Stocks Finish Higher as Oil Prices Reverse Lower

Indices
S&P 500 1,204.29 +.17%
DJIA 10,553.49 +.03%
NASDAQ 2,097.80 +.48%
Russell 2000 625.24 +.24%
DJ Wilshire 5000 11,910.22 +.21%
S&P Barra Growth 582.59 +.22%
S&P Barra Value 617.17 +.12%
Morgan Stanley Consumer 588.54 +.04%
Morgan Stanley Cyclical 727.79 +.19%
Morgan Stanley Technology 488.32 +.75%
Transports 3,649.96 +.44%
Utilities 368.40 -.04%
Put/Call .95 +39.71%
NYSE Arms 1.15 +43.11%
Volatility(VIX) 11.84 -4.21%
ISE Sentiment 174.00 +32.82%
US Dollar 87.75 -.41%
CRB 304.16 -.06%

Futures Spot Prices
Crude Oil 53.57 -1.89%
Unleaded Gasoline 151.47 -1.91%
Natural Gas 6.80 +.18%
Heating Oil 153.90 -.06%
Gold 424.10 -.16%
Base Metals 123.28 +1.30%
Copper 151.00 -.43%
10-year US Treasury Yield 3.90% +.48%

Leading Sectors
Airlines +5.91%
Disk Drives +3.18%
Oil Tankers +2.34%

Lagging Sectors
Biotech -.23%
Gold & Silver -.70%
Computer Hardware -1.00%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on FCD.

Afternoon/Evening Headlines
Bloomberg:
- US anti-dumping laws hurt consumers and businesses by artificially inflating prices, two of President Bush’s former economic advisers write in the latest issue of the journal Foreign Affairs.
- President Chirac’s popularity plunged to a record low 24% following the May 29 defeat of the European Union constitution referendum.
- Toyota Motor slashed the time it took to build a car in North America last year by 5.9%, the biggest efficiency gain in an annual survey of auto plants.
- Morgan Stanley will move 2,300 jobs to lower Manhattan and add 578 positions in the next five years.
- Phelps Dodge plans to spend $210 million on a project to process the metal by a new leaching technology to cut costs, closing a New Mexico smelter and an Arizona refinery permanently.
- Apple Computer will issue $50 vouchers or extended service warranties as part of a tentative settlement with customers who experienced battery problems with older versions of the iPod music player.
- The Duke/CFO Magazine global CFO survey says: Capital spending and employment growth to slow due to interest rates, high fuel costs, healthcare costs and lack of pricing power.

Nikkei English:
- Honda Motor plans to increase production at its four North American plants by 7% to 1.5 million automobiles a year by its fiscal 2007.

BOTTOM LINE: The Portfolio finished unchanged today as gains in my Steel shorts and Homebuilding longs offset losses in my Energy-related shorts. I took profits in a few QQQQs and added to my FFIV long, thus leaving the Portfolio 100% net long. The tone of the market was slightly positive today as the advance/decline finished modestly higher, most sectors rose and volume was average. Measures of investor anxiety were mixed into the close. Overall, today’s market action was slightly positive ahead of tomorrow’s jobs report. Expectations are for a rise of 175K in non-farm payrolls vs. a gain of 274K last month. Given the upward revision to 1Q unit labor costs, I would like to see a number below 200K. I think this will be the case. Investors would likely welcome a change between 75K-200K. Above 250K would probably spark fears that the labor market is becoming too tight and thus quell recent speculation of a Fed pause. Below 75K could renew fears of a U.S. hard landing.

Stocks Mixed Mid-day Ahead of Tomorrow's Jobs Report

Indices
S&P 500 1,201.63 -.05%
DJIA 10,533.46 -.15%
NASDAQ 2,089.99 +.11%
Russell 2000 623.78 +.01%
DJ Wilshire 5000 11,887.23 +.02%
S&P Barra Growth 581.63 +.06%
S&P Barra Value 615.91 -.08%
Morgan Stanley Consumer 587.44 -.14%
Morgan Stanley Cyclical 726.35 -.02%
Morgan Stanley Technology 486.10 +.29%
Transports 3,642.10 +.23%
Utilities 368.56 +.01%
Put/Call .95 +39.71%
NYSE Arms 1.14 +42.90%
Volatility(VIX) 12.19 -1.38%
ISE Sentiment 210.00 +60.31%
US Dollar 87.84 -.31%
CRB 305.33 +.33%

Futures Spot Prices
Crude Oil 54.60 -.09%
Unleaded Gasoline 154.80 +.25%
Natural Gas 7.00 +2.96%
Heating Oil 157.80 +2.47%
Gold 424.80 +1.70%
Base Metals 123.28 +1.30%
Copper 151.65 +2.09%
10-year US Treasury Yield 3.89% +.19%

