Stocks Slightly Lower into Final Hour Ahead of Fed

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Software longs, Networking longs and Computer longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is above-average. A reversal in the homebuilding sector into positive territory seems to be helping boost the broad market near session highs. Tech stocks and cyclicals are now higher on the day. As well, strength can be found in road/rail, restaurants, airlines, engineering/construction and steel. A number of market-leading stocks are gaining upside traction. My intraday gauge of investor angst is above average. The 10-year yield is stable despite stocks' gains from session lows. After touching its 50-day moving-average, corn is gapping 3.5% lower today. I still believe the commodity has put in a long-term top. I expect US stocks to trade mixed-to-higher into the close from current levels on buyout speculation and investment manager performance anxiety after another failed sell-off attempt.

Today's Headlines

Bloomberg:
- The government of Sudan is breaching a UN arms embargo by moving weapons into the western region of Darfur, citing a report by Amnesty International.
- Six New Jersey men were arrested for allegedly plotting a terrorist attack against soldiers at Fort Dix. The men planned to gain entry and use automatic weapons to kill as many soldiers as they could at the base.
- NY Mayor Michel Bloomberg may run for governor against incumbent Eliot Spitzer in 2010.
- Senate aides, looking for new sources of revenue, are studying how Harvard, Yale and Stanford are using offshore hedge funds to avoid tax bills.
- The US House Financial Services Committee will proceed with legislation to aid subprime borrowers if mortgage lenders don’t act to keep people from losing their homes, a subcommittee chairwoman said.
- Shares of Countrywide Financial(CFC) jumped as much as 9.6%, the biggest gain in the S&P 500 Index, on speculation the largest US mortgage lender may be the target of a takeover or leveraged buyout.
- US retailers’ sales probably fell for the first time in four years last month as an earlier Easter and the coldest April in a decade discouraged purchases of lightweight clothing, gifts and garden equipment.
- Hewlett-Packard(HPQ) said second-quarter earnings and sales beat its forecast.
- Corn prices in Chicago are falling 3.5%, heading for the biggest drop in a month, after a government report showed US farmers planted more acres than expected last week.

Wall Street Journal:
- Bank of America(BAC), BNP Paribas SA, Citigroup Inc.(C) and other investment banks are planning to start a system in July that will distribute bond and derivatives prices to clients.
- US cable operator Cox Communications(COX) will disable the fast-forward feature that lets television skip ads, as part of an agreement with ABC and ESPN to offer hit programs and football games on demand.
- Fannie Mae(FNM) and Freddie Mac(FRE) would benefit from an amendment proposed for the legislation creating a regulator to oversee the mortgage companies’ portfolios.
- CBS Corp.’s(CBS) Simon & Schuster book-publishing subsidiary will start an Internet book channel called Bookvideos.tv next month. The channel will be hosted on Google’s(GOOG) YouTube.com and other video-sharing sites.
- People increasingly use search engines to find information over the Internet and about 7% of all inquiries on the Web use a person’s name, citing the search engine Ask.com.

NY Times:
- Chevron Corp.(CVX) will admit it should have known former dictator Saddam Hussein was collecting kickbacks on oil purchased from Iraq through a corrupt United Nations program. The company will pay $25 million to $30 million, the largest penalty for a US company connected to the UN/Iraq oil-for-food scandal.
- A weaker dollar has resulted in Irish investors buying property in NY that is less expensive than real estate in Ireland and the UK.

Chronicle of Higher Education:
- New Orleans colleges and universities expect freshman enrollments to rise after declines following Hurricanes Katrina and Rita in 2005. Tulane University said on Monday that it expects a 56% increase in enrollments this fall. Loyola Univ., Xavier Univ., the Univ. of New Orleans and Dillard University reported anticipated increases from 30% to 100%.

Indianapolis Star:
- Allegations of cheating resulted in disciplinary action against almost half of second-year students at Indiana University’s School of Dentistry.

Financial Times:
- Worldwide mergers and acquisitions topped $2 trillion, driven by cheap debt and light antitrust scrutiny, citing Dealogic. The numbers are 63% higher than in the same period of 2006, when $1.235 trillion worth of deals were announced. Leveraged-buyout firms also have big pools of cash to spend. April was the busiest month in history, with $647 billion in deals announced. The busiest industry was financial services, with $410.6 billion worth of transactions.
- Dow Jones(DJ) investors may be hoping that Rupert Murdoch’s News Corp.(NWS/A) makes a higher bid, because an outside offer may be unlikely.

Nikkei English News:
- Japan will propose halving so-called greenhouse gases by 2050 at next month’s Group of Eight summit in Germany.

Xinhua News Agency:
- China’s crude oil import bill will only rise by 4.8% this year despite the country’s much stronger economic growth.

Kuwait News Agency:- Kuwait Petroleum Corp. doubled the budget for the new al-Zour refinery to $12 billion, citing the company’s managing director.

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.