Stocks Consolidate After Yesterday's Strong Performance

Indices
S&P 500 1,172.63 -.26%
DJIA 10,340.38 -.43%
NASDAQ 1,961.80 -.02%
Russell 2000 595.64 +.07%
DJ Wilshire 5000 11,541.79 -.18%
S&P Barra Growth 566.08 -.19%
S&P Barra Value 602.19 -.32%
Morgan Stanley Consumer 582.61 -.34%
Morgan Stanley Cyclical 710.87 -.45%
Morgan Stanley Technology 445.47 -.22%
Transports 3,528.85 +.26%
Utilities 366.44 -.82%
Put/Call 1.06 +11.58%
NYSE Arms 1.37 +179.94%
Volatility(VIX) 13.98 +.94%
ISE Sentiment 118.00 -10.61%
US Dollar 83.90 -.12%
CRB 300.20 -.26%

Futures Spot Prices
Crude Oil 51.26 +2.23%
Unleaded Gasoline 148.76 +1.45%
Natural Gas 6.70 +1.07%
Heating Oil 145.15 -.21%
Gold 431.10 +.09%
Base Metals 122.16 +.71%
Copper 143.00 unch.
10-year US Treasury Yield 4.14% -.90%

Leading Sectors
Oil Tankers +2.39%
Energy +.95%
Homebuilders +.87%

Lagging Sectors
Steel -.84%
Networking -.96%
Disk Drives -1.89%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on COH, ARO, NKE, LIZ, PMMAY and CBG.
- Reiterated Underperform on GPI.

Afternoon/Evening Headlines
Bloomberg:
- The US government is proposing that a mandatory national cattle identification system be in place by 2009 to help control outbreaks of livestock illnesses such as foot and mouth disease and mad cow disease.
- US Treasury notes advanced after S&P cuts its credit ratings on GM and Ford to junk, driving investors to the haven of government debt.
- Boeing won an order from Northwest Airlines for 18 of its new 787 airplanes valued at about $2.16 billion, beating Airbus SAS for the third time in two weeks.
- US House Ways and Means Committee Chairman Thomas cautioned Democrats to drop preconditions on their willingness to negotiate a bill that shores up Social Security.

Reuters:
- Martha Stewart Living Omnimedia is close to a deal with a “major cable company” to air its new television show starring its founder, Martha Stewart.

Financial Times:
- India plans to start special economic zones similar to those in China and ease restrictions on bank ownership to attract foreign investment.

BOTTOM LINE: The Portfolio finished lower today on losses in my Internet long and Energy-related shorts. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market improved into the afternoon as the advance/decline finished nearly unchanged, sector performance improved and volume was average. Measures of investor anxiety were higher into the close. Overall, today’s market action was slightly positive considering the GM and Ford debt downgrades, a rise in energy prices and yesterday’s strong performance. As I stated earlier in the day, I believe the odds of the Fed going on hold after the June meeting have risen substantially over the last 24 hours based on the auto debt downgrades and today’s Fed comments. Oil below $50/bbl. and the Fed slowing its pace of rate hikes are two key factors in my bullish view.

Stocks Modestly Lower Mid-day on GM and Ford Debt Downgrades

Indices
S&P 500 1,170.27 -.46%
DJIA 10,322.42 -.60%
NASDAQ 1,955.81 -.33%
Russell 2000 592.78 -.41%
DJ Wilshire 5000 11,515.06 -.40%
S&P Barra Growth 564.92 -.39%
S&P Barra Value 600.91 -.54%
Morgan Stanley Consumer 581.07 -.60%
Morgan Stanley Cyclical 709.61 -.62%
Morgan Stanley Technology 444.85 -.36%
Transports 3,525.56 +.17%
Utilities 364.77 -1.28%
Put/Call .98 +3.16%
NYSE Arms 1.35 +176.82%
Volatility(VIX) 14.28 +3.10%
ISE Sentiment 118.00 -10.61%
US Dollar 84.01 +.01%
CRB 299.25 -.57%

Futures Spot Prices
Crude Oil 49.80 -.76%
Unleaded Gasoline 145.40 -.85%
Natural Gas 6.62 -.08%
Heating Oil 143.00 -1.68%
Gold 430.30 +.07%
Base Metals 122.16 +.71%
Copper 143.10 +.14%
10-year US Treasury Yield 4.16% -.42%

