Durables Not That Bad, Crude Inventories Surging

- Durable Goods Orders for March fell 2.8% versus estimates of a .3% increase and a downwardly revised .2% decline in February.
- Durables Ex Transports for March fell 1.0% versus estimates of a .5% increase and a .2% fall in February.
- Summary of Weekly Petroleum Data for the Week Ending April 22, 2005. Crude oil inventories rose 5.5M barrels versus estimates of a 650K rise, distillate fuel inventories fell 1.4M barrels versus estimates of a 100K rise and gasoline inventories fell 300K barrels versus estimates of a 1M barrel fall.

Bottom Line: Durable goods orders for March fell 2.8% vs. estimates of a .3% increase and a downwardly revised .2% decline in February. Durables excluding transports for March fell 1.0% vs. estimates of a .5% increase and a .2% fall in February. This "very bearish" number, as some pundits are calling it, doesn't appear to me to be that worrisome. Orders for transportation equipment fell 7.8%, mainly due to a 23% decline in the very volatile aircraft component. Boeing received orders for only 11 planes last month, compared with 34 in February. Moreover, the report was skewed by the loss of working days around Easter, which was in March rather than April. The only economist to correctly forecast March's decline was Ian Shepherdson of High Frequency Economics. He is saying "these data are unreliable" and that "he expects a hefty April rebound." I believe analyst estimates of 3.5% GDP growth are at risk for 1Q as a result of a weaker-than-expected March and a higher-than-expected deflator. However, I continue to believe that U.S. growth will temporarily slow to around 2% before rebounding in the second half. I do not think a recession is likely. I also continue to believe the "contango" in crude is resulting in a temporary artificial boost to current demand. As perceptions shift over the next couple of months, a demand vacuum will send crude prices lower than most currently expect.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- The South Korean government has yet to see any signs that North Korea is preparing for an imminent nuclear weapons test.
- Australian consumer prices rose less than economists expected in the first quarter, signaling the central bank may refrain from raising interest rates again this year.
- The US dollar rose against the yen and traded near an eight-day high versus the euro in Asia on speculation US growth will outpace that of Japan and Europe, heightening the appeal of US assets.
- STMicroelectronics NV, Europe's No.2 maker of semiconductors, forecast second-quarter sales that may miss analysts' estimates as memory-chip prices fall.

Financial Times:
- The European Union may broaden its investigation into Chinese textile exports.

Tex Report:
- World nickel supply will meet demand of 1.31 million tons this year.

South China Morning Post:
- Property prices in Shanghai, China's most expensive city, have begun to fall after the government introduced lending curbs and a capital gains tax. Average prices fell 15% to $914 per square meter last week.

Xinhua News Agency:
- China's government is working on several plans, including improving the quality of listed companies and developing institutional investors, to bolster stock markets.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on AIG, AMGN, DD, SLB, COH, FDC, HMA and X.
- Reiterated Underperform on SLG, AVB, CR, AKS and AAI.

Night Trading
Asian Indices are -1.0% to -.50% on average.
S&P 500 indicated -.06%.
NASDAQ 100 indicated -.10%.

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Earnings of Note
Company/EPS Estimate
AGN/.67
AHC/2.09
BUD/.63
APPB/.35
BHI/.50
BDX/.67
BIIB/.37
BA/.55
CDN/.14
CTX/2.50
CHIR/.17
CLF/1.05
CL/.61
COP/3.27
DO/.18
DRIV/.50
JDSU/-.02
JNY/.70
KMG/2.20
MCHP/.25
NEM/.30
PFCB/.39
PD/3.35
PHM/1.43
SWK/.74
SBUX/.24
STN/.66
TDW/.35
RIG/.17
VZ/.60
WLP/1.83
XMSR/-.70

Splits
None of note

Economic Releases
8:30 EST:
- Durable Goods Orders for March are estimated to rise .3% versus a .5% increase in February.
- Durables Ex Transportation for March are estimated to rise .5% versus no change in February.

