’s a good time to buy big-ticket items, actually rose to 104.9 in May from 104.4 in April. The improvement in the overall sentiment score from the mid-May preliminary estimate "is an encouraging sign," said Stephen Stanley, chief economist at RBS Greenwich Capital. "While consumers have been saying that they are worried, their spending patterns suggest otherwise. Look for further improvement in attitudes in June," he said.

BOTTOM LINE: Overall, last week's economic data were positive. Job growth, rising incomes and mortgage rates near a four-decade low will continue fueling home sales and spurring construction, which adds to economic growth. I continue to believe there is not a nation-wide bubble in housing, notwithstanding the attempts by many to suggest otherwise. I expect homebuilding stocks to outperform through at least year-end. I still expect the Fed to raise rates 25 basis points at the June meeting and remove the word "measured" from their policy statement, thus paving the way for a holding period with respect to rate hikes. The underlying strength in the Durable Goods report bodes well for a rebound in manufacturing activity at some point over the coming months. An improving trade deficit and strong consumer spending helped spur the 3.5% increase in 1Q GDP. This compares favorably to the 10-year average rate of US growth of 3.3%. GDP growth is likely slowing to around 2.5% this quarter, spurred by weakness in the manufacturing sector. Low interest rates, an end to the inventory correction, falling commodity prices, a booming housing market, improving consumer sentiment, rising stock prices, improving trade/budget deficits and a firmer US dollar should propel growth back to around average levels sometime during the third quarter. A recession in Europe or "hard landing" in China could potentially alter my future US growth expectations. The labor market remains healthy. However, a period of moderation is likely during the next few months. The PCE Core, the Fed’s favorite inflation gauge, rose 1.6%. This is well within their stated optimal range of 1.5-1.8%. Incomes were up 7.0% last month from April 2004, well above the inflation rate. This should continue to fuel consumer spending. High gas prices and incessant talk of a “housing bubble” continue to weigh on sentiment. However, the consumer continues to exhibit high levels of confidence by their actions. Record high home sales and better-than-expected retail sales illustrate this. The average price of self-serve gas is falling. Unleaded Gasoline futures have now declined 17.0% since the first week of April. Rising stock values, low long-term interest rates and a booming housing market should also help boost the next sentiment report. Finally, the ECRI Weekly Leading Index fell .15% to 132.90 and is still forecasting slowing, but healthy levels of economic activity.

Market Week in Review

S&P 500 1,198.78 +.80%



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was positive. The advance/decline rose, most sectors gained and volume was light on the week. Commodities, Small-caps and Tech outperformed as economic reports exceeded expectations. Measures of investor anxiety were mostly lower on the week. The AAII % Bulls rose again and is now at average levels. Mortgage rates continued to drop and are now only 44 basis points away from all-time lows set in June 2003. Energy prices rose as crude inventories registered a weekly decline. However, overall oil fundamentals actually deteriorated further. Oil supplies last week were 11% higher than a year ago at this time. Crude inventories were 24 million barrels, or 7.8%, above the five-year average. Stockpiles have now risen in 13 of the last 15 weeks. API implied US crude demand last week was down 3.03% from a year earlier. Finally, the contango spread in the oil futures market is finally beginning to narrow, which is bearish for crude. Fed comments this week were relatively hawkish. This will likely remain the case until closer to the June meeting, thus keeping downward pressure on commodity prices. The fact that long-term rates declined this week even with strong economic reports leads me to believe a breach of the 4.0% level on the 10-year T-note is imminent as global growth continues to slow and inflation fears further diminish.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,198.78 +.80%
DJIA 10,542.55 +.68%
NASDAQ 2,075.73 +1.43%
Russell 2000 616.90 +1.23%
DJ Wilshire 5000 11,833.81 +.90%
S&P Equity Long/Short Index 1,007.12 +.21%
S&P Barra Growth 579.91 +.79%
S&P Barra Value 614.37 +.80%
Morgan Stanley Consumer 588.64 -.39%
Morgan Stanley Cyclical 725.72 +.80%
Morgan Stanley Technology 481.39 +1.11%
Transports 3,623.13 +.06%
Utilities 365.03 +.04%
S&P 500 Cum A/D Line 7,282 +.46%
Bloomberg Crude Oil % Bulls 57.0 +162.19%
Put/Call .81 -18.18%
NYSE Arms 1.23 +6.96%
Volatility(VIX) 12.15 -7.53%
ISE Sentiment 171.00 +19.58%
AAII % Bulls 44.14 +13.41%
US Dollar 86.42 -.21%
CRB 300.89 +2.59%

Futures Spot Prices
Crude Oil 51.85 +6.47%
Unleaded Gasoline 147.53 +4.19%
Natural Gas 6.37 -.78%
Heating Oil 144.58 +5.61%
Gold 422.70 +.40%
Base Metals 122.04 +2.06%
Copper 144.35 +5.13%
10-year US Treasury Yield 4.07% -1.21%
Average 30-year Mortgage Rate 5.65% -1.05%

