DJIA Closes at Another Record High on Oil Price Decline and Buyout Speculation

Indices
S&P 500 1,486.30 +.27%
DJIA 13,136.14 +.56%
NASDAQ 2,531.53 +.26%
Russell 2000 816.25 +.21%
Wilshire 5000 14,949.24 +.23%
Russell 1000 Growth 586.45 +.31%
Russell 1000 Value 853.94 +.21%
Morgan Stanley Consumer 734.99 +.33%
Morgan Stanley Cyclical 1,020.56 +2.0%
Morgan Stanley Technology 596.17 +.46%
Transports 5,034.33 -.06%
Utilities 524.53 +1.02%
MSCI Emerging Markets 121.71 +.17%

Sentiment/Internals
Total Put/Call 1.12 +19.15%
NYSE Arms .94 -34.88%
Volatility(VIX) 13.51 -4.99%
ISE Sentiment 114.0 -5.79%

Futures Spot Prices
Crude Oil 64.47 -1.89%
Reformulated Gasoline 224.78 -.51%
Natural Gas 7.71 -1.92%
Heating Oil 188.67 -.43
Gold 675.90 -1.11%
Base Metals 272.32 +.70%
Copper 362.25 +1.86%

Economy
10-year US Treasury Yield 4.64% +2 basis points
US Dollar 81.63 +.23%
CRB Index 311.58 -.36%

Leading Sectors
Restaurants +1.27%
Homebuilders +1.05%
Medical Equipment +1.04%

Lagging Sectors
Gold -.71%
REITs -.78%
Alternative Energy -1.09%

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Afternoon Recommendations
Bank of America:
- Upgraded (CME) to Buy, target $622.

Afternoon/Evening Headlines
Bloomberg:
- OPEC should increase production to assure adequate supplies in case of terrorist attacks and other disruptions, the Intl. Energy Agency said.
- The average gasoline pump price in the US is likely to rise to a record this summer because of refinery “disruptions,” Energy Secretary Samuel Bodman said.
- Cotton in NY fell to the lowest price in 20 months on speculation unsold supplies in the US will rise more than estimated as exports slump.
- OPEC’s compliance with output reductions set last year rose to 70% in April, from 65% in March, OPEC’s secretary general said.

Wall Street Journal:
- Shareholders with a slight majority of Dow Jones(DJ) stock don’t support News Corp.’s(NWS/A) $5 billion takeover bid.

Sparkspread.com:
- Dynegy Corp.(DYN) and US Power Generating Co. are considering bids for Mirant Corp.(MIR), citing officials familiar with the proposals.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Retail longs and Telecom longs. I exited my (LVLT) long and took profits in a trading short in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was neutral today as the advance/decline line finished slightly lower, most sectors rose and volume was heavy. Measures of investor anxiety were above average into the close. Today's overall market action was mildly bullish as the major averages finished near session highs, reversing morning losses, on heavy volume. Oil is down $1.22 per bbl. on little news. As well, gold fell $7.50 per ounce and continues to trade poorly, considering all the recent potential upside catalysts. The 10-year yield finished off session highs, rising 1 basis point. Today was another very frustrating day for the bears considering the below-expectations housing report and weak retail sales reports. Given the market's overbought state and heavy volume today, I suspect even more investors and traders are trapped leaning too heavily bearish.

Stocks Higher into Final Hour on Buyout Speculation, Lower Energy Prices and Stable Long-term Rates

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Retail longs and Telecom longs. I sold an existing long and added to my (IWM)/(QQQQ) hedges this morning and then covered some (IWM)/(QQQQ) hedges this afternoon, thus leaving the Portfolio 75% net long. The tone of the market is neutral as the advance/decline line is slightly lower, most sectors are rising and volume is heavy. Under Armour (UA) reported an in-line quarter but gave mildly conservative guidance and the stock is falling 8.4%. I am still very confident in the long-term story and will look to add again to my long position on signs of technical stabilization. Bear Stearns is saying that Dow Jones (DJ) will likely accept the News Corp. (NWS-A) bid. As well, Prudential is saying that it doesn't expect other bidders to materialize. The major averages are moving higher again as the 10-year yield begins to pull back as oil prices decline. Housing stocks are now higher after the morning sell-off on the pending home sales report. Cyclicals are substantially outperforming the broad market, with the MS Cyclical Index rising 2.1%, boosted by Dow Jones(DJ). As well, shares of Whirlpool (WHR), Masco (MAS), Citigroup (C), FedEx (FDX), Honeywell International (HON) and Hewlett-Packard (HPQ) are pushing the index higher. My intraday gauge of investor angst is at high levels considering the gains in the major averages. I expect US stocks to trade mixed-to-higher into the close on positive earnings reports, short-covering, falling energy prices and buyout speculation.

