Stocks Finish Near Session Highs as Oil Falls to Session Lows

Indices
S&P 500 1,185.56 +1.0%
DJIA 10,464.45 +1.28%
NASDAQ 2,030.65 +1.32%
Russell 2000 607.88 +2.12%
DJ Wilshire 5000 11,684.88 +1.13%
S&P Barra Growth 573.82 +.94%
S&P Barra Value 607.27 +1.06%
Morgan Stanley Consumer 589.43 +.98%
Morgan Stanley Cyclical 720.30 +2.48%
Morgan Stanley Technology 472.06 +1.47%
Transports 3,605.24 +2.51%
Utilities 362.43 +.43%
Put/Call .80 -19.19%
NYSE Arms .75 +27.59%
Volatility(VIX) 13.63 -6.45%
ISE Sentiment 113.00 -14.39%
US Dollar 85.81 -.46%
CRB 294.85 +.26%

Futures Spot Prices
Crude Oil 47.10 -.32%
Unleaded Gasoline 141.20 -.17%
Natural Gas 6.39 -.08%
Heating Oil 135.66 -.12%
Gold 421.60 -.07%
Base Metals 120.09 +.39%
Copper 137.50 -.07%
10-year US Treasury Yield 4.08% -.65%

Leading Sectors
Steel +7.79%
Airlines +5.56%
Homebuilders +.3.46%

Lagging Sectors
Insurance -.19%
Energy -.20%
Oil Service -.66%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on AMR, CAL and IBM.

Afternoon/Evening Headlines
Bloomberg:
- The US dollar fell against the euro and yen after a measure of inflation was unexpectedly unchanged last month, damping speculation the Fed may speed the pace of interest rate hikes.
- The Commerce Department today sided with petitions from US textile companies to impose caps on four categories of Chinese clothing imports, less than a week after announcing quotas on three other products.
- Google today released a product to find files and e-mails on business computers, an effort to get its software installed on personal computers inside companies and guide more users to its Web search engine.
- Morgan Stanley must pay billionaire investor Ron Perelman $850 million in punitive damages based on his claims that the firm defrauded him as part of the 1998 sale of his controlling stake in Coleman to Sunbeam.

San Diego Union-Tribune:
- Titan Corp. CFO Sopp canceled meetings with investors over the next two weeks, triggering speculation that the company has entered takeover talks.

BOTTOM LINE: The Portfolio finished substantially higher today on gains in my Homebuilding, Networking, Wireless and Internet longs. I took profits in a steel short and a few long QQQQs in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market strengthened into the afternoon as the advance/decline line finished near session highs, almost every sector rose and volume was above-average. Measures of investor anxiety were mixed into the close. Overall, today’s market action was positive considering recent gains. Oil tanker rates have declined almost 28% in a month and are near January lows. Too many ships are competing for the same cargo. I continue to believe OPEC will CUT production during the second half of the year. This will further pressure rates and should result in forward earnings estimate cuts for the tanker stocks. I remain short various stocks in this group.

Stocks Sharply Higher Mid-day on Declining Inflation Worries

Indices
S&P 500 1,184.20 +.89%
DJIA 10,443.38 +1.08%
NASDAQ 2,027.82 +1.18%
Russell 2000 605.58 +1.73%
DJ Wilshire 5000 11,676.40 +1.05%
S&P Barra Growth 573.56 +.90%
S&P Barra Value 606.95 +1.01%
Morgan Stanley Consumer 588.17 +.76%
Morgan Stanley Cyclical 719.39 +2.35%
Morgan Stanley Technology 472.09 +1.49%
Transports 3,591.45 +2.11%
Utilities 362.10 +.34%
Put/Call .80 -19.19%
NYSE Arms .61 +3.99%
Volatility(VIX) 13.67 -6.18%
ISE Sentiment 118.00 -10.61%
US Dollar 85.89 -.37%
CRB 295.37 +.44%

