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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Medtronic Inc.(MDT) will report today that its stent for preventing heart attacks didn’t cause blood clots in test, increasing the cardiac-device maker’s chances of expanding its share of the $5.4 billion-a-year worldwide market.
- Chevron USA, a wholly owned subsidiary of Chevron Corp.(CVX), has agreed to sell all 96,891,014 of its shares of Class A common stock of Dynegy Inc.(DYN) in an underwritten public offering.
- Shares of NEC Corp., Japan’s largest personal-computer maker, surged 6.6% after the company said profit will triple this year.

Nightly Business Report:
- Federal Reserve Bank of Chicago President Michael Moskow said US inflation is likely to slow from a pace he considers too fast, while economic growth quickens. “I see the economy improving as we move through this year,” Moskow said. “Our expectation is that inflation rates will continue to come down as well during this period and I would expect the unemployment rate will not go up a great deal.”

Financial Times:
- An association representing hedge funds will publish today modernized principles on how hedge funds should operate but reject calls from Germany for a full voluntary code of conduct for the industry.

China Daily:
- China will make food and consumer-product safety its top priority, citing a vice minister in charge of quality inspection.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (ONNN), target $13.
- Reiterated Buy on (FNSR), target $5.
- Rated (SNPS) Buy, target $34.
- (TGT) sales are off to a solid start, based on results for the first two weeks of May. The arrival of warmer weather at the start of May likely drove sales of seasonal items, such as apparel. However, the expected arrival of cooler weather for Memorial Day weekend, combined with a tough weather comparison from last year, could challenge sales in the back half of the month.
- Added (CMCSK) to Recommended List, target $33.

CSFB:
- We believe the April crude steel production data supports our view the recent round of price increases in the US have now come to an end, and we continue to expect US pricing to plateau in the coming months. Without additional price increases, we believe the shares of the US steel producers are near fair-value, supported by consolidation speculation, but constrained by valuations.

Night Trading
Asian Indices are unch. to +.75% on average.
S&P 500 indicated -.04%.
NASDAQ 100 indicated -.01%.

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Earnings of Note
Company/EPS Estimate
- (AEO)/.35
- (ADI)/.37
- (AZO)/2.16
- (BJ)/.20
- (PLCE)/.42
- (CSC)/1.48
- (DY)/.27
- (FRE)/1.09
- (MDT)/.62
- (MW)/.63
- (PBY)/.06
- (SNDA)/.31
- (SPLS)/.29
- (TECD)/.39
- (UNFI)/.35
- (ZLC)/-.05

Upcoming Splits
- (ATLS) 3-for-2
- (GIL) 2-for-1

Economic Releases
- None of note

Other Potential Market Movers
- The Fed’s Bernanke speaking, Fed’s Lacker speaking, weekly retail sales reports, Richmond Fed Manufacturing Index, Citigroup Healthcare Conference, Morgan Keegan Homeland Security Conference, JPMorgan Tech Conference and UBS Oil&Gas Conference could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by technology and financial stocks in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

S&P 500 Touches All-Time Closing High, Boosted by Buyout Activity and Small-Caps

Indices
S&P 500 1,525.10 +.15%
DJIA 13,542.88 -.10%
NASDAQ 2,578.79 +.80%
Russell 2000 833.65 +1.21%
Wilshire 5000 15,337.08 +.32%
Russell 1000 Growth 598.91 +.25%
Russell 1000 Value 880.35 +.22%
Morgan Stanley Consumer 744.23 -.25%
Morgan Stanley Cyclical 1,063.67 -.15%
Morgan Stanley Technology 613.74 +.64%
Transports 5,202.94 -.21%
Utilities 535.72 +.44%
MSCI Emerging Markets 126.76 +.29%

Sentiment/Internals
Total Put/Call .93 -4.12%
NYSE Arms .90 +57.79%
Volatility(VIX) 13.30 +4.23%
ISE Sentiment 150.0 +16.28%

Futures Spot Prices
Crude Oil 66.22 +2.02%
Reformulated Gasoline 239.46 -.56%
Natural Gas 7.91 -.35%
Heating Oil 194.70 +1.66%
Gold 663.70 +.26%
Base Metals 270.05 +2.32%
Copper 340.15 +2.35%

Economy
10-year US Treasury Yield 4.78% -2 basis points
US Dollar 82.37 +.21%
CRB Index 316.49 +1.06%

Leading Sectors
Homebuilders +1.20%
Networking +.95%
Internet +.92%

Lagging Sectors
Drugs -.70%
Airlines -.70%
Road&Rail -.74%

Evening Review
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In Play

Afternoon Recommendations
Bank of America:
- Rated (BDK) Sell.

Afternoon/Evening Headlines
Bloomberg:
- More than $40 billion of takeovers extended the stock market’s seven-week rally and helped the S&P 500 flirt with an all-time high.
- Kirk Kerkorian, the billionaire who owns 56% of MGM Mirage(MGM), is studying “alternatives” for his investment in the company and plans to start talks to buy its Bellagio Hotel & Casino and CityCenter complex in Las Vegas. MGM shares soared 16% in after-hours trading.
- The US corn crop is in better shape than a year ago when farmers produced the third-largest harvest on record. About 78% of the crop was in good or excellent condition as of yesterday, up from 66% a year ago.
- New Mexico Governor Bill Richardson officially announced his candidacy for the 2008 Democratic presidential nomination, touting his “proven track record” with domestic and foreign policy issues.

AP:
- Congressional Democrats plan to draft a war-funding measure that drops a requirement for US troops to withdraw from Iraq. The new proposal would also omit billions of dollars in domestic spending opposed by the president. A minimum wage increase will be included in the legislation.
- Iran charged US scholar Haleh Esfandiari today with trying to topple the Iranian leadership, citing Iranian state television.

