Wednesday Watch

Late-Night Headlines
Bloomberg:
- Abu Bakar Bashir, the Idonesian Muslim cleric convicted of being involved in the 2002 Bali bombings that killed 202 people, was released from prison after serving only two years in jail.
- Crude oil is falling for a third day in NY on speculation that demand for the fuel is slowing.
- Copper futures in Shanghai plunged by the daily maximum allowable limit for a fourth day amid concerns that rising interest rates may slow demand for the metal used in pipes and wires. Copper has plunged 32% from May 15 highs.
- Steel-product output in China, the world’s biggest maker and user of the alloy, rose 27% to a record last month.
- iSuppli raised its LCD-TV panel shipment forecast for 06 to 46.7M from 42M.
- Japan’s Nikkei 225, on course for its biggest quarterly drop in almost five years, may decline further because of a slowdown in economic and earnings growth, according to JPMorgan’s Hajime Kitano.

Commerical Times:
- AU Optronics(AUO) won orders from Sony(SNE) to make liquid-crystal displays for televisions.

Beijing Times :
- China’s capital lifted a 20-month ban on live poultry sales and downgraded its bird flu alert.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are -.25% to +1.25% on average.
S&P 500 indicated +.25%.
NASDAQ 100 indicated +.44%.

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Earnings of Note
Company/EPS Estimate
- (KV/A)/.20
- (ROLL)/.33

Upcoming Splits
- (KMG) 2-for-1
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Economic Releases
8:30 pm EST
- The Consumer Price Index for May is estimated to rise .4% versus a .6% gain in April.
- The CPI Ex Food & Energy for May is estimated to rise .2% versus a .3% gain in April.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude drawdown of 700,000 barrels. Gasoline supplies are expected to rise 1,400,000 barrels. Distillate inventories are estimated to rise 1,250,000 barrels. Finally, refinery utilization is expected to rise 0.40%.

2:00 pm EST
- Fed’s Beige Book

BOTTOM LINE: Asian indices are higher, boosted by exporting and financial stocks in the region. I expect US equities to open modestly higher and to build on gains into the afternoon, finishing higher. The Portfolio is 50% net long heading into the day.

Stocks Finish Lower, Led by Continuing Plunge in Commodity Shares

Indices
S&P 500 1,223.69 -1.03%
DJIA 10,706.14 -.80%
NASDAQ 2,072.47 -.90%
Russell 2000 672.72 -1.53%
Wilshire 5000 12,267.38 -1.16%
S&P Barra Growth 568.07 -.74%
S&P Barra Value 653.69 -1.32%
Morgan Stanley Consumer 593.55 -.42%
Morgan Stanley Cyclical 777.04 -1.29%
Morgan Stanley Technology 472.60 -.87%
Transports 4,441.32 -.39%
Utilities 406.72 -1.46%
Put/Call 1.40 +48.94%
NYSE Arms 1.32 -46.29%
Volatility(VIX) 23.81 +13.60%
ISE Sentiment 127.00 -1.55%
US Dollar 86.47 +.72%
CRB 330.23 -2.41%

Futures Spot Prices
Crude Oil 68.29 -.39%
Unleaded Gasoline 204.50 -.33%
Natural Gas 6.15 -.11%
Heating Oil 192.80 -.19%
Gold 566.40 -.07%
Base Metals 196.82 -5.40%
Copper 301.00 -.02%
10-year US Treasury Yield 4.96% -.32%

Leading Sectors
Telecom +.31%
HMOs unch.
Drugs -.26%

Lagging Sectors
Alternative Energy -3.66%
Gold & Silver -3.71%
I-Banks -4.77%

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Afternoon Recommendations
SmithBarney:
- Rated (CAH) Buy, target $83.
- Rated (ABC) Buy, target $49.

