Trade Deficit Widens on Energy Imports, Import Prices Decelerate, Job Market Remains Healthy

- The Trade Deficit for March widened to -$63.9 billion versus estimates of -$60.0 billion and a downwardly revised -$57.9 billion in February.
- The Import Price Index for April rose 1.3% versus estimates of a 1.0% gain and a downwardly revised 1.5% increase in March.
- Initial Jobless Claims fell to 297K versus estimates of 315K and 306K the prior week.

BOTTOM LINE: The US trade deficit widened more than forecast in March as higher crude oil shipments drove the biggest increase in imports in more than four years, Bloomberg said. Imports from China fell. Imports of petroleum products rose to $24.6 billion from $20.9 billion the prior month. Shipments to the US of consumer goods surged to a record $40.1 billion as spending stayed strong enough in March to sustain demand. I continue to believe the US trade deficit will only improve modestly over the intermediate-term as US growth accelerates, mostly offsetting a likely fall in energy prices.

Prices of goods imported into the US rose for a third month in April, led by gains in the cost of crude oil, Bloomberg said. Prices excluding fuels rose .2% for the month. The price of capital goods fell by the most in almost two years, which implies inflation will remain contained. Year-over-year import prices rose 1.9% versus a 2.6% gain in March. Prices of imported autos, parts and engines were unch. As well, prices of goods from China fell .1%. I suspect import prices have already peaked for the year and will trend lower over the intermediate-term.

First-time claims for jobless benefits unexpectedly dropped to a four-month low last week, signaling the companies are letting go of fewer workers, Bloomberg reported. The four-week moving-average of jobless claims fell to 317,250 from 328,750 the prior week. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, held steady at 1.9%. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- China’s ambassador promised to toughen safety standards to prevent exports of contaminated food and drugs, US lawmakers said.
- Time Warner(TWX) fired Home Box Office Chairman and CEO Chris Albrecht over his arrest following a fight with his girlfriend in Las Vegas.
- South Korea’s central bank kept the benchmark interest rate unchanged for a ninth month as inflation remained in check and mortgage lending rose at the slowest pace in more than six years.
- Shares of Rio Tinto Group(RTP) fell 4.2% in Australia after the world’s third-largest mining company damped speculation of any takeover approach from BHP Billiton(BHP).
- China’s stocks, which accounted for half the trading in Asia yesterday, may face a “correction” as earnings can’t justify the rally that’s made them the world’s biggest gainers this year, according to Goldman Sachs. China’s CSI 300 Index, which tracks yuan-denominated A shares listed on the country’s two exchanges, is the world’s most expensive key stock index, at 42 times reported earnings.

Financial Times:
- Marathon Oil(MRO), the fourth largest US oil and gas company, has been warned by federal regulators that its refining unit could face legal action alleging manipulation of futures trading contracts. The action claims that a unit of the Houston-based Marathon tried to manipulate the price of West Texas Intermediate crude oil.
- US television production costs are becoming “unsustainable” as media companies pay more for writers, actors and special effects, citing 20^th Century Fox Television President Gary Newman.
- The value of shares traded on China’s stock exchanges yesterday surpassed the total for the rest of Asia.
- Geron Corp.(GERN) will start clinical trials of its embryonic stem-cell therapy for spinal cord injury in early 2008, citing CEO Tom Okarma.
- The NYSE referred 45 potential cases of insider trading to the SEC between Jan. 1 and April 20 this year, compared with 111 filed in the whole of 2006.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (TOL), target $36.
- Reiterated Buy on (WW), target raised to $62.

Morgan Stanley:
- Reiterated Overweight on (PCLN), target $66.

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Asian Indices are -.25% to +.50% on average.
S&P 500 indicated -.07%.
NASDAQ 100 indicated -.13%.

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Earnings of Note
Company/EPS Estimate
- (AIG)/1.55
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Economic Releases
8:30 am EST
- The trade deficit for March is estimated to widen to -$60.0 billion versus -$58.4 billion in February.
- The Import Price Index for April is estimated to rise 1.0% versus a 1.7% gain in March.
- Initial Jobless Claims are estimated to rise to 315K versus 305K the prior week.
- Continuing Claims are estimated to rise to 2513K versus 2495K prior.

2:00 pm EST
- The monthly budget surplus for April is estimated at $145 billion versus $118.8 billion the prior month.

Other Potential Market Movers
- The ICSC Chain Store Sales, Fed’s Moskow speaking, Fed’s Kroszner speaking, (STM) analyst meeting, (IDTI) analyst meeting, weekly EIA natural gas inventory report, Merrill Lynch Global Industries Conference, CIBC Communications Conference, Goldman Sachs Power/Utility Conference, Robert Baird Growth Stock Conference, Bear Stearns Global Transportation Conference, Goldman Consumer Products Symposium, Piper Jaffray Semi/Communications Conference, AG Edwards Lodging/Leisure Symposium and Bank of America Basic/Industrials Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by technology 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.

