Today's Headlines

Bloomberg:
- US Treasury note yields are no longer the “conundrum” Fed Chairman Greenspan said they were in February, given signs of slowing global economic growth, according to Paul McCulley, a managing director at PIMCO.
- Abu al-Faraj, a Libyan national and one of the most senior leaders in the global al-Qaeda terrorist network, has been captured in northern Pakistan.
- The European Central Bank kept interest rates at a six-decade low as the outlook for economic growth in the 12 nations sharing the euro deteriorates.
- Investor Kirk Kerkorian offered to buy as many as 28 million shares of GM for $31 each.
- The US Treasury said it is considering whether to resume selling 30-year bonds, a security it eliminated four years ago.

Wall Street Journal:
- Coca-Cola, Unilever Plc and McDonald’s are phasing out hydrofluorocarbons, a chemical cooler that is believed to contribute to global warming.
- Sanofi-Pasteur, the biggest US supplier of flu vaccines, and Chiron already have sold almost all their available stockpiles of flu vaccines six months before the flu season normally starts.
- Symantec has obtained a broad patent for virus-scanning technology that may help defend against competition from rivals including Microsoft.
- American Tower may announce today an agreement to acquire SpectraSite for about $3 billion in stock, to become the US’s largest communications tower operation.
- Japanese wig maker Aderans is trying to clone hair cells resistant to a particular hormone that causes hair loss.

NY Times:
- US airlines added 134 non-stop routes in the past year as larger carriers such as Delta Air compete with so-called low fare airlines such as Southwest for customers.
- Microsoft plans to expand its headquarters in Redmond, Washington, by 2.2 million square feet as it begins constructing two office buildings this year.
- Wal-Mart is under pressure from community groups and lawmakers to raise wages.

Chicago Tribune:
- Nike Inc. will stop selling shoes to Sears Holding in a decision that it said was part of the normal process of reviewing accounts.
- Baxter Intl. will increase spending on research and development this year at a rate faster than sales growth.

USA Today:
- The US federal government plans to start collecting full names and birth dates of domestic air travelers this summer to screen passengers for possible ties to terrorism.

Energy Inventories Soaring and Another Strong Consumer Report

- ISM Non-Manufacturing for April fell to 61.7 versus estimates of 61.0 and a reading of 63.1 in March.
- Summary of Weekly Petroleum Data for the Week Ending April 29, 2005.
- Crude inventories rose 2.6M barrels versus estimates of a 1.25M rise. Distillate fuel inventories fell 300K barrels versus estimates of a 575K rise. Gasoline inventories rose 2.2M barrels versus estimates of a 875K rise.

Bottom Line: The ISM Non-Manufacturing is holding just under the 62.4 average for all of last year. This is an exceptionally strong level, considering services account for 85% of the US economy. This is still near the all-time high that was set last year in April at 66.9. However, components within the index show a continuation of the recent deceleration is likely. Measures for new orders, order backlogs, inventories and employment were modestly weaker. Once again, another measure of inflation showed deceleration. The prices paid component of this index fell to 61.9 from 65.6 the prior month.

Home Sales are booming. Auto sales yesterday were the strongest in long time, especially considering the lack of incentives compared to prior months. Now, a report shows the largest part of the US economy, the service sector, is still very healthy. I continue to believe that US growth is slowing to more healthy sustainable levels. The case for a US hard landing is growing harder by the day.

OPEC’s daily production last month rose an average of 280,000 barrels from the prior month. This is the highest level that OPEC has pumped since October 1979. US supplies for crude are now near 6-year highs. With global demand falling, the US dollar firmer and supply at very high levels, I continue to believe we have seen the highs in oil prices for this cycle. As I have stated before, the contango that currently characterizes the oil futures market will result in a steeper decline than most expect once perceptions change. I expect crude to reach around $35-$40/bbl. sometime during the second half of the year and that it will average around $30-$35/bbl. during 2006. If I am correct, most energy-related companies will show very little earnings growth next year. Momentum and growth investors that have recently turned to commodity stocks will be very disappointed under this scenario.

Links of Interest

Market Snapshot
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Real-time Intraday Chart/Quote

Wednesday Watch

Late-Night Headlines
Bloomberg:
- US 10-year Treasury notes rose after the Fed said it forgot to add to it policy statement today that long-term inflation expectations are "well-contained."
- Patients whose arteries are being propped open with drug-coated heat stents made by Johnson & Johnson and Boston Scientific may be twice as likely to develop lethal blood clots as previously thought, a trial found.
- Toyota Motor, Honda Motor and Nissan Motor, Asia's largest automakers, led Japanese and South Korean companies to record US market share in April, helped by fuel-efficient cars and small sport-utility vehicles.
- Global concern over N. Korea's push to develop nuclear weapons is mounting and the issue has reached "critical point."
- The US dollar is falling in Asia after the Fed said inflation is "well contained," raising speculation it will slow the pace of interest-rate increases later this year.
- Fresenius Medical Care AG agreed to acquire Renal Care Group for $3.5B, 22% higher than yesterday's closing price.

NY Times:
- Johnson & Johnson's heart-failure drug Natrecor may be banned by heart doctors at the Cleveland Clinic, one of the largest cardiac-care centers in the US, citing Eric E. Topol, the clinic's chairman of cardiovascular medicine.

Wen Wei Po:
- China's steel industry may face a 5.7% profit slide as the government cuts tax rebates on some steel exports.

The Standard:
- Starbucks plans to add 10 shops a year each in Hong Kong and in southern China.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform PXD, AVP, LVS, YHOO, CSCO, EPD and HD.
- Reiterated Underperform on BA and PPS.

Night Trading
Asian Indices are -.25% to +.75% on average.
S&P 500 indicated +.12%.
NASDAQ 100 indicated +.07%.