Leading Sectors
Airlines +4.74%
Disk Drives +3.34%
Oil Tankers +2.04%

Lagging Sectors
Insurance -.45%
Banks -.47%
Computer Hardware -1.35%

BOTTOM LINE: The Portfolio is slightly lower mid-day on losses in my Internet longs and Energy-related shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly negative as the advance/decline line is slightly lower, most sectors are higher and volume is about average. Measures of investor anxiety are mixed. Today’s overall market action is neutral, given recent gains and mixed economic data. Many believe the Fed's Fisher does not speak for most other Fed members. He is being portrayed in some circles as an inexperienced loose cannon who should be ignored. If his dovish comments yesterday were so off-the-mark, why hasn't any other Fed member attempted damage control? The Fed's Stern had his chance today and didn't take it. I expect US stocks to trade mixed-to-higher into the close on short-covering and subsiding Fed worries.

Today's Headlines

Bloomberg:
- China’s benchmark Shanghai Composite Index slumped to an eight-year low on concern that the second phase of the government’s plan to cut its shareholdings will result in a flood of poor-quality stock.
- US Commerce Secretary Carlos Gutierrez called on China to crack down harder on copyright piracy and open its markets further to US products or risk a protectionist backlash that would hurt both economies.
- Sun Microsystems agreed to buy Storage Technology for $4.1 billion.
- US retailer from Target to Neiman Marcus posted better-than-expected sales gains in May as bigger paychecks overcame the effect of cold weather on spending.
- Motorola had its credit rating raised by Moody’s for the first time in 17 years, reflecting greater-than-expected gains in sales and profit.
- The US dollar fell the most in six weeks against the euro as strategists said a three-week decline in US Treasury yields made US debt less attractive to international investors.

Wall Street Journal:
- A European Union antitrust investigation into US-based Johnson & Johnson’s proposed $25.4 billion takeover of Guidant is focused on whether the merger would damage smaller competitors and keep prices high for cardiovascular devices.
- China’s government is trying to control the spread of Christianity that has increased the number of Catholics and Protestants to 45 million from six million 25 years ago.
- SBC Communications and other providers are regaining customers who want landline service because of lower pricing and better transmission than on cell phones.
- US homeowners are increasingly finding that installing solar-powered electricity generators can pay off, as states including California, NY and Texas now offer loans, rebates and other programs.
- The link between Viagra and vision defects is far from certain, citing ophthalmologists.
- Orlando, Florida, travelers may speed through airport security as early as next month with the help of a $79.95 identity card.
- Psychemedics Corp., PharmChem’s Phamatech and Q3 Innovations may benefit from increasing demand for their in-home drug-testing kits as parents watch for drug use in their children.
- Merck will begin television, radio and print advertisements this week in the first corporate brand campaign in the drugmaker’s 144-year history.
Cnet Networks is offering plot summaries, photographs and video clips of television shows from the 1940s to the present on a Web site called TV.com.

NY Times:
- The rejection of the European Union’s proposed constitution by French and Dutch voters this week reflected growing dissatisfaction with the continent’s leaders.
- Yahoo! plans to revive the live concert television show “PepsiSmash” on its Internet site through a collection of short video segments available on demand.
- Richard Braddock, the former president of Citicorp and former chairman of Priceline.com, has been named chairman of FreshDirect, a NY-based Internet grocer, signaling a possible move toward an IPO.

Boston Globe:
- Biogen Idec has told the FDA that a fourth patient may have developed a rare neurological disorder after being treated with the multiple sclerosis drug Tysabri.

Washington Post:
- A US rule that took effect yesterday requires all companies and individuals to destroy private consumer information obtained from credit bureaus and other information providers.

San Francisco Chronicle:
- A California bill aimed at permitting doctor-assisted suicide was rescued from likely defeat in the Sate Assembly when the authors used a parliamentary move to shift the bill to the Senate.

AP:
- South Korean cloning science specialist Hwang Woo Suk said he wants to open a stem-cell bank this year to help speed the search to grow replacement tissue.

AFP:
- Boeing may book more aircraft orders this year than Airbus SAS.

Financial Times:
- Western observers are underestimating problems in the Chinese economy, even as Chinese entrepreneurs step up their criticisms of internal barriers to doing business in the country, said Yasheng Huang, an associate professor in the MIT’s Sloan School.

Moscow Times:
- Starbucks opened its first store in Moscow amid a trademark dispute with an eponymous Russian company.

Globe and Mail:
- Lowe’s is preparing to expand into Canada.
- E*Trade Financial may revive merger discussions with TD Waterhouse after Ameritrade Holding said it’s in talks to buy Waterhouse after Ameritrade Holding said it’s in talks to buy Waterhouse’s US assets.

