Stocks Sharply Higher into Final Hour as Investors Anticipate Fed "Pause"

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Networking longs, Computer longs, Medical longs and Retail longs. I covered some of my (IWM) and (QQQQ) shorts today, thus leaving the Portfolio 75% net long. The tone of the market is very positive as the advance/decline line is substantially higher, every sector is rising and volume is above average. The Johnson Redbook retail same-store sales index rose a robust 4.3% year over year last week vs. a 3.3% rise the prior week. This is the strongest reading since August 2005. The long-term average is a gain of around 2.5%. Notwithstanding this strong reading, retail sales growth is likely peaking for the year right now. I continue to believe a slowdown in housing will result in consumer spending slowing back to average levels, which should push U.S. GDP growth back down to average rates. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering as investors factor in an imminent Fed “pause.”

Today's Headlines

Bloomberg:
- Higher imports of liquefied natural gas and increased US natural-gas production are likely to push prices lower, RBC Capital Markets said.
- Two Duke University lacrosse players were arrested this morning on charges of raping a woman at a team party.
- Commodity prices rose to records as concern over Iran’s nuclear program sent oil to an all-time high and speculation stoked buying of metals by investment funds.
- US Treasuries are rising after a measure of producer prices increased less than forecast and housing starts fell.

Wall Street Journal:
- Gap Inc.(GPS) is set to say today that it has signed a franchise agreement to open stores in the Middle East.
- Saks Inc.(SKS) may today announce an agreement to license the Saks Fifth Avenue name for a store in Shanghai, marking the first entry by a luxury dept. store chain into China.
- McDonald’s Corp.(MCD) said it has been screening US chickens it uses in its fast-food outlets for avian flu for the past 10 months.
- General Motors(GM) and other US companies are putting product placement ads in comic books to attract the attention of men in their 20s.
- Michael Eisner, former chief executive of Walt Disney(DIS), will join the board of Veoh Networks, a company that wants to start a system for television broadcasting on the Internet.

NY Times:
- The NY Police Dept. has put almost 90 officer-mounted horses on patrol in some high-crime areas, and will almost double that to 160 within three years.
- Some US universities are offering courses in so-called services science.
- Iraqi and UN officials are seeking to restore Babylon, which was damaged again during the liberation of Iraq, into a cultural center, possibly even a theme park.
- Dow Chemical(DOW) has tripled its research into coal-based ingredients as it seeks an alternative to the rising prices of oil and natural gas, which are used as raw materials in manufacturing.

USA Today:
- Higher energy prices have slowed consumer and business spending, shaving economic growth by as much as 1 percentage point since prices began to rise in late-2003, citing a letter by Federal Reserve Chairman Ben Bernanke to a Republican congressman.

Minneapolis Star Tribune:
- The Mall of America, the largest US retail complex, plans to add a 6,000-seat performing arts center, a museum and a dinner theater to help attract older, more sophisticated customers.

East African Standard:
- China's Cnooc Ltd. signed an agreement with the Kenyan government to search for oil along the country’s coastline.

al-Riyadh:
- Saudi Arabian Oil Co. tested a new offshore gas field in the Persian Gulf.

Core Inflation Tame, Housing Continues to Slow

- The Producer Price Index for March rose .5% versus estimates of a .4% increase and a 1.4% decline in February.
- The PPI Ex Food & Energy for March rose .1% versus estimates of a .2% increase and a .3% gain in February.
- Housing Starts for March fell to 1960K versus estimates of 2025K and 2126K in February.
- Building Permits for March fell to 2059K versus estimates of 2100K and 2179K in February.

BOTTOM LINE: Producer prices in the US rose last month, while a smaller-than-expected rise in costs excluding fuel and food pointed to tame inflation, Bloomberg said. The .1% rise in the core rate was the smallest gain since November. Computers, metal-cutting machine tools and floor coverings all fell in price in March. Costs of intermediate goods, which are partially finished goods such as lumber or steel, fell .1% last month, the second straight fall. Raw materials fell 2.7%. Core producer prices rose 1.7% over the last 12 months. I continue to believe inflation readings will decelerate throughout most of the year.

Builders started work last month on the fewest new houses in a year as rising mortgage rates and record inventories of unsold homes discouraged new projects, Bloomberg said. Housing starts fell 7.8% in February, while Building Permits declined 5.5%. Starts fell 16% in the West, 8.2% in the Midwest, 4.8% in the South and .5% in the Northeast. I continue to expect housing to slow to average levels from historic highs. This will also help slow consumer spending and overall US growth back to average levels from robust rates.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Berkshire Hathaway(BRK/A) agreed to buy Russell Corp.(RML) for almost $600 million in cash to add to its apparel businesses.
- Calpine Corp. said it will take more than $7 billion in charges to reduce the value of its assets as it restructures under bankruptcy protection.
- Lenovo Group Ltd., China’s largest PC maker, will buy $1.2 billion of Microsoft’s Windows software over the next year as part of efforts to curb piracy of the world’s most popular operating system software.

Financial Times:
- Amazon.com(AMZN) is selling grocery products and will offer delivery to become the leading one-stop Internet site in the US, citing the company.
- Goldman Sachs(GS) CEO Paulson warned executives to stop using the firm’s money to back unsolicited bids because they risk damaging relationships with corporate clients.

