Stocks Finish Higher on Short-covering, Bargain Hunting and Lower Energy Prices

Indices
S&P 500 1,270.09 +.81%
DJIA 11,168.31 +.67%
NASDAQ 2,178.88 +.65%
Russell 2000 721.01 +1.40%
Wilshire 5000 12,802.45 +.92%
S&P Barra Growth 587.72 +.65%
S&P Barra Value 680.63 +.97%
Morgan Stanley Consumer 605.49 +.59%
Morgan Stanley Cyclical 835.13 +1.06%
Morgan Stanley Technology 501.91 +.48%
Transports 4,669.65 +1.98%
Utilities 406.17 +1.44%
Put/Call .92 -21.37%
NYSE Arms .57 -74.29%
Volatility(VIX) 16.44 -11.90%
ISE Sentiment 90.00 -13.46%
US Dollar 84.67 +.46%
CRB 344.87 -.87%

Futures Spot Prices
Crude Oil 71.36 +.10%
Unleaded Gasoline 209.50 -.03%
Natural Gas 6.40 +.33%
Heating Oil 199.73 +.10%
Gold 650.50 +.23%
Base Metals 230.41 -1.05%
Copper 361.70 -.19%
10-year US Treasury Yield 5.12% +.87%

Leading Sectors
Oil Service +3.13%
Airlines +2.81%
Steel +2.34%

Lagging Sectors
REITs +.01%
Homebuilders -.02%
Networking -.08%

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Afternoon Recommendations
CIBC:
- Upgraded (T) to Sector Outperformer, target $35.

Deutsche Bank:
- Rated (DTAS) Buy, target $15.
- Rated (FWRD) Buy, target $42.

Afternoon/Evening Headlines
Bloomberg:
- Futures traders raised bets that the Fed will increase its benchmark interest rate to 5.25% in June after minutes of the central bank’s May 10 meeting said inflation was more than the Fed expected.
- US Treasuries fell as minutes of the Fed’s most recent meeting on monetary policy increased concern that policy makers may continue hiking the benchmark Fed Funds rate.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Networking longs, Medical longs and Retail longs. I did not trade in the final hour, thus leaving the Portfolio 50% net long. The tone of the market was positive today as the advance/decline line finished higher, almost every sector rose and volume was about average. Measures of investor anxiety were mostly lower into the close. Overall, today's market performance was mildly bullish. While the major averages finished with decent gains, I would like to see healthier underlying action. Trading was choppy and incoherent throughout most of the day. The concerns I spoke of in my prior post still persist. The 10-year yield finished near session highs at 5.12%. On the positive side, the ISE Sentiment Index made a 52-week low of 89.0. The CRB Index is back below its 50-day moving-average. The SOX finished with a 1.77% gain and Small-caps outperformed the broad market, rising 1.4%.

Stocks Slightly Higher into Final Hour on Bargain Hunting and Falling Energy Prices

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Medical longs, Networking longs and Retail longs. I have not traded today, thus leaving the Portfolio 50% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are gaining and volume is about average. So far, the major averages are holding onto slight gains. However, I am seeing too many negatives to expect this bounce to gain substantial upside traction. Any sustainable rally can't be led by commodity stocks, in my opinion. I find it highly unlikely the Fed will cease raising rates with the 10-year yield approaching recent highs and oil above $70 per barrel. Finally, while breadth is OK today, a number of market-leading stocks are lower or barely rising. I plan to remain nimble, but a test of recent lows still looks likely. I expect US stocks to trade mixed into the close from current levels as lower energy prices offset higher long-term rates.

Today's Headlines

Bloomberg:
- Emerging-market stocks are headed for the biggest monthly drop in more than 3 ½ years as the prospect of higher interest rates and a slump in prices of commodities caused some investors to pull out of the riskiest markets from India to Russia.
- ADC Telecom offered about $2 billion in stock to take over Andrew Corp.(ANDW).
- Mortgage applications in the US declined last week to the lowest level in four year as higher borrowing costs hurt home purchases and refinancing.
- More than 84,000 people in 145 countries will take the CFA exams this year, as record profits drive both investment banks and job candidates to try to boost their competitiveness.
- Crude oil fell for the first time in a week and gold declined after the US offered to join European talks with Iran if the country halts uranium enrichment.
- Fed policy makers were unsure three weeks ago about how much further to raise interest rates.

