Stocks Finish at Session Lows on Worries Over European Equities, Rise in Oil and Long-term Rates

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Stocks Lower into Final Hour on Weakness in Europe, Higher Oil and Rising Rates

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Biotech longs, Medical longs and I-Banking longs. I added to my (TLT) long and to a steel short today, thus leaving the Portfolio 100% net long. The tone of the market is very negative as the advance/decline line is substantially lower, every sector is declining and volume is above average. A number of market-leading growth stocks are substantially outperforming today with some posting sharp gains. This is especially significant considering the recent rise in rates. I sense the long-term trend is in the initial stages of switching away from expensive value stocks and toward cheap growth stocks. (According to value stock guru Jeremy Grantham, value is expensive, and a recent CSFB report said that growth was cheaper than value for first time in over 30 years.) The days of shorts throwing darts at stocks with P/Es above 20, regardless of the underlying fundamentals, and making money on the multiple contraction are likely over. The 10-year yield is beginning to stabilize. It is down to 5.09% now. It is interesting to note that the iShares Lehman TIPS Bond Fund (TIP) continues to decline, and gold trades very poorly as the U.S. dollar firms. This indicates inflation worries aren't the cause of the rise in yields, in my opinion. I continue to believe that the recent rise in yields is more related to the "recession is imminent" trade being taken off by large macro funds. I still believe that, after 3% growth this quarter, U.S. GDP growth will move back toward 2% as inventory rebuilding subsides and the effects of the recent rise in rates takes hold. Long-term yields are likely very near a peak for the year, in my opinion. I plan to add meaningfully to my iShares Lehman 20+ Year Treasury Bond (TLT) long on any unexpected move in the 10-year yield to around 5.15%-5.25%. Today's trading feels like a mini panic. The NYSE Arms is soaring to a high 1.48. The VIX is surging 13%. The CBOE total put/call is an above average 1.15, and the ISE Sentiment Index is plunging 34%, to a depressed 78.0. I expect US stocks to trade modestly higher into the close from current levels on bargain hunting and short-covering.

Job Market Still Healthy, Inventories Match Record Low

- Initial Jobless Claims for last week fell to 309K versus estimates of 312K and 310K the prior week.

- Continuing Claims rose to 2535K versus estimates of 2500K and 2463K prior.

- Wholesale Inventories for April rose .3% versus estimates of a .3% increase and an upwardly revised .4% gain in March.

BOTTOM LINE: The number of Americans filing first-time claims for state unemployment benefits fell unexpectedly last week, pointing to a resilient labor market, Bloomberg reported. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, held at a historically low 1.9%. The four-week moving average of jobless claims rose to 307,250. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

Inventories at US wholesalers rose in April while sales increased faster, setting the stage for an increase in production, Bloomberg reported. Sales at wholesalers rose 1.3% versus a 2.1% gain the prior month. The ratio of inventories to sales is now matching a record low. Petroleum inventories surged 6.3% versus a 4.9% gain the prior month. I continue to believe US growth is rebounding substantially this quarter to around 3% or slightly higher, but I expect growth to decelerate back to around 2% or slightly higher in 3Q as inventory rebuilding subsides and the effects of the recent rise in long-term rates takes hold.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- New Zealand’s central bank unexpectedly raised its benchmark interest rate to a record 8%, saying housing demand and consumer spending are fanning inflation.
- Brazil’s central bank lowered the benchmark lending rate by half a percentage point today, the biggest reduction this year, as a rally by the country’s currency holds inflation at an eight-year low.
- China, the world’s biggest consumer of copper, may have slashed imports of the metal by 50% last month as high prices deterred buyers, said traders and analysts, including Xue Feng at Maike Futures. Refined copper and alloy imports are expected to drop to between 50,000 and 100,000 metric tons in May, Li Rong, an analyst at Great Wall Futures Co., said by phone from Shanghai. This compares with April’s level of 192,069 tons. A slowdown in copper shipments to China may allow global stockpiles of the metal to rebuild and weigh on prices ahead of the traditionally weak summer demand period.

Wall Street Journal:
- Brian Tierney, who last year led an effort to purchase the Philadelphia Inquirer and Philadelphia Daily News for $515 million, is interested in bidding for Dow Jones(DJ)

Shanghai Securities News:
- China Three Gorges Project Corp. has invested more than $21 billion in the world’s largest hydro-electric dam project.

Late Buy/Sell Recommendations
Citigroup:
- US equity investors have become far more concerned this week, as 10-year treasury yields have approached 5%, fearing that valuations will begin to be in jeopardy of contracting. We add equity risk premium to bond yields, which provides a stronger correlation with P/Es than the traditional Fed Model. This approach is still signaling strong gains for stocks ahead. Admittedly, if the 10-year treasury yield increased to 5.5%(all else equal), this would not be a positive sign for equities, but this is not in our forecast. We believe that investors are still skeptical, and our Panic/Euphoria model is nowhere near Euphoric levels as in 1987 or the last 1990s. Indeed, this gauge is signaling a better than 90% probability of positive six-month forward gains for US stocks. Our six- and 12-month outlook continues to be upbeat, and we do not expect small pullbacks to change our longer-term outlook. Thus, we would be buyers during market weakness.’