DJIA Hits Another Record High After Fed Comments

Indices
S&P 500 1,512.58 +.32%
DJIA 13,362.87 +.40%
NASDAQ 2,576.34 +.18%
Russell 2000 834.77 +.47%
Wilshire 5000 15,230.32 +.38%
Russell 1000 Growth 596.84 +.35%
Russell 1000 Value 870.40 +.37%
Morgan Stanley Consumer 743.58 +.28%
Morgan Stanley Cyclical 1,055.12 +.56%
Morgan Stanley Technology 610.69 +.37%
Transports 5,215.49 -.05%
Utilities 529.52 +.26%
MSCI Emerging Markets 125.76 +1.08%

Sentiment/Internals
Total Put/Call .73 -26.26%
NYSE Arms .83 -20.06%
Volatility(VIX) 12.88 -2.50%
ISE Sentiment 164.0 +32.26%

Futures Spot Prices
Crude Oil 61.57 -1.11%
Reformulated Gasoline 224.52 +1.85%
Natural Gas 7.73 +1.26%
Heating Oil 182.07 -.50%
Gold 682.80 -.67%
Base Metals 283.77 +.52%
Copper 366.25 -1.61%

Economy
10-year US Treasury Yield 4.66% +3 basis points
US Dollar 82.0 +.08%
CRB Index 308.68 -.07%

Leading Sectors
Steel +1.87%
Semis +1.8%
Retail +1.34%

Lagging Sectors
Oil Tankers -.16%
Drugs -.18%
Internet -1.34%

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Afternoon Recommendations
Deutsche Bank:
- Rated (SLAB), (XLNX), (MRVL), (TSRA) and (NETL) Buy.

Afternoon/Evening Headlines
Bloomberg:
- Edison Intl.(EIX) said it plans to more than triple its wind-power production capacity within two years, an investment that may to $2 billion.
- Crude oil in NY fell to the lowest in seven weeks in NY after an EIA report showed inventories surged near eight-year highs and gasoline supplies rose more than expected even as refinery utilization rose less than expected.
- Sugarcane production in Brazil, the world’s largest grower, will soar 54% in the next five years as global demand increases for crop-based fuels, said the head of Brazil’s largest sugar and ethanol group.
- Alltel Corp.(AT) is in talks with three competing buyout groups including one that pairs the Carlyle Group with Kohlberg Kravis Roberts.
- Whole Foods Market(WFMI) reported second-quarter profit that fell more than expected on costs to open new stores and competition from traditional grocers. The shares fell 9% in after-hours trading.
- Vice-President Dick Cheney said he was “impressed” by the commitment of Iraqi leaders to move forward on measures to speed political reconciliation in their nation after conferring with them in Baghdad today.
- WebSideStory(WSSI), a provider of Web site analytics, increased its full-year forecast. The stock soared 21% in after-hours trading.

Dow Jones:
- Atticus Capital LLC, one the largest shareholders of Deutsche Boerse AG, said the German exchange’s plan to purchase International Securities Exchange(ISE) will hurt investors.

CNBC:
- Bill Gross, manager of the world’s biggest fixed-income fund, told CNBC that he prefers short-maturity notes because the Fed will lower interest rates to support economic growth.

BOTTOM LINE: The Portfolio finished higher today on gains in my Computer longs, Networking longs, Semi longs, Retail longs and I-Banking longs. I didn’t trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished modestly higher, most sectors rose and volume was above-average. Measures of investor anxiety were slightly below-average into the close. Today's overall market action was bullish as the major averages and breadth finished near session highs. The broad market outperformed the S&P 500. Retail, REITs, Engineering/Construction, Semis, Homebuilders, Wireless, Steel and Coal all saw very good gains today. The U.S. Dollar Index finished at session highs and the 10-year yield rose 3 basis points as the FOMC statement implied faster U.S. economic growth going forward. I suspect many anticipated a Fed news sell-off before the upcoming retail sales data, which likely left more traders leaning the wrong way. Back in February, I pointed out that heavily shorted Mohawk Industries (MHK) was exploding higher despite lowering forward guidance meaningfully. This should have been a huge red flag to the shorts, yet short interest has only grown since then, from around 10% of the float to 13%. The stock surged 3.5% today on heavy volume to an all-time high on private equity chatter. I want to reiterate how amazing this is considering what has transpired in housing and how disturbing it should be to the many "U.S. housing collapse will lead to a market collapse" bears. This is just more evidence of the severe complacency in the bear camp, in my opinion.

