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

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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
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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
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Daily ETF Performance
Style Performance
Market Wrap CNBC Video(bottom right)
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GuruFocus.com
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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.