Wholesaler Sales Rise Most in 18 Months, Inventories Rise Less Than Expected

- Wholesale Inventories for March rose .3% versus estimates of a .4% gain and a downwardly revised .4% increase in February.

BOTTOM LINE: Sales at US wholesalers rose at the fastest pace in 18 months in March, outstripping an increase in inventories and pointing to a pick-up in production, Bloomberg said. The increase reflected rising demand for computer equipment and durable goods. Sales of durable goods at wholesalers jumped 2.1% versus a .8% decline in February. It also implies that companies have successfully trimmed inventories down to manageable levels. Goods on hand represented 1.14 months’ supply at the current sales pace, the lowest this year. This corresponds with the recent ISM Manufacturing report that manufacturing grew at the fastest pace in almost a year. I continue to believe the worst of the inventory de-stocking is over and that inventory rebuilding will begin adding to economic growth this quarter.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Thomson Corp. confirmed that it’s in talks to take over Reuters Group Plc, the world’s largest publicly traded provider of financial data.
- Toyota Motor(TM) sold more care than GM(GM) for the first time in the three months through March, generating what may be record profits. Toyota outspent GM by 50% during the past three years and will open its eighth North American factory in Mississippi in 2010.
- Billionaire investor Carl Icahn failed to win a seat on Motorola’s(MOT) board after a three-month campaign, in a victory for CEO Zander.
- Inotera Memories, Taiwan’s most-profitable memory-chipmaker, said prices will rebound from a 64% slump this year as Microsoft’s(MSFT) Vista operating system drives demand. Inotera joins Korean rivals Samsung Electronics and Hynix Semiconductor in predicting a second-half price recovery because of Microsoft’s new Windows operating system.
- Tyco Intl.(TYC) bondholders said today they rejected the company’s offer to buy back $6.6 billion of debt securities, likely making it more expensive for the maker of ADT security systems to spit into three entities.
- Nucor Corp.(NUE), the second-largest US based steel company, may hold off on making acquisitions because steel assets are overvalued, CEO Dan DiMicco said. Asset prices aren’t reflecting the threat of continued high imports into the US, which helped depress prices in recent months, DiMicco said. “To participate in the acquisition activity just to be one of the boys is a bad business decision,” DiMicco said.
- Alcoa(AA) may face competition for its $26.9 billion bid for rival Alcan(AL) from mining companies including BHP Billiton(BHP) and Rio Tinto Group(RTP), said Credit Suisse Group.
- French President-elect Nicolas Sarkozy was warned by European finance ministers and central bankers that his plan to press the European Central Bank to focus more on bolstering growth would prove futile.
- Fortress Investment Group(FIG), the first US manager of private equity and hedge funds to go public, is starting a new $5 billion buyout fund.

NY Times:
- News Corp.’s(NWS/A) Fox Interactive Media is close to acquiring Photobucket, an Internet service that allows users to store photos and videos, for as much as $300 million. Photobucket has 41 million users, up from 14 million a year ago. Sixty percent of Photobucket’s Web traffic came from users of News Corp.’s MySpace during the week ending last Saturday.

Financial Times:
- Citigroup Inc.(C), the US financial firm once lauded for its adoption of environmental policies, will today say it will give $50 billion to environmental projects over the next decade The US bank will pledge to increase 10-fold, to $10 billion, its spending on reduction of its own greenhouse gas emissions. CEO Prince will call for world-wide regulation on the environment “to bring certainty to the markets and achieve a level playing field.”
- CB Richard Ellis Group(CBG), a real-estate broker, has started a $199 million property hedge fund. The Iceberg Alternative Real Estate fund, a newly formed London-based joint venture between CB Richard Ellis and Reech, a derivatives specialist, will aim for returns of 15 percentage points above cash rates.

London-based Times:
- Dutch shareholder group VEB said it will block the sale of ABN Amro Holding NV’s La Salle Bank to Bank of America(BAC), citing VEB Chairman Peter Paul de Vries.

Xinhua News Agency:
- Beijing handed out $6.50 spitting fines to 56 people during the week-long May holiday as the city tries to stamp out embarrassing behavior ahead of the 2008 Olympic Games.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (CCRN), target $28.

Morgan Stanley:
- Rated (UNP) and (NSC) Overweight.
- Unfavorable weather conditions, the Easter calendar shift, and higher gas prices have combined to create the “perfect storm” for retail softlines in April. However, our retail sales lead indicator predicts potential acceleration into 2H2007. Our updated MSRSLI predicts sales growth ex autos and gas of +6.0% into July, up from +4.2% growth in February.

