Stocks Lower into Final Hour on Profit-taking, Mixed Economic Data

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Retail longs, Semi longs and Medical longs. I added to my Under Armour(UA) long and to an existing short today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, sector performance is mostly negative and volume is below average. I added a bit to my Under Armour (UA) long ahead of tomorrow morning's earnings report. Bearishness is high on the stock ahead of the report. Under Armour's open interest put/call is currently 2.09, just off record highs of 2.50 set last week. As well, short interest is a record 8.65 million shares, or 35% of the float. Under Armour is the type of stock that should flourish in the current macro environment. I expect the stock to rise tomorrow, notwithstanding any initial morning weakness related to profit-taking. The AAII percentage of Bulls fell 16.4%, to 39.2%, and the AAII percentage of Bears soared 28.3%, to 37.9% last week. These readings came as the DJIA was blowing through another record high, which is remarkable. Over the weekend, I expected to see quite a few headlines regarding the piercing of the 13,000 barrier on the Dow, instead the headlines were overwhelmingly negative and focused on how "poorly" the U.S. economy was performing. As well, many suggested that only large U.S. companies with substantial emerging market exposure are doing well, yet many U.S .small-caps and most mid caps continue to outperform large caps, and the cumulative advance-decline line is at a record high. I continue to believe that overall investment sentiment regarding U.S. stocks has never been worse in history with stocks up this much and the DJIA at a record high. There is still a high wall of worry for stocks to climb substantially from current levels.

Today's Headlines

Bloomberg:
- Deutsche Boerse AG, operator of the Frankfurt stock exchange, agreed to buy International Securities Exchange Holdings(ISE), the second-largest US options market, for about $2.8 billion in cash.
- China, the world’s largest steel producer, will introduce export licenses for some steel products from May 20 to rein in shipments which more than doubled in the first quarter.
- US Treasury 10-year notes rose the most in almost seven weeks after the measure of inflation favored by the Fed policy makers showed core consumer prices were stable in March.
- Prince Harry will serve in Iraq despite the risk of him being killed or kidnapped by insurgents, UK General Sir Richard Dannatt, Chief of the General Staff said.
- Apple Inc.(AAPL) may repeat iPod magic with Apple TV, according to Bear Stearns(BSC) analysts. “Apple TV along with iTunes has the potential to emerge as a new means for purchasing, storing and accessing video in the same way iPod/iTunes and MP3 players have become a new way to purchase, store and listen to music,” writes Kunal Madhukar, analyst at Bear Stearns in NY, in a research note.
- Yahoo!(YHOO) plans to acquire the remain stake in Right Media it doesn’t already own for $680 million in cash and stock, aiming to increase online advertising sales.
- Alltel Corp.(AT) shares rallied to a six-year high on speculation that the largest regional wireless carrier in the US may be an acquisition target.
- US newspaper circulation fell 2.1% in the six months through March as the LA Times and Washington Post lost readers, the Newspaper Assoc. of America said.
- Merrill Lynch(MER) said it may buy back as much as $6 billion of its stock.

Wall Street Journal:
- Immigrant activists plan to demonstrate on May Day to put pressure on Congress to adopt more favorable immigration laws.
- Hedge fund leveraging through which investors place large bets without actually putting down any money has regulators worried because no one knows how much there is.
- Marathon Oil(MRO) is betting on increased demand for diesel from cars and light trucks because of the fuel’s higher efficiency over gasoline.
- Jones Apparel Group(JNY) is acting like a private equity firm over the possible sale of the Barneys NY chain of luxury department stores.
- UnitedHealth Group(UNH), Humana(HUM) and other companies that expanded into Medicare are fighting to defend their business as Democrats try to slash the payments insurers get.

NY Times:
- Melamine, a chemical linked to tainted pet foot that has killed dogs and cats in the US, is commonly added to animal feed in China as a counterfeit protein, citing interviews with Chinese workers familiar with the process.

Baltimore Sun:
- Duke University’s Fuqua School of Business will punish 34 first-year MBA students after it learned they collaborated on a take-home exam.

NY Post:
- Wal-Mart Stores(WMT) plans to open smaller stores in urban areas to spur revenue, citing analysts.
- Pure Digital Technologies plans to put on sale tomorrow a tiny camera device known as Flip Video that allows users to instantly edit and download footage to YouTube and other Internet sites.
- Fresh Pet, a Secaucus, NJ-based company, plans to sell a new line of refrigerated, pre-cooked dog food following the recall of more than 60 million containers of pet food.

AP:
- Google Inc.(GOOG) is partnering with four US states to develop a search engine to make public records more accessible over the Internet.

USA Today:
- PepsiCo Inc.(PEP) will top the US Environmental Protection Agency’s list of “green power” companies because it will buy credits to subsidize production of renewable energy.
- A majority of the 100 top-grossing US law firms reported 2006 profits of more than $1 million per equity partner.