Today's Headlines

Bloomberg:
- A flurry of so-called collateralized debt obligations backed by other CDOs may be crated soon to lure investors who might be more interested in assets linked to subprime mortgages if they were less risky, according to managers, underwriters and lawyers at a conference in Miami.
- Oil is falling another $1.26/bbl. $64.44/bbl. as investment funds sell ahead of tomorrow’s energy inventory data report.
- Gold fell $7/oz. in NY on speculation investors may sell the metal after the US dollar rallied on a better-than-expected ISM Manufacturing report.
- The cheating episode at Duke University may cause academics to conclude the post-Enron emphasis on teaching ethics in graduate business schools is a failure.
- National City Corp.(NCC) agreed to buy MAF Bancorp(MAFB) for about $1.9 billion in stock to expand in Chicago and enter Wisconsin.
- Federal Reserve Chairman Ben Bernanke warned against any retreat by US policy makers into protectionism, as the economy stands to benefit more over the long term from free trade.
- Citigroup Inc.(C) would be worth more if broken up and shareholders are pressing for action, said Michael Jones, chief executive officer of Clover Capital Management.

Wall Street Journal:
- Ford Motor(F) plans to aggressively market the company’s F-150 pickup truck with advertising that indirectly targets the safety ratings of rival Toyota Motor(TM) Corp’s Tundra.
- Carl Icahn stepped up his campaign to get a seat on the board of Motorola Inc.(MOT) with a letter to shareholders published as a full-page advertisement in today’s Wall Street Journal.

NY Times:
- US Immigration officials increased deportation of illegal immigrants by 20% during the past year compared with a year earlier.

NY Post:
- Microsoft Corp.(MSFT) is weighing a bid to acquire Internet advertising provider 24/7 Real Media(TFSM).

CNBC:
- News Corp.(NWS/A) has made an unsolicited offer of $60 a share to buy Dow Jones(DJ). Shares of Dow Jones soared 56% on the report.

LA Times:
- Southern California will again set records for international trade this year, although the railroad system serving the region is at capacity and cargo fees may drive business to other ports.

Billings Gazette:
- ConocoPhillips’(COP) refinery in Billings, Montana, may operate at full capacity by the end of the week, after a shutdown for “maintenance.” The plant has a capacity to process 58,000 barrels of crude oil a day.

ISNA:
- Iran’s foreign minister will not hold a “dialogue” with US Secretary of State Condoleezza Rice at the Iraq security conference planned this week.

Kuwait News Agency:
- Kuwait, the Middle East’s fourth-largest oil producer, has made a “large” discovery of light crude oil and natural gas in the north of the country, citing the country’s oil minister.

Pending Home Sales Fall, ISM Manufacturing Surges

- Pending Home Sales for March fell -4.9% versus estimates of a .1% increase and an upwardly revised 1.1% gain in February.
- ISM Manufacturing for April rose to 54.7 versus estimates of 51.0 and 50.9 in March.
- ISM Prices Paid for April rose to 73.0 versus estimates of 67.8 and a reading of 65.5 in March.

BOTTOM LINE: An index of pending sales of existing homes in the US unexpectedly fell in March, Bloomberg reported. Pending re-sales declined 7.1% in the South, 6.9% in the Midwest and 4.9% in the Northeast. Sales rose 1.6% in the West. Residential construction fell at a 17% pace in the first quarter, subtracting 1 percentage point from overall US gdp growth. Low unemployment, record net worth and strong wage growth continue to give consumers’ the confidence to purchase houses at relatively high rates by historic standards. I continue to believe the worst of the housing downturn is past.

