Consumer Prices Decelerate, NY Manufacturing Improves, Foreign Demand for US Assets Strong

- The Consumer Price Index for April rose .4% versus estimates of a .5% gain and a .6% rise in March.
- The CPI Ex Food & Energy for April rose .2% versus estimates of a .2% gain and a .1% increase in March.
- Empire Manufacturing for May came in at 8.0 versus estimates of 8.0 and a reading of 3.8 in April.
- Net Long-term TIC Flows for March rose to $67.6 billion versus estimates of $71.0 billion and $58.1 billion in February.

BOTTOM LINE: Prices paid by US consumers rose less than forecast in April, suggesting inflation may be abating, Bloomberg reported. Core prices in the 12 months ended in April were up 2.3%, the smallest gain in a year, which means fuel costs aren’t filtering through the economy. The Consumer Price Index for April rose 2.6% year over year, down from a 4.7% increase in September 2005. This is also below the 20-year average of 3.1%. Moreover, the CPI has only been lower during four other brief periods since the mid-1960s. Energy prices rose 2.4% versus a 5.9% gain in March. The price of gas rose throughout the month, ending at $2.97/gallon, near the record $3.06 reached during the aftermath of Hurricane Katrina. Unusually low gasoline refinery utilization as a result of a rash of nationwide “outages” has been the driving force behind the recent rise in gas prices. Clothing prices fell .3% during the month versus a 1.0% decline the prior month. Auto prices were unchanged during the month. I continue to believe inflation concerns have peaked for this cycle as global growth slows, unit labor costs remain subdued and the mania for commodities continues to reverse course.

Manufacturing in NY state expanded at a faster rate for the second straight month in May as orders and shipments improved, Bloomberg reported. The New Orders component of the index rose to 8.0 from 3.9 prior. The Inventories component fell to zero, which indicates supplies stopped accumulating. The Future Conditions component of the index soared to 49.8 in May, the highest since August 2005, from 33.9 the prior month. This was the largest jump in this component since October 2001. The Prices Paid component fell to 34.4 from 40.5 the prior month. I continue to believe manufacturing is adding to overall economic growth this quarter, after subtracting in 1Q on substantial inventory de-stocking.

Net international buying of US long-term securities rose in March, led by purchases of Treasuries and agency bonds, Bloomberg said. International purchases of US stocks rose to a net $14.8 billion in March versus $13.5 billion in February. I continue to believe foreign demand for US assets will remain strong.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- The Fed’s Fisher said he expects US economic growth to “pick up in future quarters” and that he is hopeful inflation will moderate.
- Japan’s machinery orders fell unexpectedly for a second month in March, highlighting concern among manufacturers.
- Bank of Communications Ltd. shares surged 86% on their first day of trading in Shanghai, riding a market rally that’s made Chinese stocks the world’s most expensive. The Shanghai-based company has a market capitalization of $67.7 billion based on today’s pricing.
- China Shenhua Energy Co., the nation’s largest coal producer, increased coal production 6.1% in April.
- Shanghai copper futures are falling by the 4% daily limit amid speculation that demand will slow in China, the world’s biggest consumer of the metal.

ABC News:
- Former House Speaker Newt Gingrich said he may seek the 2008 Republican presidential nomination.

American Banker:
- Ohio’s attorney general plans to sue mortgage lenders and Wall Street firms over subprime mortgage defaults on behalf of both borrowers and the Ohio Public Employees Retirement System.

Financial Times:
- Companies in the EU may face more impromptu checks of their employees’ documents as part of a crackdown on illegal immigration, citing proposals from EU Justice Commissioner Franco Frattini.

London-based Times:
- Dow Jones’(DJ) board has a fiduciary duty to hold talks with News Corp.(NWS/A) over its $5 billion bid for the media company, citing Institutional Shareholder Services.

Securities Times:
- China’s securities regulator has ordered the country’s fund management companies to not get involved in speculation of shares. Fund managers must be mindful of “liquidity risks” and are barred from owning more stocks than they’re capitalized for. Fund managers are banned from offering stock tips to relatives or friends.

Commercial Times:
- Qualcomm Inc.(QCOM) may order about 20% more from Taiwan Semiconductor Manufacturing and Advanced Semiconductor Engineering in the second half of the year over the first.

China Securities Journal:
- China’s securities watchdog issued draft regulations allowing mutual funds to manage private assets for the first time.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (MGA), target $100.

Morgan Stanley:
- The People’s Bank of China 1Q Monetary Policy Report flags the authorities’ concern about the risk of a generalized overheating. We sense that PBOC is preparing the market for further hikes of the base lending and deposit rates in the near-term. We forecast at least two additional rate hikes in the remainder of the year, with the next one likely to come as early as in a matter of weeks.

