Stocks Finish Near Session Lows on Profit-taking and Emerging Market Worries

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Stocks Sharply Lower into Final Hour on Profit-taking and Emerging Market Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Semi longs and Computer longs. I have not traded 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 lower and volume is heavy. "High-school dropout" copper is getting pounded 3.4% today and is down almost 17% in less than a month, even as U.S. economic data have improved meaningfully over the last few weeks. I continue to believe prices anywhere around current levels are absurd and any substantial rallies in the metal can be sold. Slowing demand growth from emerging markets, rising production, a firmer U.S. dollar and more investment fund downside speculation will provide the catalysts for further declines in the commodity. I still believe it can approach $2 a pound by year-end. I expect US stocks to trade modestly higher into the close from current levels on buyout speculation, short-covering and more economic optimism.

Today's Headlines

Bloomberg:
- Russ Koesterich, who helps manage $1.8 trillion at Barclays Global Investors, said today’s New Home Sales report was “unambiguously good.”
- Crude oil is falling $1.53/bbl. because of a glut of oil at Cushing, Oklahoma, the delivery point used for benchmark futures.
- Gold is falling another $8/oz. to a two-month low in NY as a gain in the value of the dollar reduced demand for the precious metal and worries over emerging market demand rose.
- Copper futures in NY fell the most in more than three months on speculation that supplies in China, the biggest consumer, may exceed demand. The metal has declined 17% in about five weeks.
- Shares of Greenlight Capital(GLRE), the reinsurer led by hedge fund manager David Einhorn, surged on their first day of trading as investors bet on his ability to manage the company’s portfolio.
- Dell Inc.(DELL) said it will sell personal computers at Wal-Mart Stores(WMT), in the biggest step away from its direct-sales strategy since the company was dethroned by Hewlett-Packard(HPQ) as the industry leader.

Wall Street Journal:
- Citigroup Inc.(C), one of the biggest issuers of credit cards in the US, is switching thousands of American Airlines credit cards from Visa to American Express(AXP) as part of its bid to boost its relationship with American Express.
- China stock picking has turned to numerology that often relies on combinations of the letter eight.
- Goldman Sachs Group(GS) started a market to trade stakes in companies that want to avoid the oversight and costs of going public.
- Services from SimulScribe.com and SpinVox Ltd. that convert voice mail messages to text are quite useful.

Washington Post:
- Democratic strategist Robert Shrum, who worked on John Edwards’ 1998 North Carolina Senate campaign, is critical of Edwards in a new book. In Shrum’s memoir, “No Excuses: Concessions of a Serial Campaigner,” he wrote that he asked Edwards at the beginning of the 1998 campaign about his position on gay marriage. Shrum wrote that Edwards replied, “I’m not comfortable around those people,” to which his wife, Elizabeth said “John, you know that’s wrong.”

Reuters:
- Iraq will auction 15 oil and gas fields for exploration after a new energy law is passed by parliament, citing an Iraq oil ministry official on a trip to India.

Interfax:
- Russian President Vladimir Putin said the country’s $113.7 billion Stabilization Fund won’t be invested in Russian stocks.

Yonhap News:
- South Korea will suspend plans to provide food aid to North Korea until the country meets a commitment to close its main nuclear reactor.

Algeria Presse Service:

- OPEC won’t heed calls from consumers to increase crude-oil output because the market is already well supplied, citing Algerian Energy Minister Chakib Khelil.

Durable Goods Rise for 3rd Consecutive Month, Job Market Healthy, News Home Sales Soar Most in 14 Years, New Home Inventories Fall Most in 26 Years

- Durable Goods Orders for April rose .6% versus estimates of a 1.0% gain and an upwardly revised 5.0% increase in March.

- Durables Ex Transports for April rose 1.5% versus estimates of a .6% increase and an upwardly revised 1.5% gain in March.

- Initial Jobless Claims for last week rose to 311K versus estimates of 305K and 296K the prior week.

- Continuing Claims rose to 2529K versus estimates of 2495K and 2471K prior.

- New Home Sales for April rose to 981K versus estimates of 860K and 844K in March.

BOTTOM LINE: Orders for durable goods recorded a third straight gain last month, the longest streak in almost two years, confirming that manufacturing will help buoy the economy, Bloomberg reported. Orders for non-defense capital goods excluding aircraft, a gauge of future business investment, rose 1.2% versus a 4.4% jump the prior month. Manufacturers had a 1.47 month’s supply of durable goods on hand at the current sales pace, the lowest this year. The last time durables (excluding transports) rebounded this sharply in a three-month period was the first quarter of 2002. I continue to believe manufacturing will add to economic growth this quarter and help boost overall US growth back to around average levels before year-end.