Leading Sectors
Gold & Silver +7.10%
Energy +5.78%
Oil Service +5.19%

Lagging Sectors
Banks -.58%
Gaming -.73%
I-Banks -1.50%

*5-Day % Change

Stocks Quietly Higher Mid-day Ahead of Memorial Weekend

Indices
S&P 500 1,198.16 +.05%
DJIA 10,540.28 +.03%
NASDAQ 2,074.45 +.16%
Russell 2000 616.67 +.32%
DJ Wilshire 5000 11,826.83 +.11%
S&P Barra Growth 579.72 +.03%
S&P Barra Value 613.99 +.07%
Morgan Stanley Consumer 589.08 -.03%
Morgan Stanley Cyclical 725.53 +.09%
Morgan Stanley Technology 481.36 -.21%
Transports 3,629.04 -.20%
Utilities 364.59 +.35%
Put/Call 1.0 +31.58%
NYSE Arms 1.20 +84.57%
Volatility(VIX) 12.27 +.25%
ISE Sentiment 159.00 -4.79%
US Dollar 86.45 -.46%
CRB 300.94 +.28%

Futures Spot Prices
Crude Oil 51.75 +1.45%
Unleaded Gasoline 147.45 +1.84%
Natural Gas 6.38 +2.70%
Heating Oil 145.10 +.19%
Gold 422.50 +.45%
Base Metals 122.04 -.11%
Copper 144.50 -.31%
10-year US Treasury Yield 4.07% -.14%

Leading Sectors
Gold & Silver +3.47%
Steel +1.15%
Energy +1.13%

Lagging Sectors
Homebuilders -.36%
Software -.47%
Semis -.91%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Internet, Wireless and Networking longs. I added to a few longs this morning and added PD short, thus leaving the Portfolio 100% net long. I am using a $92.50 stop-loss on this position. The tone of the market is modestly positive as the advance/decline line is slightly higher, most sectors are rising and volume is very light. Measures of investor anxiety are lower. Today’s overall market action is positive, given last week’s gains, rising energy prices and more positive economic data. The major indices and breadth are rising after the report of King Fahd's hospitalization. As well, the put/call and arms reading are modestly elevated. This leads me to believe the path of least resistance is higher today. I expect US stocks to rise modestly into the close on short-covering and more optimism.

Today's Headlines

Bloomberg:
- Manufacturers’ confidence in France, Europe’s third-largest economy, unexpectedly dropped to a 19-month low in May amid concern about the worsening growth outlook.
- Seven European countries including France, Germany and Spain have signed a treaty today to improve cross-border cooperation to clamp down on terrorism, crime and illegal immigration.
- Crude oil is rising for a fifth day, heading for the biggest weekly gain in 5 weeks, as US refiners boost gasoline output before the summer holiday season.

Wall Street Journal:
- US buyout firm Ripplewood Holdings LLC took RHJ International public two months ago in a $178M IPO, and the results will help determine whether other private-equity firms tap the markets in a similar way.
- The US government is sending 15 F-117 stealth fighters to South Korea and drafting a plan of action should six-party nuclear talks with North Korea fail.
- Paul Smith Ltd., Warnaco Group, Berkshire Hathaway’s Fruit of the Loom unit and other companies are rushing to sign agreements in China to buy clothing before the US and other countries apply quotas.
- Taiwan-based Via Technologies is introducing computer chips that may challenge Intel in the mobile computer market.
- General Motors and Ford Motor officially lose their investment-grade status on June 1 and $85 billion of their debt will land in the junk-bond market.

NY Times:
- US movie box-office receipts have fallen for 13 straight weekends from a year earlier as DVDs, the Internet and advances in home entertainment systems keep consumers home.
- US prosecutors charged four Tennessee state lawmakers with extorting money from a company created by the FBI to entrap the legislators.
- The US Homeland Security’s Customs and Border unit will attempt to boost port security by forcing importers to verify improvements and ensure that more high-risk containers are inspected.
- The risks associated with weight reduction, or bariatric, surgery have led to many physicians to stop offering the procedures to avoid higher malpractice premiums and lawsuits.

AFP:
- North Korea may face a famine on the scale of the country’s crisis in the mid 1990s, when millions died of hunger, citing a speech in Seoul by World Food Programme Asia Director Tony Banbury.

Reuters:
- China is maintaining US dollar holdings in the country’s foreign-currency reserves.

Incomes Rising, Inflation Decelerating, Confidence Stable

- Personal Income for April rose .7% versus estimates of a .7% increase and a .5% gain in March.
- Personal Spending for April rose .6% versus estimates of a .8% increase and an upwardly revised .9% gain in March.
- PCE Deflator(YoY) for April rose 2.7% versus a 2.4% increase in March.
- PCE Core(YoY) for April rose 1.6% versus a 1.7% gain in March.
- Final Univ. of Mich. Consumer Confidence for May rose to 86.9 versus estimates of 86.0 and a prior estimate of 85.3.

