Today's Headlines

Bloomberg:
- The yen rose against the dollar and the euro after the People’s Daily, a Communist Party-owned newspaper, said that China will revalue its currency next week after keeping it pegged for the past decade.
- US mortgage applications rose 9.4% last week, the most since January, as filings for home purchases surged to a record and more people refinanced.
- Bonds of Delphi and Visteon fell on concern that the two biggest US makers of auto parts will have more trouble paying their debts.
- The US dollar is rising to the highest in almost a month against the euro and erased a decline versus the yen after the US trade deficit unexpectedly narrowed in March.
- Crude oil is falling more than $1/bbl. in NY after a government report showed that US inventories rose to the highest since July 1999.
- The US Capitol, part of the White House and other federal buildings in Washington were evacuated for about 30 minutes today after a private plane strayed into restricted airspace within three miles of the presidential residence.
- Billionaire Carl Icahn probably won a seat on the board of Blockbuster after waging a proxy battle to displace Chairman Antioco.
- The cost to insure US investment-grade debt against default reached its highest in at least two years, boosted by investors’ concern over automakers’ credit.

Wall Street Journal:
- Bradford Hu, a senior Morgan Stanley executive in the equities division, resigned on May 9 after more than 18 years at the firm.
- US appliance-maker Maytag Corp. regularly paid a dividend for decades, and the board my decide tomorrow to cut or stop the quarterly cash payout after an 80% collapse in first-quarter earnings.
- Molson Coors Brewing facing hurdles including the cancellation of the National Hockey League season and a switch to lower-priced beers, both in its biggest market of Canada.
- Wyndham International put itself up for sale.
- Altria Group’s tough legal strategy to defend Philip Morris against lawsuits is starting to pay off.
- Fannie Mae will be increasing its purchases of 40-year mortgages, giving lenders an incentive to offer more of them.
- PG&E, Edison International and Sempra Energy plan to replace conventional electric and gas meters in California with meters that provide current usage information.

NY Times:
- The SEC widened its investigation of Saks Inc. unit Saks Fifth Avenue to include payments deductions to clothing makers for allegedly defective products, also known as chargebacks.
- The US House of Representatives may pass bills today increasing minimum sentences for federal drug offences, establishing minimum penalties for courthouse crimes and broadening the definition of a street gang.

NY Post:
- Walt Disney is considering selling ABC Radio because of slow growth in the industry.

AP:
- Nintendo has selected IGN Entertainment to enable users of its Nintendo DS hand-held game machine to play each other online using wireless “hot spots.”

Washington Post:
- The criminal trial of the former finance director of Senator Hillary Clinton began in Los Angeles yesterday, a proceeding that will be closely watched by politicians from both parties.

Philadelphia Inquirer:
- Comcast said revenue and cash flow will increase through 2008 as it adds phone customers and existing customers switch to more expensive digital television.

Financial Times Deutschland:
- The OECD has lowered its forecast for growth in the dozen countries sharing the euro to 1.6% this year from a prior estimate of 1.9%.

Trade Deficit Improving, Oil Inventories at 6-year Highs

- The Trade Balance for March rose to -$55.0B versus estimates of -$61.9B and -$60.6B in February.
- Summary of Weekly Petroleum Data for the Week Ending May 6, 2005.
- The EIA reported that crude inventories rose 2.67M barrels versus estimates of a 1.25M rise. Distillate fuel inventories rose 1.7M barrels versus estimates of a 275K gain. Gasoline inventories rose 187K barrels versus estimates of a 900K increase.

Bottom Line: The US trade deficit unexpectedly shrank in March to $55 billion, the best showing in 6 months. This should help boost GDP estimates. US exports are now at an all-time high. Imports from China fell. Imports of all goods and services fell 2.5% in March, the largest drop since December 2001. This is bullish for the US dollar. The Dollar Index(DXY) is breaking above its 200-day moving-average for the first time since last September. This afternoon’s Monthly Budget Statement should also help.

Crude inventories are now at the highest level since July 1999, when demand was rising dramatically during the height of the bubble. Last year, US 4Q growth accelerated substantially due to the end of the election and tax incentives. There are no such catalysts this year. The IEA today CUT its 2005 Chinese crude demand growth estimate to 7.4% from 16.0% last year. I expect further estimate cuts for China later in the year. This is significant. I continue to believe oil is being propped up by the “belief” that 4Q demand will soar. I find this highly unlikely. I believe demand will decelerate from last year's levels.

Links of Interest

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Warner Music Group raised $554.2 million in an IPO after cutting the price of the shares to attract investors.
- Australia's $16.8 billion of income tax cuts announced in yesterday's budget will spur economic growth without stoking inflation or prompting the central bank to raise interest rates, executives and economists said.
- The Canadian dollar had the biggest fluctuation of any currency, falling in Asia after Parliament passed a motion calling on Prime Minister Paul Martin to resign.
- Wal-Mart Stores CEO Scott is adding upscale household goods and self-service checkout lines to revive same-store sales to fend off more-profitable Target Corp.