Dagens Nyheter:
- Ericsson AG(ERIC) is in better shape today than it ever was after emerging from the industry slump a few years ago, former CEO Hellstroem said.

Kargozaraan:
- Iran has expelled about 20,000 Afghan immigrants from Sistan-Baluchistan province in the past eight days.

Personal Incomes Higher, Spending Lower, Inflation Gauge Decelerates Further, Chicago Area Activity Decelerates, Construction Spending Decelerates

- Personal Income for March rose .7% versus estimates of a .6% increase and an upwardly revised .7% gain in February.
- Personal Spending for March rose .3% versus estimates of a .5% gain and an upwardly revised .7% increase in February.
- The PCE Core for March was unch. versus estimates of a .1% gain and a .3% increase in February.
- Chicago Purchasing Manager for April fell to 52.9 versus estimates of 54.0 and a reading of 61.7 in March.
- Construction Spending for March rose .2% versus estimates of a .1% gain and an upwardly revised 1.5% increase in February.

BOTTOM LINE: Personal spending in the US rose less than forecast, while incomes gained more than estimates and the Fed’s favorite inflation gauge eased in March, Bloomberg reported. The Fed’s recent Beige Book survey said generally positive retail sales were offsetting slower growth in manufacturing in most regions and that most regions reported tight labor market conditions. The unemployment rate is matching a five-year low and wages/salaries gained the most in six years during the first quarter. The Core PCE, the Fed’s favorite inflation gauge decelerated further. The gauge is now rising at a 2.1% year-over-year rate versus the 20-year average of 2.5%. I continue to believe wages will continue growing well above most measures of inflation, thus powering spending and helping sustain economic growth.

A measure of business activity in the Chicago region fell this month from the highest level in almost two years, Bloomberg reported. The report indicates that companies are still increasing production and spending after holding back to work down inventories. The inventories component of the index fell to 43.2 from 48.8 the prior month. The prices paid component rose to 64.9 versus 59.1 in March. However, the employment component rose to 50.5 from 45.0 the prior month. Considering last month saw one of the largest jumps in US history in this index, a large drop was expected. I continue to believe US economic growth will grind slowly higher over the remainder of the year.

Construction spending in the US rose for a second month in March as work on office buildings, hotel and schools increased, Bloomberg said. Private residential construction spending fell 1.0% in March versus a 1.8% gain the prior month. While overall construction spending is holding up, residential construction will continue to mute activity as homebuilders work down inventories.

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Monday Watch

Weekend Headlines
Bloomberg:
- US stocks rose for the fourth straight week, sending the DJIA above 13,000 for the first time, after profit reports that topped analysts’ estimates and a surge in takeovers reinforced speculation that shares are cheap.
- Shares of Aluminum Corp. of China Ltd., the nation's biggest maker of the lightweight metal, rose as much as 300% as the company started trading on the Shanghai stock exchange today.
- President Bush said he is gaining new support for immigration overhaul as his administration works with lawmakers in both political parties to try to tackle the issue this year.
- China orders banks to set aside more money as reserves for the seventh time in 11 months to try to prevent an accelerating economy from overheating. Premier Wen Jiabao is trying to stop a flood of cash from an export boom from fueling wasteful investment, inflation and a stock market bubble.
- The Fed’s Yellen said the odds are good for exceptionally strong world growth and that US growth should rebound later this year. Current below trend growth may mitigate inflation risk and low rates haven’t cut demand for US assets, she said.
- It’s a question few in Tokyo want to ask: What happens if deflation returns to Japan?
- Speculators are increasing their purchases of Russian stocks just as six years of gains grind to a halt in the world’s second-largest emerging market.
- The cost of shipping coal and iron-ore is about to decline as the supply of cargo vessels overwhelms demand.

NY Times:
- Citigroup Inc.(C) plans to spend $30 million in two months on a global advertising campaign, the first since it was created almost a decade ago.
- Michael S. Dell, the chairman and chief executive of Dell, who built his business by selling direct to his customers, is now thinking about changing the way the company markets its computers.
- The US military has found a cooperative ally in Sunni Muslim tribal leaders in Iraq’s Anbar province in fighting against the al-Qaeda terrorist network.

Boston Globe:
- Boston will plant 100,000 trees during the next 13 years and the US Forest Service will study the results on the city’s residents and environment.

Washington Post:
- The Interior Dept. will announce plans on April 30 to permit oil and gas drilling off the Virginia coast, an area currently off-limits. New exploration in Alaska’s Bristol Bay and the Gulf of Mexico would also be allowed. A news release the department distributed yesterday said officials had finished a five-year plan, including a major proposal for expanded oil and natural gas development on the US Outer Continental Shelf.

