Today's Headlines

Bloomberg:
- The San Francisco Chronicle plans to cut a quarter of its newsroom jobs to stem losses, citing a union official.
- Peter Hickson, global strategist for basic materials at UBS AG, sees copper prices falling further as Chinese demand slows.
- Microsoft’s(MSFT) plan to buy AQuantive(AQNT) for $6 billion increases the likelihood that the software maker will also buy Yahoo! Inc.(YHOO), Goldman Sachs(GS) analyst Anthony Noto said.
- The People’s Bank of China today raised its one-year benchmark lending rate by .18 percentage point and its one-year deposit rate by .27 percentage point.
- Goldman Sachs(GS), the highest-earning securities firm in Wall Street history, set a record today when its market value crossed $100 billion.
- Odyssey Marine Exploration(OMR), a company that searches for sunken treasure, said it may have recovered the biggest collection of silver and gold coins ever salvaged from a shipwreck.
- Shares of Trump Entertainment(TRMP) had their biggest jump in almost two years after the company said it is considering takeover offers.
- Gasoline futures are falling for the first time in four days despite ConocoPhillips(COP) saying it would idle a third unit at its plant in Borger, Texas, for “repairs.”
- Sugar is falling again in NY, capping the biggest weekly decline this year, on concern that a global surplus will widen as demand fails to keep pace with rising supply from India and Brazil, the world’s largest producers.

Wall Street Journal:
- UniCredit SpA is about to make an all-stock offer for Capitalia SpA, to create Europe’s second-biggest bank after HSBC Holdings Plc.

NY Times:
- The pet food contamination that sickened thousands of cats and dogs in the US is leading to pressure on China to improve the safety of its foods and other exports.
- House Democrats scrapped a plan that would have tightened congressional ethics rules by extending a one-year ban on lobbying by former lawmakers or staff members. Democratic leaders in the House faced a rank-and-file revolt over the issue, which would crimp their ability to cash in on their government service for lobbying paychecks.

Sparkspread.com:
- PPL Corp.(PPL) is considering a bid for Mirant(MIR), citing two industry sources.

USA Today:
- US drivers are logging fewer miles for the first time in 26 years, in part because of record gasoline prices, new public transit systems and a shift in demographics, citing federal highway data. While the number of US drivers has increased by more than 1 million since 2005, miles driven in February fell 1.9% from a year earlier, citing figures from the Federal Highway Administration.

Financial Times:
- John Negroponte, the deputy US secretary of state, said terrorist activities will spread widely if the US withdraws from Iraq too soon.
- Controversies over Blackstone Group LP leveraged buyout firm probably won’t slow its proposed IPO.
- US companies raised more funds through private placements last year than IPOs last year for the first time ever.

Frankfurter Allgemeine Zeitung:
- Germany expects a weekend meeting of Group of Eight finance chiefs to make progress toward endorsing a code of conduct for hedge funds.

Kommersant:
- Journalists at Russia’s main radio news provider quit en masse yesterday to protest censorship after management banned coverage of opposition movements, citing a reporter.

Nikkei English News:
- Nintendo Co. Ltd. President Satoru Iwata said the world’s biggest maker of handheld video-game players may pursue more acquisitions to gain access to technologies that can help its product development.

Market News International:- China’s government will allow faster gains in the yuan this year, as long as the economy doesn’t suffer.

Consumer Confidence Improves

- Preliminary Univ. of Mich. Consumer Confidence for May rose to 88.7 versus estimates of 86.2 and a reading of 87.1 in April.

BOTTOM LINE: Confidence among US consumers unexpectedly rose in May as strength in the labor and stock markets helped overcome high gasoline prices. The Expectations component of the index rose to 79 this month from 75.9 the prior month. The Current Conditions component fell slightly to 103.8 from 104.6 the prior month. The average price of gas rose to $3.13/gallon yesterday, about .30/gallon more than the average the prior month. I continue to believe consumer confidence readings will head back towards cycle highs later this year as stocks rise further, housing sales stabilize at relatively high levels, interest rates remain low, inflation decelerates further, gas prices fall substantially and the job market remains healthy.

