Core Producer Prices Unchanged, Advance Retail Sales Decline, Business Inventories Decline on Rising Sales

- The Producer Price Index for April rose .7% versus estimates of a .6% gain and a 1.0% increase in March.
- The PPI Ex Food & Energy for April was unch. versus estimates of a .2% increase and unch. in March.
- Advance Retail Sales for April fell -.2% versus estimates of a .4% gain and an upwardly revised 1.0% increase in March.
- Retail Sales Less Autos for April were unch. versus estimates of a .5% increase and a 1.1% gain in March.
- Business Inventories for March fell -.1% versus estimates of a .3% gain and a downwardly revised .2% increase in February.

BOTTOM LINE: Core US wholesale prices were unexpectedly unchanged for the second month in a row, a sign that inflation pressures may diminish, Bloomberg reported. The last time core prices went two consecutive months without a rise was in the fourth quarter of 2005. Core prices rose 1.5% year-over-year versus a 1.7% rise in March. I continue to believe inflation concerns have peaked for this cycle and that inflation will continue to decelerate in the second half of the year.

Retail sale in the US unexpectedly fell last month, a sign that higher gas prices and falling home values are taking a toll on consumers, Bloomberg said. The recent increase in gas prices diverted spending from other goods and services in April. As well the coldest April in a decade, the 14^th snowiest and the East calendar shift impacted sales greatly. Stores selling building materials and garden supplies showed a 2.3% decrease in sales, the largest drop since February 2003. I expect retail sales to bounce back into the summer on more seasonal weather and lower gas prices.

Sales at US businesses jumped and inventories unexpectedly dropped in March, showing companies may no longer have to pare stockpiles in coming months, Bloomberg said. Business sales surged 1.4%, the most since May 2006. At the current sales pace, the amount of goods on hand declined to 1.27 months, the lowest since August of last year. I continue to believe inventory rebuilding will begin adding to US growth this quarter as company gain confidence in the sustainability in the current expansion.

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Late-Night Headlines
Bloomberg:
- Twenty-nine state attorneys general urged Anheuser-Busch Cos.(BUD) to warn buyers of its alcoholic drinks spiked with caffeine about the dangers of mixing the two drugs. They also said the “starter drinks” appeal to teenagers. Anheuser’s Tilt, Spykes and Bud Extra should have labels saying the drinks may make people feel less impaired than they really are, the officials said today in a letter to the company.
- CPC Corp., Taiwan’s state-owned refiner, plans to more than double oil and gas reserves in five years to shield the island against the rising cost of importing almost all its supplies of crude. Annual exploration spending will more than triple to $300 million within 3 years.
- Lead prices may fall as much as 41% this year as rising supply from China boosts stockpiles and demand growth slows, according to industry forecaster Beijing Antaike Information Development.
- Copper futures are falling in Shanghai for a second day as international prices continued to drop amid concern that demand from China may slow.
- Former Fed chairman Greenspan said he still sees about a one-third chance of a recession in the US economy this year. “My arithmetic says if there’s a one-third probability of a recession, then there’s a two-thirds probability there won’t be a recession,” he said. Greenspan said “asset-related” problems are more likely in Asia than a repeat of the 1997 financial crisis that depleted the region’s foreign-exchange reserves.
- China’s stock trading volume surged to $970 billion in the first quarter, up 580% from a year earlier, as more people opened trading accounts.

NY Times:
- Facebook Inc., the second-most popular social-networking site behind MySpace Inc., will begin posting free classified ads, citing founder Mark Zuckerberg.

Financial Times:
- As many as 35 Chinese companies are expected to list in the US this year, equal to the combined total for the past three years, citing Eric Landheer, Asia Pacific head for Nasdaq Stock Market(NDAQ).

Reuters:
- Valero Energy Corp.(VLO), the largest US refiner, reduced rates on a fluid catalytic cracking unit at its Delaware refinery because of a “problem with a boiler,” citing state regulators. Rates were reduced to 55,000 barrels a day from 82,000 barrels a day. The Delaware refinery can process 210,000 barrels of oil a day. Low refinery utilization as a result of a rash of nationwide “outages” has been the main reason for the recent surge in gas prices.

Shanghai Securities News:
- China’s central bank sold about $14 billion of additional three-year bills to selected banks yesterday to absorb cash from the financial system. The sale of the additional bills, together with an increase in the required reserve ratio effective May 15, will remove almost 300 billion yuan from the banking system.

Dong-a Ilbo:
- The US government is prepared to announce an end to the Korean War, formally ending hostilities with North Korea, by September, before the Asia-Pacific Economic Cooperation summit. The US is also prepared to establish ties with North Korea, if the country acts to end its nuclear program.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (MGA), target raised to $100.
- Reiterated Buy on (FLR), target raised to $126.
- Reiterated Buy on (URBN), target $30.

Business Week:
- Combinatorx Inc.(CRXX) shares are likely to rise because the company has many promising drugs in development.
- News Corp.’s(NWS/A) stock could reach $30 a share with a purchase of Dow Jones(DJ), citing Sarat Sethi, a partner at Douglas C. Lane & Assoc.

Night Trading
Asian Indices are -1.25% to -.75% on average.
S&P 500 indicated -.01%.
NASDAQ 100 indicated +.03%.

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Economic Releases
8:30 am EST
- The Producer Price Index for April is estimated to rise .6% versus a 1.0% gain in March.
- The PPI Ex Food and Energy for April is estimated to rise .2% versus unch. in March.
- Advance Retail Sales for April are estimated to rise .4% versus a .7% gain in March.
- Retail Sales Less Autos for April are estimated to rise .5% versus a .8% gain in March.

10:00 am EST
- Business Inventories for March are estimated to rise .3% versus a .3% gain in February.

Other Potential Market Movers
- The Goldman Sachs Power/Utility Conference and Deutsche Bank Hospitality/Gaming Conference could also impact trading.

BOTTOM LINE: Asian indices are lower, weighed down by commodity and technology stocks in the region. I expect US equities to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

Stocks Break Winning Streak, Finish Near Session Lows on Profit-taking

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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.