Inflation Tame, Retail Hot, Employment Stable

- The Consumer Price Index for June was unchanged versus estimates of a .2% increase and a .1% decline in May.
- The CPI Ex Food & Energy for June rose .1% versus estimates of a .2% increase and a .1% gain in May.
- Advanced Retail Sales for June rose 1.7% versus estimates of a 1.0% increase and a upwardly revised .3% decline in May.
- Retail Sales Less Autos for June rose .7% versus estimates of a .6% gain and an unchanged reading in May.
- Initial Jobless Claims for last week rose to 336K versus estimates of 322K and 320K the prior week.
- Continuing Claims rose to 2617K versus estimates of 2600K and 2572K prior.

BOTTOM LINE: US consumer prices were unchanged in June as companies discounted products such as clothing and cars to boost sales. Consumer prices were up 2.5% for the 12 months ended in June. As I predicted at the beginning of the year, inflation will likely rise this year less than the long-term average of 3.0%. The cost of all goods including cars, apparel and food fell .2% last month.

US retail sales rose a greater-than-expected 1.7% in June, led by spending on cars, furniture and gasoline. An improving job market, a rising stock market and booming housing market are helping to boost consumer sentiment and spending. Retail sales account for about half of all consumer spending.

The number of US workers filing jobless claims rose to 336,000 last week, reflecting a temporary shutdown of auto plants. The four-week moving average of claims rose to 320,750 from 320,500. The insured employment rate, which tracks the US jobless rate, rose to 2.1%.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- Crude oil is falling a second day in NY after a US government report showed stockpiles of distillates, which include heating oil and diesel, rose more than analysts predicted.
- People who work at the top 50 hedge funds ranked by assets have directed 62% of donations to Democrats since January 2003, a Bloomberg News review of campaign-finance disclosures shows.

Financial Times:
- European financial and commodities markets will today stop to observe a two minutes silence at noon London time in memory of the victims of the July 7 bombing in the UK capital.
- Cnooc's board agreed yesterday to allow its executives to raise the company's $18.5 billion takeover offer for Unocal.

China Daily:
- Philip Morris International, a member of Altria Group, is in talks with manufacturers in China about the possibility of making Marlboro cigarettes in the world's largest nation of smokers.
- China's military is shifting from large fighting divisions to smaller brigades than can be deployed swiftly to upgrade its battle readiness.

Shanghai Daily:
- Wal-Mart Stores plans to open its first store in Shanghai on July 28, its 48th location on China's mainland.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on BC, NSM and DNA.

Night Trading
Asian Indices are +.50% to +1.0% on average.
S&P 500 indicated +.11%.
NASDAQ 100 indicated +.19%.

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Earnings of Note
Company/EPS Estimate
CBH/.46
FCS/.05
FITB/.74
GENZ/.53
IFIN/.59
MAR/.77
MTG/1.52
PII/.68
LUV/.18
TRB/.58
UNH/.60

Upcoming Splits
None of note

Economic Releases
8:30 am EST
- The Consumer Price Index for June is estimated to rise .2% versus a .1% decline in May.
- The CPI Ex Food & Energy for June is estimated to rise .2% versus a .1% gain in May.
- Advance Retail Sale for June are estimated to rise 1.0% versus a .5% decline in May.
- Retail Sales Less Autos for June are estimated to rise .6% versus a .2% decline in May.
- Initial Jobless Claims for last week are estimated to rise to 322K versus 319K the prior week.
- Continuing Claims are estimated to rise to 2600K versus 2581K prior.

BOTTOM LINE: Asian indices are higher, led by technology shares in the region. I expect US equities to open modestly higher and build on gains later in the day. I expect the CPI to rise slightly below estimates tomorrow and retail sales to slightly exceed expectations. The Portfolio is 100% net long heading into the day.

Stocks Finish Mildly Higher as Oil Recedes

Indices
S&P 500 1,223.29 +.09%
DJIA 10,557.39 +.41%
NASDAQ 2,144.11 +.04%
Russell 2000 667.65 -.47%
DJ Wilshire 5000 12,203.30 unch.
S&P Barra Growth 584.87 +.05%
S&P Barra Value 634.16 +.13%
Morgan Stanley Consumer 579.30 +.13%
Morgan Stanley Cyclical 738.26 +.17%
Morgan Stanley Technology 498.46 +.71%
Transports 3,609.62 +.35%
Utilities 396.87 +.13%
Put/Call .78 +1.30%
NYSE Arms .71 -14.56%
Volatility(VIX) 10.84 -1.0%
ISE Sentiment 155.00 -18.85%
US Dollar 89.35 +1.13%
CRB 311.54 -.04%

Futures Spot Prices
Crude Oil 59.56 -1.75%
Unleaded Gasoline 174.05 -1.97%
Natural Gas 8.0 +1.46%
Heating Oil 170.60 -2.60%
Gold 424.50 -.61%
Base Metals 122.76 -.78%
Copper 154.95 +.68%
10-year US Treasury Yield 4.16 +.33%

Leading Sectors
Airlines +2.42%
Computer Hardware +1.08%
Networking +.95%

Lagging Sectors
HMOs -1.01%
Oil Service -1.18%
Hospitals -2.99%

Evening Review
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Afternoon Recommendations
Goldman Sachs:
- Reiterated Underperform on RAI.