Links of Interest

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Friday Watch

Late-Night Headlines
Bloomberg:
- Precision Castparts Corp.(PCP), a maker of metal forgings used in jet engines, may replace MedImmune Inc.(MEDI) in the S&P 500 Index, according to an analyst at Wachovia Capital Markets LLC.
- Bill Gross, manager of the world’s biggest bond fund, is sticking to his call that the Federal Reserve will cut interest rates this year.
- The yen headed for a fourth weekly decline against the US dollar as signs of weakening growth in Japan are likely to keep the Bank of Japan from lifting borrowing costs anytime soon.
- Copper prices fell to their lowest in eight weeks in Shanghai on concern that rising production and inventories in China, the world’s biggest consumer of the metal, may signal a glut in the market. The world’s copper surplus will rise to 520,000 metric tons next year from 280,000 tons this year, the Lisbon-based International Copper Study Group said.
- Crude oil was little changed near a three-week high in NY after rising more than $2 a barrel yesterday on speculation refiners won’t restore below-average US gasoline stockpiles before the summer demand peaks.

Wall Street Journal:
- General Electric(GE) is close to selling its plastics unit for about $11 billion. Saudi Basic Industries, known as Sabic, and Basell, a unit of Access Industries, are the remaining suitors after a long auction process.

Business Week:
- Current and former employees at Wall Street firms including Bear Stearns(BSC), Morgan Stanley(MS), Goldman Sachs(GS) and Merrill Lynch(MER) are being investigated over alleged kickbacks involving short sellers.

Financial Times:
- Britons bought goods worth $6.9 over the Internet last month, an increase of 55% compared with April 2006, citing Interactive Media in Retail Group. Interactive Media had expected UK internet sales to increase 39% this year.

Financial Express:
- The Tata Group is in talks with JC Penney(JCP) and Woolworths Ltd. for its retail business. Infiniti Retail, a fully owned unit of Tata Sons Ltd., may seek a technical alliance with JC Penney for its apparel segment and with Woolworths for its supermarket division.

Late Buy/Sell Recommendations
Citigroup:
- Rated (GET) Buy, target $68.
- Raised (RVBD) to Buy, target raised to $52.
- Raised (VZ) to Buy from Sell, target raised to $48.
- Reiterated Buy on (KYPH), target $54.
- Reiterated Buy on (AKAM), target $68.

CSFB:
- Investors should use options to bet the US dollar will extend gains against the British currency as US economic growth accelerates.

Business Week:
- Morton’s Restaurant Group(MRT), a steakhouse chain, is benefiting from boardroom business. The chain receives about 20% of sales from private rooms tailored to function as ad hoc boardrooms.
- VeriChip Corp.(CHIP) shares may almost triple to $12 in a year as more hospitals and doctors use the company’s product, citing William Woodward of Anthem Venture Partners.
- OfficeMax(OMX) could be acquired by Staples(SPLS) or Office Deport(ODP). The top two competitors only have a 20% share of the office supply market, and buying OfficeMax would add to either company’s earnings with a buyout price in the mid-$50 range, citing Jack Cunningham, CIO at J&W Seligman.

Night Trading
Asian Indices are -.75% to +.25% on average.
S&P 500 indicated -.03%.
NASDAQ 100 indicated +.01%.

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Earnings of Note
Company/EPS Estimate
- None

Upcoming Splits
- (IEX) 3-for-2

Economic Releases
10:00 am EST
- The Preliminary Univ. of Mich. Consumer Confidence reading for May is estimated to fall to 86.2 versus 87.1 in April.

Other Potential Market Movers
- The BMO Capital North American REIT Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by metal stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Slightly Lower on Profit Taking and Higher Energy Prices

Indices
S&P 500 1,512.75 -.09%
DJIA 13,476.72 -.08%
NASDAQ 2,539.38 -.32%
Russell 2000 815.64 -.56%
Wilshire 5000 15,186.72 -.11%
Russell 1000 Growth 593.33 -.15%
Russell 1000 Value 873.28 -.03%
Morgan Stanley Consumer 741.16 -.37%
Morgan Stanley Cyclical 1,060.54 +.20%
Morgan Stanley Technology 604.22 -.61%
Transports 5,222.38 +.14%
Utilities 529.95 -.67%
MSCI Emerging Markets 125.88 -.20%

