Friday Watch

Late-Night Headlines
Bloomberg:
- An employee of San Jose-based Data Physics was indicted on charges he exported to China equipment used to design and manufacture missiles, federal prosecutors said.
- Nielsen/NetRatings, a global leader in Internet media and market research, today announced that Google(GOOG) accounted for 50% of all searches conducted in April, followed by Yahoo! and MSN, with 22% and 11%, respectively. Year-over-year, Google gained three percentage points in market share, while Yahoo! remained flat and MSN dipped slightly.
- The yen fell, reversing a gain, after Japanese Finance Minister Sadakazu Tanigaki said there still wasn’t enough evidence that seven years of deflation in the world’s second-largest economy has ended.

Financial Times:
- The top two highest paid hedge fund managers in a list of 26 earned around $1.5 billion each last year, citing the Institutional Investor’s Alpha magazine list. Renaissance Technologies Chairman James Simons earned $1.5 billion in 2005, while T. Boone Pickens, chairman of BP Capital LLC, earned $1.4 billion speculating mainly on the rise in energy prices.

Commercial Times:
- AU Optronics(AUO) urged liquid-crystal displays makers to cut production to help clear excess inventory that has caused prices to fall.

Xinhua News Agency:
- China won’t buy crude oil from the international market to fill its strategic reserves because of high prices, citing a senior Chinese government official.

Late Buy/Sell Recommendations
Business Week:
- Anadys Pharmaceuticals(ANDS), a drug developer will see its share price rise later this year as favorable results from early trials of certain drugs come in, citing Eric Schmidt, an analyst with Cowen & Co.
- Sierra Health Services(SIE) may rise as much as 34% because of its earnings and possible acquisition interest from other companies.
- Signature Bank(SBNY), a commercial bank started by 100 former First Republic Bank employees, is growing by targeting the underserved market of smaller private companies, citing David Long of William Blair.

Night Trading
Asian Indices are +.75% to +1.25% on average.
S&P 500 indicated -.04%.
NASDAQ 100 indicated +.08%.

Morning Preview
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Earnings of Note
Company/EPS Estimate
- None of note

Upcoming Splits
- (APC) 2-for-1
- (IMO) 3-for-1
- (NICE) 2-for-1
- (TLM) 3-for-1
- (UMBF) 2-for-1

Economic Releases
8:30 am EST
- Personal Income for April is estimated to rise .7% versus a .5% increase in March.
- Personal Spending for April is estimated to rise .6% versus a .6% gain in March.
- The PCE Core for April is estimated to rise .2% versus a .3% gain in March.

9:45 am EST
- The final Univ. of Mich. Consumer Confidence reading for May is estimated at 79.0 versus a prior estimate of 79.0.

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

Stocks Finish Sharply Higher on Bargain Hunting and Short-covering

Indices
S&P 500 1,272.88 +1.14%
DJIA 11,211.05 +.84%
NASDAQ 2,198.24 +1.34%
Russell 2000 725.58 +2.01%
Wilshire 5000 12,818.76 +1.24%
S&P Barra Growth 591.12 +1.11%
S&P Barra Value 679.74 +1.16%
Morgan Stanley Consumer 606.95 +.63%
Morgan Stanley Cyclical 834.24 +1.57%
Morgan Stanley Technology 507.20 +1.08%
Transports 4,647.39 +1.05%
Utilities 399.36 +.94%
Put/Call .85 -37.50%
NYSE Arms .58 -46.28%
Volatility(VIX) 15.50 -10.71%
ISE Sentiment 165.00 +55.66%
US Dollar 84.68 -.04%
CRB 346.35 +1.12%

Futures Spot Prices
Crude Oil 71.45 +.18%
Unleaded Gasoline 210.20 -.11%
Natural Gas 6.01 +.59%
Heating Oil 199.25 -.09%
Gold 651.30 +.43%
Base Metals 234.85 +2.03%
Copper 368.00 -.74%
10-year US Treasury Yield 5.06% +.64%

Leading Sectors
Steel +5.49%
Gold & Silver +4.86%
Internet +3.81%

Lagging Sectors
Hospitals +.10%
Broadcasting +.07%
Semis -.44%

Evening Review
Detailed Market Summary
Market Gauges
Daily ETF Performance
Style Performance
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In Play

Afternoon Recommendations
Bear Stearns:
- Upgraded (BT) to Outperform.

Deutsche Bank:
- Rated (TRMP) Buy, target $25.

Raymond James:
- Added (SKYW) to Aggressive Growth category of Focus List.

Oppenheimer:
- Rated (ODP) Buy, target $51.

Afternoon/Evening Headlines
Bloomberg:
- Federal Reserve Chairman Ben Bernanke said consumer price increases, excluding food and energy, have remained stable over the past year and that longer-term inflation expectations are “well contained.”
- Wage inflation may now be less of a concern to Fed policy makers following revised figures form the government today that showed smaller increases in labor costs.
- The Senate approved the most sweeping overhaul of immigration policy in 20 years, voting to create a new guest-worker program and give those illegally in the US a chance to gain legal status.
- Shares of (GM) rose for a second day because of reports that US union workers are taking the company’s buyout and early retirement offers.

New Haven Register:
- The Connecticut Interscholastic Athletic Conference, aiming to end lopsided high school football games, will suspend head coaches for one game if their team wins by more than 49 points.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs, Networking longs and Medical longs. I did not trade 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 substantially higher today, almost every sector rose and volume was above average. Measures of investor anxiety were mixed into the close. Overall, today's market performance was bullish. I expect stocks to build on today's gains tomorrow. I still believe most stocks have seen their lows for the year, however another period of weakness is likely over the coming weeks as economic data come in below estimates, resulting in further selling in the most economically sensitive stocks.

Stocks Higher into Final Hour as Correction Loses Steam

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Networking longs, Computer longs and Medical longs. I covered some of my (IWM), (EEM) and (QQQQ) shorts today, thus leaving the Portfolio 75% net long. The tone of the market is positive as the advance/decline line is substantially higher, almost every sector is higher and volume is above average. Theflyonthewall.com is reporting that Apple Computer (AAPL) will redesign the iPod nano to include video playback. I continue to believe Apple is trading at very attractive levels for both short and longer-term investors. I expect the stock to challenge its high of $86.40 by year-end. I remain long Apple. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain hunting.

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.

Links of Interest

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