Thursday Watch

Late-Night Headlines
Bloomberg:
- Microsoft agreed to change its Windows XP operating software to address fresh antitrust concerns that traces of programs consumers choose to hide still appear on their computer screens.
- SEC Chairman Donaldson's resignation may spark a battle to reduce the agency's reach over corporate America and Wall Street.

Wall Street Journal:
- Citigroup is in discussion to exchange its Smith Barney mutual fund business with Legg Mason.

AP:
- President Bush will nominate California Republican Representative Christopher Cox to be the new chairman of the SEC, replacing William Donaldson.

Economic Daily News:
- Nvidia Corp. and ATI Technologies have chosen Taiwan Semiconductor Manufacturing as their only supplier of chips that use 90-nanometer technology.

People's Daily:
- Property prices and transaction volume in 11 major Chinese cities fell after the government unveiled measures last month to curb real estate speculation.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on SBUX, FMD, CAL, MDT and ARO.

Night Trading
Asian Indices are -.25% to +.75% on average.
S&P 500 indicated +.02%.
NASDAQ 100 indicated +.03%.

Morning Preview
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Earnings of Note
Company/EPS Estimate
JTX/1.38
SFL/.50
TTWO/-.13

Splits
COP 2-for-1
EGN 2-for-1
RESP 2-for-1

Economic Releases
8:30 EST:
- Final 1Q Non-farm Productivity is estimated to rise 3.0% versus a prior estimate of a 2.6% increase.
- Final 1Q Unit Labor Costs is estimated to rise 2.1% versus a prior estimated of a 2.2% gain.
- Initial Jobless Claims for last week are estimated to rise to 325K versus 323K the prior week.
- Continuing Claims are estimated to rise to 2581K versus 2574K prior.

10:00 EST:
- Factory Orders for April are estimated to rise 1.1% versus a .1% gain in March.

BOTTOM LINE: Asian indices are mostly higher, spurred by gains in exporting and energy shares in the region. I expect US equities to open mixed as optimism over an end to Fed rate hikes offsets higher energy prices. The Portfolio is 100% net long heading into the day.

Stocks Close Higher Even as Energy Prices Finish at Session Highs

Indices
S&P 500 1,202.22 +.90%
DJIA 10,549.87 +.79%
NASDAQ 2,087.86 +.95%
Russell 2000 623.74 +1.14%
DJ Wilshire 5000 11,884.67 +.90%
S&P Barra Growth 581.29 +.96%
S&P Barra Value 616.42 +.84%
Morgan Stanley Consumer 588.30 +.65%
Morgan Stanley Cyclical 726.43 +.85%
Morgan Stanley Technology 484.69 +1.22%
Transports 3,633.86 +.95%
Utilities 368.54 +.93%
Put/Call .68 -29.90%
NYSE Arms .80 -48.30%
Volatility(VIX) 12.36 -7.0%
ISE Sentiment 131.00 -31.77%
US Dollar 88.11 +.40%
CRB 304.33 +1.16%

Futures Spot Prices
Crude Oil 54.27 +4.43%
Unleaded Gasoline 153.50 +4.64%
Natural Gas 6.72 +5.42%
Heating Oil 153.47 +5.88%
Gold 417.60 -.31%
Base Metals 121.70 +.70%
Copper 148.20 +1.75%
10-year US Treasury Yield 3.88% -2.43%

Leading Sectors
Gold & Silver +1.97%
Energy +1.86%
Internet +1.37%

Lagging Sectors
Defense -.31%
Oil Tankers -1.24%
Oil Tankers -1.28%

Evening Review
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In Play

Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on FMD, SBC, UTX and AIG.

Afternoon/Evening Headlines
Bloomberg:
- Dutch voters rejected the European Union’s constitution, dealing a second blow to European integration three days after the treaty was defeated in France, causing the euro to plunge.
- UK Prime Minister Blair came under pressure from European Union leaders not to scrap a British referendum on the EU constitution after the Netherlands became the second country to reject the new rulebook.
- JP Morgan Chase said second-quarter trading results through May 31 were “the worst the firm has experienced in some time.”
- The SEC has asked a US judge to appoint a receiver to take control of Amerindo Investment Advisors, after its two co-founders, Alberto Vilar and Gary Tanaka, were jailed on criminal charges last week.
- Ford Motor and GM, which are losing share to Asian competitors, had US sales declines of more than 11% in May, prompting North American production cuts and increased sales incentives.

