DJIA Hitting Another All-Time High into Final Hour on Economic Data, Buyout Speculation

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my I-Banking longs and Retail longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly positive as the advance/decline line is slightly higher, most sectors are rising and volume is heavy. The ECRI Weekly Leading Index is hitting a new cycle high and has a growth rate of 4.4%. Moreover, the bond market seems to like today's jobs number as the 10-year yield is down 3 basis points. The growth rate of the ECRI future inflation gauge is -5.7%, the lowest since January 2004. The Case-Shiller August Housing price futures are ticking higher again, from $214,800 last week to $215,400 this week. Tech stocks are outperforming today, boosted by news of the potential acquisition of Yahoo! (YHOO) by Microsoft (MSFT). While this deal makes sense on paper, I suspect it would indeed eventually become a mess on the scale of AOL/Time Warner (TWX). In my opinion, Google (GOOG), which I already view as egregiously undervalued relative to the broad market and its Internet peers, would be the monster winner. The gasoline crack spread is now 32.42, eclipsing the post-Katrina record highs set in 2005. While this is temporarily boosting prices in the energy complex, I continue to believe it is doing significant long-term damage to oil demand, which will become evident as the nationwide rash of refinery "outages" subsides. I expect US stocks to trade mixed-to-higher into the close from current levels on lower long-term rates, short-covering, falling energy prices and buyout speculation.

Today's Headlines

Bloomberg:
- Crude oil is falling another $1.37/bbl. to $61.82/bbl. in NY as investment fund speculation that gasoline supplies aren’t adequate to meet summer driving demand subsides.
- Sunoco Inc.(SUN), the largest gasoline refiner in the US Northeast, will shut its Tulsa, Oklahoma, refinery for most of June for “maintenance,” the company’s vp of investor relations and planning said. Historically low refinery utilization as a result of a rash of refinery “outages” has been the main reason for the recent surge in gasoline prices.
- US ethanol daily average production rose 2.9% to 386,000 bbl./day last month, according to a Dept. of Energy report.
- Brazilian President Luiz Inacio Lula da Silva broke the patent on Merck’s(MRK) AIDS drug Efavirenz after the company’s offer to cut prices failed to satisfy demands from the country’s health ministry.
- Interactive Brokers Group(IBKR) shares gained 10% after the second-largest US IPO this year made the electronic derivatives trader more valuable than the company that owns the Chicago Board of Trade.
- NY state is drafting a new plan to renovate the Penn Station area that includes expanding the train terminal, moving Madison Square Garden and adding 5.5 million square feel of office space.
- Two hurricanes and three tropical storms may strike the US East and Gulf coasts this year. The forecasters lowered their prediction for the number of tropical storms that will form in the Atlantic during the June-to-November season to 16 from 17.
- Shares of PetroChina, the nation’s largest oil producer, surged after the company announced China’s biggest oil discovery in 50 years.
- Saudi Arabia aims to increase its crude-oil reserves by 76% and gas reserves by 40%.
- Bank of America Corp.(BAC) will buy a minority stake in a hedge fund created by its former chief investment officer, joining other lenders in expanding into the fast-growing industry.

Wall Street Journal:
- Imposing deadlines on Iraq could lead to greater violence and insecurity by helping the resistance and weakening moderates, US Deputy Secretary of State John Negroponte said in an editorial. Diplomatic, political and economic progress is being made that is the basis for a stable Iraq, he wrote.
- Wealthy US collectors are equipping their wine cellars with motion sensors, video surveillance, infrared alarms and other expensive security paraphernalia to protect their valuable assets.
- Florida is calculating the electoral impact of a decision to allow convicted felons to retain their civil rights, including the right to vote. At least 950,000 released felons in Florida may regain their voting rights.
- Max Baucus, the head of the US Senate finance committee, said rules on taxation of hedge-fund managers deserve a review because they might be outdated. Baucus, a Montana Democrat, said aides have been reviewing whether fund managers should pay higher taxes on profit.
- The US Treasury Dept. will soon announce changes designed to stop complaints that European and Asian financial markets are winning business because of the regulatory and legal climate in the US.
- Rupert Murdoch, the CEO of News Corp.(NWS/A) who made a bid to buy Dow Jones(DJ), said he wouldn’t make broad changes to the Wall Street Journal if his offer is accepted.

NY Post:
- Microsoft Corp.(MSFT) has asked Yahoo! Inc.(YHOO) to enter formal negotiations over a possible acquisition, citing unidentified banking sources. The company is working with Goldman Sachs(GS) over a possible deal. An agreement between the two would raise the combined companies’ share of the search advertising market to 27% compared with Google’s(GOOG) 65%. Yahoo has been valued at as much as $50 billion by Wall Street analysts.
- Westwood One(WON), a provider of sports, weather and traffic information, has hired UBS to find a possible buyer.
- Ion Media Networks(ION) yesterday approved a takeover bid from hedge fund Citadel Investment Group and NBC Universal.

Financial Times:
- European Union finance ministers will stop short of calling for restrictions on hedge funds in recommendations due next week.
- Billionaire Sam Zell, who is making an $8.2 billion purchase of Tribune Co.(TRB), said he isn’t interested in selling the LA Times, the Chicago-based media chain’s biggest newspaper.
- A US Supreme Court ruling last week that will make it easier to challenge existing patents is a welcome change which should help cut back on undeserved patents.

Reuters:
- ICAP Plc’s stock jumped on speculation the world’s biggest broker of trades between banks may be the target of a takeover by Deutsche Boerse AG.