Futures Spot Prices
Crude Oil 47.90 -2.08%
Unleaded Gasoline 143.25 -.36%
Natural Gas 6.44 -.56%
Heating Oil 138.00 +.44%
Gold 421.90 +.50%
Base Metals 120.09 +.39%
Copper 137.60 +2.04%
10-year US Treasury Yield 4.07% -.98%

Leading Sectors
Steel +8.98%
Airlines +4.56%
Homebuilders +3.21%

Lagging Sectors
Energy +.09%
Insurance -.04%
Oil Service -.37%

BOTTOM LINE: The Portfolio is substantially higher mid-day on gains in my Internet, Homebuilding and Networking longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is very strong, almost every sector is higher and volume is above-average. Measures of investor anxiety are mostly lower. Today’s overall market action is positive. The strong rally I have been anticipating for the second half of the year has likely begun. I am very confident the lows for the year are in place. All my intermediate-term trading indicators are now giving bullish signals. While the major averages are getting extended short-term, I expect any pullback over the coming months to be relatively mild. I expect US stocks to trade modestly higher into the close on short-covering, bargain hunting, subsiding inflation worries and lower energy prices.

Today's Headlines

Bloomberg:
- Aries Maritime Transport Ltd.’s plan to sell shares to the public for the first time may make the three months through the end of June the busiest on record for shipping company offerings.
- Bill Gross, manager of the world’s largest bond fund, said 10-year US Treasury yields may fall to as low as 3% because there is little threat of accelerating inflation through 2010.
- Intel President Otellini’s push to sell more laptop computer chips my be paying off as demand for notebooks surges, prompting analysts to raise their estimates for sales and profit.
- Nucor CEO DiMicco said US steel prices, down about 20% since October, will rebound “in the next month or two” as distributors work off excess inventories stockpiled last year.
- Federal Reserve Governor Edward Gramlich will leave the central bank effective Aug. 31 after serving seven years, the Fed said.
- Apollo Management LP agreed to buy Metals USA for $22 a share.
- US 10-year T-notes are surging, pushing yields back near 4%, after a government report showing a measure of consumer prices was unchanged in April eased inflation concerns.
- Viacom’s CBS canceled “60 Minutes Wednesday,” as ratings have declined due to airing an unsubstantiated report by Dan Rather that said President Bush received preferential treatment when he was in the National Guard.
- Crude oil is falling to a three-moth low after an Energy Department report showed US oil inventories rose more than expected.
- Los Angeles voters elected Antonio Villaraigosa mayor, giving the second-biggest US city its first Hispanic mayor since 1872.

Wall Street Journal:
- Hedge fund managers, driven by their trading instincts, have become some of the most active buyers and sellers of hundreds of millions of dollars in art works.
- Hedge funds’ losses are piling up, causing concern about possible repercussions on financial markets.
- Las Vegas has become one of the hottest retail development markets in the world.
- A new highway bill passed yesterday by the US Senate would force automakers to print crash-test data on the information stickers of all new cars.
- US cable operators and wireless companies have been in talks for months about joining forces and Comcast Corp., the biggest cable company, is being watched especially closely.
- MetLife, Allstate and Chubb are among insurers offering all-in-one policies that bundle coverage from home to auto into one policy.

NY Times:
- California, Washington and Maine are among US states considering allowing unused drugs from nursing homes and long-term care centers to be redistributed to poorer patients in an effort to reduce health-care costs.
- The Bush administration suggested that Newsweek magazine, which retracted a false report about US interrogators at Guantanamo Bay, Cuba, should clarify US policies on religious symbols such as the Koran to “help repair the damage” from the article. Newsweek’s erroneous report that interrogators tried to flush a Koran down a toilet resulted in anti-US riots in Muslim countries in which 17 people died.

Washington Post:
- The Bush administration may try to talk Federal Reserve Chairman Greenspan into working at least a few months after his Jan. 31 term expiration.
- US Airways Group may not survive if a possible merger with America West Holdings isn’t completed.
- Citigroup will start giving customers more notice that they may face higher rates for their credit cards if they are late in paying other credit card companies.

Financial Times Deutschland:
- SAP AG introduced a new global program aimed at expanding its network of partners that help it win customers among small and mid-sized companies.