Sentiment/Internals
Total Put/Call .80 -21.57%
NYSE Arms .71 +6.96%
Volatility(VIX) 13.51 +.07%
ISE Sentiment 137.0 +31.73%

Futures Spot Prices
Crude Oil 65.01 +3.92%
Reformulated Gasoline 243.70 +4.28%
Natural Gas 8.08 +2.52%
Heating Oil 193.70 +3.75%
Gold 657.60 -.59%
Base Metals 266.57 -2.87%
Copper 330.05 -3.56%

Economy
10-year US Treasury Yield 4.75% +4 basis points
US Dollar 82.31 +.21%
CRB Index 313.15 +.98%

Leading Sectors
Oil Service +2.29%
Road & Rail +1.67%
Homebuilders +1.07%

Lagging Sectors
Semis -.71%
Biotech -1.16%
REITs -1.85%

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Afternoon Recommendations
Morgan Keegan:
- Rated (UNP), (NSC), (KSU) and (BNI) Outperform.

Bank of America:
- Rated (HWAY) Buy, target $50.

Afternoon/Evening Headlines
Bloomberg:
- US Treasury two-year note yields climbed to the highest since February as evidence of a strengthening economy reduced speculation the Fed will cut rates.
- Nordstrom Inc.(JWN) said profit rose 19% on increased sales of women’s clothes and handbags. The company boosted its annual earnings forecast and the stock is rising $.79 to $53.95 in after-hours trading.
- Department stores JC Penney(JCP), Kohl’s(KSS) and Nordstrom(JWN) reported first-quarter profits that exceeded analysts’ estimates and raised their full-year earnings forecasts.
- Intuit Inc.(INTU) said third-quarter net income climbed 23% on increased sales of the company QuickBooks product for small businesses. The shares are surging 10% in after-hours trading.
- Marvell Tech(MRVL) lowered its 2Q revenue estimate to $645 million from $680.17 million. However, the stock is rising $.36 to $17.36 on the report.

Reuters:
- BP Plc(BP) will idle the fluid catalytic cracking unit at its refinery in Texas City, Texas, for “repairs." The “routine repairs” will take 11 days. The plant is capable of processing 460,000 barrels of oil a day.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Computer longs and Retail longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was mildly negative today as the advance/decline line finished lower, sector performance was mixed and volume was above average. Measures of investor anxiety were around average into the close. Today's overall market action was mildly bearish. Considering recent gains and today's jump in oil and move higher in long rates, today's action wasn't too bad. I think it would take a move in the 10-year yield above 5% and a move above $70 per barrel to meaningfully impact equities in a negative fashion. I don't expect either. While breadth was negative today, I had an unusual number of stocks that I monitor moving higher on decent volume. Very few stocks fell on volume today. Gold fell another $3 per ounce on U.S. dollar strength and is very close to breaking it intermediate-term uptrend. Especially noteworthy today were gains in retailers, airlines and homebuilders, considering oil and Bernanke's housing comments. I suspect that, after a modestly weaker market open, we will finish the week on a positive note.

Stocks Mixed into Final Hour as More Economic Optimism is Offsetting Higher Energy Prices

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Computer longs and I-Banking longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is neutral as the advance/decline line is slightly lower, most sectors are gaining and volume is above average. Oil has moved to session highs, rising $2.34 per barrel. The 10-year yield is grinding higher at 4.75%, right where I projected it to average for the year, yet stocks are modestly improving. This is likely leading to some short-covering as the many bears are unable once again to gain any meaningful downside traction. Moreover, retail and airlines are outperforming substantially. Homebuilders and brokers are at session highs. An Apple (AAPL) spokeswoman just confirmed that Apple will ship the iPhone in late June. The stock is surging to session highs. Most pundits and analysts continue to say almost reflexively that the economy is worsening. However, almost all the data I see point to an economic acceleration this quarter from a sluggish first quarter. This is the main reason for the recent mild rise in long-term rates, not rising inflation worries. The bears' thesis revolves around the housing downturn leading to an imminent collapse in the consumer as unemployment soars. Even as the economic data are improving, it seems the bears see every move higher in the market as unjustified and continue to see a market crash right around the corner. I continue to believe the many bears remain stunningly complacent. I expect US stocks to trade modestly higher into the close from current levels on short-covering, buyout speculation and more economic optimism.