Globe and Mail:
- Thomson Corp. is in takeover talks with Reuters Group Plc, which said today that it received an approach from an undisclosed company.

El Universal:
- Venezuela was one of two countries in Latin America and the Caribbean to record foreign capital outflows last year, citing the UN’s Economic Commission on Latin America and the Caribbean. Foreign companies took $543 million out of Venezuela last year while the region, led by Brazil, Mexico and Chile, received $72 billion of direct foreign investment.

88,000 New Non-Farm Jobs in April, Unemployment Rate Still Historically Low at 4.5%, Hourly Earnings Still Substantiall Exceeding Inflation

- The Unemployment Rate for April rose to 4.5% versus estimates of 4.5% and 4.4% in March.
- The Change in Non-farm Payrolls for April was 88K versus estimates of 100K and 177K in March.
- The Change in Manufacturing Payrolls for April was -19K versus estimates of -14K and -18K in March.
- Average Hourly Earnings for April rose .2% versus estimates of a .3% gain and a .3% rise in March.

BOTTOM LINE: Employers in the US last month added fewer jobs and the unemployment rate rose slightly, Bloomberg reported. The unemployment rate ticked slightly higher, but still remains historically low and is down from 5.1% in September 2005, notwithstanding fewer real estate-related jobs and significant auto production cutbacks. The unemployment rate’s current 12-month average is 4.6%. It has only been lower during two other periods since the mid-50s. The economy has created almost 2 million jobs in just the last year. As well, the Monster Employment Index hit another record high in April. The 50-week moving average of initial jobless claims(318,700) has been lower during only two other periods since the 70s. Furthermore, most measures of Americans’ income growth are now almost twice the rate of inflation. Americans’ Average Hourly Earnings rose 3.7% year-over-year in April, substantially above the 3.2% 20-year average. The 10-month moving-average of Americans’ Average Hourly Earnings is currently 4.04%. 1998 was the only year during the 90s expansion that it exceeded current levels. I continue to believe the labor market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

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Friday Watch

Late-Night Headlines
Bloomberg:
- Crude oil may fall next week as US refineries increase gasoline production in preparation for the peak-demand summer driving season, according to a Bloomberg survey of 34 analysts and traders.
- New Century Financial Corp. will close its sub-prime home-lending unit after failing to find a buyer.
- A US House panel voted to expand a federal agency’s powers to help low-income borrowers at risk of losing their homes as Congress pushes legislative fixes for the sub-prime mortgage problems.
- US Treasury Secretary Paulson said the low returns that Chinese earn on their savings are “perverse” and undermine the nation’s goal of stimulating domestic consumption. China’s savers are earning about 2.5% on their roughly $2 trillion of assets. That means savers must save more out of their income, rather than spend, to meet their investment goals, he said.
- The oldest gauge of US transportation stocks reached a record last week, with a boost from Warren Buffett. For Keith Wirtz at Fifth Third Asset Management, it’s a sign more gains are ahead for the overall market.
- The US dollar is headed for the biggest weekly gain in four months against the euro as strength in manufacturing and services suggested the Fed will refrain from cutting interest rates in coming months.
- BP Plc(BP) forecast today that capacity at the Cushing, Oklahoma, crude-oil storage terminal, where futures contracts traded in NY are delivered, will increase by 25% to about 50 million barrels within 18 months.
- Crude oil production in April by OPEC rose 50,000 barrels per day, a Bloomberg survey showed.
- Venezuela’s dollar bonds fell to the lowest in more than six months on concern that President Chavez’s decision to withdraw from the International Monetary Fund will cause a default on the country’s debt.
- Venezuelan President Chavez threatened to seize the country’s largest steelmaker, Siderurgica Del Orinoco, saying the company is a monopoly that refuses to supply some businesses.

Wall Street Journal:
- Ellington Management Group LLC won an auction today with a bid of $58 million for a parcel of mortgage loans and residual rights owned by New Century Financial Corp.

Financial Times:
- UK Prime Minister Tony Blair may seek to become the first president of the European Union when he leave office.
- One Equity Partners LLC, the US private equity group affiliated to JPMorgan Chase(JPM), is understood to have expressed an interest in buying EMI Group Plc in a deal that could value it at more than $6 billion.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (NT), target $35.
- Reiterated Buy on (QLGC), target $21.

Business Week:
- Bank of America Corp.(BAC) shares may rise 27% within a year, citing Carl Birkelbach, chairman and CEO of Birkelbach Investment Securities.
- Accredited Home Lenders Holding(LEND), a sub-prime lender, is a potential takeover target. Matthew Howlett of the investment firm Fox-Pitt Kelton Ltd. told the magazine a sale is the “most-likely” long-term option for Accredited.
- Monsanto(MON) will be a leader in agribusiness growth worldwide, citing Robert Levitt, founder and CIO of Levitt Capital Management.

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S&P 500 indicated -.05%.
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Earnings of Note
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Economic Releases
8:30 am EST
- The Change in Non-farm Payrolls for April is estimated at 100K versus 180K in March.
- The Unemployment Rate for April is estimated to rise to 4.5% versus 4.4% in March.
- The Change in Manufacturing Payrolls for April is estimated at -14K versus -16K in March.
- Average Hourly Earnings for April are estimated to rise .3% versus a .3% increase in March.

BOTTOM LINE: Asian indices are higher, boosted by metal and technology stocks in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Slightly Higher, DJIA Closes at Another Record

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