London-based Times:
- Google(GOOG) may today say it will start an online travel Web site to rival Expedia(EXPE) and Sabre Holdings’(TSG) Travelocity.com.

Late Buy/Sell Recommendations
Raymond James:
- Raised CACI to Outperform, target $74.

Night Trading
Asian Indices are -.50% to +.50% on average.
S&P 500 indicated +.07%.
NASDAQ 100 indicated +.06%.

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Earnings of Note
Company/EPS Estimate
- (ALL)/1.66
- (AMGN)/.89
- (ASO)/.51
- (BSX)/.46
- (BCR)/.79
- (CYMI)/.42
- (DJ)/.15
- (DHI)/1.11
- (RE)/3.06
- (FITB)/.64
- (FCX)/.88
- (GILD)/.53
- (IBM)/1.05
- (JNJ)/.98
- (KEY)/.69
- (LLTC)/.38
- (MAT)/.00
- (MEL)/.49
- (MER)/.32
- (MOT)/.29
- (BTU)/.44
- (STX)/.52
- (STT)/.77
- (TER)/.20
- (TXN)/.32
- (UNH)/.64
- (USB)/.62
- (WM)/.90
- (WFC)/1.20
- (YHOO)/.11

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- (CB) 2-for-1

Economic Releases
8:30 am EST
- The Producer Price Index for March is estimated to rise .4% versus a 1.4% decline in February.
- The PPI Ex Food & Energy for March is estimated to rise .2% versus a .3% rise in February.
- Housing Starts for March are estimated to fall to 2030K versus 2120K in February.
- Building Permits for March are estimated to fall to 2100K versus 2179K in February.

2:00 pm EST
- Minutes of March. 28th FOMC Meeting.

BOTTOM LINE: Asian indices are mostly higher, boosted by commodity and financial stocks in the region. I expect US equities to open modestly higher and to trade modestly lower into the afternoon, finishing mixed. The Portfolio is 25% net long heading into the day.

Stocks Finish Lower on Worries Over Consumer Spending

Indices
S&P 500 1,285.33 -.29%
DJIA 11,073.78 -.57%
NASDAQ 2,311.16 -.64%
Russell 2000 749.47 .22%
Wilshire 5000 12,999.46 -.25%
S&P Barra Growth 602.35 -.42%
S&P Barra Value 680.20 -.16%
Morgan Stanley Consumer 595.90 -.46%
Morgan Stanley Cyclical 828.28 -.05%
Morgan Stanley Technology 546.49 -.68%
Transports 4,586.29 -1.28%
Utilities 382.84 +.09%
Put/Call .78 -7.14%
NYSE Arms 1.03 +46.57%
Volatility(VIX) 12.58 +1.62%
ISE Sentiment 188.00 +79.05%
US Dollar 88.65 -1.05%
CRB 348.46 +1.79%

Futures Spot Prices
Crude Oil 70.34 -.09%
Unleaded Gasoline 216.52 -.21%
Natural Gas 7.59 +.17%
Heating Oil 202.30 unch.
Gold 617.50 -.21%
Base Metals 197.30 +.42%
Copper 289.60 +.03%
10-year US Treasury Yield 5.0% -.74%

Leading Sectors
Gold & Silver +4.29%
Steel +2.19%
Energy +1.78%

Lagging Sectors
HMOs -1.49%
Computer Hardware -1.69%
Airlines -5.56%

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Afternoon Recommendations
Morgan Stanley:
- Rated VCG Overweight, target $14.
- Downgraded IWA to Underweight, target $16.

Afternoon/Evening Headlines
Bloomberg:
- Eli Lilly’s(LLY) Evista osteoporosis drug safely cuts in half a women’s risk of getting invasive breast cancer, a government study found.
- Merrill Lynch’s(MER) strategy of putting less money at risk in trading and acquisitions than its Wall Street rivals is making it one of the cheapest stocks in the US securities industry.
- Chinese and Russian diplomats said they would block imposition of the first UN penalties on Sudanese military and militia leaders accused of committing crimes against humanity in the nation’s Darfur region.
- Symantec Corp.(SYMC) said the IRS is seeking at least $1 billion in additional taxes from the company.
- Two Duke University lacrosse players were indicted in the alleged rape of a women in a case that’s raised racial tensions between the predominantly white school and the largely black city where it’s located.

Washington Times:
- Three out of four lawmakers on the US Senate Finance and House Ways and Means committees, which write the nation’s tax laws, use professional tax preparers to complete their annual returns.

BOTTOM LINE: The Portfolio finished lower today on losses in my Networking longs, Computer longs and Energy-related shorts. I did not trade in the final hour, thus leaving the Portfolio 25% net long. The tone of the market was negative today as the advance/decline line finished lower, sector performance was mostly negative and volume was about average. Measures of investor anxiety were mixed into the close. Overall, today's market performance was bearish. The fact that the bond market acknowledged weaker data today is a positive. Given the news, my measures of intraday investor complacency are relatively muted, which is a negative short-term. In my opinion, commodities have entered a "blow off" phase as they ignore all bearish data and rise sharply on any bullish data. I expect market bears to overreach once again over the coming weeks, providing another excellent entry point on the long side.