GDP Exceeds Estimates, Oil Inventories Rising

- Final 1Q GDP rose 3.8% versus estimates of 3.7% and a prior estimate of 3.5%.
- Final 1Q Personal Consumption rose 3.6% versus estimates of 3.6% and a prior estimate of 3.6%.
- Final 1Q GDP Price Index rose 2.9% versus estimates of a 3.2% increase and a prior estimate of 3.2%.
- Summary of Weekly Petroleum Data for the Week Ending June 24, 2005.
- The EIA reported that crude inventories rose 1.1M barrels vs. estimates of a 1.4M barrel fall. Gasoline inventories rose 310K barrels vs. estimates of a 190K barrel decline. Distillate inventories rose 1.64M barrels vs. estimates of a 1.5M barrel rise.

BOTTOM LINE: The US economy grew more than originally thought in the first three months of the year as the trade deficit narrowed and home construction increased more than initially estimated. Without adjusting for inflation, GDP rose 6.7%, the strongest in a year. The Core PCE Price Index rose 2.0%, substantially below recent measures of income growth. Current-production cash flow, or the internal funds available to companies for investment, increased 8.4% in the first quarter, the biggest rise since the second quarter of 1978, Bloomberg reported. The pace of first-quarter growth was faster than the 3.0% average of the last 3 decades. The last time growth exceeded 3% for eight or more quarters was from January-March 1983 to the first three months of 1986, according to Bloomberg. The US economy remains the strongest of all major industrialized nations. Growth this year is forecast at 3.5% versus projections of 1.4% growth in Europe. This would be the 13th year out of 14 US growth has exceeded that of Europe.

Crude oil is down modestly on the energy inventory news. According to the Dept. of Energy, crude supply is up 7.76% over the last year, while API implied crude demand has declined 5.65% during this same period. I would expect further declines in oil later today.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Johnson & Johnson's Concerta attention-deficit disorder drug users have experienced hallucinations, psychotic behavior, suicidal thoughts and heart complications such as high blood pressure, the FDA said.
- The Australian dollar fell to its lowest in two weeks on a plunge in the price of commodities, which account for almost 60% of the nation's exports.
- Japan's industrial production fell in May as technology companies pared inventories and demand from China and the US slowed.
- The National Academy of Sciences has decided to publish a study that details how terrorists could contaminate the US milk supply with botulism, after the US government warned the study was a "road map for terrorists."

DigiTimes:
- South Korean electronics overtook those from Taiwan in China's market for the first time in 10 years, citing World Trade Atlas data.

Financial Times:
- European finance ministers in the 12 countries sharing the euro should enter a "dialogue" with the European Central Bank to define common economic government to tackle stagnate growth and high unemployment, citing French Prime Minister Dominique de Villepin.
- Labor market reforms are essential in the context of high unemployment rates in France and Germany that show no sign of declining this year, citing the OECD.

AFP:
- US Defense Secretary Donald Rumsfeld and his Indian counterpart Pranab Mukherjee signed a 10-year defense agreement that includes joint production of weapons and cooperation in missile defense.

Hong Kong Economic Journal:
- CNOOC Ltd. is expected to complete talks with Unocal Corp. within a week in its bid to buy Unocal for $18.5 billion.

Australian Financial Review:
- Microsoft CEO Ballmer said the company has "great" growth prospects, though sales will no longer increase by 20% a year.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on BAC and AIG.

Night Trading
Asian Indices are -.25% to +.50% on average.
S&P 500 indicated -.04%.
NASDAQ 100 indicated unch.

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Earnings of Note
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GIS/.65
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Upcoming Splits
None of note

Economic Releases
8:30 am EST:
- Final 1Q GDP is estimated to rise to 3.7% versus a prior estimate of 3.5%.
- Final 1Q Personal Consumption is estimated to rise 3.2% versus a prior estimate of 3.6%.
- Final 1Q GDP Price Index is estimated to rise 3.2% versus a prior estimate of 3.2%.

10:30 am EST:
- Summary of weekly energy inventory data.

BOTTOM LINE: Asian indices are mostly higher, led by technology and automaker shares in the region. I expect US equities to open modestly higher and build on gains later in the afternoon. The Portfolio is 100% net long heading into the day.

