PPI Rises Less Than Expected, Retail Sales Decelerate, Inventories Still Low

- The Producer Price Index for May rose .2% versus estimates of a .4% rise and a .9% gain in April.
- The PPI Ex Food & Energy for May rose .3% versus estimates of a .2% gain and a .1% rise in April.
- Advance Retail Sales for May rose .1% versus estimates of a .1% gain and a .8% rise in April.
- Retail Sales Less Autos for May rose .5% versus estimates of a .5% increase and a .8% rise in April.
- Business Inventories for April rose .4% versus estimates of a .6% increase and a .7% gain in March.

BOTTOM LINE: Prices paid to US producers rose less than expected in May, Bloomberg reported. Computer prices fell .6% last month versus a 3.7% decline the prior month. Food prices fell .5% after a .1% gain a month earlier. I continue to believe inflation fears have peaked for this cycle.

Sales at US retailers rose at the slowest pace in three months in May as soaring gas prices cut spending on other goods, further evidence the economy is cooling, Bloomberg said. Stores selling building materials and garden supplies showed a .4% drop in sales last month versus a 2.1% fall in April. Purchases from auto dealers fell 1.6% in May versus a .8% increase in April. I continue to believe retail sales are in the process of slowing to more average rates.

Business inventories in the US rose less than expected in April, held back by a decline in stockpiles at retailers, Bloomberg said. Sales rose .6% versus a .9% gain the prior month. At the current sales pace, companies had enough goods on hand to last 1.26 months, near the record low of 1.25 months in January. Inventories will likely stabilize around current levels before companies begin rebuilding later in the year as confidence improves in the sustainability of the current expansion.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Shares of LG.Philips LCD Co., the world’s second-largest liquid-crystal display maker, may fall after the company slashed its quarterly earnings forecast days after rival AU Optronics(AUO) cut estimates.
- Fed Chairman Bernanke said it’s in China’s interest to make the yuan’s exchange rate more flexible and the world economy more balanced.
- Crude oil fell a second day in NY as a government report may show US gasoline inventories rose for a seventh straight week.

Wall Street Journal:
- Blackstone Group LP and Carlyle Group, two private equity firms seeking to hold IPOs this year, have postponed their plans and may not list.

Economic Daily News:
- Taiwan’s central bank will raise interest rates at its quarterly policy meeting later this month.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are -2.25% to -1.5% on average.
S&P 500 indicated +.10%.
NASDAQ 100 indicated +.16%.

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Earnings of Note
Company/EPS Estimate
- (BBY)/.36
- (CA)/.19
- (FLS)/.52
- (FRE)/1.21
- (GS)/4.19

Upcoming Splits
- (KMG) 2-for-1
- (LUK) 2-for-1
- (AIT) 3-for-2
- (BMI) 2-for-1
- (CLDN) 3-for-2
- (DDE) 3-for-2

Economic Releases
8:30 pm EST
- The Producer Price Index for May is estimated to rise .4% versus a .9% increase in April.
- The PPI Ex Food & Energy for May is estimated to rise .2% versus a .1% increase in April.
- Advance Retail Sales for May are estimated to rise .1% versus a .5% increase in April

10:00 am EST
- Business Inventories for April are estimated to rise .6% versus a .7% increase in March.

BOTTOM LINE: Asian indices are sharply lower, pressured by commodity and technology stocks in the region. I expect US equities to open modestly lower and to rise into the afternoon, finishing modestly higher. The Portfolio is 25% net long heading into the day.

