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Friday Watch

Late-Night Headlines
Bloomberg:
- The US dollar headed for its biggest weekly gain versus the yen in more than four months and traded near a six-month high against the euro on expectations the US economy will outperform those of Europe and Japan.
- Crude oil prices may fall for a second week because of rising US inventories and signs that growth in global demand is slowing.
- Shanghai copper futures had their biggest decline in a month, as supplies increase in China, the largest consumer.
- Taiwan President Chen Shui-bian reaffirmed his rejection of a 1992 accord in which China and Taiwan's leaders at the time agreed that the two sides belonged to "one China."

Wall Street Journal:
- Liquefied natural gas-exporting companies are considering whether to limit production to avoid a glut of the commodity by the end of the decade.

Asian Wall Street Journal:
- China may adopt measures in the next two months to curb textile exports after the European Union and the US said a surge in Chinese shipments was hurting their companies.

Xinhua News:
- China's central bank Governor Zhou Xiaochuan said media reports of an expected revaluation of the yuan on May 18 are not "correct."

Financial Times:
- Carlyle Group, a US buyout fund, has ended efforts to raise a fund worth $300 million for Russian investments.

NHK Television:
- Microsoft and Toshiba concluded a comprehensive cross patent agreement for digital products.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on KSS and MMM.

Banc of America:
- Upgraded UHT to Buy, target $31.

Night Trading
Asian Indices are -.50% to +.50% on average.
S&P 500 indicated +.26%.
NASDAQ 100 indicated +.34%.

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Earnings of Note
Company/EPS Estimate
DRS/.60
LBTYA/-.03
TIF/.24

Splits
None of note

Economic Releases
8:30 EST
- The Import Price Index for April is estimated to rise .4% versus a 1.8% increase in March.
- Business Inventories for March are estimated to rise .6% versus a .5% increase in February.
- Preliminary Univ. of Mich. Consumer Confidence for May is estimated to rise to 88.2 versus 87.7 in April.

BOTTOM LINE: Asian indices are mixed as gains in tech shares in the region are offsetting losses in commodity-related stocks. I expect US equities to open higher on tech sector gains, declining energy prices, a better-than-expected consumer confidence reading and decelerating import prices. The Portfolio is 75% net long heading into the day.

Stocks Finish Near Lows on Plunging Commodity Shares

Indices
S&P 500 1,159.36 -1.0%
DJIA 10,189.48 -1.08%
NASDAQ 1,963.88 -.39%
Russell 2000 586.89 -1.46%
DJ Wilshire 5000 11,415.62 -1.04%
S&P Barra Growth 561.35 -.87%
S&P Barra Value 693.63 -1.14%
Morgan Stanley Consumer 578.06 -.63%
Morgan Stanley Cyclical 692.31 -2.27%
Morgan Stanley Technology 448.40 +.06%
Transports 3,440.50 -2.65%
Utilities 362.85 -1.04%
Put/Call 1.03 +3.0%
NYSE Arms 1.61 +102.75%
Volatility(VIX) 16.12 +11.56%
ISE Sentiment 116.00 -23.68%
US Dollar 85.65 +.90%
CRB 396.02 -1.64%

Futures Spot Prices
Crude Oil 48.68 +.29%
Unleaded Gasoline 143.31 +.08%
Natural Gas 6.52 +.22%
Heating Oil 138.11 +.11%
Gold 422.50 +.07%
Base Metals 122.25 -.85%
Copper 138.10 +.36%
10-year US Treasury Yield 4.16 -.80%

Leading Sectors
Semis +.29%
Internet +.23%
Nanotechnology +.11%

Lagging Sectors
Energy -4.33%
Oil Service -4.54%
Steel -5.54%

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In Play

Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on XRX and FDC.

Business Week:
- The shares of Industrial Distribution Group are worth buying because the stock is cheap compared to rival industrial distributors.
- Shares of XM Satellite Radio Holdings have dropped 25% this year and Lee Schultheis of Alternative Investment Partners expects it to rebound.

Afternoon/Evening Headlines
Bloomberg:
- Dell Inc. said first-quarter profit rose 28%, as discounts and printer giveaways drove PC sales.
- Commodity prices plunged the most in seven weeks, led by declines in copper and oil, on concern that demand growth in China is slowing and that a rally in the dollar is boosting the cost of raw materials for importers.
- Crude oil in NY traded near a three-month low amid rising US inventories and as the dollar surged against the euro and yen, making the fuel more expensive for European and Japanese buyers.

Financial Times:
- Liberty Media may be interested in buying part of IAC/InteractiveCorp after a proposed spinoff.

BOTTOM LINE: The Portfolio finished unchanged today as gains in my Energy-related and Base Metal shorts offset losses in my Gaming and Homebuilding longs. I exited a few longs as they hit stop losses and added to my oil tanker shorts, thus leaving the Portfolio 75% net long. The tone of the market deteriorated into the afternoon as the advance/decline finished near its session lows, most sectors fell and volume was average. Measures of investor anxiety were higher into the close. Overall, today’s market action was negative considering the declines in commodity prices and strong retail sales. Soaring commodity prices had been the main focus of inflation fears. I continue to believe measures of inflation will decelerate through year-end to below average rates. Commodity-related shares had been market leaders. The market is currently in the process of transitioning to new leadership, which should emerge over the coming weeks. In the hedge fund community, the long commodities/short dollar/short bonds trades are resulting in immense pain which could lead to further dislocations for some large funds. I still believe longer-term investors should use any further weakness related to hedge fund blow-up worries to add to favorite long positions. As I stated previously, declining commodity prices are the main key to my positive thesis for the second half of the year.

