Consumer Expectations Jump, Current Account Gap Widens

- The 1Q Current Account Deficit rose to -$195.1B versus estimates of -$190.0B and -$188.4B in 4Q.
- Preliminary Univ. of Mich. Consumer Confidence for June rose to 94.8 versus estimates of 88.8 and 86.9 in May.

BOTTOM LINE: Higher-priced oil and strong demand for goods from US consumers propelled the current account deficit higher. The US economy is significantly stronger than that of Europe and Japan, which is the main reason for the widening deficit. I expect declining energy prices and a rising US dollar to help during the second half of the year.

US consumer sentiment rose more than expected in June as the job market improved and gasoline prices eased in recent months. The index is the highest in five months and showed the biggest improvement since January 2004. The unemployment rate fell to 5.1% last month, the best level since September 2001. As well, the average price for a gallon of gasoline at the pump fell to $2.17 for the week ended June 13 from a record $2.32 in the week ended April 11. The current conditions component of the index, which reflects Americans’ perception of their financial situation and whether it’s a good time to buy big-ticket items, rose to 110.4 from 104.9 in May. The expectations component of the index jumped to 84.8 from 75.3 last month. This was the largest gain since the US economy began a significant acceleration in the first half of 2003. I continue to believe consumer spending will remain vigorous through year-end on modest labor market improvements, low interest rates, a strong housing market, a rising stock market and lower energy prices.

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Friday Watch

Late-Night Headlines
Bloomberg:
- Iran's former president Akbar Hashemi Rafsanjani, who is campaigning for more jobs and a "new chapter" in his country's relations with the US, may win the first round of presidential elections today, the latest polls show.
- The euro headed for its third weekly decline against the dollar in Asia on speculation European Union policy makers will today fail to resolve differences over the region's budget and constitution.

Wall Street Journal:
- Boeing and Lockheed Martin are competing to sell India 126 fighter jets.

Business Week:
- Older US workers may add 9% to GDP by 2045, or more than $3 trillion a year in today's dollars, as technology and better health allow people to work later into life.
- FedEx's earnings growth will get a boost from business in Asia.
- Hewlett-Packard CEO Hurd plans to reorganize the company's sales force, a move that would dismantle a key piece of predecessor Fiorina's strategic plan.

Financial Times:
- Microsoft must compromise further if it is to comply with its European Union antitrust order.
- Morgan Stanley will not split the role of chairman and chief executive when appointing a successor to Philip Purcell.

Xinhua:
- China will add bank loan fraud and illegal disposal of non-performing assets as new crimes under its Criminal Law.

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

Business Week:
- Alaska Communications Systems(ALSK) shares are an attractive buy because the company has an 8.4% dividend yield amid strong revenue growth.
- Casual Male Retail Group(CMRG) shares may almost double within 12 months as earnings from operations rise because of lower costs and sales of higher-margin brands.

Night Trading
Asian Indices are unch. to +.50% on average.
S&P 500 indicated -.01%.
NASDAQ 100 indicated unch.

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Economic Releases
8:30 EST:
- Current Account Balance for 1Q is estimated at -$190.0B versus -$187.9B in 4Q.

9:45 EST:
- Preliminary Univ. of Mich. Consumer Confidence for June is estimated at 88.8 versus 86.9 in May.

BOTTOM LINE: Asian indices are mostly higher, led by commodity-related stocks in the region. I expect US equities to open mixed and move modestly higher later in the day on better-than-expected consumer confidence and lower long-term rates. The Portfolio is 100% net long heading into the day.

Stocks Finish at Session Highs on Lower Long-term Rates

Indices
S&P 500 1,210.96 +.36%
DJIA 10,578.65 +.12%
NASDAQ 2,089.15 +.69%
Russell 2000 644.03 +1.07%
DJ Wilshire 5000 12,018.08 +.47%
S&P Barra Growth 581.07 +.27%
S&P Barra Value 625.56 +.45%
Morgan Stanley Consumer 583.62 +.05%
Morgan Stanley Cyclical 741.15 +1.23%
Morgan Stanley Technology 481.19 +.46%
Transports 3,566.69 +1.12%
Utilities 373.11 -.22%
Put/Call .96 +15.66%
NYSE Arms .86 -2.17%
Volatility(VIX) 11.15 -2.71%
ISE Sentiment 173.00 -18.78%
US Dollar 88.68 +.05%
CRB 308.59 +.52%

Futures Spot Prices
Crude Oil 55.53 -.09%
Unleaded Gasoline 159.60 -.11%
Natural Gas 7.56 -.63%
Heating Oil 162.20 -.22%
Gold 437.60 -.07%
Base Metals 125.06 +.77%
Copper 157.10 +.10%
10-year US Treasury Yield 4.06% -.75%

Leading Sectors
Gold & Silver +3.34%
Biotech +2.93%
Steel +2.33%

Lagging Sectors
Tobacco -.31%
Telecom -.33%
Oil Tankers -.75%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on KLAC, DNA and SVU.
- Rated MNST Outperform, target $35-40.