Night Trading
Asian Indices are -.50% to +.25% on average.
S&P 500 indicated -.14%.
NASDAQ 100 indicated -.18%.

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Earnings of Note
Company/EPS Estimate
- (AMAT)/.28
- (CPWR)/.16
- (FIG)/.26
- (FOSL)/.20
- (FRE)/1.14
- (HD)/.59
- (SGR)/.19
- (TDS)/.24
- (TJX)/.38
- (TSAI)/.31
- (WMT)/.68

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Consumer Price Index for April is estimated to rise .5% versus a .6% gain in March.
- The CPI Ex Food & Energy for April is estimated to rise .2% versus a .1% gain in March.
- Empire Manufacturing for May is estimated to rise to 8.0 versus a reading of 3.8 in April.

9:00 am EST
- Total Net TIC Flows for March are estimated to fall to $45.0 billion versus $94.5 billion in February.

1:00 pm EST
- The NAHB Housing Market Index for May is estimated at 33 versus 33 in April.

Other Potential Market Movers
- The Fed’s Lockhart speaking, Fed’s Bernanke speaking, Fed’s Minehan speaking, Fed’s Mishkin speaking, Fed’s Geithner speaking, Fed’s Hoenig speaking, weekly retail sales reports, IBD/TIPP Economic Optimism Index, UBS Alternative Energy Conference, CSFB Semi & Supply-Chain Summit, Merrill Lynch Global E&C/Infrastructure Conference, Oppenheimer Moving Beyond Voice Conference, UBS Global Financial Services Conference, Deutsche Bank Tech Conference, Morgan Stanley Communications Conference could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by commodity and technology stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the day.

Stocks Finish Mostly Lower on Profit-taking

Indices
S&P 500 1,503.15 -.18%
DJIA 13,346.78 +.15%
NASDAQ 2,546.44 -.62%
Russell 2000 822.33 -.87%
Wilshire 5000 15,123.46 -.27%
Russell 1000 Growth 591.64 -.31%
Russell 1000 Value 866.44 -.10%
Morgan Stanley Consumer 737.22 -.23%
Morgan Stanley Cyclical 1,052.20 -.02%
Morgan Stanley Technology 607.09 -.43%
Transports 5,118.08 -.93%
Utilities 528.32 +.34%
MSCI Emerging Markets 124.97 +.11%

Sentiment/Internals
Total Put/Call .84 -10.64%
NYSE Arms .80 +27.34%
Volatility(VIX) 13.91 +7.41%
ISE Sentiment 160.0 +31.15%

Futures Spot Prices
Crude Oil 62.45 +.13%
Reformulated Gasoline 229.27 -2.53%
Natural Gas 7.94 +.58%
Heating Oil 186.45 -.95%
Gold 670.0 -.34%
Base Metals 277.65 +.11%
Copper 350.20 -2.83%

Economy
10-year US Treasury Yield 4.69% +2 basis points
US Dollar 82.04 -.08%
CRB Index 309.07 -.66%

Leading Sectors
Telecom +.51%
Energy +.38%
Utilities +.34%

Lagging Sectors
Coal -1.25%
I-Banks -1.32%
Gold -2.0%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- The HedgeStreet Exchange announced today it plans to launch a new class of “corporate actions” contracts that enable investors to trade on the anticipated revenues and earnings per share (EPS) of large publicly owned corporations.
- Shares of Massey Energy(MEE), the fourth-largest US coal producer, had their biggest drop since July after an analyst said a federal water-pollution lawsuit may lead to $2 billion in fines.
- Gasoline futures fell 2.4% today on forecasts US inventories will increase for a second straight week following three months of declines.
- Optionable Inc., the brokerage that had Bank of Montreal as its biggest customer until the bank last month revealed a $407 million loss on natural-gas options, said its CEO, Kevin Cassidy, resigned.
- Agilent Technologies(A), the world’s biggest maker of scientific-testing equipment, said second-quarter profit rose 7% as demand increase for bio-analytical instruments. The shares rose 3.5% in after-hours trading.

Financial Times Deutschland:
- Bayerische Motoren Werke AG, the world’s largest maker of luxury cars, plans to build its new X3 sports-utility vehicle in the US.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Internet longs and Retail longs. I didn’t trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was negative today as the advance/decline line finished lower, most sectors fell and volume was about average. Measures of investor anxiety were about average into the close. Today's overall market action was slightly bearish. Today's underlying action was worse than the S&P 500's small loss indicates. CNBC reported the Bancroft family is currently meeting on the News Corp. (NWS) offer. As well, Reuters says that News Corp. offered to establish an independent editorial board if the deal is approved. Dow Jones (DJ) rose slightly on the report. The 10-year yield trended slightly higher today and the U.S. dollar was stable ahead of tomorrow’s inflation data. Gasoline futures are at session lows, falling 2.6%. We could seem some meaningful declines in gas futures later this week if refinery utilization jumps. The Fed just released its April quarterly survey of senior loan officers.

