Stocks Lower Mid-day on Steep Declines in Commodity Stocks

Indices
S&P 500 1,160.17 -.93%
DJIA 10,212.17 -.54%
NASDAQ 1,961.25 -.52%
Russell 2000 587.25 -1.39%
DJ Wilshire 5000 11,424.65 -.96%
S&P Barra Growth 561.68 -.80%
S&P Barra Value 594.34 -1.01%
Morgan Stanley Consumer 578.90 -.48%
Morgan Stanley Cyclical 692.79 -2.20%
Morgan Stanley Technology 448.17 +.01%
Transports 3,441.92 -2.60%
Utilities 363.16 -.96%
Put/Call .81 -19.0%
NYSE Arms 1.19 +50.19%
Volatility(VIX) 15.75 +9.0%
ISE Sentiment 115.0 -24.34%
US Dollar 85.50 +.72%
CRB 295.96 -1.65%

Futures Spot Prices
Crude Oil 48.70 -3.47%
Unleaded Gasoline 143.30 -3.24%
Natural Gas 6.50 -2.74%
Heating Oil 137.80 -1.79%
Gold 422.30 -1.31%
Base Metals 122.25 -.85%
Copper 138.20 -4.19%
10-year US Treasury Yield 4.18% -.52%

Leading Sectors
Semis +.49%
Internet +.49%
Airlines +.20%

Lagging Sectors
Oil Tankers -4.24%
Oil Service -4.31%
Steel -5.58%

BOTTOM LINE: The Portfolio is slightly higher mid-day on gains in my Energy-related and Base Metal shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are lower and volume is average. Measures of investor anxiety are mostly higher. Today’s overall market action is negative considering the declines in energy prices and strong retail report. The commodity declines I have been warning about since last year are finally here. Investors appear to be incorrectly assuming these declines mean US growth is slowing substantially. As well, the rising US dollar is prompting fears of earnings misses at multi-national companies and more hedge-fund blow-ups. My entire positive thesis for the second half of the year is built around declining commodity prices. I do not believe the dollar will rise enough to hurt earnings at most companies. Any hedge fund blow-ups will likely be minor dislocations. In my opinion, longer-term investors should use any further weakness to accumulate shares in favorite longs. I expect US stocks to trade higher into the close on short-covering, bargain hunting and lower energy prices.

Today's Headlines

Bloomberg:
- Cornell University scientists have developed a machine that can replicate itself, potentially paving the way for robots that could repair themselves while working in space or in hazardous conditions.
- Sabre Holdings, operator of the Travelocity.com travel service, agreed to buy Lastminute.com for $1.08 billion to add the UK’s largest Internet travel business.
- Italy’s economy, Europe’s fourth-biggest, unexpectedly fell into recession for the second time in less than two years as rising oil prices and concern about the growth outlook eroded corporate investment and consumer spending.
- Wal-Mart Stores said first-quarter profit rose 13.6%, below analysts’ estimates, as rising gas prices hurts sales of general merchandise.
- Berkshire Hathaway is paying more to sell debt on concern the company’s ties to American International Group will hurt its credit rating.
- JP Morgan, among the banks most bearish on the US dollar at the end of last quarter, joined ABN Amro Holding NV and Citigroup in raising its dollar forecast as the US economy extends its expansion.
- Ford’s credit rating was cut two levels today by Moody’s Investors Service to one step above junk-bond status after the second-biggest US automaker said its earnings will fall short of forecasts.
- US Treasuries fell after a government report showed April retail sales increased more than forecast, bolstering confidence the economy is gaining momentum.
- Crude oil is fell below $49/bbl., dropping for a second day after reports showed rising US petroleum inventories and slower growth in Chinese demand.
- the US dollar surged to a six-month high against the euro and gained versus the yen after US retail sales in April rose the most in seven months.

Wall Street Journal:
- A US Senate panel accused European officials of secretly receiving millions of barrels of Iraqi oil before the US liberation of Iraq and then covering up the profit.
- Toyota Motor faces concerns over quality standards as it shifts more production to developing countries to trim costs.
- Half of the US still lacks the technology needed to locate cell phone users in distress.
- France Telecom SA’s Orange unit, Vodphone Group Plc and other European wireless providers expect that sex video clips will help encourage the use of their broadband mobile-phone services.
- Russian officials are protecting the piracy of films, music, business software and books, helping make the country one of the biggest producers of counterfeit electronic goods.
- Global Crossing, which runs a high-speed fiber-optic network for sending calls and data, and rival companies are still trying to cope with a glut of capacity.
- Sales of identity-management software, which gives companies more control over who is accessing their networks, are soaring as more businesses turn to the software to save money and increase security.
- US CEOs may be required to certify the accuracy of their companies’ tax returns or face stiff penalties as part of a spending bill before Congress expected to be passed this week.
- Short positions outstanding at big US stock markets have risen more than 9% this year, to record highs.
- SABMiller Plc will boost advertising for its cheapest beers, Milwaukee’s Best and Miller High Life, by 35% this year in an effort to win customers from larger brew Anheuser-Busch.

Chicago Tribune:
- The Chicago City Council has voted to ban motorists from holding cellular phones while driving and may fine violators as much as $200.

Orlando Sentinel:
- Florida’s Orlando International Airport next week will begin using an iris-scanning device to verify employees’ identities before allowing them access to secured areas.

Retail Surging, Job Market Still Healthy

- Advance Retail Sales for April rose 1.4% versus estimates of a .7% increase and a .4% gain in March.
- Retail Sales Less Autos for April rose 1.1% versus estimates of a .5% gain and a .2% increase in March.
- Initial Jobless Claims for last week rose to 340K versus estimates of 325K and 336K the prior week.
- Continuing Claims rose to 2598K versus estimates of 2610K and 2583K prior.

Bottom Line: US retail sales increased twice as much as forecast in April as consumers spent more on cars, clothes and restaurant meals. A strong housing market, rising incomes and improving job prospects are giving Americans the means to keep spending even as gas prices take more of their paychecks.

Weekly jobless claims are still averaging about 327,000 this year, down from the 343,000 average during 2004. The four-week moving average of initial jobless claims, a less volatile measure, rose to 324,000 from 322,000. The insured unemployment rate, which is closely correlated to the US employment rate, held at a four-year low of 2%. The four-week moving-average of continuing claims fell to 2.59M, the best since the week that ended March 31, 2001.

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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%

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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.