Stocks Finish Near Session Lows on Rise in Long-term Rates Ahead of Inflation Data

Indices
S&P 500 1,493.00 -1.07%
DJIA 13,295.01 -.97%
NASDAQ 2,549.77 -.87%
Russell 2000 821.72 -1.38%
Wilshire 5000 15,043.88 -1.06%
Russell 1000 Growth 590.02 -.95%
Russell 1000 Value 857.09 -1.15%
Morgan Stanley Consumer 729.34 -.79%
Morgan Stanley Cyclical 1,054.30 -1.09%
Morgan Stanley Technology 603.83 -1.15%
Transports 4,994.82 -1.92%
Utilities 488.16 -1.38%
MSCI Emerging Markets 125.66 -1.06%

Sentiment/Internals
Total Put/Call 1.10 +1.85%
NYSE Arms 1.18 +28.44%
Volatility(VIX) 16.67 +13.32%
ISE Sentiment 107.0 -18.94%

Futures Spot Prices
Crude Oil 65.26 -1.08%
Reformulated Gasoline 213.10 -.94%
Natural Gas 7.71 +1.34%
Heating Oil 191.40 -.78%
Gold 651.20 -1.18%
Base Metals 252.22 -1.88%
Copper 326.80 -2.62%

Economy
10-year US Treasury Yield 5.27% +12 basis points
US Dollar 82.94 +.27%
CRB Index 309.71 -.75%

Leading Sectors
Restaurants -.10%
Computer Services -.54%
Medical Equipment -.56%

Lagging Sectors
Coal -2.02%
Homebuilders -2.24%
Steel -2.38%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Congress should more than double tax rates for many hedge fund managers and private equity partners who classify their pay as capital gains, former Clinton administration Treasury secretaries Robert Rubin and Lawrence Summers said.
- Yields on benchmark 10-year Treasuries rose to the highest in five years as signs of accelerating global growth raised concern central banks will increase borrowing costs.
- The US dollar posted its longest rally against the euro since October as speculation increased that the Federal Reserve will hold interest rates steady this year.
- Intercontinental Exchange Inc.(ICE), one of two suitors for the Chicago Board of Trade(BOT), said it will submit a revised merger offer for the Chicago company that included a $2.5 billion cash component.
- Nickel fell to the lowest price in more than three months in London on signs that demand for the metal used in stainless steel probably slowed while supply increased.

Nikkei English News:
- Honda Motor(HON) plans to market passenger vehicles with “clean,” fuel-efficient diesel engines in the US and Japan by 2009 and possibly as early as 2008.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Software longs and Semi longs. I added to my (TLT) long and (IWM)/(QQQQ) hedges in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was very negative today as the advance/decline line finished substantially lower, every sector declined and volume was above average. Measures of investor anxiety were slightly above average into the close. Today's overall market action was bearish. Commodity, transport and real estate-related stocks were especially weak today. Many growth stock leaders held up very well despite today's losses in the major averages. As well, there were an unusual number of stocks on my monitor pages higher today considering the losses. Trading was sloppy throughout the day as it appeared large asset allocation programs were at play. The U.S. Dollar index finished near session highs as gold and TIPS finished near session lows. This remains very noteworthy considering the rise in the 10-year yield. The Nikkei futures are indicating about an 85-point drop on the open in Japan.

Stocks Lower into Final Hour on Rise in Long-term Rates

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Medical longs and Software longs. I added to my (IWM)/(QQQQ) hedges this morning and then took profits in some of them, thus leaving the Portfolio 75% net long. The tone of the market is very negative as the advance/decline line is substantially lower, almost every sector is declining and volume is above average. Cyclicals and small caps are under the most pressure today as each step up in long-term rates raises the likelihood of much slower economic growth later this year after this quarter's snapback. Today's rate rise is once again accompanied by a falling gold price, declining TIPS prices and a 0.25% gain in the U.S. dollar. As well, weekly retail sales rose a below average 1.7% this week. True growth stock leaders are displaying relative outperformance again today. My intraday gauge of investor angst is slightly above average levels given today's declines. Former Fed head Greenspan spoke this afternoon. He said there is no evidence that China is selling U.S. Treasuries and that China's growth is likely to slow. He also said that people take the risks he outlines as forecasts when they shouldn’t and that he gets more credit for his market impact than he really has. The 10-year yield is pulling back from session highs again. I suspect that a decline in the 10-year yield back around 5.2% or lower on upcoming inflation data will likely trigger stock gains over the coming days. I still think those reports will help bring long-term rates back down. I expect US stocks to trade mixed-to-lower into the close from current levels on rising long-term rates.

Today's Headlines

Bloomberg:
- China’s corn exports may drop as the country’s ethanol production rises more than 300% by 2010, according to the head of the China National Grain and Oils Information Center.
- Gold is falling $5.40/oz., resuming a decline that sent prices last week to their lowest level since March, on concern that higher global interest rates may cut demand for the metal as an alternative investment.
- Crude oil is falling $.60/bbl. on speculation that an Energy Dept. repot tomorrow will show US fuel inventories increased as refiners boosted operating rates.
- Copper in NY declined for the fifth time in six sessions, falling another 2.3%, as imports by China, the largest consumer of the metal, tumbled in May.
- The 10-year T-note yield is rising 7 basis points after reports in China and Japan showed consumer and producer prices rising, which the head of the UK central bank signaled borrowing costs may need to rise to keep inflation from accelerating.
- The US dollar is posting its longest rally against the euro since October as speculation increased that the Fed will hold interest rates steady this year as the economy accelerates.
- Lehman Brothers(LEH) said profit rose 27% to a record as a rally in stocks fueled equity trading and investment-banking revenue increased.

