Today's Headlines

Bloomberg:
- Fugitive terrorist leader Abu Musab al-Zarqawi’s “most trusted operations agent” in Iraq was captured without incident two days ago in the northern city of Mosul.
- US Treasuries rallied after a report from the Fed’s Philly branch showed the region’s manufacturing was weaker this month than most economists forecast.
- Eurex AG, the world’s largest futures exchange by transactions, plans a currency futures market in the US to rival the Chicago Mercantile Exchange, where $38 billion of the securities change hands each day.

Wall Street Journal:
- The European Union needs to tackle the biggest concern of voters who turned down the proposed European constitution -- the weak European economy – said Giorgio La Malfa, Italy’s minister of European affairs.
- US clothing companies are poised to accelerate acquisitions in order to strengthen their position in pricing negotiations with consolidating retailers.

NY Times:
- The UAW won’t agree to allow GM to pare back health-care benefits for hourly workers.
- The US Corporation for Public Broadcasting is being investigated for more than $29,000 in payments last year to lobbyists and consultants that weren’t disclosed to the corporation’s board.
- New York state lawyers are increasingly stealing from their clients, with a growing number of abuses from Long Island attorneys, citing statistics from the Lawyer’s Fund for Client Protection.

Lloyd’s List:
- The cost of leasing a container ship fell in the past week, the first decline since December 2003.

Financial Times:
- Former Iranian President Akbar Hashemi Rafsanjani, running again for president, is a pragmatist who could be a force for change in the Middle East.

Housing Starts Near Record Levels, Jobless Claims Hold Steady

- Housing Starts for May rose to 2009K versus estimates of 2050K and 2005K in April.
- Building Permits for May fell to 2050K versus estimates of 2109K and 2148K in April.
- Initial Jobless Claims for last week rose to 333K versus estimates of 330K and 332K the prior week.
- Continuing Claims rose to 2641K versus estimates of 2587K and 2583K prior.

BOTTOM LINE: US housing starts rose .2% in May to the best pace since February as low interest rates and job growth continued to fuel demand. These numbers reinforce the view that this will be the best year for homebuilding since 1978 and the best year ever for home sales. Starts increased in all regions but the South, where they fell 12%. US home sales will top 8 million this year, the fifth consecutive record.

The four-week moving-average of jobless claims rose to 335,000 from 332,250. Jobless claims fell to an average of about 328,000 this year from 343,000 for all of last year. The four-week moving-average of continuing claims rose to 2.597 million from 2.585 million. The insured unemployment rate rose to 2.1% in the week from 2% the week before. Employers have added jobs at a monthly rate of about 180,000 this year, compared with a monthly average of 183,000 for all of last year. The economy generated 2.2 million new jobs last year, the most in five years.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- Integrated Device Technology agreed to buy Integrated Circuit Systems for $1.7 billion in cash and stock.
- Pfizer will acquire all outstanding shares of Vicuron Pharmaceuticals at a price of $29.10 per share in cash, for an aggregate equity purchase price of approximately $1.9 billion.

Wall Street Journal:
- GM's European auto business is showing the first signs of recovery, according to GM Europe Chairman Frederick Henderson.
- SAP AG hired several executives from Oracles and other rivals as competition grows.

MarketWatch:
- Marin Capital Partners, a hedge fund that previously managed about $2 billion, will close this week because of a "lack of suitable investment opportunities in the current market."

Financial Times:
- Growth in the level of service jobs outsourced from wealthy nations may be restrained due to the lack of skills held by workers in low-wage countries, citing a study by McKinsey Global Institute.
- Elan Corp. Plc, Ireland's biggest drugmaker, has developed a vaccine for Parkinson's disease which early-stage trials show works well in mice, citing test data from the Univ. of Cal., San Diego.

BBC:
- Iran did not tell the UN inspectors investigating its nuclear program about all its nuclear work, citing Iranian presidential candidate Ali Akbar Hashemi Rafsanjani.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on AMLN.

Night Trading
Asian Indices are -.25% to +.50% on average.
S&P 500 indicated +.04%.
NASDAQ 100 indicated +.06%.

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Earnings of Note
Company/EPS Estimate
ADBE/.27
CHTT/.56
GS/1.87
KBH/1.78
WGO/.49

Upcoming Splits
None of note

Economic Releases
8:30 EST:
- Housing Starts for May are estimated to rise to 2050K versus 2038K in April.
- Building Permits for May are estimated to fall to 2107K versus 2148K in April.
- Initial Jobless Claims for last week are estimated to remain at 330K versus 330K the prior week.
- Continuing Claims are estimated to fall to 2587K versus 2588K prior.

12:00 EST:
- The Philly Fed. for June is estimated to rise to 10.0 versus a reading of 7.3 in May.

BOTTOM LINE: Asian indices are mostly higher, led by commodity-related stocks in the region. I expect US equities to open modestly higher on positive economic reports and merger activity. Several Fed speakers are scheduled for later in the day, which could also impact trading. The Portfolio is 75% net long heading into the day.