Fox News:
- Arab Bank Plc is the target of an FBI criminal investigation for suspicion of moving funds for alleged terrorists.

Financial Times:
- Apollo Management LP, the NY-based buyout firm founded by former Drexel Burnham Lambert banker Leon Black, plans to raise $6 billion for its next buy-out fund.

Korea Economic Daily:
- North Korea has shown no signs it is preparing for nuclear tests, citing an unidentified South Korean government official.

China Daily:
- China's media regulator awarded the country's first license for Internet protocol television and mobile-phone television programs to Shanghai TV Station, a unit of state-owned Shanghai Media Group.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on NFP, CSCO and YHOO.
- Reiterated Underperform on NFB, SIAL and RNWK.

Night Trading
Asian Indices are -.50% to -.25% on average.
S&P 500 indicated -.06%.
NASDAQ 100 indicated -.21%.

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Earnings of Note
Company/EPS Estimate
FD/.67
MYL/.17
URI/.27
DIS/.32

Splits
None of note

Economic Releases
8:30 EST
- The Trade Balance for March is estimated to fall to -$61.9B versus -$61.0B in February.

2:00 EST
- The Monthly Budget Statement for April is estimated to rise to $60.0B versus $17.6B in March.

BOTTOM LINE: Asian indices are lower on renewed worries about slowing global growth. I expect US equities to open modestly lower on worries over slowing global growth and hedge fund troubles. However, stocks may gain ground later in the day on short-covering, an improving budget deficit and lower energy prices. The Portfolio is 75% net long heading into tomorrow.

Stocks Close Near Session Lows

Indices
S&P 500 1,166.22 -1.07%
DJIA 10,281.11 -.99%
NASDAQ 1,962.77 -.85%
Russell 2000 595.04 -1.31%
DJ Wilshire 5000 11,493.34 -1.02%
S&P Barra Growth 563.31 -.96%
S&P Barra Value 598.57 -1.18%
Morgan Stanley Consumer 578.81 -.77%
Morgan Stanley Cyclical 705.56 -1.39%
Morgan Stanley Technology 444.96 -1.28%
Transports 3,498.56 -1.70%
Utilities 365.25 -.70%
Put/Call .85 +1.19%
NYSE Arms 2.11 +234.17%
Volatility(VIX) 14.91 +8.44%
ISE Sentiment 133.00 -7.64%
US Dollar 84.45 -.22%
CRB 301.44 +.21%

Futures Spot Prices
Crude Oil 51.82 -.40%
Unleaded Gasoline 150.30 +1.06%
Natural Gas 6.68 +.07%
Heating Oil 144.55 +.37%
Gold 427.20 +.07%
Base Metals 124.43 +.45%
Copper 145.40 +.52%
10-year US Treasury Yield 4.20% -1.91%

Leading Sectors
Biotech +.67%
Restaurants -.19%
Hospitals -.31%

Lagging Sectors
Oil Service -2.25%
Airlines -3.33%
Steel -4.62%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on ARO and AEOS.
- Reiterated Underperform on FHN and SMP.

Afternoon/Evening Headlines
Bloomberg:
- Jefferson County International Baccalaureate School in Alabama topped Newsweek’s list of the best US high schools based on the number of advanced placement or college-level tests taken by students.
- Toyota Motor will form a fuel-cell joint venture with GM
- SkyEurope Airlines AS, a Slovakian low-cost airline, agreed to buy 16 of Boeing’s 737-700 aircraft valued at $880 million as the carrier expands service through the European Union.
- US Treasuries rose as demand at an auction of $22 billion in three-year notes surged to the highest since the government resumed sales of the security in 2003.
- Visteon, the second-biggest US maker of auto parts, said it would delay its US regulatory filing for the first quarter.
- Yahoo! said it would start a new subscription music service tomorrow that will compete with Apple and RealNetworks.

AP:
- A State Supreme Court judge ruled today that New York can’t revoke the driver’s licenses of as many as 252,000 illegal immigrants who don’t have Social Security numbers.

Nikkei English News:
- The People’s Bank of China is “technically” prepared to carry out currency reforms, citing Deputy Governor Wu Ziaoling.

BOTTOM LINE: The Portfolio finished lower today on losses in my Internet and Airline longs. I did not trade in the afternoon, thus leaving the Portfolio 75% net long. The tone of the market weakened into the afternoon as the advance/decline finished near its daily lows, almost every sector fell and volume was light. Measures of investor anxiety were higher into the close. Overall, today’s market action was negative considering energy prices finished lower. Rumors of a large hedge fund “blow-up” were behind today’s sell-off. I suspect these fears are exaggerated. The spike in the NYSE Arms is a positive. In my opinion, any further declines over the coming weeks should be viewed as buying opportunities for longer-term investors.