BOTTOM LINE: Asian indices are lower on weakness in exporters after declines in the US. I expect US equities to open modestly lower on tech earnings worries and continuing concerns over slowing global growth. The Portfolio is 75% net long heading into tomorrow.

Tuesday Close

Indices
S&P 500 1,151.74 -.89%
DJIA 10,151.13 -.89%
NASDAQ 1,927.44 -1.20%
Russell 2000 587.66 -1.47%
DJ Wilshire 5000 11,349.22 -.90%
S&P Barra Growth 557.33 -.88%
S&P Barra Value 590.06 -.91%
Morgan Stanley Consumer 571.95 -.91%
Morgan Stanley Cyclical 701.80 -1.58%
Morgan Stanley Technology 438.66 -1.15%
Transports 3,404.55 -1.91%
Utilities 365.61 -1.07%
Put/Call .75 -5.06%
NYSE Arms 1.78 +169.42%
Volatility(VIX) 14.91 +1.98%
ISE Sentiment 161.00 +25.78%
US Dollar 83.93 +.13%
CRB 309.78 +.36%

Futures Spot Prices
Crude Oil 54.36 -.38%
Unleaded Gasoline 162.70 -1.45%
Natural Gas 7.15 -.04%
Heating Oil 151.38 -.28%
Gold 438.60 +.64%
Base Metals 124.60 -.42%
Copper 145.70 -1.82%
10-year US Treasury Yield 4.26% +.42%

Leading Sectors
Gaming +2.57%
Broadcasting -.18%
Retail -.29%

Lagging Sectors
Tobacco -3.34%
Computer Hardware -3.64%
Steel -4.53%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on GILD and LVS.

Afternoon/Evening Headlines
Bloomberg:
- Amazon.com reported first-quarter net income fell to $78 million, hurt by new discounts on shipping and increased development costs.

Financial Times:
- The benefits of countries opening their borders to foreign service-providers will exceed any reduction in jobs, citing the OECD.

BOTTOM LINE: US stocks finished lower today on continuing worries over slowing global growth. The Portfolio finished slightly lower on losses in my Internet and Networking longs. I did not trade in the afternoon, thus leaving the Portfolio 75% net long. The tone of the market deteriorated into the afternoon as the advance/decline finished at its daily lows, almost every sector fell and volume was average. Measures of investor anxiety were mixed. Overall, today’s market action was negative, considering strong home sales, a rising US dollar, falling energy prices, good earnings reports and stable interest rates. Choppiness will likely continue until oil breaks below $50/bbl. or the Fed makes less hawkish comments. The fact that the Homebuilders declined today even with home sales substantially exceeding expectations, building costs declining, mortgage rates dropping and weather improving is a negative and illustrates the overly pessimistic environment that still dominates trading.

Mid-day Scoreboard

Indices
S&P 500 1,160.41 -.15%
DJIA 10,225.88 -.17%
NASDAQ 1,942.01 -.45%
Russell 2000 591.81 -.78%
DJ Wilshire 5000 11,433.60 -.17%
S&P Barra Growth 561.79 -.10%
S&P Barra Value 594.41 -.18%
Morgan Stanley Consumer 575.45 -.30%
Morgan Stanley Cyclical 708.29 -.67%
Morgan Stanley Technology 442.31 -.34%
Transports 3,440.77 -.87%
Utilities 368.76 -.21%
Put/Call .68 -13.92%
NYSE Arms .93 +40.02%
Volatility(VIX) 14.59 -.21%
ISE Sentiment 161.00 +25.78%
US Dollar 84.02 +.24%
CRB 309.59 +.29%

Futures Spot Prices
Crude Oil 54.15 -.77%
Unleaded Gasoline 162.00 -1.88%
Natural Gas 7.08 -1.02%
Heating Oil 151.00 -.53%
Gold 438.90 +.71%
Base Metals 124.63 -.42%
Copper 145.70 -1.82%
10-year US Treasury Yield 4.27% +.61%

