Stocks Close Modestly Higher on Strength in Retail

Indices
S&P 500 1,203.91 +.26%
DJIA 10,547.57 +.24%
NASDAQ 2,069.04 unch.
Russell 2000 634.39 +.85%
DJ Wilshire 5000 11,934.14%
S&P Barra Growth 578.52 +.16%
S&P Barra Value 621.06 +.35%
Morgan Stanley Consumer 584.02 +.33%
Morgan Stanley Cyclical 727.62 +.50%
Morgan Stanley Technology 477.79 -.89%
Transports 3,510.99 -.35%
Utilities 375.56 +.30%
Put/Call .82 -6.82%
NYSE Arms .93 +52.61%
Volatility(VIX) 11.79 +1.20%
ISE Sentiment 185.00 +56.78%
US Dollar 89.30 +.39%
CRB 304.96 +.22%

Futures Spot Prices
Crude Oil 55.02 +.04%
Unleaded Gasoline 153.90 -.12%
Natural Gas 7.27 +.58%
Heating Oil 163.93 +.04%
Gold 428.70 -.14%
Base Metals 123.18 -.24%
Copper 153.15 +.33%
10-year US Treasury Yield 4.11% +.52%

Leading Sectors
Retail +2.15%
Gaming +1.79%
Homebuilders +1.36%

Lagging Sectors
Semis -1.09%
Oil Tankers -1.22%
Gold & Silver -1.49%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Underperform on WTW.

Afternoon/Evening Headlines
Bloomberg:
- UK Prime Minister Tony Blair said he has a “sharp disagreement” with French President Jacques Chirac over the European Union’s budget that may be hard to resolve as EU leaders debate how the region is run and funded.
- Pfizer said its Exubera diabetes treatment, the first type of insulin to be inhaled rather than injected, was effective and didn’t harm patients’ lungs in three trials.
- President Bush called for an end to “partisan bickering” over Social Security as he extended his months-long campaign to save the system.
- Crude oil fell as ministers proposed that OPEC raise production quotas and give the group’s president the authority to further boost targets at a meeting tomorrow.
- TXU’s senior, unsecured debt rating was cut below investment grade by S&P on concern that the company is boosting its share price at the expense of creditworthiness.
- Viacom said its board approved Chairman Sumner Redstone’s plan to split into two parts, with CBS Television anchoring one business and the MTV cable networks in the second.

AP:
- The US will set new passport standards that include a digital photograph to match a person’s unique physical characteristics and an embedded identification chip.

Financial Times:
- The global music industry recovered in 2004 after a 20% decline between 1999 and 2003 due to online piracy and illegal music downloads, citing the OECD.
- European leaders must stop using anti-capitalist rhetoric if they want to avoid losing US investment.

BOTTOM LINE: The Portfolio finished slightly higher on gains in my Retail, Networking longs and Oil Tanker shorts. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was modestly positive today as the advance/decline finished higher, sector performance was mixed and volume was very light. Measures of investor anxiety were mixed into the close. Overall, today’s market action was neutral considering the decline in energy prices and PPI decline. I expect the CPI to come in below consensus expectations tomorrow. Industrial Production may meet estimates, while I expect Empire Manufacturing to fall below expectations. The 10-year T-Note yield has recently bounced from around 3.8% to 4.12%. I would be surprised to see rates above 4.2%. I may look to add a long position in TLT on any further pullback.

Stocks Mixed Mid-day as Energy Prices Fall

Indices
S&P 500 1,204.07 +.24%
DJIA 10,547.27 +.23%
NASDAQ 2,066.21 -.18%
Russell 2000 631.40 +.38%
DJ Wilshire 5000 11,916.18 +.15%
S&P Barra Growth 578.02 +.09%
S&P Barra Value 620.40 +.25%
Morgan Stanley Consumer 583.54 +.24%
Morgan Stanley Cyclical 726.85 +.40%
Morgan Stanley Technology 477.36 -.98%
Transports 3,513.34 -.29%
Utilities 375.39 +.25%
Put/Call .84 -4.55%
NYSE Arms .70 +15.78%
Volatility(VIX) 11.94 +2.49%
ISE Sentiment 182.00 +54.24%
US Dollar 89.16 +.24%
CRB 305.01 +.24%

Futures Spot Prices
Crude Oil 55.30 -.58%
Unleaded Gasoline 154.80 -.90%
Natural Gas 7.26 unch.
Heating Oil 165.40 -.55%
Gold 429.30 -.42%
Base Metals 123.18 -.24%
Copper 152.65 -.84%
10-year US Treasury Yield 4.11% +.47%

Leading Sectors
Retail +2.01%
Gaming +1.74%
HMOs +1.27%

Lagging Sectors
Semis -.90%
Oil Tankers -.95%
Gold & Silver -1.76%

BOTTOM LINE: The Portfolio is modestly higher mid-day on gains in my Oil Tanker shorts and Networking/Retail longs. I added a few new longs from various sectors this morning, thus leaving the Portfolio 100% net long. One of my new longs is HET and I am using a $71 stop-loss on this position. The tone of the market is modestly positive as the advance/decline line is slightly higher, sector performance is mixed and volume is very light. Measures of investor anxiety are mostly lower. Today’s overall market action is neutral, considering the decline in the PPI and energy prices. Several Fed members have stated that the Fed can continue raising rates at a "measured" pace. However, every time they make the caveat that it "will depend on the data." I continue to expect a 25-basis-point hike and the removal of the word "measured" from the policy statement at the June 30 meeting, thus paving the way for a pause. While I am less confident in this prediction than a few weeks ago, upcoming data should result in increased expectations for this outcome. I expect US stocks to trade mixed-to-higher into the close on lower energy prices and stabilizing long-term rates.