Leading Sectors
Oil Tankers +1.90%
Retail +.67%
Homebuilders +.66%

Lagging Sectors
Steel -1.04%
Networking -1.08%
Disk Drives -1.93%

BOTTOM LINE: The Portfolio is lower mid-day on losses in my Internet longs and Energy-related shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is modestly negative as the advance/decline line is slightly lower, most sectors are declining and volume is above-average. Measures of investor anxiety are higher. Today’s overall market action is neutral considering the F and GM debt downgrades and yesterday’s sharp gains. The debt downgrades raise the odds that the Fed will pause sooner-than most expect. It is also a positive to see the CRB Index back below 300. I expect US stocks to trade higher into the close on short-covering, bargain-hunting and more optimism the Fed will slow their pace of rate hikes.

Today's Headlines

Bloomberg:
- Wal-Mart Stores said April sales rose .9%, the smallest gain in five months, as record-high gas prices had more shoppers limiting purchases to food and other necessities.
- Merck named company insider Richard Clark to succeed CEO Gilmartin, whose almost 11-year tenure included losing the company’s spot as the world’s largest drugmaker and the recall of the Vioxx painkiller.
- GM and Ford had their debt ratings cut to junk by S&P.

Wall Street Journal:
- The US budget proposal for fiscal 2006 would more than double premiums paid by companies to the Pension Benefit Guaranty over the next five years.
- Some US environmentalists are breaking with longstanding opposition to cutting trees and say the best way to save forests may be by using them.
- Northrop Grumman is pondering whether to link up with the French company EADS to bid against Boeing for a contract to supply aerial-refueling tankers to the US Defense Department.
- More US executives like 87-year-old billionaire Kirk Kerkorian are staying at the desks into the seventh and eighth decades of their lives, defying common expectations that most people retire at 65.
- Massey Energy, the fourth-biggest US coal producer, and other coal mining companies are facing shortages of workers that may curtail expansion plans and cause electricity prices to rise.
- The Chicago Merc will list futures on three exchange-traded funds next month.
- More companies are being targeted by blackmailers who threaten to paralyze computer systems unless they are paid tens or hundreds of thousands of dollars.
- Lawyer Sean Coffey’s tactics have boosted demand for him in the field of class-action securities litigation, and his next target is HealthSouth.
- Royal Philips Electronics, LG Electronics and Samsung Electronics may benefit as flat-panel screen prices recover.

NY Times:
- A location committee for California stem cell research efforts will choose between San Francisco, Sacramento and San Diego as the city that will house research headquarters.

Washington Post:
- Increased US imports of Chinese textile goods hasn’t reduced purchases from US clothing makers.
- The US military is examining reports that Abu Musab al-Zarqawi, leader of the al-Qaeda network in Iraq, may be ill or wounded and was present in a hospital last week in the al-Anbar province.

Fort Worth Star-Telegram:
- American Airlines and its pilots union are opposing legislation that would increase the mandatory retirement age for commercial pilots to 65 from 60.

Modest Job Creation is a Positive

- Preliminary 1Q Non-farm Productivity rose 2.6% versus estimates of a 1.8% increase and a 2.1% gain in 4Q.
- Preliminary 1Q Unit Labor Costs rose 2.2% versus estimates of a 2.0% gain and a 1.7% increase in 4Q.
- Initial Jobless Claims for last week rose to 333K versus estimates of 323K and 322K the prior week.
- Continuing Claims rose to 2589K versus estimates of 2595K and 2551K prior.

Bottom Line: While unit labor costs, which account for two-thirds of inflation, exceeded estimates slightly, investors are focusing more on the much better-than-expected productivity number. As long as productivity remains elevated, it is unlikely we will see unit labor costs rise substantially. As a result, hiring will remain modest by historic standards and inflation will remain well in check.

The four-week moving average of jobless claims fell to 321,500. This is the lowest since April 7, 2001. Moreover, the Challenger, Gray & Christmas report released earlier in the week showed job cuts are at the lowest level in almost five years and 20% less than in April of last year. I continue to believe the US economy can create at least 100,000 to 125,000 jobs on average through year-end which will keep the unemployment rate low by historic standards.

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