Stocks Finish at Session Lows on Economic Worries and Stock Options Concerns

Indices
S&P 500 1,236.40 -1.27%
DJIA 10,792.58 -.91%
NASDAQ 2,091.32 -2.05%
Russell 2000 683.19 -2.59%
DJ Wilshire 5000 12,411.02 -1.49%
S&P Barra Growth 572.29 -1.24%
S&P Barra Value 662.40 -1.29%
Morgan Stanley Consumer 596.06 -.81%
Morgan Stanley Cyclical 787.16 -1.60%
Morgan Stanley Technology 476.74 -1.81%
Transports 4,458.78 -1.84%
Utilities 412.74 +.12%
Put/Call .94 -6.93%
NYSE Arms 2.46 +78.18%
Volatility(VIX) 20.96 +15.67%
ISE Sentiment 129.00 +22.86%
US Dollar 85.93 +.24%
CRB 338.39 -.50%

Futures Spot Prices
Crude Oil 70.37 +.01%
Unleaded Gasoline 212.40 -.01%
Natural Gas 6.31 +1.46%
Heating Oil 199.58 +.23%
Gold 608.00 -.54%
Base Metals 208.04 -1.91%
Copper 319.70 -.98%
10-year US Treasury Yield 4.97% +.39%

Leading Sectors
Utilities +.12%
Tobacco -.29%
Broadcasting -.34%

Lagging Sectors
Oil Service -4.61%
Steel -4.71%
Alternative Energy -5.04%

Evening Review
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Afternoon Recommendations
Goldman Sachs:
- Rated (OCR) Outperform, target $57.

Piper Jaffray:
- Rated (ARRS) Outperform, target $18.
- Rated (FDRY) Outperform, target $18.

Banc of America:
- Rated (NDAQ) Buy, target $39.

Afternoon/Evening Headlines
Bloomberg:
- The US dollar gained against the euro for a sixth day, its longest rally since November, on speculation the Fed will raise rates for a 17th straight time.
- Fatah gunmen loyal to Palestinian Authority President Abbas stormed the Hamas Cabinet office in the West Bank City of Ramallah today and set the building on fire.
- Stocks in emerging markets worldwide resumed their slump on concern higher interest rates will depress global economic growth. Colombia’s stock exchange had its first automatic trading suspension since the IGBC index was created in 2001, as its drop exceeded 10%.
- Crude oil fell on speculation that a government report will show US gas supplies rose for a seventh straight week.

Automotive News:
- Billionaire hedge fund investor and Democratic political activist George Soros may spend as much as $200 million to fund a joint venture with Chinese carmaker Chery Automobile to produce vehicles for the US market, citing Chery.

BOTTOM LINE: The Portfolio finished slightly lower today as losses in my Internet longs, Networking longs and Semi longs more than offset gains in my Index shorts, Energy-related shorts and Base Metal shorts. I did not trade in the final hour, thus leaving the Portfolio 25% 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 about average. Measures of investor anxiety were mixed into the close. Overall, today's market performance was bearish, however there were some positives again. The NYSE Arms finished at an elevated 2.46 and the VIX rose 16% today, finishing above 20. As well, oil is trading near session lows and continues to act “toppy” heading into hurricane season. The 10-year and the U.S. dollar maintained recent gains throughout the day. The broad market continues to trade as though multiple large funds are liquidating, which is very likely considering the amount of leverage associated with commodities. Overseas markets will likely come under pressure again tonight. I suspect tomorrow's PPI may actually be a positive for US equities.

Stocks Lower into Final Hour on Hawkish Fed Comments and Ongoing Stock Options Concerns

BOTTOM LINE: I am now having trouble with my own internal systems, thus I was unable to post "Today's Headlines." Hopefully, I can have these problems fixed soon. The Portfolio is slightly lower into the final hour as losses in my Networking longs, Semi longs and Internet longs more than offset gains in my Energy-related shorts and Base Metal shorts. I added to my (EEM), (IWM) and (QQQQ) shorts and was stopped-out of an Internet long this morning, thus leaving the Portfolio 25% net long. The tone of the market is very negative as the advance/decline line is substantially lower, almost every sector is falling and volume is about average. Measures of investor anxiety are mixed. Today’s overall market action is bearish considering recent losses and relatively little new negative news. The Fed's Fisher just told reporters that the Fed does have "some angst" about inflation. This seems to be pressuring the broad market again. I expect FOMC members to continue talking hawkish through the next meeting. Thereafter, I expect their comments to become decidedly more dovish.
I expect stocks to trade mixed into the close as short-covering, bargain hunting and lower energy prices offsets economic worries.

Economic Releases

- None of note