Today's Headlines

Bloomberg:
- Emerging-market bonds are lagging behind junk-rated debt in the US this month, as the riskiest securities end more than five years of trading in tandem.
- Yahoo! and EBay(EBAY) forged an alliance to challenge Google’s grip on the Internet.
- Ken Lay and Jeffrey Skilling, who built Enron Corp. into the nation’s seventh-largest company and then drove it into bankruptcy, were convicted of orchestrating a fraud that made the energy trader the symbol of corporate deceit in America.
- Crude oil rose above $71/bbl. in NY after the US economy grew at a faster than initially reported and talks to convince Iran to abandon uranium enrichment ended inconclusively.
- Dell Inc.(DELL) agreed to sell computers with Google software(GOOG), making it the pre-installed default search engine on its PCs.

Wall Street Journal:
- US credit card holders are paying off larger amounts and balancing debt more adroitly, cutting into profit card issuers make on unpaid balances.
- Regions Financial Corp. agreed yesterday to combine with AmSouth Bancorp(ASO) in a $10 billion transaction as they seek to compete with larger rivals.
- Intel Corp.(INTC) has been telling computer makers that its new desktop microprocessor, internally called Conroe, won’t be limited to higher-end PCs.
- Nokia Oy(NOK), Samsung Electronics and Sony Ericsson have brought out cell phones with cameras that produce surprisingly high resolution photos.

NY Times:
- A Pakistani immigrant was convicted yesterday on charges of plotting to blow up NYC’s Herald Square subway station.

San Francisco Chronicle:
- California wines beat French ones for the second time in 30 years in an annual tasting of selected vintages from the two regions.

Interfax:
- The Russian government will hold 45% of its windfall oil fund in US dollars and 45% in euros, with the remainder in British pounds, citing Finance Minister Kudrin.

First Quarter Growth Robust, Labor Market Softening Slightly, Housing Slows

- Preliminary 1Q GDP rose 5.3% versus estimates of a 5.8% increase and a prior estimate of a 4.8% gain.
- Preliminary 1Q GDP Price Index rose 3.3% versus estimates of a 3.3% increase and a prior estimate of a 3.3% gain.
- Preliminary 1Q Personal Consumption rose 5.2% versus estimates of a 5.6% gain and a prior estimate of a 5.5% increase.
- Preliminary 1Q Core PCE rose 2.0% versus estimates of a 2.0% gain and a prior estimate of a 2.0% increase.
- Initial Jobless Claims rose 329K versus estimates of 315K and 369K the prior week.
- Continuing Claims rose to 2420K versus estimates of 2405K and 2382K the prior week.
- Existing Home Sales for April fell to 6.76M versus estimates of 6.75M and 6.9M in March.

BOTTOM LINE: US economic growth rose at an annual rate of 5.3% in the first quarter, slower than forecast, Bloomberg reported. The rise in GDP was the biggest since the third quarter of 2003. A slowing housing market and weaker consumer spending should prompt the Fed to stop raising interest rates if data point to a smaller risk of accelerating inflation, according to economists. Morgan Stanley revised their 2Q GDP forecast to 2.8% from 2.9% on the report. Exports added 1.47 percentage points to first-quarter growth. Business fixed investment grew at an annual pace of 14.3% versus a 4.5% increase the prior quarter. I continue to believe US growth is slowing from the scorching 5.3% of the first quarter back down to average rates through year-end.

First-time claims for unemployment benefits in the US fell last week as employees in Puerto Rico returned to work following a temporary shutdown of government offices, Bloomberg said. The unemployment rate among those eligible to collect benefits, which tracks the US unemployment rate, rose to 1.9% from 1.8% the prior month. The four-week moving-average of claims rose to 337,000 from 333,750. I continue to expect the labor market to remain relatively healthy over the intermediate-term without generating substantial unit labor costs increases.

Sales of previously-owned homes in the US fell last month, reinforcing expectations that a slowdown in housing will help cool economic growth this year, Bloomberg said. Compared with year-ago levels, sales fell 5.7%. The median price of an existing home rose 4.2% to $223,000 from year-ago levels. The supply of homes for sale at the current pace rose to 6 months from 5.6 months in March. Recent housing data makes me more optimistic that the market is slowing to more sustainable healthy levels. A “soft landing” in housing still appears to be the most likely scenario.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- CBS Radio has settled its breach-of-contract lawsuit with talk-show host Howard Stern.
- Preakness Stakes winner Bernardini will skip next month’s Belmont Stakes, leaving the last led of horse racing’s Triple Crown without the Kentucky Derby and Preakness winners for the first time in six years.
- MasterCard Inc.(MA), the world’s no. 2 credit-card association, raised $2.39 billion in the second-biggest US IPO this year, selling a 46% stake.
- Japanese stocks are declining on speculation overseas investors are cutting their holdings in Japanese securities.
- Asian-Pacific companies will get a record $200 billion of loans this year as borrowing costs drop to levels before the region’s financial crisis nine years ago.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are -1.25% to -.50% on average.
S&P 500 indicated -.06%.
NASDAQ 100 indicated +.02%.