Wall Street Journal:
- EBay agreed to buy Shopping.com for about $620 million in cash.

AP:
- Palestinian Authority President Abbas underwent angioplasty yesterday after being admitted to an Amman, Jordan, hospital for fatigue.

Reuters:
- Nextel Communications CEO Donahue expects the mobile-phone company to meet or beat forecasts for this year.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet, Retail and Homebuilding longs. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline finished higher, almost every sector rose and volume was average. Measures of investor anxiety were mostly lower into the close. Overall, today’s market action was modestly positive, considering the Fed’s Fisher’s dovish comments. Rising energy prices likely muted an otherwise more vigorous rally.

Stocks Higher Mid-day on Diminishing Fed Fears and Lower Inflation

Indices

S&P 500 1,204.26 +1.07%

DJIA 10,569.01 +.97%

NASDAQ 2,092.24 +1.14%

Russell 2000 624.09 +1.20%

DJ Wilshire 5000 11,901.87 +1.05%

S&P Barra Growth 581.83 +1.06%

S&P Barra Value 617.62 +1.03%

Morgan Stanley Consumer 587.71 +.55%

Morgan Stanley Cyclical 728.74 +1.17%

Morgan Stanley Technology 486.86 +1.67%

Transports 3,637.89 +1.08%

Utilities 369.52 +1.20%

Put/Call .56 -42.27%

NYSE Arms .62 -59.67%

Volatility(VIX) 12.29 -7.52%

ISE Sentiment 129.00 -32.81%

US Dollar 88.06 +.34%

CRB 303.04 +.74%

Futures Spot Prices

Crude Oil 53.75 +3.43%

Unleaded Gasoline 151.80 +3.61%

Natural Gas 6.62 +3.78%

Heating Oil 152.50 +5.28%

Gold 417.70 -.29%

Base Metals 121.70 +.70%

Copper 148.70 +2.09%

10-year US Treasury Yield 3.90% -1.81%

Leading Sectors

Energy +2.21%

Gold & Silver +2.14%

Gaming +1.78%

Lagging Sectors

Telecom -.15%

Defense -.29%

Oil Tankers -.83%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Internet, Homebuilding, Retail and Wireless longs. I added a number of new longs this morning, thus leaving the Portfolio 100% net long. One of my new longs is GME and I am using a $28 stop-loss on this position. The tone of the market is positive as the advance/decline line is higher, almost every sector is higher and volume is above average. Measures of investor anxiety are mostly lower. Today’s overall market action is positive, given the rise in energy prices and disappointing ISM report. The Fed's Fisher said on CNBC today that "there's room to tighten a little bit further" and that "we're in the eighth inning of rate cycle.” I am more confident than ever that the Fed is almost ready to "pause." However, I would not be surprised to see conflicting comments over the next couple of weeks from Fed speakers. Fisher's comments today were not a mistake or the result of inexperience, in my opinion. They were the first attempt at changing perceptions in an orderly manner before the June 30 meeting. I expect US stocks to trade mixed into the close as rising energy prices and growth worries are offset by lower long-term interest rates, subsiding Fed worries and decelerating inflation.

Today's Headlines

Bloomberg:

- Global emergency oil reserves total about 4 billion barrels and are sufficient to cover a major supply disruption in a producing country, said Claude Mandil, executive director of the IEA.
- MGM Mirage is looking for more projects in the southern Chinese city of Macau as it prepares to build a $975 million casino hotel in the only place in China where casino gambling is legal.

- Dutch voters will probably reject the European Union constitution in a referendum today, opinion polls show, as French President Chirac promised renewed efforts to reduce high unemployment following the defeat of the treaty in France.

- The European Central Bank cut its growth forecast for the 12 countries sharing the euro to 1.4% from 1.6%.

- Electronic Arts today will announce an agreement with Qualcomm aimed at grabbing a bigger slice of the $1.3 billion market for games played on mobile phones.

- SBC Communications, the largest provider of high-speed Internet access on digital subscriber lines, cut the price for its standard DSL service by 25% to add more customers.

- William Donaldson, chairman of the SEC, plans to resign as the top regulator for the world’s biggest financial market on June 30.

- UN Secretary-General Kofi Annan yesterday fired Joseph Stephanides, an official in the Iraq/UN oil-for-food program, for misconduct in the awarding of a contract to a company that inspected humanitarian goods imported by Saddam’ regime.