Night Trading
Asian Indices are -.50% to +.25% on average.
S&P 500 indicated -.08%.
NASDAQ 100 indicated -.13%.

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Earnings of Note
Company/EPS Estimate
- (MDRX)/.12
- (ATW)/1.09
- (BBG)/.21
- (CELL)/.13
- (CRL)/.60
- (CHD)/.63
- (CSCO)/.33
- (CNO)/.34
- (CVS)/.46
- (DIGE)/.22
- (DUK)/.31
- (DYN)/.03
- (EP)/.25
- (ERTS)/.02
- (ENER)/-.07
- (EXPE)/.19
- (GI)/1.22
- (HET)/1.01
- (HSIC)/.48
- (HEW)/.27
- (LAZ)/.59
- (MVSN)/.23
- (MMC)/.50
- (MLM)/.72
- (MVL)/.34
- (PZZA)/.40
- (PFGC)/.18
- (PCLN)/.35
- (REV)/-.07
- (STE)/.40
- (THC)/-.02
- (TYC)/.47
- (VSE)/.11
- (DIS)/.36
- (WMG)/-.11

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Economic Releases
10:00 am EST
- Wholesale Inventories for March are estimated to rise .4% versus a .5% gain in February.

Other Potential Market Movers
- The (TXN) analyst meeting, weekly retail sales reports, Robert Baird Growth Stock Conference, Bear Stearns Global Transportation Conference, UBS Global Generic/Specialty Pharma Conference, Goldman Consumer Products Symposium, BIO Intl. Convention and Bank of America Basic/Industrials Conference could also impact trading today.

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

Stocks Finish Mixed as DJIA Closes at Another Record on Energy Price Decline and Buyout Speculation

Indices
S&P 500 1,509.48 +.26%
DJIA 13,312.97 +.36%
NASDAQ 2,570.95 -.05%
Russell 2000 831.87 -.12%
Wilshire 5000 15,190.52 +.20%
Russell 1000 Growth 595.27 +.13%
Russell 1000 Value 868.20 +.33%
Morgan Stanley Consumer 742.53 +.06%
Morgan Stanley Cyclical 1,045.91 +.51%
Morgan Stanley Technology 605.91 -.37%
Transports 5,165.01 -.12%
Utilities 530.81 +.87%
MSCI Emerging Markets 125.27 +.38%

Sentiment/Internals
Total Put/Call .69 -14.81%
NYSE Arms .83 -14.32%
Volatility(VIX) 13.15 +1.86%
ISE Sentiment 163.0 +15.60%

Futures Spot Prices
Crude Oil 61.60 -.53%
Reformulated Gasoline 219.52 -.96%
Natural Gas 7.78 -1.95%
Heating Oil 180.67 -1.32%
Gold 691.30 +.23%
Base Metals 281.66 unch.
Copper 371.60 -1.13%

Economy
10-year US Treasury Yield 4.63% -1 basis point
US Dollar 81.65 -.10%
CRB Index 308.92 -.75%

Leading Sectors
Steel +1.72%
Defense +1.66%
Utilities +.87%

Lagging Sectors
Oil Service -.50%
I-Banks -.74%
Homebuilders -.76%

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Afternoon Recommendations
Citigroup:
- Rated (UTHR) Buy, target $81.

Morgan Stanley:
- Upgraded (UA) to Equal Weight.