Afternoon/Evening Headlines
Bloomberg:
- UK Prime Minister Tony Blair said it would be a mistake for the government to withdraw British soldiers from Iraq, citing Blair.
- Emerging-market stocks fell to the lowest in more than six-months as investors dumped riskier assets on concerns over higher interest rates. The Morgan Stanley Emerging Markets Index has plunged 25% since peaking on May 8.
- US Treasury 10-year notes rose, pushing their yield to a two-month low on speculation the Fed will keep inflation from accelerating.
- The US dollar rose a seventh straight day against the euro, prompting a $45 plunge in the price of gold to $566/oz.
- Oil fell to a three-week low as speculators sold ahead of tomorrow’s inventory data and other commodities plunged.

Wall Street Journal:
- General Motors’(GM) CEO Wagoner said fixing the company’s finances is more important than remaining the world’s largest automobile seller.

BOTTOM LINE: The Portfolio finished higher today on gains in my Retail longs, Computer longs, Energy-related shorts and Base Metal shorts. I covered some of my (QQQQ) and (IWM) shorts in the final hour, thus leaving the Portfolio 50% 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 very heavy. Measures of investor anxiety were mostly higher into the close. Overall, today's market performance was mildly bearish, however there were again some positives. A number of market-leading stocks finished higher as the leadership change away from commodities/cyclicals intensified. The CBOE total put/call finished at 1.4, an elevated level. The NYSE Arms closed at 1.32, an above-average level. The VIX surged another 14% and the ISE Sentiment Index remains depressed at 127.0. Investor sentiment remains very depressed considering the macro backdrop. I suspect the CPI and the Fed's Beige Book report may result in a nice bounce in the major averages tomorrow.

Stocks Rebounding into Final Hour as Commodities Plunge

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Computer longs, Index ETF shorts, Energy-related shorts and Base Metal shorts. I took profits in some of my (QQQQ) and (IWM) shorts this morning and then added back to them, thus leaving the Portfolio 25% net long. The tone of the market is very negative as the advance/decline line is substantially lower, most sectors are declining and volume is very heavy. Gold is now trading down the most since 1991, falling 5.8%, according Bloomberg. The metal is now down 22% from its high a few weeks ago. As I forecast a few weeks ago, I continue to believe inflation fears have peaked for the year. A significant change for the positive is now under way. The negativity bubble is poised to burst, but it has sucked in so many that few see what is happening, in my opinion. I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower energy prices and bargain hunting.

Today's Headlines

Bloomberg:
- Best Buy(BBY), the largest US electronics retailer, posted its biggest profit increase in a year on rising demand for flat-panel televisions.
- Oil is falling to a three-week low on concern slowing global economic growth will curtail energy use.
- The US dollar rose a seventh straight day against the euro as a report showing gains in US wholesale prices boosted speculation the Fed will keep lifting interest rates.
- President Bush traveled to Baghdad today on a surprise visit to assure Iraqi Prime Minister Nuri al-Maliki and his cabinet that the US won’t back away from its commitment to their country.
- Gold had its biggest plunge in 15 years, falling bellow $600 an ounce, and copper tumbled to a seven-week low on speculation rising global interest rates will curb economic growth.
- Karl Rove won’t face criminal charges in a three-year investigation into the leak of a CIA operative’s name, his lawyers said.
- Investors in June were the least optimistic about equities in 13 months as expectations for a slowdown in economic growth soared.
- Emerging-market stocks dropped to a six-month low after a seventh Fed official in as many days hinted US rates will rise, prompting investors to dump riskier assets. Shares in Russia and Poland led the slide.

Wall Street Journal:
- US technology companies such as Microsoft(MSFT), Yahoo!(YHOO) and IAC/Interactive Corp.(IACI) are seeking secure, cheaper supplies of electricity to cut costs and fuel their growing demand for power as use of the Internet increases.

NY Times:
- US sales of DVDs are slowing, and movie studios are looking for something new to replace declining revenue.
- Upstate New York cities’ long-term viability is being threatened by the migration of young adults.

USA Today:
- More Americans approve of President Bush and are optimistic about the outcome of the war in Iraq after the death of Abu Musab al-Zarqawi, citing a USA Today/Gallup poll.

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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