Stocks Close Higher as Commodity Prices Fall the Most in 14 Years

Indices
S&P 500 1,201.57 +.91%
DJIA 10,405.63 +1.12%
NASDAQ 2,069.89 +1.21%
Russell 2000 641.48 +2.10%
DJ Wilshire 5000 11,939.42 +.98%
S&P Barra Growth 574.50 +1.12%
S&P Barra Value 622.88 +.71%
Morgan Stanley Consumer 576.61 +1.23%
Morgan Stanley Cyclical 721.94 +1.89%
Morgan Stanley Technology 476.70 +.68%
Transports 3,480.91 +2.51%
Utilities 385.95 +.98%
Put/Call .75 -21.05%
NYSE Arms .67 -47.59%
Volatility(VIX) 11.58 -7.51%
ISE Sentiment 176.00 +37.50%
US Dollar 88.99 +.61%
CRB 304.48 -2.21%

Futures Spot Prices
Crude Oil 58.30 +.17%
Unleaded Gasoline 162.60 +.07%
Natural Gas 7.07 +.03%
Heating Oil 162.50 +.28%
Gold 437.50 -.05%
Base Metals 123.51 -.64%
Copper 154.80 -.39%
10-year US Treasury Yield 3.96% +1.66%

Leading Sectors
Airlines +6.30%
Steel +3.05%
Defense +2.64%

Lagging Sectors
Gold & Silver -.62%
Energy -1.69%
Oil Service -2.10%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on PAYX and ADP.
- Reiterated Underperform on LEA.

Afternoon/Evening Headlines
Bloomberg:
- American International Group former CEO Maurice “Hank” Greenberg is reversing the transfer of 41 million shares of company stock to his wife.

Financial Times:
- China has pledged to improve accounting standards for its companies, bringing them closer to international practices, citing Wang Jun, assistant minister of finance.
- Richard Scrushy, the former chief executive of HealthSouth, was acquitted of directing a $2.7 billion accounting fraud that nearly bankrupted the company he built into the largest US operator of rehabilitation hospitals.
- Apple Computer cut prices on its iPod digital music players, added color screens to some models and began supporting downloadable radio programs to boost sales of the devices.
- Crude oil fell more than $2/bbl., the biggest drop in eight weeks, on speculation fuel supplies increased.
- Verizon Wireless will unveil a music-playing phone and online music service to compete with Apple Computer’s iTunes store and planned phone with Motorola.
- The dollar rallied against the euro for the first day in three as reports showed US consumer confidence at a three-year high while optimism dwindles in Germany and Italy.
- Commodity prices plunged by the most in 14 years, led by declines in crude oil, hog, corn and soybean futures.
- AIG, reporting its first results since a $3.9 billion earnings restatement, said quarterly profit rose 44% on Asian life insurance businesses and gains from derivatives.

BOTTOM LINE: The Portfolio finished substantially higher on gains in my Homebuilding, Retail and Technology 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 substantially higher, almost every sector rose and volume was below average. Measures of investor anxiety were lower into the close. Overall, today’s market action was positive. I would like to see better volume on a follow-through from today’s gains. I expect tomorrow's final revision to 1Q GDP to come in around expectations. I also expect to see a greater build in distillate inventories than expectations, which should lead to further declines in the price of crude.

Stocks Higher Mid-day on Oil Decline and Strong Consumer Confidence Reading

Indices
S&P 500 1,199.49 +.74%
DJIA 10,372.87 +.81%
NASDAQ 2,065.79 +1.02%
Russell 2000 637.70 +1.49%
DJ Wilshire 5000 11,916.25 +.79%
S&P Barra Growth 573.40 +.93%
S&P Barra Value 621.98 +.57%
Morgan Stanley Consumer 576.07 +1.14%
Morgan Stanley Cyclical 719.68 +1.57%
Morgan Stanley Technology 477.02 +.74%
Transports 3,457.92 +1.83%
Utilities 384.84 +.70%
Put/Call .81 -14.74%
NYSE Arms .67 -47.29%
Volatility(VIX) 11.77 -5.99%
ISE Sentiment 200.00 +56.25%
US Dollar 89.00 +.63%
CRB 304.08 -2.36%

Futures Spot Prices
Crude Oil 58.10 -4.03%
Unleaded Gasoline 162.10 -3.22%
Natural Gas 7.02 -1.58%
Heating Oil 161.50 -3.65%
Gold 437.70 -.91%
Base Metals 123.51 -.64%
Copper 155.40 -.58%
10-year US Treasury Yield 3.96% +1.51%

Leading Sectors
Airlines +4.68%
Steel +2.68%
Homebuilders +2.20%

Lagging Sectors
Gold & Silver -.97%
Energy -1.50%
Oil Service -1.78%

BOTTOM LINE: The Portfolio is substantially higher mid-day on gains in my Internet, Homebuilding, Retail and Networking longs. I covered my Steel shorts this morning, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is substantially higher, almost every sector is higher and volume is below average. Measures of investor anxiety are lower. Today’s overall market action is positive. The Johnson Redbook Same-store-sales Index rose 3.8% year over year last week vs. a 3.7% rise the prior week. This is also up from a 1.5% gain in late April and the eighth week in a row the index has exceeded 3%. Oil is breaking down through a relentless uptrend that had been in place since mid-May. It has a ways to go before longer-term trends break, but it's a start. I expect US stocks to trade modestly higher into the close on short-covering, declining energy prices and quarter-end window-dressing.