Stocks Lower Mid-day on Worries Over a Hedge Fund Blow-up

Indices
S&P 500 1,170.60 -.70%
DJIA 10,321.07 -.60%
NASDAQ 1,968.44 -.56%
Russell 2000 597.64 -.87%
DJ Wilshire 5000 11,537.68 -.64%
S&P Barra Growth 565.35 -.62%
S&P Barra Value 601.03 -.77%
Morgan Stanley Consumer 580.74 -.44%
Morgan Stanley Cyclical 708.54 -.97%
Morgan Stanley Technology 445.81 -1.10%
Transports 3,523.17 -1.01%
Utilities 366.71 -.30%
Put/Call .83 -1.19%
NYSE Arms 1.54 +138.56%
Volatility(VIX) 14.31 +4.07%
ISE Sentiment 115.0 -20.13%
US Dollar 84.46 -.20%
CRB 301.67 +.29%

Futures Spot Prices
Crude Oil 52.15 +.23%
Unleaded Gasoline 151.00 +1.53%
Natural Gas 6.72 +.76%
Heating Oil 145.75 +1.20%
Gold 427.90 +.23%
Base Metals 124.43 +.45%
Copper 145.80 +.79%
10-year US Treasury Yield 4.23% -1.21%

Leading Sectors
Biotech +.84%
Oil Tankers +.49%
Restaurants +.15%

Lagging Sectors
I-Banks -1.47%
Airlines -2.58%
Steel -3.65%

BOTTOM LINE: The Portfolio is lower mid-day on losses in my Airline and Semiconductor longs. I exited a few longs this morning as they hit stop-losses, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is light. Measures of investor anxiety are higher. Today’s overall market action is modestly negative considering last week’s gains and the rebound from morning lows. I am closely monitoring the “sentiment” with respect to oil. I do not believe the fundamentals justify current prices. It is the belief that 4Q oil demand will outstrip supply that is currently propping up prices. As inventories build and demand continues to decelerate, I believe this perception will change and provide the catalyst for the accelerated decline I envision in the second half of the year. I expect US stocks to trade mixed into the close as short-covering ahead of Cisco’s report offsets worries over a hedge fund blow-up.

Today's Headlines

Bloomberg:
- China is improving its far-flung system of human spies, recruits, sleeper agents and electronic eavesdropping in tandem with its buildup of conventional military power, according to a new Pentagon report and analysts.
- Crude oil and gas in NY are rising as ConocoPhillips said that portions of its Alliance refinery in Belle Chasse, Louisiana, closed because of a power failure.
- Delta Air Lines is seeking to ease terms of loan agreements and said it may have to file for bankruptcy protection if those efforts fail.
- US Treasury notes are rising on speculation an increase in yields will boost demand at government debt auctions starting today.

Wall Street Journal:
- European Aeronautic Defense & Space may announce today that it will join Raytheon to bid on a Pentagon contract for a US Army transport aircraft.
- The group Citizens for Responsibility and Ethics, known for their criticism of Republican House Majority Leader Tom DeLay over ethics issues, has contributed nearly 60 times as much money to Democratic causes than Republican ones.
- Dissidents at Morgan Stanley may urge investors to sign a petition calling on the board to hold a special shareholders meeting.
- A possible lawsuit by the US Justice Department against the National Association of Realtors could help boost the number of realtors selling homes at discount prices over the Internet.
- Warner Music Group may sell shares as early as tomorrow in its IPO.

NY Times:
- The Bush administration said it would pay $1 billion through September 2008 to doctors and hospitals for providing emergency services to illegal immigrants.
- IBM will announce today that it will buy Gluecode Software, as part of its strategy to build a business around open-source software.
- Goldman Sachs’ decision to withdraw its plan to build a $2 billion headquarters next to the World Trade Center site could damage Lower Manhattan’s stature as a financial and commercial center.
- The Ford Foundation plans to give $50 million over five years to support public broadcasting on television and radio.

Washington Post:
- Merrill Lynch is among securities firms that are trying to sell services to South-Asian Americans and Hispanic Americans to boost revenue.

Lloyd’s List:
- Malaysia International Shipping, the world’s biggest carrier of liquefied natural gas, said freight rates may fall because of a glut in the world fleet.

Tex Report:
- Brazilian steelmakers offered to sell hot-roiled coil at $600 a ton to Asian buyers.

Reuters:
- Pfizer CEO Hank McKinnell said the company’s arthritis drug Bextra will likely return to the market.

