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Tuesday Watch

Late-Night Headlines
Bloomberg:
- California Governor Schwarzenegger called a special election for November, the state's fourth ballot in two years, threatening to bypass lawmakers and win voter approval to curb spending and redraw political lines.
- Ericsson AB and Lucent Technologies are among the companies at Asia's biggest telecom trade show this week vying for business in China and India as the two most populous nations prepare to upgrade cell phone networks.
- China will probably react angrily to the European Union's decision to delay ending a 16-year-old arms embargo on the country and may start to target individual European states to get around the ban, China-based analysts said.

Financial Times:
- The amount of capital being moved out of Russia has reached its highest level since just before the country's financial crisis in 1998, citing a report by Fitch Ratings.

China Daily:
- China's automakers had profits decline 74% in the first four months of 2005 from a year earlier because of falling prices and rising raw material costs.
- China's western province of Xinjiang plans to boost crude oil output fourfold to meet rising demand and may supply 60% of the country's total.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on MERQ, MFE and CBB.
- Reiterated Underperform on WTW and EW.

Night Trading
Asian Indices are unch. to +.25% on average.
S&P 500 indicated -.06%.
NASDAQ 100 indicated +.03%.

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Earnings of Note
Company/EPS Estimate
BE/.00
BBY/.30
BMC/.23
DRL/.42
FLS/.25
KKD/-.03
LEH/2.22
PIR/-.13
URS/.58

Splits
MW 3-for-2

Economic Releases
8:30 EST:
- The Producer Price Index for May is estimated to fall .2% versus a .6% increase in April.
- The PPI Ex Food & Energy for May is estimated to rise .2% versus a .3% increase in April.
- Advance Retail Sales for May is estimated to fall .2% versus a 1.4% gain in April.
- Retail Sales Less Autos for May is estimated to rise .2% versus a 1.1% increase in April.

BOTTOM LINE: Asian indices are mostly higher, led by exporters in the region on optimism over sales to the US. I expect US equities to open modestly higher on better-than-expected economic data. The Portfolio is 75% net long heading into the day.

Stocks Close Modestly Higher as US Dollar and Energy Rise

Indices
S&P 500 1,200.82 +.23%
DJIA 10,522.56 +.09%
NASDAQ 2,068.96 +.29%
Russell 2000 629.02 +.43%
DJ Wilshire 5000 11,890.26 +.58%
S&P Barra Growth 577.60 +.14%
S&P Barra Value 618.86 +.31%
Morgan Stanley Consumer 582.12 +.02%
Morgan Stanley Cyclical 723.99 +.48%
Morgan Stanley Technology 482.09 +.63%
Transports 3,523.43 +.06%
Utilities 374.43 +.34%
Put/Call .88 +23.94%
NYSE Arms .61 -31.36%
Volatility(VIX) 11.65 -2.59%
ISE Sentiment 118.00 -27.61%
US Dollar 88.95 +.29%
CRB 304.28 +.60%

Futures Spot Prices
Crude Oil 55.60 -.04%
Unleaded Gasoline 156.06 -.08%
Natural Gas 7.32 +.81%
Heating Oil 166.82 +.31%
Gold 430.60 -.12%
Base Metals 123.48 -.24%
Copper 153.55 -.26%
10-year US Treasury Yield 4.09% +1.0%

Leading Sectors
Broadcasting +1.95%
Hospitals +1.38%
Papers +1.38%

Lagging Sectors
Restaurants -.52%
Airlines -1.49%
Oil Tankers -1.58%

Evening Review
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Afternoon Recommendations
Goldman Sachs:
- Reiterated Underperform on PFG.

Afternoon/Evening Headlines
Bloomberg:
- Intel said it is setting up a $200 million investment fund to help accelerate the use of computers and the Internet in China.
- Ford’s Hertz rental-car unit said it plans an IPO of as much as $100 million in stock.
- US Treasuries maturing in 10 years or more fell for a fourth day, the longest slide since February, as investors anticipate stronger US growth.
- Shares of Northwest Airlines dropped 12% after Chairman Gary Wilson disclosed he sold 59% of his Northwest stock over the past month.
- Hewlett-Packard separated its personal-computer and printing units five months after combining the businesses.
- Crude oil rose more than $2/bbl. in NY on concern that refiners will be unable to meet surging global demand for distillate fuels such as diesel and heating oil.

SportsBusiness Journal:
- Nike signed NY Yankees All-Star Alex Rodriguez to a five-year sponsorship that might earn him $1 million a year.

Reuters:
- The Blackstone Group, one of the world’s largest private equity firms, is among the companies interested in buying appliance-maker Maytag.

Financial Times:
- SBC Communications said plans for a plan $4 billion fiber-optic network is progressing.
- Haier, a Chinese appliance maker, is considering making a bid for Maytag.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Internet and Semiconductor longs. I exited a tech long in after-hours and added to my QQQQ long, thus leaving the Portfolio 75% net long. The tone of the market was modestly positive today as the advance/decline finished slightly higher, most sectors rose and volume was below average. Measures of investor anxiety were mixed into the close. Overall, today’s market action was positive considering the rise in energy prices. I expect another modestly positive day tomorrow on a better-than-expected PPI reading and better-than-expected retail sales.