Afternoon/Evening Headlines
Bloomberg:
- Oil fell to a six-week low and gasoline declined on speculation that US refiners will increase output of the motor fuel before the peak-demand driving season. Low refinery utilization as a result of a nationwide rash of “outages” has been the driving force behind higher gas prices of late. US oil inventories are still approaching 8-year highs.
- World crude-oil markets are “over-supplied,” the Qatari energy minister said.
- Starbucks Corp.(SBUX) will eliminate artificial trans fats in food and beverages sold at all its stores in the continental US, Alaska and Canada.
- Alcoa’s(AA) proposed $26.9 billion takeover of Alcan(AL) would get close antitrust scrutiny to determine whether creating the world’s largest aluminum maker would raise prices, experts said.
- Consumer borrowing increased in March by the most in four months as Americans charged more purchases to their credit cards and took out more car loans, Federal Reserve figures showed.
- WellCare Health(WCG) surged 7.8% in after-hours trading after it boosted its forecast.
- Blue Nile(NILE) rose 6.7% in extended trading after 1Q profit exceeded estimates.
- Guitar Center(GTRC) soared 10% in after-hours trading after 1Q easily exceeded estimates.
- French President-elect Nicolas Sarkozy will name Francois Fillon, a former education minister and his chief campaign adviser, as prime minister. Fillon’s appointment is part of Sarkozy’s attempt to win support for his labor reforms, which are facing strong opposition from France’s two biggest trade unions, the CFTD and CGT.
- Citadel Investment Group LLC, a Chicago hedge fund manager, boosted its stake in networking-equipment maker 3Com Corp.(COMS) to 8.4% from less than 1%. Citadel said it may seek alternatives to increase shareholder value in 3Com, according to a filing today with the SEC. 20.2 million shares of the company are currently sold short. The stock is surging 4% after-hours on the report.
- New Century Financial(NEWC) won court approval to sell $170 million worth of loans to hedge fund Ellington Management Group LLC for about .34 on the dollar.
- Western Refining(WRN) said its El Paso, Texas, refinery will increase processing of high-sulfur, or sour, crude oil to as much as 50% of capacity next year from 10% after modifications are completed.
- Duke Energy(DUK) said if it receives board approval it plans to buy Southern Co.’s(SO) 500-megawatt interest in a proposed nuclear power project in South Carolina.

BOTTOM LINE: The Portfolio finished higher today on gains in my Biotech longs, Medical longs, Computer longs and Semi longs. I didn’t trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was neutral today as the advance/decline line finished slightly lower, most sectors gained and volume was below-average. Measures of investor anxiety were about average into the close. Today's overall market action was slightly bullish. These are the types of days the bulls should cheer after recent sharp gains as stocks work off their overbought state without any technical damage. Moreover, most sectors rose and many stocks posted 1%+ gains today, providing excellent opportunities for true stockpickers. Very few stocks declined on volume. The 10-year yield fell another basis point ahead of likely weak retail sales data and slightly more dovish FOMC commentary. Most commodities were weak today, despite another U.S. dollar decline. Bloomberg is reporting global crude oil markets are "oversupplied," according to the Qatari energy minister. I continue to believe that the rash of nationwide U.S. refinery "outages" will only result in further long-term global oil demand destruction. Commercial hedgers, historically the "smart money," remain significantly net short oil despite the commodity's recent decline.

DJIA Hits Another Record into Final Hour on Lower Energy Prices and Buyout Speculation

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Medical longs, Semi longs and Computer 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 lower, most sectors are rising and volume is below-average. Over the weekend, as usual, I read and heard numerous scary headlines despite the DJIA putting in its best showing in decades. Local papers had big headlines on the front of their business sections talking of a U.S. recession without even mentioning the Dow's record-shattering run. As well, around the web there was more depression comparisons and 20s crash talk. Finally, a recent Street.com column illustrates the prevailing sentiment among the many bears, in my opinion. David Tice of the Prudent Bear fund said, "We've never been more confident" and "I am as confident as ever that we are going to be right," in references to his belief in the market's impending 50% collapse. Even more telling, his fund is down 5% over the last decade including dividends, yet his fund sales are near their peak during the 2000-2003 market meltdown and his assets are at a new all-time high. The many bears still remain stunningly complacent, in my opinion. I continue to believe overall investor sentiment regarding U.S. stocks has never been worse in history with the DJIA at record highs. I view sentiment as closer to a major market bottom than a major market top. Sentiment gauges have been the best market-timing tools since the major bear market lows in 2002, in my opinion. I have noticed that the new bear catchword to describe the U.S. economy relative to the U.S. stock market is "disconnect." The market anticipates the future. In the current "U.S. negativity bubble" the thought that things could actually get better, not worse, isn't even considered. The mid-cycle slowdown in 1995 was much worse than the current one, yet stocks rose by double-digit percentages during that period as multiples expanded in anticipation of faster economic growth. The real "disconnect" is between the perception of investors regarding the long-term prospects for U.S. stocks and reality, in my opinion. I expect US stocks to trade mixed into the close from current levels as lower energy prices and buyout speculation offset profit-taking and positioning ahead of likely weak retail sales reports.