Stocks Surging into Final Hour Again After Constructive Fed Comments

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Retail longs, I-Banking longs and Semi 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 mildly higher, most sectors are rising and volume is heavy. Weekly mortgage applications rose 3.6%, the third consecutive weekly gain. As well, purchase applications rose again; they were up 2.6%, and up 17% from October lows. The upcoming April retail same-store-sales and advance retail sales data will likely come in below even lowered estimates. The coldest April in a decade and the Easter calendar shift played a huge part in the likely weak data. However, I wonder if this is already priced into stocks given how much short interest has risen in the retail sector and how many analysts have made cautious comments of late regarding the prospects for April sales. Yesterday, Morgan Stanley described a "perfect storm" for softline retail during April. However, their note also said their proprietary retail sales leading indicator is predicting an acceleration to 6%, excluding autos and gas, in July from 4.2% in February. I agree with these expectations. So far this year, despite numerous perceived headwinds, the Morgan Stanley Retail Index (MVRX) is 8.1% higher vs. a 7.3% gain for the S&P 500. I expect US stocks to trade mixed-to-higher into the close from current levels on buyout speculation, short-covering, lower oil prices and investment manager performance anxiety after another failed sell-off attempt.

Today's Headlines

Today’s Headlines
Bloomberg:
- Oil is falling -$.71/bbl. after inventories surged to the highest since June of last year and approached 8-year highs. Moreover, gasoline supplies rose more than estimate despite lower-than-expected refinery utilization.
- The Fed kept the benchmark US interest rate at 5.25% and said inflation remains the “predominant” risk for the economy. The FOMC also said it expects economic growth to rise at a moderate rate and inflation to decelerate.
- News Corp.’s $5 billion bid for Dow Jones(DJ) has a 40% chance of success and its failure would send the shares plunging to below their pre-offer price, according to UBS.
- IBM(IBM) shares climbed to the highest level in five years after Goldman, Sachs(GS) suggested buying the stock because of rising earnings at the world’s largest computer-services provider.
- Amaranth Advisors LLC, the hedge fund that collapsed in September under $6.6 billion of energy-trading losses, will pay $717,000 to settle an unrelated case by the SEC. The firm improperly used shares acquired during public offerings in 2004 and 2005 to cover short positions, or bets that the shares would drop, the SEC said today.
- Eric Rosenfeld, co-founder of Long-term Capital Management, and two of his former colleagues are starting a hedge fund that uses computers to pick investments.

Wall Street Journal:
- Alltel Corp.(AT), a wireless telephone company, is holding talks with three groups of leveraged-buyout firms who are considering a possible acquisition.
- Chinese investors may soon start investing in real estate abroad, if restrictions on private investment in overseas real estate are lifted later this year.
- EBay Inc.(EBAY) is in talks to acquire StumbleUpon, an Internet company that helps people find Web sites that interest them.
- Delta Air(DAL) plans to overhaul and develop its facilities in NY and LA.
- United Steelworkers, the union representing workers in the US steel industry, is blocking takeovers, demanding board seats, and taking sides in bidding wars to enhance its negotiating power.
- Plans by Citigroup Inc.(C), to spend $50 billion in alternative energy sources are getting a lukewarm response from environmentalist advocates that say the company could also do other things.
- Hewlett-Packard(HPQ) and Eastman Kokak(EK) are among the printer-makers that recently introduced lower-priced ink cartridges to compete with the rapid market expansion of cartridge-refilling firms.
- Tetra Technologies(TTI) and other companies are working around the clock to bolster oil gas rigs in the Gulf of Mexico against the next storm.
- A US official accused Venezuela of allowing its airports and ports to be used by drug traffickers shipping cocaine to Europe.

NY Times:
- Mowaffak al-Rubaie, the national security adviser to Iraq’s prime minister Nuri Kamil al-Maliki, made his case to American legislators that pulling out troops from his country would be a disaster. He met several Democrats on Tuesday who have been calling for imminent US military withdrawals from Iraq, including Representative John P. Murtha and Senator Carl Levin. The meetings didn’t seem to shift the lawmakers’ positions.

Financial Times:
- Marathon Oil(MRO), the fourth largest US oil and gas company, has been warned by federal regulators that its refining unit could face legal action alleging manipulation of futures trading contracts. The action claims that a unit of the Houston-based Marathon tried to manipulate the price of West Texas Intermediate crude oil.
- Thomson Corp.’s offer to buy Reuters Group Plc for $17.5 billion may not be concluded quickly and the Canadian company’s share price may suffer during the process.

Haaretz:
- Israel has a good chance of being accepted into the OECD next week.

Handelsblatt:
- The German government plans to force hedge funds to disclose more information.