Stocks Lower Mid-day on Steep Declines in Commodity Stocks

Indices
S&P 500 1,160.17 -.93%
DJIA 10,212.17 -.54%
NASDAQ 1,961.25 -.52%
Russell 2000 587.25 -1.39%
DJ Wilshire 5000 11,424.65 -.96%
S&P Barra Growth 561.68 -.80%
S&P Barra Value 594.34 -1.01%
Morgan Stanley Consumer 578.90 -.48%
Morgan Stanley Cyclical 692.79 -2.20%
Morgan Stanley Technology 448.17 +.01%
Transports 3,441.92 -2.60%
Utilities 363.16 -.96%
Put/Call .81 -19.0%
NYSE Arms 1.19 +50.19%
Volatility(VIX) 15.75 +9.0%
ISE Sentiment 115.0 -24.34%
US Dollar 85.50 +.72%
CRB 295.96 -1.65%

Futures Spot Prices
Crude Oil 48.70 -3.47%
Unleaded Gasoline 143.30 -3.24%
Natural Gas 6.50 -2.74%
Heating Oil 137.80 -1.79%
Gold 422.30 -1.31%
Base Metals 122.25 -.85%
Copper 138.20 -4.19%
10-year US Treasury Yield 4.18% -.52%

Leading Sectors
Semis +.49%
Internet +.49%
Airlines +.20%

Lagging Sectors
Oil Tankers -4.24%
Oil Service -4.31%
Steel -5.58%

BOTTOM LINE: The Portfolio is slightly higher mid-day on gains in my Energy-related and Base Metal 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 lower, most sectors are lower and volume is average. Measures of investor anxiety are mostly higher. Today’s overall market action is negative considering the declines in energy prices and strong retail report. The commodity declines I have been warning about since last year are finally here. Investors appear to be incorrectly assuming these declines mean US growth is slowing substantially. As well, the rising US dollar is prompting fears of earnings misses at multi-national companies and more hedge-fund blow-ups. My entire positive thesis for the second half of the year is built around declining commodity prices. I do not believe the dollar will rise enough to hurt earnings at most companies. Any hedge fund blow-ups will likely be minor dislocations. In my opinion, longer-term investors should use any further weakness to accumulate shares in favorite longs. I expect US stocks to trade higher into the close on short-covering, bargain hunting and lower energy prices.

Today's Headlines

Bloomberg:
- Cornell University scientists have developed a machine that can replicate itself, potentially paving the way for robots that could repair themselves while working in space or in hazardous conditions.
- Sabre Holdings, operator of the Travelocity.com travel service, agreed to buy Lastminute.com for $1.08 billion to add the UK’s largest Internet travel business.
- Italy’s economy, Europe’s fourth-biggest, unexpectedly fell into recession for the second time in less than two years as rising oil prices and concern about the growth outlook eroded corporate investment and consumer spending.
- Wal-Mart Stores said first-quarter profit rose 13.6%, below analysts’ estimates, as rising gas prices hurts sales of general merchandise.
- Berkshire Hathaway is paying more to sell debt on concern the company’s ties to American International Group will hurt its credit rating.
- JP Morgan, among the banks most bearish on the US dollar at the end of last quarter, joined ABN Amro Holding NV and Citigroup in raising its dollar forecast as the US economy extends its expansion.
- Ford’s credit rating was cut two levels today by Moody’s Investors Service to one step above junk-bond status after the second-biggest US automaker said its earnings will fall short of forecasts.
- US Treasuries fell after a government report showed April retail sales increased more than forecast, bolstering confidence the economy is gaining momentum.
- Crude oil is fell below $49/bbl., dropping for a second day after reports showed rising US petroleum inventories and slower growth in Chinese demand.
- the US dollar surged to a six-month high against the euro and gained versus the yen after US retail sales in April rose the most in seven months.

Wall Street Journal:
- A US Senate panel accused European officials of secretly receiving millions of barrels of Iraqi oil before the US liberation of Iraq and then covering up the profit.
- Toyota Motor faces concerns over quality standards as it shifts more production to developing countries to trim costs.
- Half of the US still lacks the technology needed to locate cell phone users in distress.
- France Telecom SA’s Orange unit, Vodphone Group Plc and other European wireless providers expect that sex video clips will help encourage the use of their broadband mobile-phone services.
- Russian officials are protecting the piracy of films, music, business software and books, helping make the country one of the biggest producers of counterfeit electronic goods.
- Global Crossing, which runs a high-speed fiber-optic network for sending calls and data, and rival companies are still trying to cope with a glut of capacity.
- Sales of identity-management software, which gives companies more control over who is accessing their networks, are soaring as more businesses turn to the software to save money and increase security.
- US CEOs may be required to certify the accuracy of their companies’ tax returns or face stiff penalties as part of a spending bill before Congress expected to be passed this week.
- Short positions outstanding at big US stock markets have risen more than 9% this year, to record highs.
- SABMiller Plc will boost advertising for its cheapest beers, Milwaukee’s Best and Miller High Life, by 35% this year in an effort to win customers from larger brew Anheuser-Busch.

Chicago Tribune:
- The Chicago City Council has voted to ban motorists from holding cellular phones while driving and may fine violators as much as $200.

Orlando Sentinel:
- Florida’s Orlando International Airport next week will begin using an iris-scanning device to verify employees’ identities before allowing them access to secured areas.