Stocks Finish Sharply Lower on Economic Worries

Indices
S&P 500 1,259.88 -1.58%
DJIA 11,094.43 -1.63%
NASDAQ 2,164.74 -2.06%
Russell 2000 711.04 -2.54%
Wilshire 5000 12,686.26 -1.62%
S&P Barra Growth 583.92 -1.60%
S&P Barra Value 674.11 -1.57%
Morgan Stanley Consumer 601.92 -1.12%
Morgan Stanley Cyclical 826.36 -1.93%
Morgan Stanley Technology 499.49 -2.15%
Transports 4,578.80 -2.07%
Utilities 400.39 -.93%
Put/Call 1.17 +58.11%
NYSE Arms 2.23 +252.05%
Volatility(VIX) 18.66 +30.86%
ISE Sentiment 101.00 -30.82%
US Dollar 84.35 -.81%
CRB 347.88 +.02%

Futures Spot Prices
Crude Oil 71.90 -.18%
Unleaded Gasoline 214.00 -.46%
Natural Gas 6.13 +.20%
Heating Oil 200.39 +1.18%
Gold 662.00 +.23%
Base Metals 232.86 -3.46%
Copper 368.90 +.41%
10-year US Treasury Yield 5.07% +.52%

Leading Sectors
Broadcasting +.12%
HMOs -.38%
Hospitals -.80%

Lagging Sectors
Internet -3.75%
Airlines -3.92%
Steel -5.04%

Evening Review
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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Emerging-market stocks resumed their decline on concern global growth will slow.
- Engelhard Corp.(EC), inventor of the catalytic converter, accepted a sweetened $5 billion takeover offer from BASF AG of Germany, ending five months of negotiations that began with a hostile bid.
- The US dollar fell the most in six weeks against the euro on speculation Treasury secretary nominee Henry Paulson won’t trey to stop a slide in the US currency.

CNBC:
- Quest Diagnostics(DGX) may make a counteroffer for Fisher Scientific(FSH), which agreed this month to be bought by Thermo Electron, Mergermarket.com reported.

BOTTOM LINE: The Portfolio finished lower today on losses in my Networking longs, Semi longs and Medical longs. I added to my (EEM), (IWM) and (QQQQ) shorts in the final hour, thus leaving the Portfolio 50% net long. The tone of the market was negative today as the advance/decline line finished substantially lower, almost every sector fell and volume was below average. Measures of investor anxiety were higher into the close. Overall, today's market performance was bearish. The market's inability to even stage a modest bounce today was telling. As well, the 10-year yield remained higher throughout the day, even as stock losses worsened. A retest of recent equity lows appears imminent as economic data disappoint. On the positive side, today's sell-off was accompanied by below-average volume and measures of investor angst were elevated. The NYSE Arms closed at a very high 2.23. Moreover, the ISE Sentiment Index closed down 31%, to a depressed level. Tomorrow's Chicago Purchasing Manager report and Fed minutes may further stoke recession fears. I continue to believe U.S. growth is just slowing, not plunging, and that the recent correction presents a very attractive opportunity for longer-term investors.

Stocks Sharply Lower Into Final Hour on Higher Energy Prices and Long-term Rates

BOTTOM LINE: The Portfolio is lower heading into the final hour on losses in my Semi longs, Networking longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is substantially lower, almost every sector is lower and volume is light. Emerging market stocks are once again underperforming. The iShares MSCI Emerging Markets Index (EEM) is 3.6% lower. I expect EEM to take out its 200-day moving-average over the coming weeks. I am still short EEM. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain hunting.

Today's Headlines

Bloomberg:
- The Nasdaq Stock Market(NDAQ) may eject companies under investigation for possible manipulation of stock options paid to executives.
- Crude oil rose to the highest in two weeks as Iran said it is pressing ahead with its nuclear research.
- Henry Paulson, CEO of Goldman Sachs(GS), was picked by President Bush to succeed John Snow at US Treasury secretary.
- Goldman Sachs(GS) Group President Lloyd Blankfein is the frontrunner to succeed Henry Paulson as CEO of the biggest US securities firm by market value.

Wall Street Journal:
- The US Air Transport Stabilization Board, a loan-guarantee program the government started after the Sept.11 terrorist attacks, has made a $300 million profit for US taxpayers.
- Officials in Calabasas, California, who 10 weeks ago banned smoking outdoors except in designated areas, say the rules are having the desired effect, reducing exposure to secondhand smoke.

NY Times:
- Tourists and the businesses that rely upon them found ways to adapt to unusually high gas prices in the US over the Memorial Day weekend. Families sometimes vacationed closer to home or used kayaks and sailboats rather than motorboats.

Boston Globe:
- Infosys Technologies(INFY), Tata Consultancy Services and other Indian companies are hiring US workers to offset labor shortages in India.

LA Times:
- College computer systems are the No. 1 target in the US for computer hackers looking for sensitive personal information, citing ChoicePoint.

al-Hayat:
- The United Arab Emirates plans to raise oil production capacity to 3.5 million barrels a day by 2011, a 37% increase from current levels.