BOTTOM LINE: US personal spending rose for a third consecutive month, spurred by rising incomes as hiring accelerated. The PCE Core, the Fed’s favorite inflation gauge, rose 1.6%. This is well within their stated optimal range of 1.5-1.8%. Incomes were up 7.0% last month from April 2004, well above the inflation rate.

High gas prices and the incessant talk of a “housing bubble” continue to weigh on sentiment. However, the consumer continues to exhibit confidence by their actions. Record high home sales and better-than-expected retail sales illustrate this. As well, the current conditions index, which reflects whether it’s a good time to buy big-ticket items, actually rose to 104.9 in May from 104.4 in April. Finally, the average price of self-serve gas is falling. The average is now $2.17/gallon versus $2.32 in April. Rising stock prices should also help the next report.

Links of Interest

Market Snapshot
Detailed Market Summary
Market Internals
Economic Commentary
Movers & Shakers
IBD New America
NYSE OrderTrac
I-Watch Sector Overview
NYSE Unusual Volume
NASDAQ Unusual Volume
Hot Spots
NASDAQ 100 Heatmap
DJIA Quick Charts
Chart Toppers
Option Dragon
Real-time Intraday Chart/Quote

Friday Watch

Late-Night Headlines
Bloomberg:
- China is preparing to complain to the WTO that the European Union and the US are abusing trade protection measures by imposing caps on the nation's textile exports.
- The euro headed for a fifth losing week, the longest such streak since August 2000, on expectations a French referendum will reject the European Union constitution and delay regional integration.
- US Senate Democrats dealt at least a temporary setback to President Bush's bid to install John Bolton as ambassador to the UN by blocking a Republican effort to hold a final vote on Bolton's nomination.

Wall Street Journal:
- Caremark Rx is near an agreement to pay $100 million in a settlement with the US Justice Department involving patients' pharmacy benefits.

Business Week:
- Google's plan to scan in the complete texts of millions of books so they can be searched electronically is a violation of copyright laws, citing unidentified publishers and attorneys.
- China's Chery Automobile and Honda Motor are both betting that China's auto industry is shifting into becoming an export base for the rest of the world from serving only the local market.

NY Times:
- US schools are putting more effort into educating minority students after the No Child Left Behind law gave greater attention to the statistical gap between their performance and that of white students and required annual improvement.

Financial Times:
- Hedge funds and banks have lost about $1 billion because of credit-derivative price swings in the past three weeks, citing Goldman Sachs.

AFP:
- Senators Joe Lieberman and Lamar Alexander co-sponsored a bill that would provide $1.3 billion in five years for Chinese language instruction in US schools.

Asian Wall Street Journal:
- Merrill Lynch will invest $300 million for a venture with Pequot Capital Management, a US hedge fund.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on AIG, EBAY, YHOO and GOOG.

Business Week:
- Shares of Snap-On(SNA), the world's biggest maker of hand tools, storage units and diagnostic equipment for mechanics, may rise more than 30% as costs will fall under new CEO Jack Michaels.
- Shares of News Corp.(NWS) may rise as much as 50% within the next year as earnings from satellite unit Sky Italia and partially owned units DirectTV Group and British Sky Broadcasting will increase.

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

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Before the Bell CNBC Video(bottom right)
Global Commentary
Asian Indices
European Indices
Top 20 Business Stories
In Play
Bond Ticker
Daily Stock Events
Macro Calls
Rasmussen Consumer/Investor Daily Indices
CNBC Guest Schedule

Earnings of Note
Company/EPS Estimate
CYBX/-.32
QSII/.32
VIP/.77

Splits
None of note

Economic Releases
8:30 EST
- Personal Income for April is estimated to rise .7% versus a .5% gain in March.
- Personal Spending for April is estimated to rise .8% versus a .6% increase in March.

9:45 EST
- Final Univ. of Mich. Consumer Confidence for May is estimated to rise to 86.0 versus a prior estimate of 85.3.

BOTTOM LINE: Asian indices are higher on gains in exporting shares in the region. I expect US equities to open modestly higher on strong personal income/spending data, a better-than-expected revision to consumer sentiment and short-covering. The Portfolio is 100% net long heading into the day.

Stocks Finish Near Session Highs as Energy Prices Reverse

Indices
S&P 500 1,197.62 +.64%
DJIA 10,537.60 +.76%
NASDAQ 2,071.24 +1.03%
Russell 2000 614.70 +1.37%
DJ Wilshire 5000 11,813.30 +.72%
S&P Barra Growth 579.56 +.59%
S&P Barra Value 613.55 +.69%
Morgan Stanley Consumer 589.26 +.29%
Morgan Stanley Cyclical 724.86 +.81%
Morgan Stanley Technology 482.37 +1.10%
Transports 3,636.22 +1.02%
Utilities 363.33 +.23%
Put/Call .76 -25.49%
NYSE Arms .65 -22.24%
Volatility(VIX) 12.24 -2.70%
ISE Sentiment 167.00 +7.05%
US Dollar 86.85 +.58%
CRB 300.09 +.28%