Wall Street Journal:
- European Central Bank policymakers are at odds over the part money-supply growth plays in price inflation, indicating that there’s no unanimity about how much to raise interest rates.
- UK entrepreneur Richard Branson plans to start an Internet marketplace called Virgin Charter, which will match passengers with companies that charter private jets.
- A large Bear Stearns(BSC) hedge fund has dropped 23% from the beginning of the year through late April as it was hit by problems with the US subprime mortgage market.
- The US plans to direct $200 million to provide small business loans in Latin America and help counter anti-capitalist sentiment in the region.
- Valero Energy(VLO), the largest US refiner, ConocoPhillips(COP) and Tesoro Corp.(TSO) have put on hold or canceled refinery expansions because of higher costs and worries over demand. The delays have helped boost gasoline prices to records and may put the industry under added criticism from consumer groups and Congress for not doing anything to boost capacity after record profits.
- Time Warner’s(TWX) Warner Bros. unit plans to release selected movies to video-on-demand services the same time they come out on DVD.
- Charles Schwab(SCHW), TD Ameritrade(AMTD) and other brokers are making it easier for individual investors to buy bonds.

NY Times:
- Seventeen executives have left Yahoo! Inc.(YHOO) since December, when CEO Semel reorganized the company into three units.
- Dog breeders who use genetics to produce pups with certain qualities are also breeding in health problems.
- Google Inc.(GOOG) will soon begin testing with Walt Disney(DIS) and Time Warner(TWX) a system that blocks copyrighted material from being uploaded onto its video-sharing Web site YouTube.

Washington Post:
- Senator Hillary Clinton’s lead over Senator Barack Obama in the race for the 2008 Democratic presidential nomination is largely due to her support from lower income, less educated women. Obama received more support from highly educated women, according to a recent Washington Post-ABC News poll.

NY Daily News:
- NY may sell resident-only permits to prevent outsiders from parking in neighborhoods as a way to avoid a proposed fee for driving into Manhattan.

Financial Times Deutschland:
- Google Inc.(GOOG) plans to start European versions of its YouTube video-sharing Web site.

Economic Daily News:
- AU Optronics(AUO) and Innolux are developing touch-panel technologies as they attempt to get orders for Apple’s iPhone.

Ham Mihan:
- A group of 57 Iranian economists has written a letter to President Mahmoud Ahmadinejad, warning about the “heavy costs” of the government’s economic policies which “lack scientific basis.”

Economic Releases

- None of note

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- The Senate unanimously voted to take up energy legislation that would raise US car fuel economy standards and increase the use of alternative fuels in an effort to reduce oil consumption.
- House Speaker Nancy Pelosi is losing support with Americans who don’t see Congress producing any real change. A 39% plurality of Americans disapprove of the California Democrat’s performance, according the latest Bloomberg/LA Times national survey; 36% approve. In January, the new speaker scored a 34% to 21% favorable rating.
- Texas Instruments(TXN) said second-quarter sales and profit will miss its highest estimates as demand for handsets and calculators declines. The stock fell $.70/share to $35.10 in after-hours trading.
- An index of energy and raw materials prices paid by companies in Japan rose 2.2% in May from a year earlier after climbing 2.3% in April, the Bank of Japan said.
- The yuan had the biggest gain in a month before the US Treasury Dept. is scheduled to name currency manipulators in a semiannual foreign-exchange report.
- The US dollar may strengthen for a fifth day against the euro as reports this week will probably show US economic growth is recovering, making an interest-rate cut this year less likely.
- Inflation in China accelerated in May, increasing the likelihood that interest rates will be raised. Consumer prices gained 3.4% from a year earlier versus a 3.0% rise in April and estimates of a 3.3% gain.

Wall Street Journal:
- Dow Jones’(DJ) controlling Bancroft family is expected to send News Corp.(NWS/A) a new list of proposals for creating a board that would ensure editorial independence at the Wall Street Journal.

DigiTimes:
- United Microelectronics and Texas Instruments(TXN) are jointly developing 45-nanometer and 32-nanometer chipmaking technology, citing Jackson Hu, the Taiwan company’s chairman.

Financial Times:
- The growth of cities in China has “devastated” the country’s historical buildings and cultural heritage, citing Qiu Baoxing, vice-minister for construction.

Daily Telegraph:
- Royal Bank of Scotland Group Plc and Bank of America Corp.(BAC) are understood to be approaching agreement over how to split ABN Amro Holding NV’s US division, LaSalle.

China Daily:
- About 60% of cities in China have polluted air and lack centralized sewage systems.

South China Morning Post:
- China suspended approvals of overseas listings by private companies because it wants them to sell shares to domestic investors.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (SNDK), target $52.

Morgan Stanley:
- Reiterated Overweight on (AAPL), target $150.

Night Trading
Asian Indices are -.25% to +.50% on average.
S&P 500 indicated -.12%.
NASDAQ 100 indicated -.12%.

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Earnings of Note
Company/EPS Estimate
- (FNSR)/.02
- (LEH)/1.87
- (SAPE)/.03
- (STEI)/.12
- (ROLL)/.41

Upcoming Splits
- (CROX) 2-for-1
- (WMS) 3-for-2
- (ADVNA) 3-for-2
- (BNHN) 3-for-2
- (BWLD) 2-for-1
- (MIDD) 2-for-1
- (PEBK) 3-for-2

Economic Releases
2:00 pm EST
- The Monthly Budget Statement for May is estimated to widen to -$70.0 billion versus -$42.9 billion in April.

Other Potential Market Movers
- The Fed’s Moskow speaking, Fed’s Lockhart speaking, former Fed head Greenspan speaking, weekly retail sales reports, JPMorgan Basics/Industrials Conference, Goldman Sachs Global Healthcare Conference and Bear Stearns Tech/Communications/Internet Conference could also impact trading today.

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