Stocks Finish Sharply Lower as Investor Angst Spikes Higher

Indices
S&P 500 1,270.32 -1.68%
DJIA 11,205.61 -1.88%
NASDAQ 2,195.80 -1.50%
Russell 2000 725.85 -1.58%
Wilshire 5000 12,816.75 -1.66%
S&P Barra Growth 588.92 -1.49%
S&P Barra Value 679.52 -1.87%
Morgan Stanley Consumer 603.86 -1.22%
Morgan Stanley Cyclical 836.24 -2.44%
Morgan Stanley Technology 505.77 -1.25%
Transports 4,670.97 -2.66%
Utilities 392.62 -1.85%
Put/Call 1.47 +48.48%
NYSE Arms 2.04 +57.02%
Volatility(VIX) 16.21 +21.42%
ISE Sentiment 119.00 -23.72%
US Dollar 84.92 +.89%
CRB 349.38 -1.08%

Futures Spot Prices
Crude Oil 68.70 +.01%
Unleaded Gasoline 197.55 +.02%
Natural Gas 6.11 -.24%
Heating Oil 192.12 -1.55%
Gold 688.00 -.55%
Base Metals 237.86 -1.76%
Copper 362.80 -1.18%
10-year US Treasury Yield 5.14% +1.07%

Leading Sectors
Hospitals +.31%
Computer Hardware +.26%
HMOs -.03%

Lagging Sectors
Energy -2.60%
Gold & Silver -3.37%
Steel -3.61%

Evening Review
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Afternoon Recommendations
Morgan Stanley:
- Rated (FDC) Overweight, target $54.
- Rated (ADP) Overweight, target $50.
- Rated (DST) Underweight.

Afternoon/Evening Headlines
Bloomberg:
- Honda Motor will build its sixth North American auto-assembly plant in the US Midwest as part of a $1.46 billion expansion plan.
- The US dollar rallied sharply, posting its biggest gain against the yen in 11 months, after France’s finance minister said he would attempt to keep the euro from strengthening and US consumer prices rose more than estimates.
- Gasoline futures in NY fell to their lowest price in six weeks after a government report showed a third straight week of US inventory gains.

BOTTOM LINE: The Portfolio finished slightly lower today as losses in my Retail longs and Medical longs more than offset gains in my Internet longs, Semi longs, Energy-related shorts and Base metal shorts. I added back (IWM) and (QQQQ) shorts in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was very negative today as the advance/decline line finished substantially lower, almost every sector fell and volume was heavy. Measures of investor anxiety were higher into the close. Overall, today's market performance was bearish. Today's action is the type I would expect to see near an intermediate-term bottom in the major averages. If the 10-year yield begins heading lower over the coming weeks, as I expect, recent action should prove to be an excellent buying opportunity. I will closely monitor the bond market's reaction to tomorrow's economic data before further shifting market exposure.

Stocks Sharply Lower as Investors Flee Most Economically Sensitive Shares

BOTTOM LINE: The Portfolio is slightly lower into the final hour as losses in my Retail longs and Medical longs are being mostly offset by gains in my Internet longs, Semi longs, Energy-related shorts and Base metal shorts. I covered my (QQQQ) and (IWM) shorts and added to my (GOOG), (TLT) and (BRCM) longs today, thus leaving the Portfolio 100% net long. The tone of the market is very negative as the advance/decline line is substantially lower, almost every sector is declining and volume is heavy. The Morgan Stanley Cyclical Index (CYC) is down 2.3% today, underperforming the broad market. I continue to believe that a rotation out of the most economically sensitive stocks and a spike in investor anxiety will pave the way for a durable bottom in the major averages. The developing implosion in commodities is not forecasting a recession, but is a function of an end to the mania and slowing growth. This bodes very well for the broad market over the intermediate-term. I expect US stocks to trade higher into the close from current levels on short-covering, lower commodity prices and bargain hunting.

Today's Headlines

Bloomberg:
- Moody’s Investors Service(MCO) plans to raise credit ratings on most of the $1.2 trillion of loans it monitors, potentially saving US borrowers as much as $4.6 billion a year in interest.
- The Cannes Film Festival opens this evening with the world premiere of “The Da Vinci Code”. Critics were disappointed after last night’s advance screening.
- Bill Miller, the fund manager who has beaten the S&P 500 for a record 15 consecutive years, said Eastman Kodak(EK) shares may almost double by the end of 2008 as the company switches to digital imaging technology.
- California’s credit rating, once teetering near junk status before Governor Schwarzenegger took office, was raised today by S&P to its highest level since 2001, ending its three-year stigma of having the lowest debt rating of all US states.
- Crude oil is falling to a one-month low after an Energy Dept. report showed that US gasoline supplies rose as demand barely rose and imports arrived at near record rates.
- US Treasuries are falling after a government report showed consumer prices in April climbed more than economists forecast.