Today's Headlines

Bloomberg:
- Cigarette smoking and obesity not only increase the risk of age-related diseases, they also make people age faster, according to a research letter published in the Lancet medical journal.
- Boeing won an order from GE’s finance unit for 20 planes worth $1.1 billion, as the company increases its lead in new business this year over Airbus SAS.
- Mylan Labs plans to buy back $1.25 billion in stock and double its annual dividend.
- Starwood Hotels & Resorts today began using low-pollution fuel cells to help power its flagship Manhattan hotel, and wants to convert many more properties if Congress approves a tax break for the energy form.
- The dollar rose against the euro as a decline in retail sales and wholesale prices failed to damp speculation the currency will extend this year’s really.
- US 10-year Treasuries fell for a fifth day, the longest slump this year, as some investors said a drop in May producer prices and retail sales failed to dim expectations for Fed interest-rate increases.
- OPEC will consider a plan to raise output quotas by as much as 3.6% in a two-step proposal designed to send prices below $50/bbl.

Wall Street Journal:
- The investigation into Russia’s role in the UN/Iraqi oil-for-food scandal is added new stains to US-Russian relations.
- Toys “R” Us investors are asking a Delaware Court of Chancery judge to stop the $6.6 billion sale of the company to a group of private-equity firms.
- Rising US corporate profits, household incomes and home sales are significantly boosting state tax revenue across the country. States will likely take in an all-time record $550 billion in the full fiscal year.

NY Times:
- A 1998 memo from an executive at Cotecna Inspection Services, a contractor for the United Nations’ oil-for-food program that employed UN Secretary General Kofi Annan’s son Kojo Annan, stated that the company could “count on” the UN’s support.
- International Business Machines will announce today plans to sell software and consulting services to clients who use RFID to track consumer goods.

NY Post:
- Ikea purchased 48 acres of waterfront property in Brooklyn’s Red Hook section for $31.3 million from US Dredging Corp. to build what will be its largest US retail store.

Detroit News:
- General Motors has told the United Auto Workers that an agreement to cut rising health-care expenses for unionized workers is needed by the end of this month.

Jyllands Posten:
- Danes probably won’t vote on the proposed European Union constitution as previously planned, citing Foreign Minister Per Stig Moeller.

Yediot Ahronot:
- Broadcom plans to acquire Orckit Communications’ optical communications company Corrigent Systems for $500 million.

Irish Times:
- More Irish voters would vote to reject the European Union constitution than endorse it, citing a recent poll.

Iran Daily:
- China will invest $220 million to help finance a new highway linking Iran’s capital with its Caspian Sea coast.

Retail Sales Moderate, Producer Prices Fall Most Since 03

- The Producer Price Index for May fell .6% versus estimates of a .2% decline and a .6% rise in April. The PPI Ex Food & Energy for May rose .1% versus estimates of a .2% increase and a .3% gain in April.
- Advance Retail Sales for May fell .5% versus estimates of a .2% decline and an upwardly revised 1.5% gain in April. Retail Sales Less Autos for May fell .2% versus estimates of a .2% increase and an upwardly revised 1.4% gain in April.

BOTTOM LINE: US wholesale prices declined more than forecast in May as costs fell for gasoline, computers and automobiles. This was the largest decline since April 2003. Prices of raw materials, used at the earliest stage of the production process, declined 2.0%. Food prices fell .3%, computer prices declined 4.8% and passenger car prices fell .2%. This is yet another measure of inflation showing substantial deceleration.

US retail sales fell by a larger-than-expected .5% in May, however an average gain of .5% over the last three months paints a healthy picture of consumer spending. Rising incomes, a booming housing market, a rebound in stock prices and gains from refinancing should lead to a continuation of recent strong trends. Stripping out autos and gasoline, retail sales were unchanged after rising a vigorous 1.3% the prior month. Consumer spending in the second quarter is projected to increase at a 3.2% pace, better than the 3.1% expected in a prior survey, according to the median forecast in a survey of 65 economists by Bloomberg.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- California Governor Schwarzenegger called a special election for November, the state's fourth ballot in two years, threatening to bypass lawmakers and win voter approval to curb spending and redraw political lines.
- Ericsson AB and Lucent Technologies are among the companies at Asia's biggest telecom trade show this week vying for business in China and India as the two most populous nations prepare to upgrade cell phone networks.
- China will probably react angrily to the European Union's decision to delay ending a 16-year-old arms embargo on the country and may start to target individual European states to get around the ban, China-based analysts said.

Financial Times:
- The amount of capital being moved out of Russia has reached its highest level since just before the country's financial crisis in 1998, citing a report by Fitch Ratings.

China Daily:
- China's automakers had profits decline 74% in the first four months of 2005 from a year earlier because of falling prices and rising raw material costs.
- China's western province of Xinjiang plans to boost crude oil output fourfold to meet rising demand and may supply 60% of the country's total.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on MERQ, MFE and CBB.
- Reiterated Underperform on WTW and EW.

Night Trading
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Earnings of Note
Company/EPS Estimate
BE/.00
BBY/.30
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DRL/.42
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Splits
MW 3-for-2

Economic Releases
8:30 EST:
- The Producer Price Index for May is estimated to fall .2% versus a .6% increase in April.
- The PPI Ex Food & Energy for May is estimated to rise .2% versus a .3% increase in April.
- Advance Retail Sales for May is estimated to fall .2% versus a 1.4% gain in April.
- Retail Sales Less Autos for May is estimated to rise .2% versus a 1.1% increase in April.

BOTTOM LINE: Asian indices are mostly higher, led by exporters in the region on optimism over sales to the US. I expect US equities to open modestly higher on better-than-expected economic data. The Portfolio is 75% net long heading into the day.