Stocks Rebounding into Final Hour on Economic Data, Buyout Speculation and Short-Covering

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Semi longs, I-Banking longs and Biotech longs. I covered some of my (QQQQ)/(IWM) hedges this morning, thus leaving the Portfolio 75% net long. The tone of the market is positive as the advance/decline line is higher, almost every sector is gaining and volume is below average. The major averages and breadth are pushing back to session highs after the news of a possible terror attack in Germany failed to make a dent in today's rally. I suspect many that were caught off guard by today's sharp morning snapback, including myself, were waiting for midday weakness to surface. That didn’t happen, thus we are seeing more short-covering into the close. The CBOE total put/call is an above average 0.94, and the ISE Sentiment Index is falling to a below average 128.0, despite today's gains. The 10-year yield is at session highs, rising 3 basis points, as I suspect many traders are anticipating better economic data going forward. Retail is the only sector not participating today. I still believe the Fed will remain on hold this year as economic growth accelerates back near average levels in the second half of the year. However, a rate cut is still much more likely than a rate hike. While most emerging markets were just modestly lower last night, Russian shares fell 2.5% and appear to be rolling over as the index breaks back below its 50-day moving-average. I expect US stocks to trade modestly higher into the close from current levels on buyout speculation and short-covering.

Today's Headlines

Bloomberg:
- The Chicago Merc(CME) raised its bid for the Chicago Board of Trade by 16% to $9.2 billion to ward off a higher offer from Intercontinental Exchange(ICE).
- Nvidia Corp.(NVDA) shares rose as much as 8.1% after the world’s second-largest producer of computer-graphics chips reported first-quarter results that topped analysts’ estimates.
- The IPO of Everquest Financial Ltd. would allow funds run by Bear Stearns(BSC) and Stone Tower Capital LLC to transfer risk from subprime mortgage bonds and buyout loans to other investors.
- A decision to sell the Beatles’ recordings online is “virtually settled,” Billboard magazine reported, quoting Paul McCartney.
- Oil futures in NY are rising $.56/bbl. after a report predicted global demand for oil will rise 1.8% this year.

Wall Street Journal:
- The fate of CBOT Holdings(BOT), which is weighing two takeover offers, will point to further deals in the exchange industry.
- Highfields Capital Management LP, the largest institutional shareholder in Wendy’s Intl.(WEN), called on Wendy’s Chairman James Pickett and other directors to find buyers for the company.
- Smartphone users are trying to muffle an annoying mosquito-like buzz that comes out of Research In Motion’s(RIMM) BlackBerry e-mail devices when used near public-address systems and electric appliances.
- A group of United Auto Workers labor union members at a Jeep plant in Toledo, Ohio, hired a financial adviser to help it in its proposal to buy the Chrysler Group from Germany’s DaimlerChrysler AG(DCX).

ABC News:
- A terrorist attack is being planned on US interests in Germany, officials from both countries said, and security is being tightened at potential targets, including adding air marshals to flights.

Washington Post:
- Democratic presidential candidate John Edwards, who has criticized predatory lending practices of sub-prime mortgage lenders, said he didn’t know hedge fund Fortress Investment Group expanded its holdings in sub-prime mortgage portfolios to at least $6.7 billion while Edwards worked at the fund.

AP:
- The US divorce rate has declined to its lowest level since 1970. The national rate per capita is 3.6 divorces per 1,000 people, down from the peak of 5.3 in 1981.

Financial Times:
- Goldman Sachs Group(GS) this week traded the first long-dated derivatives based on US home prices. Goldman speculated that expectations for home prices won’t be lower than they are now in five years by trading a contract based on the S&P/Case-Shiller home price index.

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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Friday Watch

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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