Wall Street Journal:
- India has the largest number of people with HIV/AIDS, exceeding the previous record set by South Africa, citing a UN report.
- Advanced Micro Devices(AMD) expects some personal-computer makers to soon begin selling systems based on a new group of technologies for managing digital media in the home as its seeks to compete with Intel’s(INTC) Viiv home entertainment product.
- Vonage Holdings(VG), whose shares dropped after an IPO last week, has offered to pay its underwriters back if its Internet phone customers refuse to make good on agreements to buy shares.

Weeden & Co.:
- Bill Gross, manager of the world’s biggest bond fund, cut his holdings of emerging-market debt.

Chicago Manufacturing Very Strong

- Chicago Purchasing Manager for May rose to 61.5 versus estimates of 56.0 and a reading of 57.2 in April.

BOTTOM LINE: Manufacturing in the Chicago area unexpectedly accelerated this month, and orders placed with factories were the highest in more than a year, Bloomberg said. The purchasers’ orders measure rose to 69.6, the highest since March 2005. The employment component of the index rose to 52.8 from 47.2 the prior month. The Prices Paid Index fell to 76.9 from 77.2. I continue to believe manufacturing will decelerate over the coming months as US growth slows to average rates. The Prices Paid component has likely peaked for this cycle.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Fidelity Magellan, the second-largest fund managed by Fidelity Investments, gave up $96.3 million in potential fees because the three-year return trailed its benchmark.
- Fidelity Investments pulled in $5.8 billion in April, its biggest monthly sales tally in a decade, as investors rushed to put money into four funds that were closing.
- Mirant Corp.(MIR) said it is proposing to acquire NRG Energy(NRG) for about $8 billion a week after NRG rejected the takeover proposal without engaging in discussions.
- The London Metal Exchange starting tomorrow will allow screen trading of its contracts during the Asian day to attract more business from countries including China.
- Asian stocks slumped, headed for the biggest monthly slide since the Sept. 11 terrorist attacks in 2001.

Chicago Tribune:
- Chicago asked today for proposals for construction of a citywide wireless Internet service, citing Mayor Daley.

Financial Times:
- GlaxoSmithKline Plc(GSK) will hand management of half of its new drug discovery projects to outside scientists and partners within 10 years, citing the company’s head of research and development.

Shanghai Securities News:
- China’s foreign exchange regulator plans to impose “strict” rules to control capital inflows into real estate.
- The China Foreign Exchange Trade Center and the National Interbank Funding Center may introduce a system for trading dollar-denominated bonds in the country.

Late Buy/Sell Recommendations
Needham:
- Rated (NFLX) Buy, target $37.

Lehman Brothers:
- Raised (SIRI) to Overweight, target $6.50.

Night Trading
Asian Indices are -2.0% to -1.25% on average.
S&P 500 indicated +.13%.
NASDAQ 100 indicated +.16%.

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Earnings of Note
Company/EPS Estimate
- (NDN)/.07
- (ADCT)/.29
- (CMVT)/.19
- (CPRT)/.38
- (DBRN)/.26
- (HOV)/1.43
- (NOVL)/.03
- (TIF)/.28

Upcoming Splits
- (HES) 3-for-1
- (CNX) 2-for-1
- (KEX) 2-for-1
- (MDR) 3-for-2
- (NUE) 2-for-1
- (CBG) 3-for-1
- (GDI) 2-for-1
- (HOC) 2-for-1
- (UAG) 2-for-1

Economic Releases
10:00 am EST
- Chicago Purchasing Manger for May is estimated to fall to 56.0 versus a reading of 57.2 in April.

2:00 am EST
- Minutes of May 10 FOMC Meeting

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