Stocks Modestly Higher into Final Hour on Strong Corporate Earnings

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Biotech longs and Internet longs. I exited the remainder of my IWM and QQQQ shorts and an energy short today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, sector performance is mixed and volume is above average. Earnings for the S&P 500 are coming in 13.3% above year-ago levels. This would make the first quarter the 15th straight of double digit profit gains, the best streak since record keeping began in 1936. The S&P 500 P/E has contracted relentlessly during this streak. I continue to believe that P/E multiple expansion will occur later this year, helping propel the S&P 500 to around a 15% total return for the year. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering.

Today's Headlines

Bloomberg:
- Chinese President Hu Jintao pronounced himself “a friend” of Microsoft(MSFT) as he toured the largest software maker’s headquarters and dined on smoked guinea fowl at Microsoft Chairman Gates’ lakeside home.
- White House spokesman Scott McClellan resigned.
- Envoys meeting in Moscow to discuss Iran’s nuclear development agreed the Islamic Republic must face international action for defying the UN by enriching uranium, said Nicholas Burns, US undersecretary of state for political affairs.

Wall Street Journal:
- News Corp.’s(NWS) Fox Interactive Media division is investing $3.5 million in the employment-listing site of Simply Hired Inc.
- Aztar Corp.(AZR) is close to agreeing to sell the business to Pinnacle Entertainment for about $1.5 billion.
- The US Veterans Administration medical center in Portland, Oregon, is allowing patients the option of remaining home to cut down on healthcare costs and free up beds.
- Apache Corp.(APA) says it will buy all of BP Plc’s oil and gas fields on the Gulf of Mexico’s continental shelf for $1.3 billion.
- The FAA has proposed new metal-fatigue inspection and maintenance standards that could force some planes to be retired faster.
- Boston’s office real estate market is beginning to show signs of a turnaround as demand rises for top floor space in skyscrapers and premium properties in nearby Waltham.
- Shares of eBay(EBAY) have fallen 10% this year and 33% since January 2005, but its earnings and growth are still strong, and the stock now looks like a bargain.

NY Times:
- McDonald’s Corp.(MCD) revenue growth has been driven by its Dollar Menu and hamburgers, not by healthier items such as salads that were more recently added to its menu.

USA Today:
- Construction of the US Embassy in Iraq is on schedule and within budget.

Hurriyet:
- Turkey’s state oil company Turkiye Petrolleri AO has found oil at three sites near the Syrian border.

Guardian:
- The number of worldwide refugees dropped to a 25-year low last year as millions returned to Afghanistan, Angola and Sierra Leone, according to a recent UN report.

Consumer Prices Rise as Gasoline Prices Jump

- The Consumer Price Index for March rose .4% versus estimates of a .4% gain and a .1% rise in February.
- The CPI Ex Food & Energy for March rose .3% versus estimates of a .2% increase and a .1% gain in February.

BOTTOM LINE: Prices paid by American consumers rose in March as the cost of gasoline jumped, Bloomberg reported. Consumer prices were up 3.4% for the 12 months ended in March compared with a 3.6% y-o-y rise the prior month. Gasoline costs rose 3.6%, while natural gas prices fell 4.3% in March. I expect consumer prices to decelerate throughout most of year-end as consumer spending falls back to average levels.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Ford Motor(F) is asking US lawmakers to change bankruptcy law so automakers and parts suppliers can recover their equipment and inventory held by companies that have filed for Chapter 11.
- Crude oil is falling in NY on speculation that US stockpiles rose for a fourth straight time last week.
- Nippon Oil Corp., Japan’s biggest petroleum refiner, plans to expand its fuel export potential to 10% of total production capacity this business year, seeking sales in China and Southeast Asia, as Japanese fuel demand falls.

Financial Times:
- EBay’s Skype said its China partner Tom Online filters cell phone text messages to comply with China’s censorship laws.
- Toyota Motor(TM) plans to offer a US vehicle by 2008 that can run on a mix of ethanol and gasoline, amid growing interest in so-called bio-fuels.

Daily Journal:
- Milberg Weiss Bershad & Schulman LLP, a securities class-action law firm, may be indicted for making illegal payments to plaintiffs.

Independent:
- Royal Dutch Shell Plc will today say it started production form its Cutter platform in the UK southern North Sea, the world’s first gas platform powered by wind and solar energy alone.

Securities Times:
- China’s investment in fixed assets rose 27.7% in the first quarter, a faster pace than the 22.8% of a year earlier.

Xinhua News:
- Cnooc Ltd. plans to invest $12.5 billion in the next five years to search for oil and gas near China’s coast.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are +.50% to +1.25% on average.
S&P 500 indicated +.07%.
NASDAQ 100 indicated +.30%.