No Economic Releases of Note Today

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Global venture capital funds slowed investment into Chinese companies in the first quarter after the country's foreign exchange regulator issued rules that may hinder international share sales and capital raising by China businesses.
- Crude oil rose for a fifth day in NY on speculation that OPEC and other producers may be unable to meet peak global demand in the second half of the year.
- Texas Instruments outpaced Qualcomm in sales of chips that power the newest handsets, according to researcher Forward Concepts.

Wall Street Journal:
- Toyota Motor may build its seventh North American auto plant in southern Ontario.
- Hedge fund investment returns fell about 1.8% last month and are down 1.6% in 2005.
- Southwest Airlines is fighting to overturn a law that gives rival American Airlines an advantage.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on GE, FSH and EBAY.
- Reiterated Underperform on MHX, HRB, HCC, PSA and IHR.

Banc of America:
- Upgraded NOV to Buy.

Night Trading
Asian Indices are -.25% to unch. on average.
S&P 500 indicated -.14%.
NASDAQ 100 indicated -.03%.

Morning Preview
US AM Market Call
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Earnings of Note
Company/EPS Estimate
CSCO/.22
CETV/.20
DWA/.60
ENER/-.25
FOSL/.26
HANS/.60
MAY/.16

Splits
ADCT 1-for-7
UPL 2-for-1

Economic Releases
None of note

BOTTOM LINE: Asian indices are lower, spurred by losses in Chinese shares. I expect US equities to open modestly lower on higher energy prices and worries over slowing global growth. However, stocks may gain ground later in the day on short-covering ahead of Cisco's report and optimism over moderating energy prices ahead of Wednesday's energy inventory report. The Portfolio is 100% net long heading into tomorrow.

Stocks Close at Session Highs

Indices
S&P 500 1,178.84 +.64%
DJIA 10,384.34 +.38%
NASDAQ 1,979.67 +.63%
Russell 2000 602.91 +1.07%
DJ Wilshire 5000 11,611.59 +.66%
S&P Barra Growth 568.77 +.50%
S&P Barra Value 605.71 +.78%
Morgan Stanley Consumer 583.33 +.51%
Morgan Stanley Cyclical 715.49 +.30%
Morgan Stanley Technology 450.75 +.55%
Transports 3,559.06 +.72%
Utilities 367.82 +.81%
Put/Call .84 -20.0%
NYSE Arms .63 -33.28%
Volatility(VIX) 13.75 -2.14%
ISE Sentiment 144.0 -11.66%
US Dollar 84.64 +.02%
CRB 300.82 +.12%

Futures Spot Prices
Crude Oil 52.43 +.73%
Unleaded Gasoline 149.30 +.38%
Natural Gas 6.72 +.67%
Heating Oil 144.50 +.14%
Gold 426.90 unch.
Base Metals 123.87 +.85%
Copper 144.65 unch.
10-year US Treasury Yield 4.28% +.56%

Leading Sectors
I-Banks +3.23%
Networking +2.34%
Nanotechnology +2.29%

Lagging Sectors
Tobacco -.15%
Broadcasting -.67%
Papers -.75%

Evening Review
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In Play

Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on BAC.
- Reiterated Underperform on CNA.

Afternoon/Evening Headlines
Bloomberg:
- French voters were evenly split on the European Union constitution ahead of the May 29 referendum as support declined, a survey by polling company Ipsos SA showed.
- Crude oil in NY rose more than $1 a barrel on speculation that OPEC may not be able to meet demand during the winter months, when global consumption peaks.
- GM said it will pay its 50-cents-a-share quarterly dividend as scheduled.
- Walt Disney and some of its board members were sued by former directors Roy Disney and Stanley Gold for fraud and misleading shareholders about the company’s search for a CEO to replace Michael Eisner.
- A NYSE member sued to block the exchange’s merger with Archipelago Holdings, contending the deal shortchanges seat owners and that its underwriter, Goldman Sachs Group, has a conflict of interest.

AP:
- Iran confirmed for the first time it had converted 37 tons of raw uranium into a gas, a step in the enrichment cycle.

Market News:
- South Korea’s plan to increase returns on as much as $20 billion won’t include a shift away from US Treasuries and other US assets, citing Finance Minister Han Duck Soo.

Washington Post:
- North Korean official Pak Hyon Jae called a nuclear weapons test “indispensable” to proving the communist country’s military capability.

BOTTOM LINE: The Portfolio finished unchanged today as gains in my Gaming and Homebuilding longs offset losses in my Internet and Airline longs. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market improved into the afternoon as the advance/decline finished at its daily highs, almost every sector rose and volume was light. Measures of investor anxiety were mostly lower into the close. Overall, today’s market action was positive considering last week’s gains and today’s rise in energy prices. Lower energy prices and positive earnings reports from Cisco and Dell could spur further gains later in the week.