Labor Costs Rise, Factory Orders Accelerate and Oil Inventories Rise

- Final 1Q Non-farm Productivity rose 2.9% versus estimates of a 3.0% rise and a 2.6% prior estimate.
- Final 1Q Unit Labor Costs rose 3.3% versus estimates of a 2.2% increase and a 2.2% prior estimate.
- Initial Jobless Claims for last week rose to 350K versus estimates of 325 and 325K the prior week.
- Continuing Claims rose to 2602K versus estimates of 2581K and 2570K prior.
- Factory Orders for April rose .9% versus estimates of a 1.1% gain and an upwardly revised .7% increase in March.
- Summary of Weekly Petroleum Data for the Week Ending May 27, 2005.
- The EIA said crude inventories rose 1.49M barrels versus estimates of a 250K rise. Distillate fuel inventories rose 783K barrels versus estimates of a 1.45M barrel rise. Gasoline inventories rose 1.3M barrels versus estimates of a 400K rise. Natural Gas inventories rose 86 bcf to 1778 bcf versus estimates of a rise of 89 bcf.

BOTTOM LINE: Productivity rose in the first quarter at the fastest pace in 9 months. Productivity gains exceeded 4.0% in each of the last three years. At no time in history had there even been back-to-back increases greater than 4.0%. The year-over-year increase in unit labor costs was 4.3%, the most since the third quarter of 2000. While this increase is higher than I would like to see, there is little evidence that these costs are being passed to the consumer. Moreover, increasing labor costs haven’t pressured corporate profits to any extent. US corporate profits grew 4.5% in the first quarter and accounted for the largest share of the US economy since early 1967. I also expect moderating job gains over the coming months to dampen labor costs somewhat going forward.

The number of Americans filing first-time applications for jobless benefits rose last week to a 2-month high as a result of temporary layoffs in the automobile industry. Even with the increase last week, claims have averaged 328,000 so far this year, down from 343,000 for all of 2004, when the job market was the strongest in five years. The four-week moving average of claims, a less volatile measure, rose to 334,500 from 331,000. The four-week moving average of continuing claims rose to 2.59 million, from 2.586 million. The insured unemployment rate, which moves with the US unemployment rate, held at 2.0%.

US factory orders rose the most since November, spurred by demand for autos, aircraft and computers. Excluding transportation equipment, orders fell .2%. Orders for capital goods excluding aircraft, a proxy for future business investment, rose 1.7% in April after declining 1.6% in March. I continue to expect overall weaker factory activity as companies cut inventory to healthier levels.

Oil is steady even with another rise in inventories during the seasonably strong driving period. The perception that demand will accelerate in 4Q from last year’s rates is propping up energy. I continue to believe this perception will change over the coming months, resulting in a substantial fall in crude prices.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- Microsoft agreed to change its Windows XP operating software to address fresh antitrust concerns that traces of programs consumers choose to hide still appear on their computer screens.
- SEC Chairman Donaldson's resignation may spark a battle to reduce the agency's reach over corporate America and Wall Street.

Wall Street Journal:
- Citigroup is in discussion to exchange its Smith Barney mutual fund business with Legg Mason.

AP:
- President Bush will nominate California Republican Representative Christopher Cox to be the new chairman of the SEC, replacing William Donaldson.

Economic Daily News:
- Nvidia Corp. and ATI Technologies have chosen Taiwan Semiconductor Manufacturing as their only supplier of chips that use 90-nanometer technology.

People's Daily:
- Property prices and transaction volume in 11 major Chinese cities fell after the government unveiled measures last month to curb real estate speculation.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on SBUX, FMD, CAL, MDT and ARO.

Night Trading
Asian Indices are -.25% to +.75% on average.
S&P 500 indicated +.02%.
NASDAQ 100 indicated +.03%.

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Earnings of Note
Company/EPS Estimate
JTX/1.38
SFL/.50
TTWO/-.13

Splits
COP 2-for-1
EGN 2-for-1
RESP 2-for-1

Economic Releases
8:30 EST:
- Final 1Q Non-farm Productivity is estimated to rise 3.0% versus a prior estimate of a 2.6% increase.
- Final 1Q Unit Labor Costs is estimated to rise 2.1% versus a prior estimated of a 2.2% gain.
- Initial Jobless Claims for last week are estimated to rise to 325K versus 323K the prior week.
- Continuing Claims are estimated to rise to 2581K versus 2574K prior.

10:00 EST:
- Factory Orders for April are estimated to rise 1.1% versus a .1% gain in March.

BOTTOM LINE: Asian indices are mostly higher, spurred by gains in exporting and energy shares in the region. I expect US equities to open mixed as optimism over an end to Fed rate hikes offsets higher energy prices. The Portfolio is 100% net long heading into the day.