Stocks Rising Modestly Mid-day Even as Energy Gains

Indices
S&P 500 1,201.72 +.30%
DJIA 10,539.60 +.26%
NASDAQ 2,068.84 +.28%
Russell 2000 626.88 +.09%
DJ Wilshire 5000 11,898.76 +.28%
S&P Barra Growth 578.68 +.33%
S&P Barra Value 618.75 +.29%
Morgan Stanley Consumer 582.80 +.14%
Morgan Stanley Cyclical 724.18 +.51%
Morgan Stanley Technology 482.29 +.65%
Transports 3,518.06 -.09%
Utilities 373.60 +.12%
Put/Call .91 +28.17%
NYSE Arms .58 -34.46%
Volatility(VIX) 11.59 -3.09%
ISE Sentiment 125.00 -23.31%
US Dollar 89.01 +.35%
CRB 304.31 +.60%

Futures Spot Prices
Crude Oil 55.10 +2.91%
Unleaded Gasoline 156.40 +1.32%
Natural Gas 7.24 +4.44%
Heating Oil 166.40 +3.58%
Gold 431.10 +.42%
Base Metals 123.48 -.24%
Copper 153.95 -1.47%
10-year US Treasury Yield 4.07% +.47%

Leading Sectors
Software +1.24%
Hospitals +1.17%
Papers +1.16%

Lagging Sectors
Restaurants -.64%
Airlines -1.65%
Oil Tankers -1.84%

BOTTOM LINE: The Portfolio is slightly lower mid-day on losses in my Internet and Semiconductor longs. I added to my PD short and to an existing long, thus leaving the Portfolio 75% net long. The tone of the market is modestly positive as the advance/decline line is slightly higher, most sectors are rising and volume is very light. Measures of investor anxiety are mixed. Today’s overall market action is positive, considering the rise in energy prices. I expect US stocks to trade mixed into the close as high energy prices offsets short-covering ahead of important inflation data.

Today's Headlines

Bloomberg:
- China’s inflation rate held at a 19-month low in May, adding to expectations that the central bank will refrain from raising interest rates to dampen consumer spending in the world’s fastest-growing economy.
- Nokia Oyj unveiled seven new handset models to help maintain revenue growth and take market share from competitors including Motorola.
- Morgan Stanley has fired Chairman and CEO Philip Purcell.
- The EU will shelve plans to lift a 16-year-old arms embargo against China because of concerns about the nation’s human-rights record and Pacific rim stability, completing a policy shift that marks a US victory and a French defeat.
- Cattle prices in Chicago tumbled to the lowest in 14 months on concern a second possible case of mad cow disease in the US might slash beef sales.
- US Treasuries maturing in 10 years or more fell for a fourth day, the longest slide since February, on speculation the US economy is growing more briskly.
- The euro fell to a nine-month low against the dollar after European Central Bank Chief Eocnomist Otmar spurred speculation the bank may reduce interest rates for the first time since 2003.
- OPEC may increase output for the second time this year as prices stay above $50/bbl., the Saudi Arabian oil minister said.

Wall Street Journal:
- Italy is experiencing a backlash against the euro as the country sinks deeper into recession.
- Warren Buffet’s General Re is in talks with the US government about settling a criminal inquiry into whether the company helped AIG to distort its finances.
- Toronto-Dominion Bank and Ameritrade said they’ve resumed talks about a possible merger of Ameritrade and the Canadian bank’s TD Waterhouse discount-brokerage arm.
- Boeing and United Technologies, which had a US Army program canceled last year, are teaming up again to compete for a proposed air force search-and-rescue helicopter.
- Northwest Airlines is flying dangerously close to an insolvency filing.
- Coca-Cola is bringing back the classic 1971 song used in its “Hilltop” commercial to pitch zero-calories cola to younger consumers who have opted for trendier drinks.
- Angang New Steel, the Hong Kong-listed unit of China’s second-biggest steelmaker, lowered prices of products including cold-rolled steel coil and zinc-galvanized steel.

NY Times:
- The US will issue a report this week that is critical of the UN, though it supports Secretary General Annan’s proposals to improve the organization. The US is the biggest UN contributor, liable for 22% of the organization’s operating budget and almost 27% of the budget for peacekeeping. Annan face pressure to resign amid scandals in the Iraq/UN oil-for-food program.
- The US will import more clams this year from Canada and other countries after an outbreak of red tide, a toxic algae, shut down shellfish beds from Maine to south of Cape Cod.

Washington Post:
- The US government will no longer print its postage stamps and will instead contract all the work out to private printers.

Handelsblatt:
- STMicroelectronics NV forecast a recovery in the semiconductor industry won’t happen before 2006.