Thursday Watch

Late-Night Headlines
Bloomberg:
- Shares of Chinese companies including China Unicom may lead a list of additions to Morgan Stanley Capital International's global stock benchmarks when it releases its annual review of the indexes today.
- China said it will impose new taxes and restrictions on real estate transactions to curb speculation that's caused what the government calls a property price bubble.

Wall Street Journal:
- American Express will face a new challenge in a class-action lawsuit Monday, when plaintiffs plan to file an amended complaint over the company's insurance programs.

CNBC:
- Arena Pharmaceuticals will announce the results of an insomnia study toward the end of next month, CEO Jack Lief said.

AP:
- Google Inc. received a license to operate a "representative" office in China.

Shanghai Morning Post:
- China's consumer prices may have risen 1.8% in April from a year earlier versus a 2.7% increase in March.

Business Standard:
- Wal-Mart Stores plans to purchase 30% more form India.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on DIS, DNA, EMC, IBM, MSFT, MUR and NUE.
- Reiterated Underperform on UST and KFT.

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

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Earnings of Note
Company/EPS Estimate
ADI/.30
AEOS/.34
DELL/.37
DRL/.46
KSS/.37
NVDA/.28
PSUN/.23
TGT/.53
URBN/.30
WMT/.56

Splits
CHE 2-for-1
ZQK 2-for-1
HUBG 2-for-1

Economic Releases
8:30 EST
- Advance Retail Sales for April are estimated to rise .8% versus a .3% gain in March.
- Retail Sales Less Autos for April are estimated to rise .5% versus a .1% gain in March.
- Initial Jobless Claims for last week are estimated to fall to 325K versus 333K the prior week.
- Continuing Claims are estimated to rise to 2610K versus 2589K prior.

BOTTOM LINE: Asian indices are mixed as lower energy prices offset continuing declines in Chinese shares. I expect US equities to open modestly higher on lower energy prices and a good retail sales report. The Portfolio is 100% net long heading into tomorrow.

Stocks Close Near Session Highs on Falling Oil Prices and a Stronger US Dollar

Indices
S&P 500 1,171.11 +.42%
DJIA 10,300.25 +.19%
NASDAQ 1,971.55 +.45%
Russell 2000 595.57 +.09%
DJ Wilshire 5000 11,535.83 +.37%
S&P Barra Growth 566.27 +.53%
S&P Barra Value 600.45 +.31%
Morgan Stanley Consumer 581.70 +.50%
Morgan Stanley Cyclical 708.38 +.40%
Morgan Stanley Technology 448.11 +.71%
Transports 3,534.04 +1.01%
Utilities 366.68 +.39%
Put/Call 1.0 +17.65%
NYSE Arms .79 -62.45%
Volatility(VIX) 14.45 -3.09%
ISE Sentiment 152.00 +14.29%
US Dollar 84.89 +.52%
CRB 300.95 -.16%

Futures Spot Prices
Crude Oil 50.33 -3.34%
Unleaded Gasoline 147.30 -2.47%
Natural Gas 6.67 -.36%
Heating Oil 140.41 -3.14%
Gold 428.00 +.02%
Base Metals 123.30 -.91%
Copper 144.00 -.17%
10-year US Treasury Yield 4.19% -.09%

Leading Sectors
Disk Drives +2.42%
Networking +1.30%
Internet +1.11%

Lagging Sectors
Airlines -1.0%
HMOs -1.08%
Broadcasting -1.19%

Evening Review
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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on MO.
- Reiterated Underperform on RAI.

Afternoon/Evening Headlines
Bloomberg:
- US Defense Secretary Rumsfeld agreed to reverse most of the cuts made to Lockheed Martin’s C-130J transport program.
- A US Senate panel debating a plan to create a $140 billion trust fund to compensate asbestos-exposure victims adopted a provision to pay the sickest people during the trust’s startup period.
- The US government posted the largest April budget surplus in three years as taxpayers filed returns for 2004, when Americans benefited from the fastest economic growth in almost 6 years.
- Kuwait has drawn up formal charges against Saddam Hussein, eight aides and 293 lower-ranking officials for war crimes stemming from Iraq’s 1990 invasion.

BOTTOM LINE: The Portfolio finished substantially higher today on gains in my Internet, Wireless and Gaming longs and Entertainment shorts. 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 near its session highs, most sectors rose and volume was average. Measures of investor anxiety were mostly lower into the close. Overall, today’s market action was modestly positive considering recent fears and the decline in energy prices. The US government reported the largest April budget surplus in three years this afternoon as Americans paid more taxes for 2004 due to the strongest economic growth since the bubble peaked in 1999. This is another positive for the US dollar. I expect stocks to build on today’s gains through week’s end.

Stocks Modestly Higher on Stronger Dollar and Lower Oil

Indices
S&P 500 1,169.49 +.28%
DJIA 10,291.68 +.10%
NASDAQ 1,969.73 +.35%
Russell 2000 595.16 +.02%
DJ Wilshire 5000 11,526.59 +.29%
S&P Barra Growth 565.61 +.40%
S&P Barra Value 600.06 +.25%
Morgan Stanley Consumer 581.74 +.51%
Morgan Stanley Cyclical 706.71 +.16%
Morgan Stanley Technology 447.81 +.64%
Transports 3,526.99 +.81%
Utilities 366.36 +.30%
Put/Call 1.00 +17.65%
NYSE Arms .84 -60.29%
Volatility(VIX) 14.55 -2.41%
ISE Sentiment 136.00 +2.26%
US Dollar 84.95 +.59%
CRB 301.25 -.06%