Futures Spot Prices
Crude Oil 50.96 -.04%
Unleaded Gasoline 144.75 -.29%
Natural Gas 6.12 -3.02%
Heating Oil 144.22 +.97%
Gold 417.70 -.07%
Base Metals 122.18 +.28%
Copper 144.50 -.31%
10-year US Treasury Yield 4.07% -.24%

Leading Sectors
Airlines +4.76%
Steel +2.90%
Homebuilders +2.68%

Lagging Sectors
Retail -.08%
Broadcasting -.12%
Gold & Silver -1.03%

Evening Review
Detailed Market Summary
Market Gauges
Daily ETF Performance
Style Performance
Market Wrap CNBC Video(bottom right)
S&P 500 Gallery View
Economic Calendar
Timely Economic Charts
GuruFocus.com
PM Market Call
After-hours Movers
Real-time/After-hours Stock Quote
In Play

Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on MO, TMK and Underperform on RAI.
- Rated Auto Parts sector Cautious.
- Rated JCI, DCN, BWA Outperform.
- Rated ARM, LEA, GM and DPH Underperform.

Afternoon/Evening Headlines
Bloomberg:
- US President Bush pledged the US will provide $50 million in direct aid to the Palestinian Authority, saying Palestinian leader Mahmoud Abbas is moving forward with reforms he promised.
- GLG Partners LP, Europe’s largest hedge fund manager, posted a 6.7% decline in its $3 billion convertible bond arbitrage fund in May, extending the loss for the year to 14.2%.
- President Jacques Chirac pleaded with voters to endorse Europe’s constitution in a May 29 referendum, saying the treaty will allow France to meet the challenges of globalization without giving up its welfare system.
- A US Senate panel approved creation of a $140 billion fund for asbestos-exposure victims that would end litigation that has bankrupted 77 companies.
- Smoking among Americans fell in 2003 to a new low of 21.6%.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet, Homebuilding and Computer longs. I added to a few lagging longs in the afternoon and began adding some oil service shorts, thus leaving the Portfolio 100% net long. One of my new shorts is RIG and I am using a $51.75 stop-loss on this position. The tone of the market was positive today as the advance/decline finished higher, almost every sector was higher and volume was light. Measures of investor anxiety were lower into the close. Overall, today’s market action was positive considering the major averages and breadth finished near session highs. In my opinion, long-term investors should always consider tech stocks after substantial declines. Since Jan. 31, 1991, the Morgan Stanley tech index has returned 1,914.12% vs. a return of 349.62% for the S&P 500 during the same time period. This includes the bursting of the largest tech bubble in U.S. financial market history.

Stocks Quietly Higher Mid-day on Upward GDP Revision

Indices
S&P 500 1,196.92 +.58%
DJIA 10,518.24 +.58%
NASDAQ 2,068.20 +.88%
Russell 2000 613.06 +1.10%
DJ Wilshire 5000 11,804.16 +.64%
S&P Barra Growth 579.49 +.58%
S&P Barra Value 612.88 +.58%
Morgan Stanley Consumer 589.03 +.25%
Morgan Stanley Cyclical 724.79 +.80%
Morgan Stanley Technology 481.76 +.97%
Transports 3,639.92 +1.12%
Utilities 364.48 +.55%
Put/Call .74 -27.45%
NYSE Arms .56 -32.86%
Volatility(VIX) 12.13 -3.58%
ISE Sentiment 172.00 +10.26%
US Dollar 86.87 +.60%
CRB 300.13 +.31%

Futures Spot Prices
Crude Oil 51.45 +.92%
Unleaded Gasoline 145.50 +.23%
Natural Gas 6.26 -.87%
Heating Oil 145.10 +1.58%
Gold 417.60 -.31%
Base Metals 122.18 +.28%
Copper 144.70 +1.94%
10-year US Treasury Yield 4.07% -.19%

Leading Sectors
Homebuilders +2.82%
Steel +2.47%
Airlines +2.24%

Lagging Sectors
Papers +.10%
Food +.10%
Gold & Silver -.26%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Internet, Semiconductor and Homebuilding longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is strong, almost every sector is higher and volume is light. Measures of investor anxiety are lower. Today’s overall market action is positive, given last week’s gains, rising energy prices and an upward revision to 1Q GDP. Through April, U.S. short-biased hedge funds have returned on average 17.65%, according to Hennessee. This is the best four-month performance for this style since the period around the 9/11 attacks. Record-high short interest, combined with profit protection by the shorts should cushion any pullbacks over the coming months. I expect US stocks to rise modestly into the close on short-covering and more optimism.

Today's Headlines

Bloomberg:
- Man Group Plc, the world’s largest hedge fund manager, reported its smallest annual earnings gain since 2000 after some of its biggest funds declined in value.
- Elan Corp. CEO Martin said he’s confident the multiple sclerosis drug Tysabri, linked to the death of two patients, will return to the market after a meeting with US regulators mid-year.
- Toll Brothers, the largest builder of luxury homes, said fiscal second-quarter profit more than doubled as the industry’s sales surged to a record.
- The euro is falling to a seven-month low against the US dollar after an opinion poll showed increasing French opposition to the European Union constitution before a referendum on May 29.