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Earnings of Note
Company/EPS Estimate
- (ABT)/.57
- (ADS)/.62
- (ASD)/.40
- (AMR)/-.77
- (AAPL)/.43
- (AZR)/.38
- (BLK)/1.12
- (CIT)/1.12
- (KO)/.48
- (CMA)/1.16
- (ET)/.33
- (EBAY)/.24
- (FSL)/.39
- (GD)/.84
- (HON)/.49
- (INTC)/.23
- (JPM)/.83
- (JNPR)/.19
- (JCI)/.75
- (KMI)/1.48
- (KFT)/.42
- (MDC)/2.25
- (NVLS)/.21
- (PFE)/.53
- (QCOM)/.40
- (RDN)/1.41
- (STJ)/.36
- (UTX)/.73

Upcoming Splits
- (PDA) 3-for-1

Economic Releases
8:30 am EST
- The Consumer Price Index for March is estimated to rise .4% versus a .1% gain in February.
- The CPI Ex Food & Energy for March is estimated to rise .2% versus a .1% gain in February.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude build of 2,300,000 barrels. Gasoline inventories are estimated to fall 2,200,000 barrels, and distillate supplies are expected to decrease by 1,400,000 barrels. Refinery utilization is expected to rise .20%.

BOTTOM LINE: Asian indices are higher, boosted by technology and other exporting stocks in the region after the US Fed hinted at an imminent “pause.” I expect US equities to open modestly higher and to maintain gains into the afternoon. The Portfolio is 75% net long heading into the day.

Stocks Rise Most in a Year as Investors See End to Fed Rate Hikes

Indices
S&P 500 1,307.65 +1.74%
DJIA 11,268.77 +1.76%
NASDAQ 2,356.14 +1.95%
Russell 2000 769.81 +2.71%
Wilshire 5000 13,231.40 +1.78%
S&P Barra Growth 611.49 +1.52%
S&P Barra Value 693.50 +1.96%
Morgan Stanley Consumer 603.27 +1.24%
Morgan Stanley Cyclical 848.94 +2.52%
Morgan Stanley Technology 555.24 +1.60%
Transports 4,700.10 +2.48%
Utilities 392.08 +2.41%
Put/Call .68 -12.82%
NYSE Arms .39 -62.0%
Volatility(VIX) 11.40 -9.38%
ISE Sentiment 136.00 -27.66%
US Dollar 88.21 -.49%
CRB 354.89 +1.85%

Futures Spot Prices
Crude Oil 71.08 -.38%
Unleaded Gasoline 221.00 -.63%
Natural Gas 7.95 -.72%
Heating Oil 204.50 -.28%
Gold 624.70 +.22%
Base Metals 206.20 +4.52%
Copper 298.45 +.45%
10-year US Treasury Yield 4.98% -.41%

Leading Sectors
Steel +4.02%
Homebuilders +3.54%
Semis +3.4%

Lagging Sectors
Restaurants +.61%
HMOs +.12%
Gaming -.15%

Evening Review
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Afternoon Recommendations
Oppenheimer:
- Rated TRAD Buy, target $17.50.

Afternoon/Evening Headlines
Bloomberg:
- Most Federal Reserve policy makers considered the end of their interest rate increases “was likely to be near,” while also citing the need for vigilance against inflation, minutes of their March meeting showed.
- US Treasuries rose as the minutes of the Fed’s most recent meeting on monetary policy boosted speculation the central bank will lift interest rates only once more.
- Texas Instruments(TXN) said first-quarter profit rose 42% as sales surged in India and China.
- International Business Machines(IBM) said first-quarter profit gained 22%.
- Amgen Inc.(AMGN) said first-quarter profit rose 17% as more doctors prescribed the Aranesp cancer drug.
- First quarter sales at Motorola(MOT) rose 23% on demand for high-end models in the US and Europe.
- Yahoo!(YHOO) said first-quarter profit rose 16% as users bought more display advertisements.

Guardian:
- Spending on Internet advertising in the UK in the first three months of 2006 was the highest in two years.

BOTTOM LINE: The Portfolio finished higher today on gains in my Networking longs, Computer longs, Medical longs and Retail longs. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was very positive today as the advance/decline line finished substantially higher, almost every sector rose and volume was heavy. Measures of investor anxiety were mostly lower into the close. Overall, today's market performance was very bullish. Considering oil hit an all-time high and long-term rates only fell 3 basis points today’s performance was even more impressive. The S&P 500 forward P/E is still a reasonable 15.5. This will likely decline further over the next few weeks as earnings exceed estimates and stock tread water before another push higher.