The number of Americans filing first-time claims for state jobless benefits rose from a four-month low last week while remaining at a level that economists say shows resilience in the labor market, Bloomberg reported. The four-week moving-average of jobless claims fell to 302,750, the lowest in more than a year. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, held steady at a historically low 1.9%. I continue to believe the labor market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

Purchases of new homes in the US unexpectedly surged in April by the most in 14 years, Bloomberg reported. Sales rose 16% to an annual pace of 981,000. “The report starts to seal the argument that the housing market is beginning to stabilize, at least in terms of demand,” said Richard DeKaser, chief economist at National City Corp. The median price of a new home fell from $257,000 to $229,100. The supply of new homes on the market at the current sales pace fell 20% to 6.5 months’ worth from 8.1 months’ worth in March. New home sales soared 28% in the South, 8.5% in the West and 3.8% in the Northeast. Sales fell 4% in the Midwest. Housing has subtracted about one percentage point off US economic growth the last 3 quarters. This was the largest percentage monthly drop in inventory since December 1981. One of the key components to the bear housing collapse/imminent economic collapse argument was that home inventories would skyrocket this spring, sending prices plunging. I continue to believe home sales are stabilizing at relatively high levels by historic standards and that overall housing will subtract less from economic growth as the year progresses.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- China needs to “shock” the economy with more interest rate increases because it’s too late to use a stronger yuan to cool growth, said Jim Walker, chief economist at CLSA Asia-Pacific Markets.
- Duff & Phelps Corp., which provides valuations for mergers and acquisitions, filed for a $200 million IPO.
- US thrifts earned less while widening their profit margins in the first quarter, federal regulators reported.
- Imports of crude oil by Japan, the world’s largest consumer of oil after the US and China, fell 16% in April from a year earlier. Imports of oil products, which include gasoline and naphtha, dropped 18%.
- Alcoa Inc.(AA), seeking to acquire rival aluminum producer Alcan Inc.(AL) in a $27.6 billion hostile takeover, said its “full and fair” offer won’t be increased.
- The euro traded near a record high versus the yen before a report that’s likely to show business confidence in Germany rose to the highest since 1991.
- Jordin Sparks, a high school student from Glendale, Arizona, won the sixth season of “American Idol” on Fox television, defeating Blake Lewis of Bothell, Washington, in votes cast by telephone and text message. “Idol” enabled Fox network to win this year’s prime-time television ratings race in the 18-to-49 age group that sets national advertising rates.
- Congress branded yesterday’s US-China agreements on financial services and aviation inadequate and moved to consider new trade measures against China even as Vice Premier Wu Yi met with lawmakers.
- The yuan snapped a six-day rally after central bank Governor Zhou Ziaochuan said China gains in the currency are “already moving fast enough.

Financial Times:
- GE(GE) will reveal today that its sales of environmentally friendly products have doubled to $12 billion during the past two years, citing CEO Immelt.

South China Morning Post:
- Hedge funds have invested as much as $50 billion in China’s stock markets, according to a study by a government think tank. The amount is about a third of the $128 billion of assets managed by mutual funds in China, citing Zhang Yuewen, a researcher at the Chinese Academy of Social Sciences. China should enhance supervision of short-term capital flows and business between hedge funds and local investors, citing Zhang.

Securities News:
- A Shanghai-based bank told branches to increase scrutiny on fund transfers to prevent corporate customers using loans to fund investments in stocks, citing an internal document. The unidentified publicly traded bank also stopped offering loans that used stocks as collateral and stepped up monitoring of conglomerates with excess liquidity. The Chinese government is trying to shield the banking system from volatility created by the nation’s booming stock markets, where the total value of shares more than tripled in the past year to more than $2 trillion.

China Daily:
- China may introduce a rating system for online games, in a move that may ban younger players from titles with violent and sexual content, citing the Internet culture director of the Ministry of Culture.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (CIEN), target $35.
- Reiterated Buy (CRM), target $60.
- We are raising our price target on (DJ) to $55 to reflect the recent News Corp.(NWS/A) bid. We are assuming a 65% probability that the offer is raised to $65 and accepted, and a 35% probability that the offer is declined and the stock trades down to its pre-announcement price of $36. We still believe a bid from a third party is unlikely.

Think Equity:
- Rated (OSIP) Buy, target $50.

Night Trading
Asian Indices are -.75% to unch. on average.
S&P 500 indicated -.11%.
NASDAQ 100 indicated -.10%.

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Earnings of Note
Company/EPS Estimate
- (ARO)/.25
- (AMSC)/-.23
- (ANN)/.45
- (BKS)/.01
- (BWS)/.22
- (CHRS)/.20
- (CPWM)/-.58
- (GPS)/.24
- (HIBB)/.33
- (HRL)/.51
- (MM)/1.02
- (MYL)/.49
- (PDCO)/.45
- (RRGB)/.42
- (SAFM)/.29
- (SSI)/.18
- (SMRT)/.18
- (TBL)/.20
- (TTC)/1.68

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

Economic Releases
8:30 am EST
- Durable Goods Orders for April are estimated to rise 1.0% versus a 4.3% gain in March.
- Durables Ex Transports for April are estimated to rise .6% versus a 1.4% gain in March.
- Initial Jobless Claims for last week are estimated to rise to 305K versus 293K the prior week.
- Continuing Claims are estimated to rise to 2495K versus 2473K prior.

10:00 am EST
- New Home Sales for April are estimated to rise to 860K versus 858K in March.

Other Potential Market Movers
- The Fed’s Mishkin speaking, Fed’s Fisher speaking, weekly EIA natural gas inventory report, (AFL) financial analyst meeting, (TEX) analyst meeting, (ELX) analyst day, (RX) analyst meeting, Robinson Humphrey Financial Services Conference, Goldman Sachs Internet Conference, UBS Oil & Gas Conference and Citigroup Healthcare Conference could also impact trading today.

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