Wall Street Journal:
- Seattle-based RealNetworks may not benefit from its efforts to get the European Commission to order Microsoft to change its business practices on selling media-player software.
- A French “no” on the European Union constitution vote Sunday would slow down the decades-long movement toward integration and may force European leaders to rethink the top-down approach of rules coming from Brussels.
- Delta Air Lines Song low-cost airline division is experimenting with promoting rock bands on its airlines, as part of a new venture to distinguish itself from competitors.
- Germany, the Netherlands and Greece are at the forefront of a movement to legalize prostitution in an effort to curb crime.

NY Times:
- Senator Hillary Clinton’s former national finance director accepted secret gifts intended to “buy influence,” citing US prosecutors.
- Iraq’s dominant Shiite Muslim political parties have agreed to give Sunni Muslim Arabs a broader role in writing the country’s constitution, in response to US requests that the minority group be included more.

LA Times:
- Scottish Power’s PPM Energy unit plans to build a $235 million, 150-megawattt wind farm in northern California’s Solano County capable of generating power for 112,500 homes.

USA Today:
- Tax collections by US states rose to a record $600 billion last year, up 7.2% from 2003 and the biggest jump since 2000.

AP:
- Afghanistan confiscated 40 tons of opium, the raw material for heroin, in the first five months of this year.

1Q Growth Revised Higher, Inflation Decelerating, Job Market Still Healthy

- Preliminary 1Q GDP rose 3.5% versus estimates of a 3.6% increase and a prior estimate of 3.1%.
- Preliminary 1Q Personal Consumption rose 3.6% versus estimates of a 3.5% gain and a prior estimate of 3.3%.
- Initial Jobless Claims for last week fell to 323K versus estimates of 325K and 322K the prior week.
- Continuing Claims fell to 2574K versus estimates of 2582K and 2596K the prior week.
- The Help Wanted Index for April came in at 39 versus estimates of 40 and a reading of 39 in March.

BOTTOM LINE: The US economy expanded at a greater rate in the first quarter than the government originally expected. An improving trade deficit and strong consumer spending helped spur the increase. The 10-year average rate of US growth, which includes the “bubble years,” is 3.3%. Investment in housing accelerated. Residential housing construction rose at an 8.8% annual rate in the quarter, the best since mid-2004. The prior estimate was 5.7%, and it compares with 3.4% for the fourth quarter. The personal consumption expenditures prices index, the Fed’s favorite inflation measure, rose 2.1%, slower than the 2.7% in the fourth quarter. Corporate earnings adjusted for the value of inventories and depreciation of capital expenditures rose 4.5%, compared with a hurricane-distorted 13.5% in the fourth quarter of 2004.

The four-week moving average of jobless claims rose to 330,500 from 330,000. The four-week moving-average of continuing claims rose to 2.587M, from 2.582M, which was a four-year low. The insured unemployment rate, which tends to move with the US unemployment rate, held at 2%. I expect job growth to moderate over the coming months.

Links of Interest

Market Snapshot
Detailed Market Summary
Market Internals
Economic Commentary
Movers & Shakers
IBD New America
NYSE OrderTrac
I-Watch Sector Overview
NYSE Unusual Volume
NASDAQ Unusual Volume
Hot Spots
NASDAQ 100 Heatmap
DJIA Quick Charts
Chart Toppers
Option Dragon
Real-time Intraday Chart/Quote

Thursday Watch

Late-Night Headlines
Bloomberg:
- The US dollar is rising against the euro and the yen in Europe on expectations a US government report today will show the economy grew faster in the first quarter than initially estimated.

Digi Times:
- Taiwan Semiconductor's plants will be used to 90% of their capacity in the period from between 78% and 80% in the first half. United Microeletronics' capacity use will rise to 80% from 60%. The two companies are the world's largest suppliers of made-to-order chips.

Financial Times:
- Blackstone Group LP is seeking to raise a record $11 billion buyout fund.

London-based Times:
- Former French finance minister Nicolas Sarkozy, who now heads President Jacques Chirac's ruling UMP party, accepts that France will vote "no" in a referendum on the European Union constitution.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on LVS.

Night Trading
Asian Indices are unch. to +.25% on average.
S&P 500 indicated +.01%.
NASDAQ 100 indicated -.03%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Before the Bell CNBC Video(bottom right)
Global Commentary
Asian Indices
European Indices
Top 20 Business Stories
In Play
Bond Ticker
Daily Stock Events
Macro Calls
Rasmussen Consumer/Investor Daily Indices
CNBC Guest Schedule

Earnings of Note
Company/EPS Estimate
CHS/.25
CA/.20
ELBO/.14
DRL/.46
DG/.22
HNZ/.62
PDCO/.39
TECD/.60
TIVO/-.11
TOL/1.79

Splits
NFX 2-for-1
WTNY 3-for-2

Economic Releases
8:30 EST
- Preliminary 1Q GDP is estimated to rise 3.6% versus a prior estimate of a 3.1% gain.
- Preliminary 1Q Personal Consumption is estimated to rise 3.5% versus a prior estimate of a 3.5% increase.
- Initial Jobless Claims for last week are estimated to rise to 325K versus 321K the prior week.
- Continuing Claims are estimated to fall to 2583K versus 2601K prior.