BOTTOM LINE: The Portfolio finished higher today on gains in my Computer longs, Networking 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 positive today as the advance/decline line finished substantially, sector performance was mostly positive and volume was above average. Measures of investor anxiety were above average into the close. Today's overall market action was mildly bullish. Small-caps outperformed substantially today with the iShares Russell 2000 (IWM) rising 1.2%. Mid-caps also did well. The 10-year yield finished near session lows, despite the gain in stocks, falling 2 basis points. Looking at today's insider selling report, it remains very muted and nowhere near levels associated with meaningful market tops. As well, most investor sentiment gauges remain subdued despite the recent run. Serious investment manager performance anxiety is likely now a factor. Bloomberg reported today that an international veterinary body is saying that the avian flu virus may be nearing the end of its natural cycle. Three countries have reported initial outbreaks of the HGN1 strain of the virus in domestic fowl between late February and early April, vs. 38 countries reporting initial infections in the first seven months of last year. The bird flu has been one of the many sources of fear used to scare investors away from stocks over the last few years.

Stocks Mostly Higher into Final Hour, Led by Tech Shares and Homebuilders

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Internet longs and Computer longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are gaining and volume is above average. The U.S. Dollar Index is up 0.17%. The euro is breaking below its 50-day moving average vs. the dollar today. I continue to believe the U.S. dollar has likely bottomed for the year. Shanghai copper inventories rose another 16.8% last week to the highest since April 2004, however copper is 2.3% higher so far today. I still believe any meaningful rallies in the metal should be sold. Google (GOOG) is surging 7 points from session lows to $474 on a report from Netratings that it had 55.2% of April U.S. search share vs. 21.9% for Yahoo! (YHOO) and 9% for MSN/Windows. U.S. growth stocks are the cheapest vs. value stocks in over three decades. Google is arguably one of the greatest, if not the greatest, growth stocks on the planet. It has never traded at a lower valuation relative to its future earnings estimates as now. I view these estimates as conservative. Moreover, it trades at a discount to its Internet peers. I sense the Google train is leaving the station once again. I remain long the stock. I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower long-term rates, investment manager performance anxiety, buyout speculation and more economic optimism.

Today's Headlines

Bloomberg:
- Blackstone Group LP, the manager of the world’s second-largest buyout fund, boosted the amount it plans to raise in its IPO to $4.75 billion. The company plans to sell as many as 153.3 million shares for $29-$31 each.
- Brazil will turn 53% of its cane into ethanol this year.
- Barrick Gold Corp.(ABX), the world’s largest gold producer, said it will spend $10 billion expanding its existing operations and developing new mines to take advantage of a “buoyant gold market.”
- The avian flu virus that threatens to spark the first pandemic in almost four decades may be nearing the end of its natural cycle after it killed fewer wild and migratory birds this year, an international veterinary body said.
- Crude oil is rising $.94/bbl. on rising speculation by investment funds and more economic optimism.
- Boeing Co.(BA) plans to begin final assembly of its 787 Dreamliner today, opening a new production line north of Seattle that is scheduled to roll out the first plane in 49 days.
- President Bush said Attorney General Alberto Gonzales continues to have his full support and called an attempt by Senate Democrats to hold a no-confidence vote on him “pure political theatre.”
- Former President Jimmy Carter said remarks he made about President Bush’s foreign policy were “careless or misinterpreted.”
- Rupert Murdoch’s News Corp.(NWS/A) may be preparing to walk away from a $5 billion bid for Dow Jones(DJ) after trying without success to win support from the controlling Bancroft family, Pali Research analysts said.

Wall Street Journal:
- Alcatel-Lucent is introducing a device designed to allow organizations to maintain tighter security on employees’ laptops.
- Merrill Lynch(MER) is taking a minority interest in GSO Capital Partners LP, an $8-billion hedge fund and investment firm, known for helping private equity-firms to finance transactions.
- Wal-Mart Stores(WMT) pulled its designer apparel line from more than 3,000 outlets after the world’s largest retailer ran into difficulties making its mark in fashion clothing.
- Google Inc.(GOOG) and Salesforce.com(CRM) are discussing an alliance that might help them compete against Microsoft(MSFT).
- India’s push to industrialize has set off a rural backlash from villagers whose land is being taken to build factories.
- Nasdaq Stock Market(NDAQ) is starting an introduction service to connect companies with potential directors as the NY-based stock market seeks to win trade from the larger NYSE.
- The US Financial Services Roundtable, American Bankers Assoc. and other groups representing the financial industry are planning to assist subprime borrowers.

Financial News:
- Cerberus Capital Management LP, the private equity firm that bought US automaker Chrysler last week, raised $7.5 billion to invest in companies in financial difficulties.

Women’s Wear Daily:
- Kohlberg Kravis Roberts may take footwear brand Skechers USA(SKX) and retailer Genesco(GCO) private in separate transactions.

USA Today:
- The wealth gap between Americans age 55 to 59 and those 35 to 39 is about $200,000, suggesting generational rather than class disparities account for the divide. The older group has seen its median net worth grow 97% over 15 years to about $250,000 in 2004, while the younger generation’s wealth has fallen 28% to about $50,000, Federal Reserve and Census data show. Younger households are postponing careers to gain more education, marry later and have children later.

Daily Telegraph:
- Fidelity Investments, the world’s biggest mutual-fund company, plans to enter the private-equity business.

Valor Economico:
- Dow Chemical(DOW) is seeking financing to build refineries in Brazil that will process sugarcane-based ethanol into chemicals.

Al-Hayat:- Yemen’s oil reserves rose to 10.4 billion barrels this year, up from 4.7 billion barrels in 2000, citing the head of the country’s Oil Discovery and Production Agency.

Economic Releases

- None of note