Morgan Stanley:
- Reiterated Overweight on (GILD). The CDC’s new funding for HIV testing is a positive for Gilead Sciences(GILD) as it could: 1) Accelerate new patient diagnoses by nearly 30 to 40% and 2) Drive longer-term growth of the HIV market as success of this program could also accelerate the uptake of “opt-out” routine testing. We expect Gilead to be the key beneficiary of this market expansion as it is capturing 80% of new patient starts with Atripla.

Night Trading
Asian Indices are -.75% to unch. on average.
S&P 500 indicated +.16%.
NASDAQ 100 indicated +.18%.

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Earnings of Note
Company/EPS Estimate
- (ALOG)/.31
- (CAE)/.92
- (FINL)/.07
- (FORR)/.14
- (JOSB)/.42
- (NSM)/.23
- (QSII)/.33
- (ZQK)/-.04
- (SFD)/.36
- (TBL)/.15
- (UTIW)/.16
- (VOL)/.41

Upcoming Splits
- (NGA) 3-for-2

Economic Releases
8:30 am EST
- Initial Jobless Claims for last week are estimated to rise to 312K versus 310K the prior week.
- Continuing Claims are estimated to rise to 2500K versus 2472K prior.

10:00 am EST
- Wholesale Inventories for April are estimated to rise .3% versus a .3% gain in March.

3:00 pm EST
- Consumer Credit for April is estimated to fall to $6.0B versus $13.5B in March.

Other Potential Market Movers
- The Fed’s Mishkin speaking, ICSC Chain Store Sales, EIA weekly natural gas inventory report, CSFB Engineering/Construction Conference, Bear Stearns Biotech Confab, CIBC Alternative Energy Conference, Citi Power/Gas/Utilities Conference, Keybanc Industrial/Automotive Conference, Piper Jaffray Consumer Conference, Stephens Investment Conference and Lehman Brothers Global Services Conference could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by automaker and commodity 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 Close Lower on Healthy Profit-taking and Europe Worries

Indices
S&P 500 1,517.38 -.89%
DJIA 13,465.37 -.95%
NASDAQ 2,587.18 -.92%
Russell 2000 841.21 -.83%
Wilshire 5000 15,300.98 -.92%
Russell 1000 Growth 599.77 -.98%
Russell 1000 Value 871.69 -.91%
Morgan Stanley Consumer 740.08 -.87%
Morgan Stanley Cyclical 1,075.08 -1.12%
Morgan Stanley Technology 614.06 -.94%
Transports 5,158.98 -1.76%
Utilities 503.91 -1.30%
MSCI Emerging Markets 127.12 -1.32%

Sentiment/Internals
Total Put/Call 1.12 +19.15%
NYSE Arms 1.44 +28.71%
Volatility(VIX) 14.87 +9.10%
ISE Sentiment 111.0 -29.30%

Futures Spot Prices
Crude Oil 65.98 +.56%
Reformulated Gasoline 218.93 -.82%
Natural Gas 8.11 +.56%
Heating Oil 197.38 +.48%
Gold 675.60 +.07%
Base Metals 264.74 -1.61%
Copper 340.25 -1.13%

Economy
10-year US Treasury Yield 4.96% -3 basis points
US Dollar 81.89 unch.
CRB Index 313.66 -.31%

Leading Sectors
I-Banks +.21%
Medical Equipment -.36%
Computer Hardware -.37%

Lagging Sectors
Homebuilders -2.37%
Coal -3.06%
Oil Tankers -3.38%

Evening Review
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Afternoon Recommendations
Deutsche Bank:
- Upgraded (TMB) to Buy.

Afternoon/Evening Headlines
Bloomberg:
- Federal Reserve Bank of Kansas City President Thomas Hoenig said that he’s “confident” the US economy will pick up from last quarter’s slowdown and that he’s “hopeful” inflation will slow.
- ADC Telecom(ADCT), a maker of phone-networking gear, said second-quarter profit quadruples. The shares rose .40 to $17.70 in after-hours trading.

NY Times:
- China said it would start nationwide inspections of food and drug exports, responding to global concerns sparked by poisoned toothpaste and pet food.

BOTTOM LINE: The Portfolio finished lower today on losses in my Biotech 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 negative today as the advance/decline line finished lower, almost every sector declined and volume was above average. Measures of investor anxiety were elevated into the close. Today's overall market action was bearish. However, I continue to view weakness over the last couple of days as a much needed healthy pullback, not the start of a correction. Many market-leading stocks held firm throughout the day and the Broker/Dealer Index actually rose. The many US stock market “fearleaders” were out in full force today, however as I said in my previous post, I suspect this healthy pullback is close to running its course.