Friday Watch

Late-Night Headlines
Bloomberg:
- Former NYSE members sold $1.54 billion NYSE Group(NYX) shares that they received when the exchange merged with Archipelago Holdings.

Wall Street Journal:
- Seizures of farmland by the Chinese government are increasing, driven by demand for profit amid the nation’s economic boom.

Financial Times:
- Empty retail floor space in the UK is at “recession” levels, citing the Royal Institution of Chartered Surveyors.

The Guardian:
- Time Warner’s(TWX) AOL has hired Citigroup Inc. to advise on the sale of its Internet access units in France and Germany.

Business Week:
- Phelps Dodge(PD), a copper producer, could rise on growing demand for the metal in industrializing regions like Brazil, India, Eastern Europe and China, citing Arnold Schmeidler of AR Schmeidler.
- Some small US colleges such as Yeshiva Univ. in NYC are taking a cue from Harvard and Yale universities and investing their endowments in hedge funds.
- The shares of Morton’s Restaurant Group(MRT), a steakhouse chain, are cheap, citing Aimee Marcel of Jeffries Group.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are -.25% to +.75% on average.
S&P 500 indicated -.02%.
NASDAQ 100 indicated +.03%.

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Earnings of Note
Company/EPS Estimate
- (ATK)/.71
- (BKD)/-.13
- (XEC)/1.22
- (EP)/.27
- (KCS)/.66
- (MHS)/.55
- (MLS)/1.34
- (NBR)/.74
- (PIXR)/.11
- (CKH)/1.56
- (SINA)/.15
- (THQI)/-.09

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Change in Non-farm Payrolls for April is estimated at 200K versus 211K in March.
- The Change in Manufacturing Payrolls for April is estimated at 0K versus -5K in March.
- The Unemployment Rate for April is estimated at 4.7% versus 4.7% in March.
- Average Hourly Earnings for April are estimated to rise .3% versus a .2% gain in March.

3:00 pm EST
- Consumer Credit for March is estimated to rise to $4.1B versus $3.3B in February.

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and mining stocks in the region. I expect US equities to open mixed and to trade modestly higher into the afternoon. The Portfolio is 75% net long heading into the day.

Stocks Finish Near Session Highs as Oil Falls Below $70 and Long-term Rates Stabilize

Indices
S&P 500 1,312.25 +.34%
DJIA 11,438.86 +.34%
NASDAQ 2,323.90 +.87%
Russell 2000 774.72 +.91%
Wilshire 5000 13,288.63 +.41%
S&P Barra Growth 607.43 +.27%
S&P Barra Value 703.00 +.40%
Morgan Stanley Consumer 611.13 +.31%
Morgan Stanley Cyclical 875.97 +1.04%
Morgan Stanley Technology 548.09 +.47%
Transports 4,908.24 +3.34%
Utilities 402.12 +.01%
Put/Call .62 -30.34%
NYSE Arms 1.03 -11.40%
Volatility(VIX) 11.86 -1.08%
ISE Sentiment 160.00 -26.61%
US Dollar 85.84 unch.
CRB 349.89 -.66%

Futures Spot Prices
Crude Oil 70.47 +.76%
Unleaded Gasoline 201.10 +.82%
Natural Gas 7.10 +2.77%
Heating Oil 195.00 +.63%
Gold 681.70 +.77%
Base Metals 229.56 +5.98%
Copper 348.50 +.16%
10-year US Treasury Yield 5.15% +.21%

Leading Sectors
Gold & Silver +2.64%
Disk Drives +2.30%
Steel +2.12%

Lagging Sectors
Software -.42%
Oil Service -.36%
Energy -.58%

Evening Review
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Afternoon Recommendations
Bear Stearns:
- Rated GSL Outperform, target $55.

Afternoon/Evening Headlines
Bloomberg:
- The House of Representatives passed legislation today that would tighten security at US seaports, requiring more “dirty” and nuclear bomb detectors and background checks on dockside workers.
- Taiwanese lenders are funding companies rejected by bond and equity investors as the banks seek corporate clients to offset rising consumer defaults.
- Microsoft(MSFT) agreed to buy Massive, a closely held seller of video-game ads, to gain early entry into a new ad market.
- Seven Senators from both sides of the aisle responded to surging gas prices with a proposal to reduce US oil consumption through conservation.
- Crude oil fell more than $2/bbl. as US oil inventories approach 9-year highs and gasoline demand is waning.
- A further increase in oil prices may hurt global economic growth more than the recent rise to $70 a barrel, NY Fed Reserve Bank President Geithner said in an interview published on Business Week’s Web site.

BOTTOM LINE: The Portfolio finished higher today on gains in my Retail longs, Semi longs, Medical longs and Energy-related shorts. I added (IWM) and (QQQQ) shorts in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was positive today as the advance/decline line finished higher, almost every sector rose and volume was above average. Measures of investor anxiety were mostly lower into the close. Overall, today's market performance was bullish. I want to see the bond market’s reaction to tomorrow’s likely strong employment data before shifting market exposure further. Muted losses in energy-related stocks, notwithstanding the recent sharp pullback in oil prices, show complacency is high in the sector.

