Stocks Rising Modestly Mid-day on Another Decline in Energy Prices

Indices
S&P 500 1,147.99 +.38%
DJIA 10,113.28 +.42%
NASDAQ 1,905.19 +.06%
Russell 2000 574.73 -.05%
DJ Wilshire 5000 11,278.02 +.29%
S&P Barra Growth 554.82 +.44%
S&P Barra Value 588.73 +.37%
Morgan Stanley Consumer 570.83 +.17%
Morgan Stanley Cyclical 692.96 +.50%
Morgan Stanley Technology 433.76 +.11%
Transports 3,391.43 +.08%
Utilities 368.01 +.34%
Put/Call 1.09 -2.68%
NYSE Arms 1.03 -50.62%
Volatility(VIX) 16.43 -2.55%
ISE Sentiment 129.00 -21.8%
US Dollar 84.38 +.04%
CRB 305.40 +.33%

Futures Spot Prices
Crude Oil 51.20 -1.10%
Unleaded Gasoline 151.00 -2.52%
Natural Gas 6.68 -1.01%
Heating Oil 146.25 -1.76%
Gold 435.80 +.79%
Base Metals 124.97 +1.10%
Copper 146.30 +1.32%
10-year US Treasury Yield 4.20% +1.48%

Leading Sectors
HMOs +2.74%
Papers +2.63%
Hospitals +2.10%

Lagging Sectors
Retail -1.25%
Airlines -1.50%
Disk Drives -2.30%

BOTTOM LINE: The Portfolio is unchanged as gains in my Computer longs are being offset by losses in my Oil Tankers shorts. I added a few new longs this morning and took profits in a few shorts, thus leaving the Portfolio 75% net long. One of my new positions is the QQQQ and I am using a stop-loss of $34.45 on this position. The tone of the market is modestly negative as the advance/decline line is slightly lower, sector performance is mixed and volume is above average. Measures of investor anxiety are mostly lower. Today’s overall market action is mildly negative, considering today’s positive economic data and the market’s oversold state. I expect US stocks to trade modestly higher into the close on short-covering, lower energy prices and bargain-hunting.

Today's Headlines

Bloomberg:
- French joblessness rose in March, pushing the unemployment rate to 10.2%, the highest in more than five years.
- Clear Channel Communications said it will spin off its live-entertainment unit and sell shares in its billboards business after a slump in radio advertising led the company to cut prices.
- Amylin Pharmaceuticals and Eli Lilly said US regulators approved their diabetes treatment derived from the saliva of a poisonous lizard.
- Crude oil is falling again, heading for the biggest weekly decline this year, on speculation that rising OPEC output will ensure that refiners have adequate inventories to meet gasoline demand during the summer months.
- Northrop Grumman and General Dynamics, the top two shipbuilders for the US Navy, stand to benefit from next fiscal year’s $2.6 trillion federal budget, which would change the way ship programs are funded.

Wall Street Journal:
- Devon Energy, a US oil and gas producer, is drilling under Fort Worth, Texas, to tap 27 trillion cubic feet of natural gas reserves.
- The crisis at Morgan Stanley is costing the firm business.
- Belk Inc., a closely held US department-store company, is close to an agreement to buy Saks’ Proffitt’s and McRae’s retail chains for between $600 million and $650 million.

Chicago Sun-Times:
- Sears Roebuck employees will have their pay tied to the retailer’s profitability, and other employee benefits will be cut.

TheDeal.com:
- Oracle, which already purchased PeopleSoft and Retek this year, is in discussions to buy Siebel Systems.

Beijing Antaike Information Development Co.:
- Chinese copper smelters raised processing fees by 10% this month because of rising supply of the raw material.

Die Welt:
- The German government has lowered its forecast for growth this year in Europe’s largest economy to 1%, from a 1.6% estimate last year.

