Today's Headlines

Bloomberg:
- US House Republicans introduced a measure that would almost double the amount families can contribute to health savings accounts.
- MasterCard, the credit card company planning to sell this year’s third-biggest IPO, said it increased the size of the deal by as much as 16% to $2.84 billion.

Wall Street Journal:
- Investors who specialize in buying troubled loans are looking at China, as the country is hit by defaults following its boom in real-estate prices faltered.
- Family Dollar Stores(FDO) is using a security program to raise profits at inner-city locations.
- US film studios are losing $6.1 billion in sales annually form global piracy, about 75% more than originally estimated.
- Microsoft(MSFT) has looked at the idea of taking a stake in Yahoo!(YHOO) and the two companies have discussed possible coursed of action during the past year.
- NYSE Group(NYX) is accelerating the introduction of its hybrid electronic-trading system by using the stock of Lucent Technologies(LU) in its pilot program.
- Crude oil is falling more than $2 a barrel in NY after US gasoline inventories rose for the first time in nine weeks and demand for the fuel was flat.

Peninsula:
- US companies have invested as much as $70 billion in Qatar, the US ambassador to the country, Chas Untermeyer, said.

Manufacturing Surges, Service Sector Remains Strong

- Factory Orders for March rose 4.2% versus estimates of a 3.7% gain and a .4% rise in February.
- ISM Non-Manufacturing for April rose to 63.0 versus estimates of 59.4 and a reading of 60.5 in March.

BOTTOM LINE: Orders placed with US factories rose 4.2% in March, the most in 10 months, as businesses bought equipment and parts to meet the needs of a surging economy, Bloomberg reported. Excluding transports, orders rose 2.2%, the most since August. The rise was led by a 71% jump in bookings for aircraft. Orders for capital goods excluding aircraft, a proxy for future business investment, gained 3.9% versus a .6% February decline. Inventories for factories rose .7% versus a .4% decline the prior month. The inventory-to-shipments ratio remained at 1.17 months. I continue to expect manufacturing to moderate back to average levels as inventory rebuilding subsides and demand slows.

Service industries in the US grew faster than expected in April, as companies geared up to meet greater demand spurred by a strengthening labor market, Bloomberg said. The new orders component of the index rose to 64.6 from 59.5 in March. The employment component of the index rose to 56.5 from 54.6 the prior month. The prices paid component rose to 70.5 from 60.5 the prior month. A strong job market is helping to propel consumer spending even as energy prices rise. I continue to believe a slowing housing market will send consumer spending back to average rates over the coming months.

Links of Interest

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Kohlberg Kravis Roberts, the world’s biggest buyout firm, raised $5 billion in an IPO of a private equity fund, luring three times more money than originally planned from a wider range of investors.
- Toyota Motor(TM) ranked third in US auto sales for the first time in April, outselling DaimlerChrysler AG and helping Asian companies capture a near-record share of the market.
- Australia’s central bank unexpectedly raised its official interest rate a quarter percentage point to the highest in more than five years.
- The US, UK and France will move as early as tomorrow for adoption of a UN resolution demanding that Iran halt its nuclear program, US Ambassador John Bolton said.
- Bank of China, planning to raise as much as $8 billion in an IPO, may post a $537 million exchange rate loss this year due to a rising yuan, according to UBS AG, one of the sale’s arrangers.
- German Chancellor Angela Merkel will use a visit to the US starting today to stress that her government stands united with President Bush in efforts to halt Iran’s suspected nuclear-weapons program.

Financial Times:
- The Trump Organization plans to build a $600 million tower on Dubai’s Palm, the world’s biggest man-made island.

AFP:
- The five permanent members of the UN Security Council have said Iran’s nuclear program “isn’t compatible” with international community demands.

Korea Economic Daily:
- South Korea is seeking to import 5 million barrels of ethanol a year from Brazil to mix with gasoline.

Late Buy/Sell Recommendations
Raymond James:
- Raised AMED to Strong Buy, target $45.

Night Trading
Asian Indices are unch. to +1.0% on average.
S&P 500 indicated -.03%.
NASDAQ 100 indicated -.01%.