Wall Street Journal:
- Most US companies with operations in China say the country’s policing of intellectual property rights has not improved or has gotten worse, citing a survey by the American Chamber of Commerce in China.
- Merck(MRK) is awaiting the results of a FDA committee meeting on its cervical-cancer vaccine to determine whether it has a blockbuster on its hands.
- Senate Democrats plan to present initiatives to cut gasoline consumption that focus on alternative energy sources.
- Pacific Ethanol(PEIX) insiders have sold more than $100 million in company stock recently, even as the share price has tripled in the last six months.

NY Times:
- Milberg Weiss Bershad & Schulman LLP, which has won billions of dollars in shareholder lawsuits, could be charged as early as tomorrow or May 25 in a federal investigation into paying plaintiffs.

Washington Post:
- The CEOs of the three big US automakers are due to meet tomorrow with congressional leaders to discuss energy issues.

Business Recorders:
- Oil & Gas Development, Pakistan’s biggest explorer of fuels, found deposits at two separate wells.

NY Post:
- UBS AG(UBS), Europe’s largest bank, has won the bidding to buy Dutch bank ABN Amro Holding’s futures and commodities trading unit.
- Cendant’s(CD) travel unit, owner of the Web sites Orbitz and CheapTickets.com, has received bids from Bain Capital LLC, Texas Pacific Group and Apollo Management.

Reuters:
- Johnson & Johnson(JNJ) said Medicare will pay for some patients under age 60 to have the company’s artificial spinal disk implanted.

Financial Times Deutschland:
- Hewlett-Packard(HPQ) will hire “hundreds” of salespeople in the second half of 2006 to boost its business with major customers.

Consumer Prices Rise on Higher Energy Costs

- The Consumer Price Index for April rose .6% versus estimates of a .5% increase and a .4% gain in March.
- The CPI Ex Food & Energy for April rose .3% versus estimates of a .2% gain and a .3% increase in March.

BOTTOM LINE: Prices paid by US consumers rose more than forecast in April, rekindling inflation concerns that may invite more interest-rate increases form the Fed, Bloomberg said. Consumer prices rose 3.5% year-over-year versus a 3.4% year-over-year increase the prior month. Core prices rose 2.3% from year-ago levels. Fuel costs have risen 17.8% over the last 12 months. I expect inflation fears are topping for the year right about now. Slower economic growth, subdued unit labor costs and falling commodity prices should quell inflation jitters over the coming months.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- US Treasuries rose, sending the 10-year notes to their biggest two-day gain since January, after reports showed housing starts in April fell more than forecast and as core wholesale prices stayed in check.
- The Senate today did not eliminate a guest-worker program from legislation overhauling US immigration policy.
- President Bush will beat his timetable to cut the US budget deficit in half by 2009 because of surging tax revenue as a result of surging economic activity, Treasury Secretary John Snow said.
- Federal Reserve Chairman Bernanke said market discipline is a better regulator of the $1.2 trillion hedge fund industry than government, embracing the free-market views of his predecessor Greenspan.
- Honda Motor will spend $400 million for a new factory in the US.

Financial Times:
- Germany’s Bundesbank wants hedge funds to be more open about their activities, including allowing their books to be assessed by ratings companies and setting up a code of conduct.

London-based Times:
- NYSE Group Inc.(NYX) shareholder Thomas Caldwell said he is opposed to a merger with Euronext NV.

Nihon Keizai:
- The Japanese government will increase investments in oil development companies to help them expand production.

Late Buy/Sell Recommendations
Citigroup:
- Rated (MCD) Buy.

Night Trading
Asian Indices are +.25% to +.50% on average.
S&P 500 indicated +.04%.
NASDAQ 100 indicated +.09%.

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Earnings of Note
Company/EPS Estimate
- (ACXM)/.25
- (BEAS)/.10
- (CHRS)/.24
- (CTRP)/.19
- (FL)/.37
- (GYMB)/.46
- (INTU)/1.76
- (MW)/.49
- (PETM)/.30
- (ROST)/.41
- (CRM)/.04
- (SNDA)/.07
- (SNPS)/.15
- (TLB)/.51
- (TOO)/.30
- (ZLC)/.21

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Consumer Price Index for April is estimated to rise .5% versus a .4% gain in March.
- The CPI Ex Food & Energy for April is estimated to rise .2% versus a .3% increase in March.

10:30 EST
- Bloomberg consensus estimates call for a weekly crude drawdown of 1,000,000 barrels. Gasoline supplies are expected to rise 1,500,000 barrels. Distillate inventories are estimated to rise 700,000 barrels. Finally, refinery utilization is estimated to rise .80%.

BOTTOM LINE: Asian indices are higher, boosted by technology and automaker 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.