Today's Headlines

Bloomberg:
- US stocks are rising again and the DJIA climbed to its fifth straight record after Alcoa’s(AA) unsolicited $26.9 billion bid for Alcan(AL) added to speculation the record pace of takeovers will accelerate.
- Israeli Prime Minister Ehud Olmert survived three no-confidence motions brought by parliamentary opponents after a government commission’s report blaming Olmert for being unprepared for last year’s war in Lebanon.
- Teva Pharma is bidding more than $6.1 billion to acquire Merck KGaA’s generic-drug unit.
- Microsoft(MSFT) CEO Ballmer interrupted a Hawaiian vacation to call his top Internet ad man, Yusuf Mehdi, on April 16 after Google Inc.(GOOG) announced its $3.1 billion purchase of DoubleClick.
- Abby Joseph Cohen of Goldman Sachs(GS) and Edward Keon of Prudential Equity Group raised their forecasts for US stocks as the S&P 500 climbed toward a record.
- Gasoline futures fell for a second day as some refineries increased production, after a recent rash of “outages,” signaling inventories may grow for the first time in three months. Oil is falling another $.91/bbl., breaking below its 50 and 200-day moving averages as investment funds cut record speculation on the commodity as US inventories move towards 8-year highs.
- Copper dropped in New York, halting a six-session rally, after a mining strike ended in Peru, the world’s third-largest producer of the metal.
- Corn futures in Chicago fell 3% on speculation dry weekend weather firmed muddy fields in the eastern Midwest, allowing farmers to accelerate planting of the biggest US crop.
- Wal-Mart Stores(WMT) will install solar-power systems to provide some of its electricity at 22 locations in Hawaii and California.
- Democratic presidential candidate Barack Obama said the US should help Detroit-based automakers pay for retiree health care while at the same time requiring them and their overseas competitors to boost fuel efficiency and reduce tailpipe emissions.
- Warren Buffett, the billionaire chairman of Berkshire Hathaway(BRK/A), said newspaper investors face “long-term problems.”
- Copper, nickel and lead, the best performing commodities in the past four months, may be the worst by year-end. On Wall Street, the chorus is getting louder that rising metal supplies are outpacing demand. From Goldman Sachs Group(GS) to JPMorgan Chase(JPM) to Societe Generale, there are warnings of a mania that is showing all the signs of a climax.
- New Century Financial Corp.(NEWC), the largest subprime lender in bankruptcy, can borrow as much as $100 million to stay open as it auctions off its remaining assets, a judge ruled.
- Total SA, Europe’s third-largest oil company, said its proposed oil plant in Canada may start processing bitumen from Alberta’s oilsands by 2013.

Wall Street Journal:
- BAE Systems Plc is in advanced talks to buy Armor Holdings Inc.(AH), a US maker of military and heavy vehicles, for $3.5 billion.
- Some shareholders of Clear Channel Communications(CCU) lobbied the company’s board over the weekend to reconsider a sweetened $19.35 billion buyout proposal it turned down on May 3.
- Small and mid-size company mutual fund flows were down 35% from year-ago levels in the first quarter, despite the fact that mid-caps have been this year’s best performing group, according to data from Citigroup.

NY Times:
- A US Defense Department program is using venture capitalists to help find innovations from start-ups that haven’t traditionally been part of the military’s supply chain. DeVenCi, or Defense Venture Catalyst Initiative, combines the slow moving bureaucracy of the federal government with fast-moving investors.
- Mobile-phone versions of television shows, which are rising in popularity, haven’t been able to draw advertisers, who are reluctant to abandon traditional formats.

Women’s Wear Daily:
- Wal-Mart Stores(WMT) may be interested in buying Gottschalks Inc.(GOT) department stores to gain a foothold in northern California.

AP:
- A New Jersey Senate committee may this week recommend replacing the state’s death penalty with a sentence of life imprisonment without the possibility of parole.

Edaily:
- Germany’s SunTechnics GmbH and South Korea’s Dongyang Engineering & Construction Corp. plan to build the world’s largest solar-powered plant in the Asian country.

Sarmayeh:
- Iran’s central bank passed a directive to allow foreign lenders to operate in the country.

Al-Hayat:
- The US Agency for International Development provided $350 million to support agriculture projects in Iraq.

Die Welt:
- German Finance Minister Peer Steinbrueck wants to persuade this counterparts from other European Union countries to back his government’s push for hedge funds to be subject to a code of conduct.

Gestion:
- US, German and Peruvian companies plan to invest over $100 million in wind-farm projects in Peru.

Vedomosti:
- Wal-Mart Stores(WMT) registered 42 trademarks in Russia after foreign brands including Starbucks(SBUX) were misused.