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Earnings of Note
Company/EPS Estimate
- (BWS)/.31
- (CHS)/.28
- (BLI)/.05
- (GCO)/.40
- (HRL)/.45
- (JOYG)/.53
- (PDCO)/.41
- (RL)/.57
- (SAFM)/-.47
- (TDS)/.23
- (TTC)/1.50
- (UNFI)/.28

Upcoming Splits
- (ITW) 2-for-1
- (SHOO) 3-for-2

Economic Releases
8:30 am EST
- Preliminary 1Q GDP is estimated to rise 5.8% versus a prior estimate of a 4.8% rise.
- Preliminary 1Q GDP Price Index is estimated to rise 3.3% versus a prior estimate of a 3.3% increase.
- Preliminary 1Q Personal Consumption is estimated to rise 5.6% versus a prior estimate of a 5.5% gain.
- Preliminary Core PCE is estimated to rise 2.0% versus a prior estimate of a 2.0% gain.
- Initial Jobless Claims for last week are estimated to fall to 315K versus 367K the prior week.
- Continuing Claims are estimated to rise to 2405K versus 2389K prior.

10:00 am EST
- Existing Home Sales for April are estimated to fall to 6.75M versus 6.92M prior.

BOTTOM LINE: Asian indices are lower, weighed down by commodity stocks in the region. I expect US equities to open modestly lower and to rise into the afternoon, finishing higher. The Portfolio is 50% net long heading into the day.

Stocks Finish Well Off Session Lows on Fall in Commodity Prices, Short Covering and Bargain Hunting

Indices
S&P 500 1,258.57 +.16%
DJIA 11,117.32 +.17%
NASDAQ 2,169.17 +.48%
Russell 2000 711.27 unch.
Wilshire 5000 12,661.91 +.06%
S&P Barra Growth 584.60 +.37%
S&P Barra Value 671.94 -.05%
Morgan Stanley Consumer 603.17 +.34%
Morgan Stanley Cyclical 821.38 -.36%
Morgan Stanley Technology 501.78 +.81%
Transports 4,599.12 -.35%
Utilities 395.65 +.45%
Put/Call 1.36 +27.10%
NYSE Arms 1.09 +2.10%
Volatility(VIX) 17.36 -4.93%
ISE Sentiment 106.00 -45.92%
US Dollar 85.13 +.08%
CRB 342.51 -2.80%

Futures Spot Prices
Crude Oil 69.44 -.60%
Unleaded Gasoline 201.10 -.40%
Natural Gas 5.92 -.65%
Heating Oil 193.43 -.30%
Gold 642.80 +.83%
Base Metals 230.17 -5.45%
Copper 357.25 -1.83%
10-year US Treasury Yield 5.03% +.48%

Leading Sectors
Tobacco +1.48%
Software +1.07%
Semis +.75%

Lagging Sectors
Oil Service -1.54%
Oil Tankers -1.65%
Gold & Silver -4.0%

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Afternoon Recommendations
Raymond James:
- Added WHR to Total Return Focus List.

Afternoon/Evening Headlines
Bloomberg:
- The World Health Organization officials don’t have immediate plans to ask that experts recommend raising the alert level for a possible avian influenza pandemic.
- General Motors(GM) began hiring temporary workers for some US plants to replace union employees leaving because of buyouts and retirement incentives.
- Emerging-market stocks resumed their slump after a one-day rebound as investors fled from economies that have benefited from record high commodity prices.
- Crude oil fell below $70/bbl. after a government report showed that US gasoline stockpiles rose for a fourth straight week as imports surged before driving season.
- (GM) shares rose after the company began replacing union employees lost to buyouts and retirements with temporary workers and a Merrill Lynch analyst recommended the stock.
- Analog Devices(ADI) and online publisher Cnet(CNET) Networks became the latest companies under investigation for stock-option grants.
- Commodity prices that reached record highs this month may fall because rising interest rates in Japan and the US will slow economic growth and investor demand wanes, Prudential Equity analyst John Tumazos said.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Internet longs, Semi longs, Base Metal shorts and Energy-related shorts. I covered some of my (IWM) and (QQQQ) shorts in the final hour, thus leaving the Portfolio 50% net long. The tone of the market was modestly negative today as the advance/decline line finished slightly lower, sector performance was mixed and volume was heavy. Measures of investor anxiety were mostly higher into the close. Overall, today's market performance was mildly bullish. The very sloppy trading in many stocks today usually occurs near sustainable market bottoms. I continue to believe the major averages are close to making their lows for the year. A number of stocks, such as Google (GOOG), trade as though their lows are in place. Due to the elevated state of investor anxiety readings, the magnitude of the forthcoming rally will catch many off guard.

Stocks Mostly Lower into Final Hour on Economic Growth and Bird Flu Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Networking longs and Retail longs. I added to my (IWM), (EEM) and (QQQQ) shorts today, thus leaving the Portfolio 25% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are lower and volume is heavy. Many of the same pundits and analysts that continuously make the case for ever higher commodity prices are the same ones inciting bird flu fears. I personally think the bird flu, which has only killed about 200 people globally (about the same amount that die nightly in Chinese coal mines), is just another symptom of the negativity bubble. However, if you do believe the bird flu is going to kill thousands or millions, I can't think of a more sure bet than to short commodities at current levels. Forget about the pie-in-the-sky small caps that may or may not benefit. A global pandemic would most surely be a demand-destroying event. I expect US stocks to trade modestly higher into the close from current levels on lower energy prices, short-covering and bargain hunting.