Morning Preview
US AM Market Call
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Earnings of Note
Company/EPS Estimate
BEC/.64
CI/1.51
DF/.42
DUK/.43
GNSS/.03
IACI/.20
LM/.97
QLGC/.47
SPW/.24
SYMC/.24
THQI/.21
TWX/.17
UVN/.10
WFMI/.58
ZBRA/.44

Splits
HUBG 2-for-1

Economic Releases
10:00 EST:
- ISM Non-Manufacturing for April is estimated to fall to 61.0 versus a reading of 63.1 in March.

BOTTOM LINE: Asian indices are mostly higher, led by exporter shares in the region. I expect US equities to open modestly higher on optimism that the Fed is nearing an end to the current pace of rate hikes. Gains may accelerate later in the day on any further decline in energy prices. I expect the Fed to raise rates one more time at the June meeting before pausing. Decelerating measures of inflation and US growth of around 2.5% will likely provide the catalysts. The Portfolio is 75% net long heading into tomorrow.

Stocks Finish Mixed in Choppy Trading

Indices
S&P 500 1,161.17 -.09%
DJIA 10,256.95 +.05%
NASDAQ 1,933.07 +.23%
Russell 2000 584.48 -.24%
DJ Wilshire 5000 11,417.08 -.09%
S&P Barra Growth 561.74 +.04%
S&P Barra Value 595.07 -.21%
Morgan Stanley Consumer 580.09 +.02%
Morgan Stanley Cyclical 702.21 +.08%
Morgan Stanley Technology 439.26 +.45%
Transports 3,462.65 -.61%
Utilities 369.06 -1.11%
Put/Call .84 -10.64%
NYSE Arms 1.08 +16.46%
Volatility(VIX) 14.53 -3.90%
ISE Sentiment 124.00 -24.84%
US Dollar 84.36 -.15%
CRB 299.69 -1.06%

Futures Spot Prices
Crude Oil 49.43 -2.93%
Unleaded Gasoline 145.50 -3.93%
Natural Gas 6.51 -2.82%
Heating Oil 143.50 -1.93%
Gold 429.20 +.35%
Base Metals 122.70 -1.82%
Copper 144.20 -.10%
10-year US Treasury Yield 4.15% -.71%

Leading Sectors
Steel +2.11%
Airlines +2.09%
Gold & Silver +1.10%

Lagging Sectors
Oil Tankers -2.14%
Energy -2.33%
Oil Service -2.63%

Evening Review
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In Play

Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on TYC, YHOO and AVP.

Afternoon/Evening Headlines
Bloomberg:
- Crude oil fell $1.42/bbl. in NY to the lowest in more than two months on speculation that US inventories rose last week as increased OPEC shipments arrived and refineries boosted gasoline production.
- Federal Reserve policy markers raised the benchmark US interest rate a quarter-point to 3% and restated a plan to carry out further increases at a “measured” pace to head off faster inflation.

CNBC:
- Bill Gross, CIO at PIMCO and manager of the world’s largest bond fund, said the Fed may stop raising interest rates later this year.
AP:
- NY’s Court of Appeals will allow video lottery terminals because they operate like a traditional lottery rather than a slow machine.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs and Energy-related shorts. I added some QQQQ longs, added ERTS short and added to some of my Energy-related shorts in the afternoon, thus leaving the Portfolio 75% net long. I am using a stop-loss of $55 on the ERTS short. The tone of the market finished mixed into the close as the advance/decline finished slightly higher, sector performance was mixed and volume was average. Measures of investor anxiety were mostly higher. Overall, today’s market action was neutral considering the Fed’s lack of acknowledgement of slowing growth and today’s decline in energy prices. The Fed’s comments were neither hawkish or dovish, but somewhere in between.

Stocks Mixed Ahead of Fed

Indices
S&P 500 1,160.96 -.11%
DJIA 10,249.79 -.01%
NASDAQ 1,933.73 +.27%
Russell 2000 585.90 +.01%
DJ Wilshire 5000 11,419.93 -.06%
S&P Barra Growth 561.22 -.05%
S&P Barra Value 595.37 -.16%
Morgan Stanley Consumer 579.13 -.15%
Morgan Stanley Cyclical 702.64 +.14%
Morgan Stanley Technology 439.32 +.46%
Transports 3,471.46 -.36%
Utilities 369.01 -1.12%
Put/Call .77 -18.09%
NYSE Arms 1.13 +20.75%
Volatility(VIX) 15.08 -.26%
ISE Sentiment 143.00 -13.3%
US Dollar 84.40 -.11%
CRB 300.88 -.66%

Futures Spot Prices
Crude Oil 50.15 -1.51%
Unleaded Gasoline 148.20 -2.15%
Natural Gas 6.58 -1.60%
Heating Oil 145.50 -.56%
Gold 428.30 -.49%
Base Metals 122.70 -1.82%
Copper 144.40 -.76%
10-year US Treasury Yield 4.18% -.09%

Leading Sectors
Steel +2.12%
Airlines +1.27%
Software +.93%

Lagging Sectors
Oil Tankers -1.46%
Oil Service -1.83%
Energy -1.83%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Internet longs and Energy-related shorts. I have not traded this morning, thus leaving the Portfolio 75% net long. The tone of the market is slightly positive as the advance/decline line is barely higher, most sectors are higher and volume is below average. Measures of investor anxiety are mixed. Today’s overall market action is neutral, considering the better-than-expected factory orders report and decline in energy prices. Stocks have pretty much flat-lined after the open ahead of the Fed announcement at 2:15 EST. I expect US stocks to trade higher into the close after the Fed boosts rates 25 basis points, leaves the “measured” language and makes more dovish comments. Oil breaking back below $50/bbl. should also boost stocks.