Stocks Higher into Final Hour on Falling Energy Prices and Stabilizing Long-term Rates

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Medical longs, Retail longs and Energy-related shorts. I covered the remainder of my (IWM) and (QQQQ) shorts 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 positive and volume is above average. Quanta Services (PWR) is trading up 7.4% today, to a 4-year high of around $18. Quanta beat first-quarter consensus estimates by 133%. The firm exceeded revenue estimates by 10.4% and raised 2Q guidance. I expect increased spending by utility companies on transmission infrastructure, accelerating spending by telecom companies on FTTP and hurricane rebuilding to continue to propel estimates above expectations this year. I will wait for a pullback in the shares before adding to my current long position. I expect US stocks to trade mixed into the close from current levels as falling energy prices offset profit-taking ahead of tomorrow’s employment report.

Today's Headlines

Bloomberg:
- Wal-Mart Stores(WMT) said April same-store sales in the US rose 6.8%, the largest gain in almost three years, as rising incomes more than offset surging gasoline prices.
- Zacarias Moussaoui said “God save Osama bin Laden” as a US judge sentenced him to life in prison for conspiring in the Sept.11 terrorist attacks.
- The US budget deficit will be “well below” the government’s original prediction for the year because of surging tax revenue due to a robust economy, a senior Treasury official said.
- Crude oil is falling below $70/bbl., down more than $2/bbl., as US oil inventories approach a 9-year high and US demand for gasoline falters.


Wall Street Journal:
- Lehman Brothers(LH) has told some of its analysts to stop writing reports and switch to discussing stock choices and investment approaches directly with the firms’ traders and with clients such as hedge funds.
- US universities increasingly view research as a way to obtain extra financing and are holding staff accountable if they fail to produce findings that can attract grants or contracts.
- Fred’s(FRED) plans to build a third distribution warehouse to serve new shops it plans to open as sales rebound.
- PepsiCo(PEP) is planning a marketing campaign across the US after changing the recipe of its Lay’s potato chips to reduce saturated fat.
- The US and European Union are aligning more of their policies over trade with China, adding to pressure on the Asian nation to modify its commercial practices and disclose more of its military plans.
- Debt from emerging market countries may fall this year as rising yields on Treasuries attract investors to the higher-rate US government debt.
- Hedge funds that buy debt after corporate bankruptcies are increasingly starting to clash over revival plans with the private-equity firms that own the bankrupt companies.
- Visto Corp., a wireless e-mail technology company, has sued seven rivals, including BlackBerry maker Research In Motion(RIMM), for patent infringement.

AP:
- Beginning Oct. 1 the SEC will reduce fees for registration and issuance of securities by 71.3%, and fees on transactions by 50%, as part of a plan to cut red tape.

NY Times:
- Valerie Plame, the CIA officer whose name was allegedly leaked three years ago, has submitted a book proposal to at least two publishers.

Platts:
- Southern Copper(PCU) is in talks with Anglo American, Rio Tinto, Xstrata and Phelps Dodge as the company seeks to expand production.

Kuwait News Agency:
- Algeria generated $16 billion of oil sales in the first-quarter on record prices and higher production, the country’s Oil Minister said.

Productivity High, Unit Labor Costs Decelerate, Labor Market Healthy

- Preliminary 1Q Non-farm Productivity rose 3.2% versus estimates of a 3.0% rise and a .3% decline in 4Q.
- Preliminary 1Q Unit Labor Costs rose 2.5% versus estimates of a 1.2% increase and a 3.0% increase in 4Q.
- Initial Jobless Claims for last week rose to 322K versus estimates of 310K and 317K the prior week.
- Continuing Claims rose to 2462K versus estimates of 2450K and 2441K prior.

BOTTOM LINE: Productivity gains failed to keep pace with rising wages and benefits in the first quarter, Bloomberg reported. Unit labor costs have risen 1.4% over the past 12 months versus a 2.5% increase in all of 2005. Productivity growth has averaged 3.5% since the expansion started in November 2001 versus a 2.1% increase during the 90s expansion. I continue to believe productivity will remain at elevated levels and unit labor costs, which account for two-thirds of inflation, will remain subdued over the intermediate-term.

The number of Americans filing first-time claims for unemployment benefits edged higher last week to a level that’s still consistent with an improving job market, Bloomberg said. This was the first time jobless claims exceeded 320,000 since the effects of the hurricanes in late 2005. However, the timing of spring break for schools this year may have led to the up-tick. Companies are expected to have added 200,000 jobs in April, capping the best six months of hiring since the peak of the stock market bubble in 2000. I still expect the labor market to remain healthy over the intermediate-term, but hiring will likely slow from recent rates as economic growth recedes to more average levels.

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