Financial Times:
- News Corp.’s MySpace Web site says 70% of its advertising income now comes from branded advertising, compared with around 30% a year ago.
- Senior Citigroup(C) executives fear the world’s biggest financial services company could become the target of activist hedge funds that would press for it to be broken up.
- DE Shaw, a NY-based hedge-fund firm, may start a private equity fund into which it may place some of its existing holdings.
- Iberdrola SA considers the US as the next market for growth as Spain’s second-largest power company is dissatisfied with the slow pace of energy integration in Europe. The US is “demonstrating a strong commitment to renewable energy,” Galan said. “In fact, in some states, the legislation sets out goals that go beyond the emission cuts laid out by” the 1997 Kyoto Protocol’s clean development mechanism.
- Short-sellers are facing growing structural barriers in their quest to profit from share-price declines, a reversal of fortune that helps explain the heavy losses suffered recently by hedge funds that bet against Amazon.com(AMZN), the internet retailer.

Nikkei:
- Osaka Gas Co. and Yamaha Motor Corp. are jointing developing methane gas vehicles that may be on sale within 3 years.

Commercial Times:
- Liquid-crystal display makers will accelerate price increases of some panels next month because of demand from personal computer makers. Prices of liquid-crystal displays used in computers began rising this month and may climb until the third quarter as Microsoft’s new Windows operating system spurs demand for wider screens, research firm iSuppli Corp. said.

Al-Hayat:
- Total SA plans to invest $2 billion in Yemen through 2009 to develop exploration projects and increase oil production.

Weekend Recommendations
Barron's:
- Made positive comments on (CELL) and US Dollar.
- Made negative comments on (ACP) and (AMZN).

Night Trading
Asian indices are -.50% to +.25% on average.
S&P 500 indicated -.19%.
NASDAQ 100 indicated -.21%.

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Earnings of Note
Company/Estimate
- (APC)/.76
- (ATHR)/.21
- (BEAV)/.32
- (CTX)/.63
- (CNA)/1.02
- (CVD)/.60
- (GNW)/.77
- (HLT)/.18
- (HUM)/.40
- (K)/.69
- (LTR)/.97
- (PBI)/.67
- (PPS)/.02
- (RSH)/.13
- (TSN)/.10
- (VZ)/.53
- (VMC)/.80

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Personal Income for March is estimated to rise .6% versus a .6% gain in February.
- Personal Spending for March is estimated to rise .5% versus a .6% gain in February.
- PCE Core for March is estimated to rise .1% versus a .3% gain in February.

9:45 am EST
- Chicago Purchasing Manager for April is estimated to fall to 54.0 versus 61.7 in March.

10:00 am EST
- Construction Spending for March is estimated to rise .2% versus a .3% gain in February.

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

Weekly Scoreboard*

Indices
S&P 500 1,494.07 +.66%
DJIA 13,120.94 +1.23%
NASDAQ 2,557.21 +1.22%
Russell 2000 829.70 +.10%
Wilshire 5000 15,051.89 +.61%
Russell 1000 Growth 590.63 +1.02%
Russell 1000 Value 857.66 +.17%
Morgan Stanley Consumer 737.42 +.46%
Morgan Stanley Cyclical 1,013.53 +1.51%
Morgan Stanley Technology 600.54 +3.0%
Transports 5,122.39 -1.60%
Utilities 524.38 +.73%
MSCI Emerging Markets 122.75 +.09%

Sentiment/Internals
NYSE Cumulative A/D Line 75,694 unch.
Bloomberg New Highs-Lows Index +355 -48.10%
Bloomberg Crude Oil % Bulls 42.0 +61.5%
CFTC Oil Large Speculative Longs 199,503 -3.4%
Total Put/Call 1.0 +33.3%
NYSE Arms 1.23 +41.4%
Volatility(VIX) 12.45 +3.1%
ISE Sentiment 136.0 +8.8%
AAII % Bulls 39.2 -16.4%
AAII % Bears 38.0 +28.3%

Futures Spot Prices
Crude Oil 66.46 +3.6%
Reformulated Gasoline 236.13 +10.5%
Natural Gas 7.83 +4.5%
Heating Oil 191.35 +4.5%
Gold 681.80 -2.03%
Base Metals 268.43 -2.0%
Copper 353.25 -2.5%

Economy
10-year US Treasury Yield 4.69% +2 basis points
4-Wk MA of Jobless Claims 332,000 +.8%
Average 30-year Mortgage Rate 6.16% -1 basis points
Weekly Mortgage Applications 653.30 +3.6%
Weekly Retail Sales unch.
Nationwide Gas $2.90/gallon +.04/gallon
US Heating Demand Next 7 Days 34.0% below normal
ECRI Weekly Leading Economic Index 141.60 +.9%
US Dollar Index 81.53 -.1%
CRB Index 314.20 +.7%

Leading Sectors
Oil Service +5.4%
Networking +4.8%
Internet +1.7%
Biotech +1.6%
I-Banks +1.4%

Lagging Sectors
Telecom -1.8%
Steel -1.9%
HMOs -2.2%
Gold -2.5%
Airlines -6.7%

One-Week High-Volume Gainers
One-Week High-Volume Losers

*5-Day Change