Leading Sectors
Gaming +3.06%
Homebuilders +.92%
Broadcasting +.52%

Lagging Sectors
Computer Hardware -2.61%
Tobacco -2.89%
Steel -3.84%

BOTTOM LINE: US stocks are modestly lower mid-day, spurred by declines in commodity-related stocks. The Portfolio is slightly lower on losses in my Internet and Networking longs. I added a few new shorts and longs this morning, thus leaving the Portfolio 75% net long. One of my new shorts is PD and I am using a $93 stop-loss on this position. The tone of the market is negative as the advance/decline line is lower, sector performance is mixed and volume is average. Measures of investor anxiety are mostly lower. Today’s overall market action is modestly negative, considering lower energy prices, a rising US dollar and strong home sales. The recent home sales data should quell fears that US growth is slowing too much. As well, I continue to see data that points to lower commodity prices in the future, which bodes well for a decline in inflation readings. I expect US stocks to trade modestly higher into the close on short-covering, lower energy prices and bargain-hunting.

Today's Headlines

Bloomberg:
- Syria held an official ceremony to mark the withdrawal of its remaining soldiers and intelligence agents from Lebanon and the end of 29 years of military presence in the country.
- Germany’s six leading economic institutes cut their forecast for growth this year in half to .7% as consumer spending slows and unemployment reaches levels not seen since WWII.
- Japan’s household spending, buffeted by reduced overtime hours and stagnant wages, fell for a second month in March and the economy lost jobs, suggesting consumers won’t help sustain a recovery from last year’s recession.
- Billionaire Ken Langone, who’s considering a takeover bid for the NYSE, wants to close its trading floor, ending the way the world’s biggest stock market has operated for more than two centuries.
- Shares of Roche Holding AG and partner Genentech jumped after research showed their Herceptin treatment cut the risk of relapse among women newly diagnosed with an aggressive form of breast cancer.
- IBM’s top 50 managers will give up pay increases this year after the company had trouble closing orders last quarter.
- US Treasury notes are falling after a report showed new-home sales surged 12.2% to a record pace, adding to evidence that housing is still contributing meaningfully to economic growth.

Wall Street Journal:
- The NYSE and Archipelago plan to offer a menu of products besides stocks as they seek to widen profit.
- The US Senate may debate a bill to legalize the status of hundreds of illegal immigrant college grads in coming months.
- More US corporations are starting campus recruiting drives from fall to spring, suggesting demand for candidates with a MBA degree is growing.
- The National Academies, the leading US scientific advisory body, plans to issue ethics guidelines on embryonic stem-cell research today, including not paying donors for eggs or other tissues.

NY Times:
- AIG found at least $1 billion more in accounting errors in an internal review than previously disclosed.
- Qwest Communications may increase its bid for MCI to $32 a share if Verizon Communications matches Qwest’s $30 a share offer from last week.
- Wall Street executives, including Merrill Lynch CEO O’Neal, are questioning Goldman Sachs’ role in adviser in the NYSE’s proposed takeover of Archipelago.
- Neiman Marcus has received bids for its credit card unit from American Express, Citigroup and HSBC Holdings.

USA Today:
- US federal lawmakers have accepted $16 million in privately funded trips since 2000, with more than half sponsored by nonprofit organizations that don’t have to say who’s footing the bill.

AP:
- Wal-Mart Stores will move most over-the-counter cold and allergy medicine to the pharmacy in all of its stores by early June.

Detroit News:
- GM may close more North American plants.

Boston Globe:
- Massachusetts lawmakers yesterday agreed on details of a stem-cell research bill, moving the measure closer to becoming a law.

AFP:
- Oil spills worldwide plunged over the past 30 years because of improvements in ship engineering.