Manufacturing in the US grew in April at the fastest pace in almost a year as orders jumped and production improved, Bloomberg reported. The prices paid component rose to 73.0 from 65.5 the prior month. The New Orders component of the index jumped to 58.5, the highest since February 2006, from 51.6 the prior month. The Production component rose to 57.3 from 53.0 the prior month. The Inventory component fell to 46.3 versus 47.5 in March. I continue to believe manufacturing will begin adding to US growth this quarter after substantial inventory de-stocking pressured growth in 1Q.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Police officers can end a high-speed chase that threatens innocent bystanders by forcing a fleeing suspect’s car to crash, the US Supreme Court ruled.
- Microsoft Corp.(MSFT), citing today’s victory in the US Supreme Court, will ask judges to cut more than $1 billion from jury verdicts the company lost in two other patent cases.
- George Soros’s money management firm hired Mark Malloch Brown, the former deputy secretary general of the United Nations, as vice chairman to help with investments in emerging markets.
- Anadarko Petroleum Corp.(APC), a US oil and natural-gas producer, said first-quarter profit fell 84% on lower oil and natural-gas prices.
- Japanese wages fell for a fourth month in March, signaling that growth in consumer spending in the world’s second-biggest economy will be limited.
- Pakistan and Afghanistan will boost anti-terrorism cooperation, denying sanctuary to gunmen and cutting off funds to extremists, the country’s presidents Pervez Musharraf and Hamid Karzai said after meeting in Turkey.
- Crude oil is falling a second day in NY on speculation US stockpiles rose to a five-month high last week as US refinery “fires” and “breakdowns” cut demand.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on Corning(GLW), target $29. Circuit City(CC) lowered their F1H08 guidance, citing weak TV sales in April. According to the company, the weakness was due to the overall market condition and company specific issues. Our retailing team called Best Buy(BBY) and was informed by BBY that it had not seen material changes from their expectation, and they will not revise their guidance. We believe that CC’s weakness is mostly company-specific. On the recent earnings conference call, BBY indicated that the sales of flat-panel TVs were strong and they were gaining market share. We still think the market condition for GLW’s LCD business is healthy.

Night Trading
Asian Indices are -.75% to -.25% on average.
S&P 500 indicated +.07%.
NASDAQ 100 indicated +.05%.

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Earnings of Note
Company/EPS Estimate
- (ASF)/.33
- (ACS)/.80
- (NLY)/.23
- (ADM)/.61
- (ADP)/.66
- (AVP)/.32
- (BWLD)/.52
- (CBG)/.15
- (CEC)/.99
- (CEPH)/.89
- (CEN)/.30
- (CMG)/.32
- (COCO)/.14
- (DIVX)/.14
- (DWA)/.08
- (EMR)/.60
- (EOG)/1.02
- (FLS)/.56
- (GET)/.12
- (GBE)/-.07
- (HC)/.15
- (IVGN)/.77
- (KCP)/.16
- (KMI)/1.69
- (LIZ)/.60
- (MRO)/1.96
- (MAS)/.26
- (MHS)/.74
- (MET)/1.28
- (MYGN)/-.25
- (NMX)/.57
- (OII)/.51
- (PPC)/-.15
- (PG)/.74
- (Q)/.09
- (RCL)/.06
- (RUTH)/.28
- (SAF)/1.63
- (SIRI)/-.11
- (SOHU)/.17
- (JOE)/.09
- (TUES)/.05
- (UA)/.20
- (WBMD)/.01
- (YUM)/.63

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- Pending Home Sales for March is estimated to rise .1% versus a .7% gain in February.
- ISM Manufacturing for April is estimated to rise to 51.0 versus a reading of 50.9 in March.
- ISM Prices Paid for April is estimated to rise to 67.5 from 65.5 in March.

Afternoon:
- Total Vehicles Sales for April are estimated to fall to 16.2M versus 16.3M in March.

BOTTOM LINE: Asian indices are lower, weighed down by automaker and technology stocks in the region. I expect US equities to open mixed and to weaken modestly into the afternoon. The Portfolio is 75% net long heading into the day.