Consumer Confidence Declines

- Consumer Confidence for May fell to 103.2 versus estimates of 100.9 and 109.8 in April.

BOTTOM LINE: Consumer confidence in the US fell from a four-year high in May by the most since Hurricane Katrina battered the Gulf last year and sent energy prices soaring, Bloomberg reported. Optimism about consumers’ present situation fell to 132.5 from 136.2 in the prior month. The proportion of consumers expecting their incomes to rise was 16.6%, the lowest since July 2003. Rising unit labor costs account for two-thirds of inflation. I continue to believe confidence will rebound later this year to cycle highs as stocks rise, long-term rates remain historically low, the labor market remains relatively healthy, inflation decelerates, gas prices fall and irrational pessimism lifts.

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Tuesday Watch

Weekend Headlines
Bloomberg:
- Wal-Mart Stores(WMT) said May same-store sales in the US rose about 2.3%, as higher gasoline and utility prices cut into customers’ paychecks.
- Advanced Micro Devices(AMD), Intel’s only competitor in personal computer microprocessors, will spend $2.5 billion to increase output from its two German plants.
- Richard Kinder, co-founder, chairman and CEO of Kinder Morgan(KMI), owner of 40,000 miles of pipelines in the US and Canada, is leading a group that has proposed to buy the company for $100 a shares or about $13.4 billion.
- Japanese stocks fell after government reports on industrial production and consumer spending pointed to slowing growth in the world’s second-largest economy.

Wall Street Journal:
- Donald Evans, former US commerce secretary, is the favorite to succeed John Snow as the nation’s treasury secretary.

NY Times:
- Some lawmakers say legal charges should be filed against media companies, including newspapers, for publishing classified information that harms national security.
- The US coal industry and utilities are moving ahead with plans to build power plants fueled by coal, which the US has sufficient supplies of for at least 200 years.
- The Internet Movie Database, an online guide to cinema and television, may boost its role in parent Amazon.com’s(AMZN) media retail as it develops a service to download movies and same them to DVDs.
- Senator John Kerry is still fighting to prove his military record is accurate almost two years after it was challenged during his failed 2004 presidential campaign.
- Iranian President Ahmadinejad seeks to consolidate power in the presidential office with full support from Iran’s highest authority, chief cleric Ali Khamenei, in a manner unseen in the 27-year history of the Islamic republic.
- Chicago may pass an ordinance requiring large retailers such as Wal-Mart Stores(WMT) and Home Depot(HD) to pay workers $10 an hour plus 43 an hour of benefits.
- Iran seems to be slowing its drive to enrich uranium, a sign it may be softening its position in the standoff over the country’s nuclear development or running into technical difficulties.

Alpha:
- When it comes to pure wealth creation – arguably the biggest motivation for the majority of hedge fund managers, times have never been better.

Denver Post:
- Qwest Communications(Q), AT&T(T), Sprint Nextel(S) and Verizon Communications(VZ) are bidding on a federal project called Networx worth $20 billion.

Barron’s:
- Small-cap companies are expected to outpace big-caps by 4% to 5% this year on faster growth than their larger counterparts, citing Merrill Lynch’s Satya Pradhuman.

San Jose Mercury News:
- Cisco Systems(CSCO) and other computer network-equipment makers may benefit if Internet service providers split their services into tiers.

Focus Magazine:
- McDonald’s(MCD) CFO Paull said the Chinese market may eventually be able to support as many as 10,000 of its restaurants, more than 13 times the number it already has there.

Les Echos:
- SAP AG(SAP) CEO Henning Kagermann said in an interview that his company held preliminary merger talks with Microsoft Corp.(MSFT).

Sueddeutsche Zeitung:
- Biogen Idec(BIIB) can spend at least $2 billion in cash to grow in cancer and neurology markets.

Financial Times:
- Advertising spending on the Internet may surpass spending on ads in national newspapers this year.
- A World Bank report warns that recent stock market falls have increased investor nervousness about the fragility of emerging markets.

Weekend Recommendations
Barron's:
- Had positive comments on (PHG) and (IDT).
- Had negative comments on (SCI).

Morgan Stanley:
- Rated (FMCN) Overweight.

Night Trading
Asian indices are -.25% to +.25% on average.
S&P 500 indicated -.21%.
NASDAQ 100 indicated -.26%.

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Earnings of Note
Company/Estimate
- (FRE)/1.39
- (MCDTA)/.04
- (REY)/.36
- (SMTC)/.18
- (SRZ)/.26

Upcoming Splits
- (NICE) 2-for-1
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Economic Releases
10:00 am EST
- Consumer Confidence for May is estimated to fall to 100.0 versus a reading of 109.6 in April.

BOTTOM LINE: Asian Indices are mostly lower, weighed down by cyclical shares in the region. I expect US stocks to open modestly lower and to rise into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the week.