Afternoon/Evening Headlines
Bloomberg:
- Ford Motor may have used cruise-control switches that can cause a fire in 16 million vehicles.
- US Treasury notes rose after the Philly Fed. Index unexpected slowed.
- Genentech agreed to buy a manufacturing plant in Oceanside, California, from Biogen Idec for about $408 million to make its Avastin cancer medicine.
- The United Auto Workers union said again it won’t reopen its contract with GM, while saying it would be a “huge mistake” to take “any unilateral action on health care benefits.”
- A magnitude 4.9 earthquake struck San Bernardino County near the town of Yucaipa, 71 miles east of LA.
- Crude oil traded near an 11-week high amid signs that surging global fuel consumption will strain the production capacity of OPEC and other exporters.
- The US Office of the Comptroller of the Currency filed a lawsuit to stop NY Democratic Attorney General Spitzer’s probe of mortgage-lending data from nationally chartered banks, saying he is exceeding his authority.
- XL Capital, PartnerRe, Philadelphia Consolidated and two other insurers received subpoenas from investigators.
- European Union leaders put ratification of the EU’s first constitution on hold as the stalemate over the $128 billion budget deepened and Britain and France fought over how to run the 25-nation bloc.

Wall Street Journal:
- Bank of America agreed to buy 9% of China Construction Bank for $2.5 billion.

AP:
- Two temporary memorials to victims of the Sept. 11 terrorist attacks are being built near the site of the former World Trade Center.

Frankfurter Allgemeine Zeitung:
- GM’s Opel and Saab units will introduce new sports utility vehicle models next year.

BOTTOM LINE: The Portfolio finished slightly higher on gains in my Gaming, Homebuilding longs and Oil Tanker shorts. I exited a few shorts in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline finished higher, almost every sector gained and volume was above average. Measures of investor anxiety were mixed into the close. Overall, today’s market action was positive considering the major indices and breadth closed at session highs in the face of rising energy prices and a disappointing Philly Fed. According to the latest data from the Energy Intelligence Group, global demand for crude has risen 1.59% over the last 12 months to 83.2 million barrels/day. However, global supply has risen 4.17% to 84.9 million barrels/day. The price of a barrel of crude is up over 60% during this same period of time. I expect tomorrow’s consumer confidence report to exceed estimates. As well, another decline in long-term rates could spur gains in US stocks.

Stocks Mixed Mid-day as Oil Rises and Rates Fall

Indices
S&P 500 1,209.03 +.20%
DJIA 10,572.05 +.05%
NASDAQ 2,083.93 +.43%
Russell 2000 641.09 +.62%
DJ Wilshire 5000 11,997.42 +.30%
S&P Barra Growth 580.39 +.13%
S&P Barra Value 624.32 +.25%
Morgan Stanley Consumer 583.44 +.02%
Morgan Stanley Cyclical 740.22 +1.10%
Morgan Stanley Technology 480.85 +.38%
Transports 3,552.36 +.71%
Utilities 371.42 -.68%
Put/Call .92 +10.84%
NYSE Arms .76 -13.38%
Volatility(VIX) 11.24 -1.92%
ISE Sentiment 190.00 -10.80%
US Dollar 88.80 +.20%
CRB 308.59 +.51%

Futures Spot Prices
Crude Oil 56.40 +1.67%
Unleaded Gasoline 158.80 +1.63%
Natural Gas 7.61 +2.27%
Heating Oil 162.20 -.01%
Gold 437.90 +1.62%
Base Metals 125.06 +.77%
Copper 156.95 +1.32%
10-year US Treasury Yield 4.08% -.42%

Leading Sectors
Gold & Silver +3.52%
Biotech +2.28%
Computer Hardware +1.84%

Lagging Sectors
Drugs -.44%
Telecom -.47%
Oil Tankers -1.38%

BOTTOM LINE: The Portfolio is slightly higher mid-day on gains in my Homebuilding/Gaming longs and Oil Tanker Shorts. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are higher and volume is above average. Measures of investor anxiety are mixed. Today’s overall market action is neutral, considering another move higher in energy and the disappointing Philly Fed report. The Prices Paid component of the Philly Fed has now declined 64.44% just since February 1. This index joins the Chicago PMI, ISM Manufacturing, ISM Non-Manufacturing and Empire Manufacturing in showing plunging prices paid indices. I expect US stocks to trade mixed into the close as high energy prices offset lower long-term rates.

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.