Stocks Sharply Lower into Final Hour on Profit-taking

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Semi longs, Retail longs and Biotech longs. I added to my (EEM) short and added (QQQQ)/(IWM) hedges today, thus leaving the Portfolio 75% net long. The tone of the market is very negative as the advance/decline line is substantially lower, every sector is declining and volume is above average. The major averages and breadth are near session lows. A number of market-leading stocks are at session lows, as well. I suspect this profit-taking could last a few days, given how far we have run and how many investors need this market lower to get back in the performance game. According to a recent Citigroup report, between year-end 2002 and year-end 2006, consumer net worth rose by $16.8 trillion. Of that increase, less than one-fifth came from increases in net real estate value. The S&P 500 has soared 25.2% since June of last year. Nationwide housing prices have barely declined after a 50% surge over the last few years. Americans' net worth is at record high levels, a fact that continues to be ignored by those calling for a consumer collapse. Unemployment is historically low and wages are growing at almost twice most measures of inflation. Today's jobless claims were the lowest since January. The job market appears to be strengthening again with the improvement in manufacturing, related to an end to the substantial inventory de-stocking. I expect retail sales to bounce back to healthy levels into the summer. I expect a surge in "the market run is over" calls over the next few days, and that will likely mark the end of this pullback. Bulls are stepping away, and bears are likely trying to get back performance by doubling down. I expect US stocks to trade mixed into the close from current levels as buyout speculation, lower long-term rates and a firmer dollar offsets profit-taking and consumer spending worries.

Today's Headlines

Bloomberg:
- Copper futures are falling the most in three months in NY on signs that demand may slow in China, the world’s largest user of the metal. Stockpiles in Shanghai Futures Exchange warehouses have more than doubled this year to the highest since December 2005.
- Gold is falling $14/oz. as the euro’s rally against the dollar stalled after the US budget deficit shrunk further and initial jobless claims fell.
- The US government’s budget surplus for April, when tax payments are due, rose to the highest in six years as swelling revenue outpaced spending. For the first seven months of the 2007 financial year, the deficit narrowed 56% from a year earlier. A healthy job market and corporate profits continue to boost tax revenue more than economists expected. Individual income tax revenue rose 17% and corporate tax receipts jumped 15%.
- The virus that causes cervical cancer may be linked to throat cancer in people who engage in oral sex, according to a report in the New England Journal of Medicine.
- JetBlue Airways’(JBLU) board replaced founder David Neeleman as CEO, three months after the airline canceled almost 1,700 flights and stranded more than 130,000 passengers because of winter storms.

Wall Street Journal:
- Oaktree Capital Management LLC, a LA-based hedge fund, wants to raise almost $700 million by selling shares in itself using a new private market being started by Goldman Sachs(GS).
- The impending merger agreement between Reuters Group Plc and Thomson Corp. may have an impact on News Corp.’s(NWS/A) bid for Dow Jones(DJ) by changing the environment for financial news and data. A Reuters-Thomson tie-up could put Dow Jones Newswires, which is part of Dow Jones’s most profitable subsidiary, at a disadvantage.
- Rules on accounting for hedging are under review by the Financial Accounting Standards Board in the US with consideration being given to simplifying them.

NY Times:
- International Business Machines(IBM) plans to invest $1 billion a year in an effort to double the energy efficiency of data centers.

Chronicle of Higher Education:
- There is almost no evidence to judge whether the more than $3 billion the US government spends a year to improve science and mathematics education is effective, citing a yearlong study by the Academic Competitiveness Council.

USA Today:
- The US Dept. of Homeland Security is testing facial-recognition technology that uses digital surveillance photographs as a method for spotting terrorist suspects and criminals.

LA Times:
- California Governor Arnold Schwarzenegger may propose making the state the first in the nation to privatize its lottery system to raise funds for billions of dollars in bond payments coming due through 2010.

Financial Times:
- Adobe Systems(ADBE) is preparing a new platform, which will allow users to work outside web browsers and connect to Internet by using a desktop icon, citing CEO Chizen. The platform, called Apollo, will run applications outside web browsers on computers, mobile phones and other devices, and will keep a limited functionality even when these are disconnected from the Internet.

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.

Night Trading
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
- (CPKI)/.18
- (ED)/.80
- (DISH)/.44
- (GLBC)/-1.77
- (IRF)/.59
- (IPG)/-.16
- (KG)/.41
- (LAMR)/.00
- (MDTH)/.27
- (MGPI)/.31
- (MIR)/.35
- (NVDA)/.39
- (PCG)/.62
- (SLE)/.13
- (SUG)/.56
- (THQI)/.14
- (TBL)/.18
- (VIA/B)/.32
- (WEBM)/.00

Upcoming Splits
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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.