Rising Personal Incomes Spur Gains in Spending

- Personal Income for March rose .5% versus estimates of a .4% increase and a .4% gain in February.
- Personal Spending for March rose .6% versus estimates of a .4% gain and an upwardly revised .7% increase in February.
- The PCE Deflator(YoY) for March rose 2.4% versus estimates of a 2.5% increase and a 2.2% gain in February.
- The PCE Core(YoY) for March rose 1.7% versus estimates of a 1.7% increase and a 1.6% gain in February.
- 1Q Employment Cost Index rose .7% versus estimates of a 1.0% increase and a .7% gain in 4Q.
- Final Univ. of Mich. Consumer Confidence for April fell to 87.7 versus estimates of 88.8 and a prior estimate of 88.7.
- The Chicago Purchasing Manager report for April fell to 65.6 versus estimates of 62.5 and a reading of 69.2 in March.

Bottom Line: Consumers are continuing to spend as if confidence were high. There is very little evidence in today’s economic data of any significant impact from high energy prices. The slight decline in the consumer sentiment reading from the prior estimate was anticipated by the market. Moreover, the current conditions component of the index, which reflects American’s perception of whether it’s a good time to buy big-ticket items, actually exceeded prior estimates and is at 104.4. Disposable incomes, when adjusted for inflation, were up 3.3% last month from a year earlier. Rising incomes are one of the most underappreciated aspects of the current environment. The 1.7% rise in the core PCE deflator, the Fed’s favorite inflation gauge, is within the stated 1.5-1.75% optimal range. This is a big positive considering gas prices reached record highs in April. As well, the benefit costs component of the employment cost index rose only 1.2%, the smallest gain in three years. The better than-expected Chicago Purchasing report is also a positive, considering it reached a 16-year high the prior month. As well, the prices paid component of the index fell to 66.1 from 68.2, which is remarkable.

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Friday Watch

Late-Night Headlines
Bloomberg:
- The euro traded near the lowest in 10 days against the dollar and was headed for its biggest weekly loss in five on concern Europe's economy is faltering.
- Oil prices may fall further next week on speculation US refiners have enough supplies to meet demand after inventories rose to the highest in almost three years, a Bloomberg survey shows.

NY Times:
- Neiman Marcus Group is set to receive bids today from three private-equity investor groups, who are expected to offer $95 to $105 a share to buy the luxury retailer.

Financial Times:
- China police have text-messaged warnings to more than 30 million mobile-phone users as part of a campaign to avert any more anti-Japan protests during the weeklong Labor Day holiday that begins May 1.

London-based Times:
- GlaxoSmithKline Plc said a US court has granted a ruling which may help its defense in a dispute with the IRA that could cost the company $7.8 billion.

Standard:
- China has told local governments to implement rules allowing overseas companies to set up their own distribution systems.

China Securities Journal:
- China has established the basic conditions to adopt a more flexible exchange rate and may allow the yuan's value to fluctuate by "several percentage points" at any time.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on K, GNW, IDIX and KLAC.
- Reiterated Underperform on CTL, MRO and PFG.
- Reiterated Attractive view of Hospital sector.

Business Week:
- Starbucks shares may rise as much as 24% by the end of the year because of growth in earnings.
- Sun Microsystems may be taken private by buyout firm Silver Lake Partners for as much a $5.50 a share, citing an unidentified hedge-fund manager close to Sun Chief Executive Scott McNealy and Silver Lake.
- Dow Jones may become the target of a buyout if the stock continues to fall.
- GM may be forced to restructure the company within five years by having fewer brands and few models, or face the risk of bankruptcy.

Night Trading
Asian Indices are -1.0% to -.75% on average.
S&P 500 indicated +.03%.
NASDAQ 100 indicated unch.

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Earnings of Note
Company/EPS Estimate
AXL/.26
APC/2.00
ADM/.40
CAH/.89
CEN/.16
CVX/1.37
CCU/.13
ITT/1.04
TKTX/-.59

Splits
KBH 2-for-1

Economic Releases
8:30 EST:
- Personal Income for March is estimated to rise .4% versus a .3% increase in February.
- Personal Spending for March is estimated to rise .4% versus a .5% gain in February.
- PCE Deflator(YoY) for March is estimated to rise 2.5% versus a 2.3% increase in February.
- PCE Core(YoY) for March is estimated to rise 1.7% versus a 1.6% gain in February.
- 1Q Employment Cost Index is estimated to rise 1.0% versus a .8% increase in 4Q.