10:00 EST
- The Help Wanted Index is estimated to rise to 40 versus a prior reading of 39.

BOTTOM LINE: Asian indices are mostly higher on gains in tech shares in the region. I expect US equities to open modestly higher and to build on gains later in the day on an upward revision to 1Q GDP, a stronger US dollar and short-covering. The Portfolio is 100% net long heading into the day.

Stocks Finish Modestly Lower on Light Volume Consolidation

Indices
S&P 500 1,190.01 -.34%
DJIA 10,457.80 -.44%
NASDAQ 2,050.12 -.56%
Russell 2000 606.40 -1.07%
DJ Wilshire 5000 11,729.34 -.43%
S&P Barra Growth 576.17 -.36%
S&P Barra Value 609.33 -.32%
Morgan Stanley Consumer 587.54 -.40%
Morgan Stanley Cyclical 719.07 -.74%
Morgan Stanley Technology 477.14 -.64%
Transports 3,599.49 -.91%
Utilities 362.48 -.28%
Put/Call 1.02 +37.84%
NYSE Arms .84 -16.05%
Volatility(VIX) 12.58 -.87%
ISE Sentiment 156.00 +2.63%
US Dollar 86.35 -.02%
CRB 299.24 +.85%

Futures Spot Prices
Crude Oil 50.96 +2.60%
Unleaded Gasoline 145.10 +1.70%
Natural Gas 6.30 -.69%
Heating Oil 142.50 +2.73%
Gold 419.50 +.14%
Base Metals 121.84 +.22%
Copper 141.95 unch.
10-year US Treasury Yield 4.08 +1.47%

Leading Sectors
Oil Tankers +1.83%
Oil Service +1.71%
Energy +1.18%

Lagging Sectors
Semis -1.10%
Airlines -1.23%
Steel -2.82%

Evening Review
Detailed Market Summary
Market Gauges
Daily ETF Performance
Style Performance
Market Wrap CNBC Video(bottom right)
S&P 500 Gallery View
Economic Calendar
Timely Economic Charts
GuruFocus.com
PM Market Call
After-hours Movers
Real-time/After-hours Stock Quote
In Play

Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on ALK.
- Rated AEP, DUK and ED Underperform.
- Rated NRG, ETR Outperform.

Afternoon/Evening Headlines
Bloomberg:
- Ratings on Fox’s “American Idol” television show surged last night and a large audience for tonight’s finale probably will help the network win the closest May audience-ratings period ever among younger viewers.
- Northrop Grumman and General Dynamics would simultaneously build versions of the Navy’s DD(X) destroyer under a service proposal intended to reduce long-term costs, the Navy’s top acquisition officer said.

CNBC:
- Investors are becoming more confident that inflation in the US “won’t run away” as oil and commodity prices fall, PIMCO Managing Director William Gross said.

Gannett News:
- International Brotherhood of Teamsters President Hoffa broke with other labor union leaders Tuesday and commended President Bush’s efforts to discuss possible remedies to the looming Social Security crisis.

Chicago Tribune:
- McDonald’s seeks to lure younger, more tech-savvy customers by offering them the ability to surf the Internet, download music and burn CDs in a test restaurant in a Chicago suburb.

BOTTOM LINE: The Portfolio finished unchanged today as gains in my Internet/Networking longs and Steel shorts offset losses in my Wireless and Homebuilding longs. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was weak today as the advance/decline finished lower, sector performance was mixed and volume was light. Measures of investor anxiety were mostly lower into the close. Overall, today’s market action was slightly negative considering the bounce from early session lows. Today’s afternoon strength bodes well for further gains tomorrow. Long-term rates look like they have begun the counter-trend rally I expected as the 10-year T-note yield hit 4.0% this morning and finished at 4.08%. I still expect rates to breach the 4.0% level over the coming weeks. As well, the spread between the November crude contract and the spot price has narrowed from $4.15 a week ago to $1.55 currently. As this spread evaporates over the coming weeks, I expect the second leg down in oil prices to begin. I still believe crude will touch $35/bbl. during the second half of the year and average $30-$35/bbl. next year.