Stocks Close Modestly Higher on Afternoon Rebound

Indices
S&P 500 1,206.58 +.22%
DJIA 10,566.37 +.18%
NASDAQ 2,074.92 +.28
Russell 2000 637.19 +.44%
DJ Wilshire 5000 11,962.12 +.23%
S&P Barra Growth 579.50 +.17%
S&P Barra Value 622.75 +.27%
Morgan Stanley Consumer 583.32 -.12%
Morgan Stanley Cyclical 732.17 +.63%
Morgan Stanley Technology 478.97 +.25%
Transports 3,527.22 +.46%
Utilities 373.94 -.43%
Put/Call .83 +1.22%
NYSE Arms .88 -5.23%
Volatility(VIX) 11.46 -2.80%
ISE Sentiment 213.00 +15.14%
US Dollar 88.65 -.73%
CRB 306.98 +.66%

Futures Spot Prices
Crude Oil 55.31 -.47%
Unleaded Gasoline 155.65 -.38%
Natural Gas 7.40 -.55%
Heating Oil 162.00 -.07%
Gold 430.90 unch.
Base Metals 124.10 +.75%
Copper 154.90 unch.
10-year US Treasury Yield 4.09% -.19%

Leading Sectors
Steel +3.37%
Gold & Silver +1.58%
Homebuilders +1.37%

Lagging Sectors
Restaurants -.50%
Airlines -1.07%
Oil Tankers -1.20%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on TAP.

Afternoon/Evening Headlines
Bloomberg:
- A panel headed by former US Senator George Mitchell and former House Speaker Newt Gingrich faulted the UN today for failing to combat genocide and safeguard human rights and urged wide changes in the body.
- The US Senate approved an amendment to the $13 billion energy bill that would require oil companies to mix 8 billion gallons of ethanol a year into the nation’s gasoline supply by 2012 to reduce reliance on foreign oil.
- General Motors’ program to offer an employee discount to all US buyers is increasing the volume of shoppers by as much as 30% at dealerships in markets with historically low GM sales, an analyst said.
- The US dollar fell against the euro for the first day in six after government reports showed inflation decelerating.

CNBC:
- Citadel Holdings and Merrill Lynch are expected to buy 10% each in the Philadelphia Stock Exchange.

BOTTOM LINE: The Portfolio finished slightly higher on gains in my Retail, Homebuilding longs and Oil Tanker shorts. I exited a few shorts and added to my GOOG long in the afternoon, thus leaving the Portfolio 75% net long. The tone of the market was modestly positive today as the advance/decline finished slightly higher, sector performance was mixed and volume was very light. Measures of investor anxiety were mostly lower into the close. Overall, today’s market action was modestly positive considering the major indices and breadth closed at session highs. The bears had their chance to get a grip on the market in the morning and failed to do so. Comments from the Fed's Beige Book and a pullback in oil/long-term rates spurred the afternoon rally. I now expect the Dow and S&P to break out to the upside of their trading ranges of the last couple of weeks. This should occur within the next few days.

Stocks Modestly Lower Mid-day on Rising Energy Prices

Indices
S&P 500 1,202.65 -.10%
DJIA 10,536.76 -.10%
NASDAQ 2,063.75 -.24%
Russell 2000 634.35 -.01%
DJ Wilshire 5000 11,926.27 -.06%
S&P Barra Growth 577.75 -.13%
S&P Barra Value 621.15 +.02%
Morgan Stanley Consumer 581.94 -.37%
Morgan Stanley Cyclical 729.12 +.21%
Morgan Stanley Technology 476.57 -.26%
Transports 3,526.83 +.45%
Utilities 372.86 -.71%
Put/Call .79 -3.66%
NYSE Arms 1.0 +7.32%
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 56.55 +2.82%
Unleaded Gasoline 158.20 +2.67%
Natural Gas 7.48 +3.49%
Heating Oil 164.10 +.15%
Gold 431.30 +.47%
Base Metals 124.10 +.75%
Copper 155.20 +1.67%
10-year US Treasury Yield 4.12% +.38%

Leading Sectors
Steel +1.80%
Gold & Silver +1.20%
Energy +.92%

Lagging Sectors
Broadcasting -.86%
Disk Drives -1.02%
Airlines -1.30%

BOTTOM LINE: The Portfolio is unchanged mid-day as gains in my Oil Tanker shorts and Homebuilding longs are offsetting losses in my Base Metal Shorts and Internet longs. I exited a number of tech longs this morning and added a QQQQ short, thus leaving the Portfolio 50% net long. The tone of the market is modestly negative as the advance/decline line is lower, sector performance is mixed and volume is average. Measures of investor anxiety are mostly lower. Today’s overall market action is modestly negative, considering positive economic reports and the rise in energy prices. The Baltic Dry Index is now down 56.4% since its December 6, 2004 high. It has fallen 44.0% in just the last eight weeks. This leading indicator continues to forecast slowing economic growth. This was one of the first indicators to turn higher in late 2002, before substantial economic growth began in the first half of 2003. I expect US stocks to trade mixed into the close as high energy prices offset better inflation readings.