Afternoon/Evening Headlines
Bloomberg:
- CNOOC’s proposed $18.5 billion purchase of US oil company Unocal is opposed by most Americans, according to a Wall Street Journal/NBC News poll.
- US Chief Justice William Rehnquist, who is fighting thyroid cancer, was admitted to the hospital last night with a fever.
- Apple Computer said third-quarter profit rose fivefold as sales of iPod digital music players surged to a record and Macintosh computer shipments reached a five-year high.
- UK Prime Minister Tony Blair urged Muslim leaders to help root out terrorists in their communities and stop those who “twist” the teachings of their own religion after attacks in London killed at least 52 people.

Xinhua News Agency:
- North Korea leader Kim Jong Il wants to denuclearize the Korean peninsula, he told visiting Chinese presidential envoy Tang Jiaxuan in Pyongyang yesterday.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet, Semiconductor and Networking longs. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was neutral today as the advance/decline line finished modestly lower, sector performance was mixed and volume was below average. Measures of investor anxiety were mixed into the close. Overall, today’s market action was slightly positive. The Morgan Stanley Healthcare Providers Index (RXH) was down about 3% today on HCA's (HCA) disappointing results. I would not be a buyer at current levels and expect this group to underperform through year end.

Stocks Mixed Mid-day, Continuing Recent Consolidation

Indices
S&P 500 1,222.25 unch.
DJIA 10,544.44 +.29%
NASDAQ 2,142.13 -.05%
Russell 2000 668.30 -.37%
DJ Wilshire 5000 12,195.99 -.06%
S&P Barra Growth 584.24 -.06%
S&P Barra Value 633.66 +.05%
Morgan Stanley Consumer 578.41 -.03%
Morgan Stanley Cyclical 737.60 +.08%
Morgan Stanley Technology 497.29 +.48%
Transports 3,598.52 +.04%
Utilities 396.32 -.01%
Put/Call .80 +3.90%
NYSE Arms .83 -.32%
Volatility(VIX) 11.12 +1.55%
ISE Sentiment 157.00 -17.80%
US Dollar 89.35 +1.14%
CRB 312.81 +.37%

Futures Spot Prices
Crude Oil 60.90 +.46%
Unleaded Gasoline 178.40 +.48%
Natural Gas 8.02 +1.84%
Heating Oil 173.20 -1.11%
Gold 424.80 -.56%
Base Metals 122.76 -.78%
Copper 155.00 +.71%
10-year US Treasury Yield 4.14% +.19%

Leading Sectors
Airlines +1.69%
Computer Hardware +.99%
Banks +.54%

Lagging Sectors
Oil Service -.53%
HMOs -1.19%
Hospitals -3.01%

BOTTOM LINE: The Portfolio is slightly higher mid-day on gains in my Semiconductor, Internet and Networking longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is modestly negative as the advance/decline line is modestly lower, sector performance is mixed and volume is below average. Measures of investor anxiety are mostly higher. Today’s overall market action is slightly positive considering recent gains. The ECRI Future Inflation Gauge came in at 117.5 for June. This is up from 116.7 in May, but down from 120.9 in February 2003. I expect US stocks to trade mixed-to-higher into the close on short-covering and bargain hunting.

Today's Headlines

Bloomberg:
- Nations such as Germany, Japan and India should unite with the US in Iraq by providing services such as border patrols or security training because the country has become central to preventing future terrorist attacks, Abraham Sofaer, a senior fellow at the Hoover Institution, said.
- ASML Holding NV, Europe’s largest maker of equipment used to make semiconductors, said second-quarter profit increased 72% as it sold more expensive machines used to make chips for mobile phones and consumer electronics.
- Tropical Storm Emily today moved toward the Windward Islands in the Caribbean Sea with maximum sustained winds of almost 60 mph and may intensify to hurricane strength.
- The US dollar rose against the euro, snapping a six-day losing streak, after a government report showed the US trade deficit in May unexpectedly narrowed.
- Former WorldCom Chairman Ebbers was sentenced to 25 years in prison for orchestrating the largest accounting fraud in US history, an $11 billion scheme that drove his company into bankruptcy.
- Crude oil is falling after a US government report showed stockpiles of distillates, which include heating oil and diesel fuel, rose more than analysts predicted.
- The Bush administration cut its estimate for this year’s budget deficit to $333 billion form a forecast of $427 billion in February because job and income growth is boosting tax receipts faster than expected.

Wall Street Journal:
- The US economy will grow 3.4% this year, inflation will remain low, and employment will increase at its current rate, citing a forecast by Ben Bernanke, Alan Greenspan’s likely replacement.

NY Times:
- Former US Secretary of State Colin Powell is joining Kleiner Perkins Caufield, the venture capital firm that financed Amazon.com, as a part-time partner.
- Publicly financed and privately run charter schools have spread across the US, with nearly 1 million students in 40 states enrolled in 3,300 schools.

NY Post:
- Sirius Satellite Radio may bid for Walt Disney’s radio station and network unit.

Star Ledger:
- New Jersey towns in districts controlled by Democrats received 93% of the state’s Homeland Security equipment grants over the past three years.

Reuters:
- Global oil demand in 2005 is proving slower than expected because of lower-than-forecast demand growth rates in China and the US, the International Energy Agency said.

Financial Times Deutschland:
- Hedge funds may adopt a set of rules for self-regulation, pre-empting possible tighter controls by governments concerned at their investment practices, citing the AIMA fund association.