Morning Preview
US AM Market Call
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Earnings of Note
Company/EPS Estimate
- (AGN)/.81
- (AT)/.78
- (BEC)/.38
- (CBT)/.43
- (CECO)/.60
- (CI)/1.89
- (CCU)/.13
- (CLX)/.71
- (ED)/.80
- (DF)/.40
- (DVN)/1.87
- (D)/1.49
- (ERTS)/.09
- (FBN)/.47
- (GRMN)/.67
- (GSF)/.62
- (HEW)/.27
- (JDSU)/.00
- (KZL)/1.14
- (MKL)/6.54
- (MMC)/.52
- (MDR)/.50
- (PTEN)/.85
- (PCG)/.60
- (PCLN)/.19
- (PG)/.61
- (PR)/1.33
- (QLGC)/.18
- (SGMS)/.27
- (SPW)/.29
- (SBUX)/.14
- (SUN)/.91
- (TK)/1.50
- (TEX)/.79
- (TDW)/1.09
- (TWX)/.20
- (WFMI)/.35
- (WYNN)/.10

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- Factory Orders for March are estimated to rise 3.7% versus a .2% rise in February.
- ISM Non-Manufacturing for April is estimated to fall to 59.4 versus a reading of 60.5 in March.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude drawdown of 150,000 barrels. Gasoline inventories are estimated to fall 650,000 barrels, and distillate supplies are expected to decrease by 100,000 barrels. Refinery utilization is expected to rise .78%. I expect crude prices to trade lower on this report.

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and commodity stocks in the region. I expect US equities to open mixed and to trade modestly higher into the afternoon. The Portfolio is 50% net long heading into the day.

Stocks Finish Near Session Highs, Led Again by Cyclicals

Indices
S&P 500 1,313.21 +.61%
DJIA 11,416.45 +.64%
NASDAQ 2,309.84 +.22%
Russell 2000 767.61 +.85%
Wilshire 5000 13,278.38 +.57%
S&P Barra Growth 609.15 +.40%
S&P Barra Value 702.06 +.82%
Morgan Stanley Consumer 610.76 +.23%
Morgan Stanley Cyclical 862.61 +1.09%
Morgan Stanley Technology 543.31 +.27%
Transports 4,728.80 +1.26%
Utilities 403.44 +2.39%
Put/Call .86 -3.37%
NYSE Arms .77 -24.86%
Volatility(VIX) 12.02 -4.15%
ISE Sentiment 153.00 -14.53%
US Dollar 85.82 -.17%
CRB 357.02 +.52%

Futures Spot Prices
Crude Oil 74.60 -.01%
Unleaded Gasoline 217.64 +.06%
Natural Gas 6.77 +.42%
Heating Oil 207.70 -.09%
Gold 671.00 +.54%
Base Metals 218.77 +1.39%
Copper 326.00 -.50%
10-year US Treasury Yield 5.11% -.53%

Leading Sectors
Oil Service +3.41%
Steel +3.19%
Utilities +2.39%

Lagging Sectors
Banks -1.12%
Biotech -1.34%
Homebuilders -1.49%

Evening Review
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In Play

Afternoon Recommendations
Banc of America:
- Rated (PETC) Sell, target $18.

Afternoon/Evening Headlines
Bloomberg:
- EMI Group Plc is making another bid for Warner Music Group, CNBC reported.
- UnitedHealth Group(UNH) shareholders re-elected all four directors up for renewal at the company’s annual meeting, ignoring criticism from some large stock owners.
- Overseas Shipholding Group(OSG), the largest US-based oil tanker owner, said first-quarter profit plunged 22% as a glut of ships drove down rates.
- President Bush telephoned Sudanese President Umar Hasan al-Bashir to urge him to commit to reaching a peace accord with rebel groups in Darfur, as Deputy Secretary of State Zoellick met with all sides in Nigeria in a bid to keep the talks alive.
- A jurisdictional tug-of-war could delay a vote in the US House of Representatives on legislation making it easier for telephone companies such as AT&T(T) to sell television service, a Key House member said.

BOTTOM LINE: The Portfolio finished about even today as losses in my Energy-related shorts offset gains in my Networking longs. I did not trade in the final hour, thus leaving the Portfolio 50% net long. The tone of the market was mildly positive today as the advance/decline line finished slightly higher, sector performance was mostly positive and volume was above average. Measures of investor anxiety were mostly lower into the close. Overall, today's market performance was mildly bullish. The Morgan Stanley Cyclical Index (CYC) has risen 27.3% in a little less than 7 months. The Consumer Index (CMR) has risen 7.5% during this period. The current spread between the two has never been this wide going back to at least 1997, according to Bloomberg. I expect this spread to begin to shrink over the coming weeks.

Stocks Modestly Higher into Final Hour, Led Again by Cyclicals

BOTTOM LINE: The Portfolio is about even into the final hour as gains in my Networking longs are offsetting losses in my Energy-related shorts. I covered some of my (IWM) and (QQQQ) shorts and added to my (GOOG) and (CIEN) longs today, thus leaving the Portfolio 50% net long. The tone of the market is slightly positive as the advance/decline line is modestly higher, sector performance is mostly positive and volume is above average. The Johnson Redbook same-store sales index rose a very strong 5.1% year over year last week vs. a 4.6% rise the prior week. This is the strongest reading since June 2004. The long-term average is a gain of around 2.5%. I still expect retail sales to decelerate back to around average levels over the coming months. I expect US stocks to trade mixed into the close from current levels as higher energy prices offset lower long-term rates.