Stocks Falling Mid-day on Light Volume as Energy Prices Rise

Indices
S&P 500 1,186.62 -.62%
DJIA 10,432.40 -.67%
NASDAQ 2,043.25 -.90%
Russell 2000 606.38 -1.07%
DJ Wilshire 5000 11,701.55 -.67%
S&P Barra Growth 574.57 -.63%
S&P Barra Value 607.78 -.58%
Morgan Stanley Consumer 589.17 -.23%
Morgan Stanley Cyclical 717.45 -.96%
Morgan Stanley Technology 474.95 -1.10%
Transports 3,594.06 -1.07%
Utilities 361.79 -.47%
Put/Call .84 +13.51%
NYSE Arms .98 -2.04%
Volatility(VIX) 13.00 +2.44%
ISE Sentiment 158.00 +3.95%
US Dollar 86.32 -.06%
CRB 299.25 +.85%

Futures Spot Prices
Crude Oil 51.35 +3.48%
Unleaded Gasoline 146.20 +2.47%
Natural Gas 6.33 -.30%
Heating Oil 143.50 +3.45%
Gold 418.60 +.22%
Base Metals 121.84 +.22%
Copper 141.80 +.93%
10-year US Treasury Yield 4.05% +.57%

Leading Sectors
Oil Tankers +2.36%
Oil Service +1.48%
Energy +1.05%

Lagging Sectors
Hospitals -1.37%
Semis -1.72%
Steel -3.02%

BOTTOM LINE: The Portfolio is lower mid-day on losses in my Internet, Wireless and Homebuilding longs and Oil Tanker shorts. 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 weak, almost every sector is lower and volume is very light. Measures of investor anxiety are mixed. Today’s overall market action is mildly negative, given last week’s gains, rising energy prices, disappointing Fed comments and the light-volume nature of today’s decline. Oil gains will likely prove fleeting as prices drop next week after the Memorial Day weekend. I expect US stocks to rise modestly into the close on short-covering and a decline in energy prices from session highs.

Today's Headlines

Bloomberg:
- France’s rejection of the European Union’s constitution would be “disastrous,” casting doubt on the future of European integration, Luxembourg Prime Minister Jean-Claude Juncker said.
- Business confidence in Germany, Europe’s largest economy, unexpectedly fell to a 21-month low in May, amid concern about the deteriorating growth outlook.
- Nokia lost market share for the first quarter in four to Motorola and Samsung Electronics, Gartner said. The researcher raised its full-year sales forecast for the industry.
- Merrill Lynch chief economist Rosenberg slashed his forecast for the 10-year T-note’s yield at year-end to 3.8% from 4.4% on indications inflation will slow.
- Ford Motor agreed to take back 24 plants form former auto-parts unit Visteon.
- Bostonians are still wearing winter fleece as they endure a May like few others in memory. Average daily high temperatures are running 8.7 degrees below normal for the month.
- Democrats won’t offer a plan to solve the Social Security crisis, a House Democratic leader said.
- China should move “as expeditiously as possible” to float its currency to help correct the US imbalance of trade, Fed Governor Bernanke said.
- Sales of Coke and Pepsi may be banned from schools by the Connecticut legislature today in what would be the first such state-wide prohibition because of concern that the soft drinks contribute to obesity in children.
- Crude oil is rising above $51/bbl. in NY after an Energy Dept. report that US crude inventories unexpectedly declined as refineries boosted gasoline production before the Memorial Day holiday.

Wall Street Journal:
- Bain Capital LLC and Game Plan LLC would bunch the 30 National Hockey League teams into three groups based on market value if their $4 billion bid for the league is successful.
- ICAP Plc, the world’s biggest broker of trades between banks, may try to make a “transformative acquisition” to increase its share of trading in bond, currency and derivatives markets.
- Rising oil prices make profit harder to find for US gasoline retailers because the outlets are reluctant to quickly pass along higher costs to customers.
- L-3 Communications Holding is closer to an agreement to acquire defense contractor Titan Corp. for a share price in the “mid-$20 range.”
- A US housing boom is benefiting some poor urban neighborhoods that have been overlooked until now, such as in Baltimore.
- GM may soon carry out a more ambitious reorganization than any undertaken hitherto, by splitting off GMAC, its profitable finance unit.
- Calpine is likely to announce today a reorganization that will include asset sales and cutting debt by $3 billion, or 16%, by the end of the year.
- Firsthand Capital Management wants to start an ETF that tracks the performance of 30 technology stocks in the S&P 500 deemed most likely to move higher.

NY Post:
- Time Warner’s AOL may gain exclusive access to SonyBMG’s music for its video-on-demand service.

LA Times:
- Video-game developers such as Electronic Arts, Activision and THG Inc. face a possible strike after unions set authorization votes during the next two weeks to press for a greater share of profits.

AP:
- Abu Musab al-Zarqawi, leader of Al-Qaeda in Iraq, fled the nation to a “neighboring country” with two doctors who are treating him for gunshot wounds to his lung, citing an Islamic Web site.

Financial Times:
- Hedge Funds are underestimating the risks of investing in high-yield bonds, and the financial markets will be jolted if the bonds return to their historic default rates, said Steven Rattner, managing principal of Quadrangle Group.

AFP:
- North Korea denied it was planning on carrying out a nuclear test, though the country is still hesitant to rejoin six-country talks on ending its nuclear program, a Czech delegation said it was told during a visit to the North Korean capital.