Here is a summary:

1. Somewhat weaker loan demand.
2. Mixed changes in overall lending standards.
3. Considerable tightening in subprime-loan standards.
4. Relatively small tightening in prime-loan standards.

Stocks Mostly Lower into Final Hour on Profit-taking

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Internet longs and Retail longs. I added to my (EEM) short and added (QQQQ)/(IWM) hedges this afternoon, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, almost every sector is lower and volume is about average. The China Banking Regulatory Commission, in an attempt to cool its overheated stock market, ruled Friday after the close that Chinese banks can now invest as much as 50% of their funds in overseas stock markets. In my opinion, it would be in China's own interests for numerous reasons to promote the purchase of U.S. stocks. Dennis Slothower, editor of the On the Money newsletter, says that this means that "up to $2.3 trillion in China monies ... can now move out of China," MarketWatch.com reported. To put that in perspective, the total value of all publicly traded stocks in the U.S. is around $15.1 trillion. If even a modest faction of this money makes its way into U.S. stocks, we could see a "further parabolic advance in equities," Slothower said. The total value of U.S. shares contracted last year, despite the 15.8% rise in the S&P 500, by the most in 22 years as a result of booming M&A activity, giant corporate stock buybacks, muted IPO activity and limited secondary offerings. So far, we have seen more of the same this year. I continue to believe overall investor sentiment regarding the prospects for U.S. stocks has never been this poor in history with the DJIA near an all-time high. While U.S. investors are likely to remain "irrationally pessimistic" toward domestic shares a while longer, an increase in demand for U.S. equities from Chinese investors could turn the tide. I still believe a low supply of U.S. stock and increasing demand will make for a lethally bullish combination. I expect US stocks to trade mixed into the close from current levels as profit-taking offsets buyout speculation.

Today's Headlines

Bloomberg:
- President Bush today will direct the government to begin taking steps to reduce dependence on foreign oil supplies and will urge Congress to enact legislation aimed at the same goal.
- Gasoline futures in NY are falling 1.4% as inventories may increase for a second straight week following three months of declines.
- Copper is falling 3.5% in NY to the lowest price in two weeks on speculation that demand will slow in China, the world’s biggest consumer of the metal. Copper inventories in Shanghai have surged 275% in about six months.
- Nokia Oyj(NOK) said its market share will rise in the second quarter, sending the stock to the highest in more than four years.
- Members of Ford Motor’s(F) founding family are discussing the sale of part of their controlling stake in the money-losing automaker, three people with direct knowledge of the talks said.
- Leading worldwide bus manufacturer Van Hool today unveiled at its Lier, Belgium, plant Belgium’s first zero-emission, 43-foot hybrid electric transit bus equipped with a UTC Power fuel cell system. UTC Power is a United Technologies(UTX) company.
- Platinum supply exceeded demand last year for the first time since 1998 and the surplus will grow because of rising South African output, according to auto catalyst manufacturer Johnson Matthey Plc.
- Alcoa Inc.(AA) probably will fail to retain investment-grade credit should its $26.9 billion bid for rival Alcan Inc.(AA) succeed, S&P said.
- OAO Lukoil, Russia’s biggest independent energy company, said crude oil output climbed 6.5% to 2 million barrels a day in the first quarter, led by gains at fields overseas. Lukoil plans to spend $27 billion over the next ten years to boost overseas output 700%.
- OPEC should raise output before its September meeting to make up for lost exports from Nigeria and prepare for an increase in demand for winter fuels, a US Energy Department official said. At least 500,000 barrels of oil production a day has been halted in Nigeria.

Wall Street Journal:
- CBS Corp.(CBS) is starting a new venture that will involve syndicating its entertainment, sports and news videos to Web sites.
- Tim Barakett, who runs Atticus Capital LLC, a NY hedge-fund firm, makes big bets, doesn’t worry about volatile performance and has no intention of making an IPO.

NY Times:
- CBS Corp.(CBS) has no plans to replace Katie Couric as host of the “CBS Evening News” and the broadcast remains profitable despite lower ratings than other network news shows.

Washington Post:
- Rural electric cooperatives plan to spend $35 billion building conventional coal plants during the next 10 years with help from a federal low-interest loan program.

USA Today:
- US cities are making street signs brighter and larger, widening sidewalks and developing housing that’s more suitable for the additional 35 million people who will be age 65 or older by the year 2030.

AP:
- Wal-Mart Stores(WMT) will offer Skype Technologies headsets, handsets and webcams in 1,800 stores to give consumers access to equipment to make free and inexpensive Internet telephone calls.

Arabesquespress:
- Algerian exports of liquefied natural gas to the US may increase threefold to 12 billion cubic meters a year within three years.