9:45 EST:
- Final Univ. of Mich. Consumer Confidence for April is estimated to rise to 88.8 versus a prior estimate of 88.7.

10:00 EST:
- Chicago Purchasing Manager for April is estimated to fall to 62.5 from 69.2 in March.

BOTTOM LINE: Asian indices are lower on more worries over slowing global growth. I expect US equities to open modestly lower on continuation of today's late afternoon decline. The Portfolio is 25% net long heading into tomorrow.

Stocks Fall on Worries Over Slowing Global Growth and a Bounce in Energy Prices

Indices
S&P 500 1,143.22 -1.14%
DJIA 10,070.37 -1.26%
NASDAQ 1,904.18 -1.36%
Russell 2000 575.02 -2.06%
DJ Wilshire 5000 11,245.73 -1.21%
S&P Barra Growth 552.38 -1.19%
S&P Barra Value 586.57 -1.09%
Morgan Stanley Consumer 569.88 -.74%
Morgan Stanley Cyclical 689.40 -1.21%
Morgan Stanley Technology 433.28 -1.26%
Transports 3,388.58 -.85%
Utilities 366.75 -.40%
Put/Call 1.12 +4.67%
NYSE Arms 2.10 +117.79%
Volatility(VIX) 16.86 +13.38%
ISE Sentiment 165.00 +2.48%
US Dollar 84.35 +.27%
CRB 304.40 -.48%

Futures Spot Prices
Crude Oil 51.90 +.56%
Unleaded Gasoline 154.70 +.33%
Natural Gas 6.78 -.15%
Heating Oil 148.50 +.75%
Gold 432.80 -.30%
Base Metals 123.61 +.06%
Copper 144.00 -.21%
10-year US Treasury Yield 4.14% -1.87%

Leading Sectors
Drugs +.02%
Hospitals -.05%
Telecom -.45%

Lagging Sectors
Steel -3.11%
Networking -3.21%
Oil Tankers -4.26%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on NFX, XOM, AET and MSFT.
- Reiterated Underperform on HC.

Afternoon/Evening Headlines
Bloomberg:
- The Chicago Board of Trade, the second-biggest US futures exchange, plans an IPO in the second half of this year as it tries to duplicate the success of bigger rival the Chicago Merc.
- Microsoft said third-quarter earnings almost doubled as legal costs fell and sales of programs to run networks increased. Revenue next year may beat analysts’ expectations.
- Boeing must compete again for US Air Force work worth over $3 billion to upgrade avionics on C-130 transports because of a conflict of interest in the original contract.

AP:
- Judy Woodruff, anchor of CNN’s “Inside Politics” program, is leaving CNN in June when her contract expires.

Financial Times:
- Debt market investors are becoming more selective about which bonds they buy from countries that share the euro ahead of a French referendum on the EU constitution.

BOTTOM LINE: The Portfolio finished substantially higher on gains in my Commodity-related shorts. I added a few ETF shorts from various sectors in the afternoon, thus leaving the Portfolio 25% net long. The tone of the market deteriorated meaningfully 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 mostly higher. Overall, today’s market action was negative. Investors are pricing in the possibility the US is slipping into recession. I strongly believe this is not the case. Growth is slowing, but not plunging. This “soft patch” will be deeper and last a bit longer than last year’s, however I continue to believe economic growth will pick back up in the second half. Modest growth, lower inflation, low long-term interest rates, a firmer dollar and lower commodity prices will make for a much better second half in US stocks. Sentiment has become much too negative and valuations are very reasonable considering fundamentals. Oil below $50/bbl. or less hawkish comments from the Fed should boost sentiment substantially.