Durables Rebound, New Home Sales Remain Strong and Crude Inventories Fall

- Durable Goods Orders for April rose 1.9% versus estimates of a 1.3% rise and an upwardly revised 1.6% decline in March.
- Durables Ex Transportation for April fell .2% versus estimates of a 1.0% rise and an upwardly revised .2% gain in March.
- New Home Sales for April rose to 1316K versus estimates of 1325K and a downwardly revised 1313K in March.
- Summary of Weekly Petroleum Data for the Week Ending May 20, 2005.
- The EIA reported crude inventories fell 1.69M barrels versus estimates of a 1.5M barrel build. Distillate fuel inventories rose 1.9M barrels versus estimates of a 538K build. Gasoline inventories rose 609K versus estimates of a 600K rise.

BOTTOM LINE: The rise in bookings for items made to last at least three years was the biggest since November and spurred by demand for machinery, computers and aircraft. With consumers still spending and interest rates low, businesses are likely to keep replacing trucks, machinery and computers to meet demand. Orders for transportation equipment rose 8.2% after declining 6.5% in March. Bookings for vehicles increased 3.4% and aircraft orders surged 28% after slumping 22% the previous month. Machinery orders increased 2.2% last month after declining 4.9% in March. Orders for computers rose 16% last month after falling 5.3%. Orders for defense hardware fell 15% last month, following an 8.3% increase. Excluding defense, orders excluding transportation in April rose 2.3%, the most since November 2004. Finally, bookings for non-defense capital goods excluding aircraft, a proxy for future business investment, gained 1.6% last month, the most since January.

US new home sales increased in April to a record pace as historically low interest rates and job gains spurred sales. New home sales so far this year have averaged a 1.27M rate versus last year’s record 1.2M. Job growth, rising incomes and mortgage rates near a four-decade low will continue fueling home sales and thus construction will continue adding to economic growth. Sales rose in two of the four regions in April. Sales surged 37.2% in the Northeast and rose 2.8% in the West. Sales fell 5.3% in the South and declined .5% in the Midwest. The median price rose to $230,800, a 3.8% rise from the same month last year. I continue to believe there is not a housing bubble in most parts of the country. Yes prices are elevated in many parts of the country and there are some bubbles, but a median gain of 3.8% over the last year hardly characterizes a nation-wide bubble.

Crude inventories are still near six-year highs and 5% above the average level over the last 5 years. I continue to expect an accelerated decline in oil prices during the second half of the year as global demand decelerates, the US dollar stays firmer and OPEC pumps near 30-year high levels.

Links of Interest

Market Snapshot
Detailed Market Summary
Market Internals
Economic Commentary
Movers & Shakers
IBD New America
NYSE OrderTrac
I-Watch Sector Overview
NYSE Unusual Volume
NASDAQ Unusual Volume
Hot Spots
NASDAQ 100 Heatmap
DJIA Quick Charts
Chart Toppers
Option Dragon
Real-time Intraday Chart/Quote

Wednesday Watch

Late-Night Headlines
Bloomberg:
- Man Group Plc, the world's largest publicly traded hedge fund manager, may report its smallest full-year earnings increase since 2000 after a decline in performance-related fees.

Wall Street Journal:
- The number of US millionaire households rose 21% last year, reaching an all-time record 7.5 million due to gains in stocks, real estate and other investments.

Financial Times:
- American International Group attorneys are examining whether the world's largest insurer can lay claim to $16 billion worth of company stock owned by Starr International.

Commercial Times:
- Taiwan Semiconductor Manufacturing may see its wafer shipments rise 17% in the third quarter form the second quarter, more than the originally expected 15%.

Seoul Economic Daily:
- Samsung Electronics may invest $15 billion in its non-memory chip business.

Shanghai Daily:
- DuPont plans to more than double its investment in China by 2010.

China Daily:
- China may face more "safeguard" measures imposed by other members of the World Trade Organization to limit imports of Chinese textiles.

Kyodo News:
- China issued a strong warning to the North Korean government not to test a nuclear weapon.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on TAP.

Night Trading
Asian Indices are -1.0% to unch. on average.
S&P 500 indicated -.23%.
NASDAQ 100 indicated -.26%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Before the Bell CNBC Video(bottom right)
Global Commentary
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In Play
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Rasmussen Consumer/Investor Daily Indices
CNBC Guest Schedule

Earnings of Note
Company/EPS Estimate
CWTR/.11
DLTR/.26
MIK/.29
WIND/.02

Splits
UGI 2-for-1

Economic Releases
8:30 EST
- Durable Goods Orders for April are estimated to rise 1.3% versus a 2.3% decline in March.
- Durables Ex Transportation for April are estimated to rise 1.0% versus a .5% decline in March.

10:00 EST
- New Home Sales for April are estimated to fall to 1328K versus 1431K in March.

BOTTOM LINE: Asian indices are lower amid worries over US Fed comments and rising energy prices. I expect US equities to open modestly lower. However, stocks may gain later in the day on better-than-expected economic reports, short-covering and lower energy prices. The Portfolio is 100% net long heading into the day.