- US junk bonds in May turned in their best performance of the year, as concern faded that GM and Ford would swamp the market for high-yield, high-risk debt after their credit ratings were cut to below investment-grade.

- US Treasuries are rising, pushing 10-year yields down to the lowest since April 2004, after the ISM’s monthly manufacturing, prices paid and employment indices all fell.

- The euro fell to an eight-month low against the dollar after manufacturing in the region contracted and the European Central Bank and European Commission cut their economic growth forecasts.

- Crude oil is rising for a seventh straight session as refinery malfunctions raised concern that refiners won’t produce enough gasoline to meet peak demand this summer.

Wall Street Journal:

- General Motors is expected to announce steep discounts to the general public today similar to GM employee-offered incentives, in an effort to unload inventories.

- Procter & Gamble is focusing on finding out what products suit women most rather than the ones that are most technologically elaborate.

- Evercore Partners is considering conducting an IPO, to profit from several previous financial advisory firm offerings.

- A book based on disclosures by former FBI official W. Mark Felt that he was “Deep Throat,” the anonymous person who helped the Washington Post uncover the Watergate scandal, could get an advance of as much as $1 million.

- The growth of China’s steel industry may slow, Shanghai Baosteel Group Corp Chairwoman Xie Qihua said in an interview.

- Wells Fargo is slicing online trading fees for clients who hold at least $25,000 in balances at the bank, following cuts by other brokerages in recent months.

- Bank of America will require Internet customers to register their computers with the bank and assign a digital image to it which will pop up when ever the user accesses his account.

- Shares of companies that own and operate crude-oil tankers have fallen this year and short-sellers are betting that they’ll fall further.

- Seven executives at Blockbuster sold 560,000 Class A shares of the company’s stock for $5.5 million.

- The Safe Blood for Africa Foundation is working to provide safe blood transfusions in Africa by improving donor screening and blood testing.

- Deere and Orvis are taking advantage of the US real estate boom by entering into separate luxury property ventures.

NY Times:

- Delta Air Lines’ Song low-fare unit plans to announce new non-stop service between Boston and California today.

NY Post:

- Michael Dell, chairman and founder of Dell Inc., plans to put a “substantial” amount of money from his personal investments into a hedge fund venture.

Philadelphia Inquirer:

- A Pennsylvania law that would legalize gambling to pay for property-tax reform was rejected by 400 of the state’s 501 local school districts over the weekend.

AP:

- Connecticut and Massachusetts lawmakers approved measures yesterday to encourage stem cell research in those states.

AFP:

- OPEC will probably decide to keep pumping oil at its current level when it meets in Vienna on June 15, the group’s president said today.

Construction Sets Another Record, Manufacturing Slowing, Inflation Decelerating

- Construction Spending for April rose .5% versus estimates of a .6% increase and an upwardly revised .6% gain in March.
- ISM Manufacturing for May fell to 51.4 versus estimates of 52.0 and a reading of 53.3 in April.
- ISM Prices Paid for May fell to 58.0 versus estimates of 67.5 and a reading of 71.0 in April.

BOTTOM LINE: US construction spending rose in April to an all-time record level. Homebuilding gained .6% and accounted for more than half the total. Non-residential construction rose 1.3% in April, the highest since May 2002. Construction of commercial buildings rose 3.8%. Thirty-year mortgage rates have averaged 5.78% this year, near the four-decade low of 5.21% seen in June 2003. The average since the start of 1980 is 9.58%. I continue to believe construction will help sustain modest US growth through at least year-end.

The pace of US manufacturing growth slowed in May for a sixth straight month. The index is the lowest since June 2003. However, it wasn’t as bad as I had feared. The new orders gauge of the index fell to 51.7 from 53.7 in April. The production index fell to 54.9 from 56.7. The ISM Prices Paid Index fell to 58.0, the lowest since September 2003, from 71 in April. Prices Paid has now plunged 34.1% since April 30, 2004. The employment component of the index decreased to 48.8 from 52.3 in April. The French vote and much better inflation readings are spurring the recent rally in bonds. I do not agree with those that say it is projecting a substantial fall in US growth. The ongoing inventory correction will likely continue for a couple more months. However, I expect manufacturing activity to accelerate thereafter as consumer spending remains very healthy.