Boersen-Zeitung:
- Schering AG said it expects its cancer drugs business to grow by 10% or more each year until after 2010.

Inflation Fears Subsiding, Oil Inventories Soar Again

- The Consumer Price Index for April rose .5% versus estimates of a .4% increase and a .6% gain in March.
- The CPI Ex Food & Energy for April was unchanged versus estimates of a .2% increase and a .4% rise in March.
- Summary of Weekly Petroleum Data for the Week Ending May 13, 2005.
- The EIA reported that crude inventories rose 4.34M barrels versus estimates of a 1.0M barrel rise. Distillate fuel inventories fell 219K barrels versus estimates of a 1.0M barrel rise. Gasoline inventories rose 1.07M barrels versus estimates of a 980K barrel increase.

Bottom Line: Core prices failed to rise for the first time since November 2003. Prices for hotel stays, new autos and clothing actually fell. Energy prices rose 4.5% in April, the largest monthly gain since March 2003, yet the CPI still decelerated from the prior month. This is sending the 10-Year T-Notes yield down 7 basis points to 4.03%. I continue to believe inflation fears have peaked for this cycle and that the CPI will rise less than last year. Over the coming months, look for the media and bears to shift from the “inflation is soaring” argument to “deflation is coming.” This will also prove incorrect.

The price of crude is falling on the energy inventory data. Oil is now down 17.6% from its April 4 highs. However, the contango in the futures market still persists. In my opinion, oil is trading at current levels due entirely to perception, not reality. Commercial hedgers are anticipating an acceleration of crude demand during the fourth quarter from last years’ high levels. Continuing reports of decelerating demand from the US and China, a firmer US dollar and growing inventories will change this view over the coming months. As perceptions change, the contango will begin reversing itself and result in a much sharper decline in oil prices than most expect.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- The US House approved a $30.8 billion spending bill for the Department of Homeland Security that boosts funds for border protection.
- Companies worldwide from Fannie Mae to Infineon Technologies AG replaced CEOs at a record rate last year as boards and investors sought to boost earnings and share prices, according to Booz Allen Hamilton.
- North Korea and South Korea failed to agree on a joint statement for their first bilateral talks in 10 months after the North balked at giving a commitment it will address concerns about its nuclear weapons program.

Wall Street Journal:
- Pequot Capital Management, a US hedge fund, formed a joint venture with Singapore-based Pangaea Capital Management to invest in distressed assets.

Washington Post:
- The Federal Communications Commission is set to issue rules tomorrow requiring most Internet phone services to provide 911 services.

Financial Times:
- T&F Informa Plc, publisher of Lloyd's List shipping newspaper and the Routledge Encyclopedia of Philosophy, may be planning to spend as much as $550 million on US acquisitions.

Shanghai Daily:
- Aluminum Corp. of China, parent of China's biggest aluminum maker, plans to raise output fivefold by 2010 to meet local demand and boost exports.

21st Century Business Herald:
- China may allow companies to award stock options to senior managers as part of employee incentives.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on MSFT.
- Reiterated Underperform on VRTX and AMAT.

Night Trading
Asian Indices are -.25% to +.50% on average.
S&P 500 indicated -.04%.
NASDAQ 100 indicated -.17%.

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Earnings of Note
Company/EPS Estimate
BEAS/.09
POS/.37
EV/.28
FL/.38
HOTT/.11
INTU/1.55
PETM/.22
MW/.53
JBX/.50
SNPS/.08
TOO/.20
TLB/.63

Splits
MHP 2-for-1
NXY 2-for-1

Economic Releases
8:30 EST
- The Consumer Price Index for April is estimated to rise .4% versus a .6% gain in March.
- The CPI Ex Food & Energy for April is estimated to rise .2% versus a .4% increase in March.
- Energy Inventory Report

BOTTOM LINE: Asian indices are mostly higher on strength in commodity-related shares in the region. I expect US equities to open mixed. However, stocks may rise later in the day as inflation worries subside. The Portfolio is 100% net long heading into the day.