Futures Spot Prices
Crude Oil 50.80 -2.44%
Unleaded Gasoline 148.10 -1.94%
Natural Gas 6.72 +.39%
Heating Oil 141.10 -2.66%
Gold 428.20 +.07%
Base Metals 123.30 -.91%
Copper 144.20 -.03%
10-year US Treasury Yield 4.19% -.14%

Leading Sectors
Disk Drives +1.53%
Networking +1.06%
I-Banks +1.04%

Lagging Sectors
Oil Tankers -1.16%
HMOs -1.22%
Airlines -1.40%

BOTTOM LINE: The Portfolio is substantially higher mid-day on gains in my Internet and Wireless longs and Entertainment shorts. I added to some of my current longs today from various sectors, thus leaving the Portfolio 100% net long. One of the longs I added to was AAPL. I am using a stop-loss of $33 on this position. The tone of the market is mixed as the advance/decline line is slightly lower, most sectors are higher and volume is average. Measures of investor anxiety are mostly lower. Today’s overall market action is modestly positive considering terrorism fears, hedge fund blow-up worries and yesterday’s sell-off. I expect US stocks to trade modestly higher into the close on short-covering, bargain hunting and lower energy prices.

Today's Headlines

Bloomberg:
- The yen rose against the dollar and the euro after the People’s Daily, a Communist Party-owned newspaper, said that China will revalue its currency next week after keeping it pegged for the past decade.
- US mortgage applications rose 9.4% last week, the most since January, as filings for home purchases surged to a record and more people refinanced.
- Bonds of Delphi and Visteon fell on concern that the two biggest US makers of auto parts will have more trouble paying their debts.
- The US dollar is rising to the highest in almost a month against the euro and erased a decline versus the yen after the US trade deficit unexpectedly narrowed in March.
- Crude oil is falling more than $1/bbl. in NY after a government report showed that US inventories rose to the highest since July 1999.
- The US Capitol, part of the White House and other federal buildings in Washington were evacuated for about 30 minutes today after a private plane strayed into restricted airspace within three miles of the presidential residence.
- Billionaire Carl Icahn probably won a seat on the board of Blockbuster after waging a proxy battle to displace Chairman Antioco.
- The cost to insure US investment-grade debt against default reached its highest in at least two years, boosted by investors’ concern over automakers’ credit.

Wall Street Journal:
- Bradford Hu, a senior Morgan Stanley executive in the equities division, resigned on May 9 after more than 18 years at the firm.
- US appliance-maker Maytag Corp. regularly paid a dividend for decades, and the board my decide tomorrow to cut or stop the quarterly cash payout after an 80% collapse in first-quarter earnings.
- Molson Coors Brewing facing hurdles including the cancellation of the National Hockey League season and a switch to lower-priced beers, both in its biggest market of Canada.
- Wyndham International put itself up for sale.
- Altria Group’s tough legal strategy to defend Philip Morris against lawsuits is starting to pay off.
- Fannie Mae will be increasing its purchases of 40-year mortgages, giving lenders an incentive to offer more of them.
- PG&E, Edison International and Sempra Energy plan to replace conventional electric and gas meters in California with meters that provide current usage information.

NY Times:
- The SEC widened its investigation of Saks Inc. unit Saks Fifth Avenue to include payments deductions to clothing makers for allegedly defective products, also known as chargebacks.
- The US House of Representatives may pass bills today increasing minimum sentences for federal drug offences, establishing minimum penalties for courthouse crimes and broadening the definition of a street gang.

NY Post:
- Walt Disney is considering selling ABC Radio because of slow growth in the industry.

AP:
- Nintendo has selected IGN Entertainment to enable users of its Nintendo DS hand-held game machine to play each other online using wireless “hot spots.”

Washington Post:
- The criminal trial of the former finance director of Senator Hillary Clinton began in Los Angeles yesterday, a proceeding that will be closely watched by politicians from both parties.

Philadelphia Inquirer:
- Comcast said revenue and cash flow will increase through 2008 as it adds phone customers and existing customers switch to more expensive digital television.

Financial Times Deutschland:
- The OECD has lowered its forecast for growth in the dozen countries sharing the euro to 1.6% this year from a prior estimate of 1.9%.

Trade Deficit Improving, Oil Inventories at 6-year Highs

- The Trade Balance for March rose to -$55.0B versus estimates of -$61.9B and -$60.6B in February.
- Summary of Weekly Petroleum Data for the Week Ending May 6, 2005.
- The EIA reported that crude inventories rose 2.67M barrels versus estimates of a 1.25M rise. Distillate fuel inventories rose 1.7M barrels versus estimates of a 275K gain. Gasoline inventories rose 187K barrels versus estimates of a 900K increase.

Bottom Line: The US trade deficit unexpectedly shrank in March to $55 billion, the best showing in 6 months. This should help boost GDP estimates. US exports are now at an all-time high. Imports from China fell. Imports of all goods and services fell 2.5% in March, the largest drop since December 2001. This is bullish for the US dollar. The Dollar Index(DXY) is breaking above its 200-day moving-average for the first time since last September. This afternoon’s Monthly Budget Statement should also help.

Crude inventories are now at the highest level since July 1999, when demand was rising dramatically during the height of the bubble. Last year, US 4Q growth accelerated substantially due to the end of the election and tax incentives. There are no such catalysts this year. The IEA today CUT its 2005 Chinese crude demand growth estimate to 7.4% from 16.0% last year. I expect further estimate cuts for China later in the year. This is significant. I continue to believe oil is being propped up by the “belief” that 4Q demand will soar. I find this highly unlikely. I believe demand will decelerate from last year's levels.

Links of Interest

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