Inflation Decelerating, Manufacturing Stabilizing, Oil Inventories Down

- The Consumer Price Index for May fell .1% versus estimates of unchanged and a .5% increase in April.
- The CPI Ex Food & Energy for May rose .1% versus estimates of a .2% increase and unchanged in April.
- Business Inventories for April rose .3% versus estimates of a .4% increase and a .5% gain in March.
- Empire Manufacturing for June rose to 11.7 versus estimates of 1.0 and a reading of -11.1 in May.
- Net Foreign Security Purchases for April fell to $47.4B versus estimates of $70.0B and $40.6B in March.
- Industrial Production for May rose .4% versus estimates of a .2% increase and a .3% decline in April.
- Capacity Utilization for May rose to 79.4% versus estimates of 79.3% and 79.1% in April.
- Summary of Weekly Petroleum Data for the Week Ending June 10, 2005.
- The EIA reported crude inventories fell 1.78M barrels versus estimates of a 1.0M barrel decline. Gasoline inventories fell 950K barrels versus estimates of a rise of 675K barrels. Distillate inventories rose 2.43M barrels versus estimates of a gain of 1.5M barrels.

BOTTOM LINE: Cheaper energy costs unexpectedly drove down consumer prices last month, the first decline since July 2004. This should further quell inflation fears. Consumer prices were up 2.8% for the 12 months ended in May, below the 40-year average of 3.0%. The cost of all goods including cars, apparel and food fell .4% last month.

Inventories at US businesses rose .3% in April, the smallest increase this year, as sales surged. The increase in sales pushed the inventory-sales ratio down to 1.3 months, an all-time low.

The Empire Manufacturing Index rose by the largest amount since May 2003. The reading is back to moderate levels from a weak one. The new orders component of the index rose to 8.2 from minus 8.2 a month earlier. The prices paid index fell to 30.6 from 41.6 in May.

International investors accumulated US assets at a slower-than-expected pace in April, amid evidence that hedge funds cut holdings of Treasuries. Japan, the largest foreign holder of US government securities, bought a net 5.7 billion in April.

US industrial production rose .4% in May, more than expected, helped by a rebound in demand for business equipment and consumer goods. Business investment is picking up again after a surge in 2004, when tax incentives siphoned orders from earlier this year. Production of autos and parts increased 1.2% in May after a 2.3% decline in April.

Distillate inventories were the main concern for traders. I wouldn't be surprised to see oil reverse lower later today.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Delays at the California ports of Los Angeles and Long Beach, adjacent harbors that form the busiest shipping point in the US, won't be as long as last year's waits, shipping companies and terminal operators said.
- Australia's dollar may end a three-year rally on concern exports will fall because a drought threatens 45% of the country's farmland this year.
- Shanghai's government, moving to avert summer blackouts that forced thousands of companies to slash production last year, asked factory owners to plan shutdowns and may also raise power prices.
- Acer Inc., the world's fifth-largest seller of PCs, said it expects sales to grow about 40-50% this year and next, fueled in part by market share gains from IBM.
- JPMorgan Chase agreed to pay investors $2.2 billion to resolve claims it helped Enron inflate revenue by hiding debt, in the largest fraud settlement by the company's investment bankers.
- China's industrial production grew at the fastest pace in three months, suggesting the government will further tighten investment curbs.

Dow Jones Newswires:
- Motorola plans to introduce 20 new high-speed mobile data handsets this year.

Guardian:
- Napster Inc., the online music service, will announce a worldwide joint venture with Ericsson AB for music downloads, citing Ericsson's vice-president of global services.

Nihon Keizai:
- AOC Holdings will sign an agreement today with Iraq's oil ministry to work on upgrading crude oil export infrastructure and cooperate on oil field surveys.

China Business News:
- DuPont may invest $1 billion to build a titanium dioxide plant in China's eastern province of Shandong.

The Beijing News:
- Qingdao Haier is reviewing Maytag's financial statements with a bank from Shandong province, as part of its plan to bid for the US appliance maker.

Asian Wall Street Journal:
- China will soon announce a new quota-allocation system for garment exports to curb growth in shipments.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on AVP, TRI, PRXL, HCA, CVD, EBAY and CL.

Night Trading
Asian Indices are +.25% to +.50% on average.
S&P 500 indicated -.06%.
NASDAQ 100 indicated unch.

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Economic Releases
8:30 EST:
- The Consumer Price Index for May is estimated to remain unchanged versus a .5% increase in April. The CPI Ex Food & Energy for May is estimated to rise .2% versus a .5% increase in April.
- Business Inventories for April are estimated to rise .4% versus a .4% increase in March.
- Empire Manufacturing for June is estimated at 1.0 versus a reading of -11.1.

9:00 EST:
- Net Foreign Security Purchases for April is estimated at $68.0B versus $45.7B in March.

9:15 EST:
- Industrial Production for May is estimated to rise .2% versus a .2% decline in April.
- Capacity Utilization for May is estimated to rise to 79.3% versus 79.2% in April.

1:00 EST:
- The NAHB Housing Market Index for June is estimated to rise to 71 versus a reading of 70 in May.

2:00 EST:
- Fed's Beige Book

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 inflation data. The Portfolio is 100% net long heading into the day.

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.