Today's Headlines

Bloomberg:
- The Fed will eventually cut borrowing costs, rather than raise them, having held its target interest rate at 5.25%, said Bill Gross, manager of the PIMCO Total Return fund.
- A group of hedge funds is tell the SEC to be on the lookout for manipulation of bonds backed by subprime mortgages.
- Bank of Canada Governor David Dodge said the dollar’s rise since April to a 30-year high outpaced demand for the country’s products compared with past moves, and repeated he may raise interest rates to cool the economy.
- The Federal Reserve gave a more upbeat assessment of US regional economies, as manufacturing and job growth picked up.
- US 10-year Treasuries surged the most since February as speculators bet that yields at a five-year high will curb the economy and inflation. The 10-year yield is falling 12 basis points from session highs.
- Ihop Corp.(IHP) offered to buy Applebee’s Intl(APPB).
- The yen is falling to the lowest against the US dollar since December 2002 and declined against the euro as Treasury yields near the highest in five years encouraged investment outside Japan.
- Crude oil is rising $.80/bbl. after a government report showed refiners cut production again during driving season.

Wall Street Journal:
- International Lease Finance Corp. may announce next week an agreement to buy at least 50 of Boeing’s(BA) Dreamliners, which would be worth $10 billion at list price.
- Computer “widget” makers may be able to earn more advertising revenue from their applications due to new data to be published today by Web tracking firm comScore Inc.
- Ceridian Corp.’s(CEN) largest stockholder may say he’s opposed to the $5.3 billion sale of the US payroll and human-resources provider and that he’s hired bankers to find a higher bid.

NY Times:
- ConAgra Foods(CAG), which owns brands including Hunt’s, Manwich, Reddi-wip and Slim Jim, is trying to strengthen its product line by making small changes.

NY Post:
- Jones Apparel Group(JNY) is in the final stages of talks to sell its Barneys NY luxury department store chain to Dubai-owned investment company Istithmar PJSC.

Dow Jones:
- European Central Bank Council member Nicholas Garganas said future interest-rate decisions will be based on economic data.

Washington Post:
- Former NY Mayor Rudi Giuliani said that he would make good on 12 campaign promises if elected president in 2008.

LA Times:
- The Los Angeles Police Dept. plans to upgrade its 911 system to accept text messages, photographs and video from mobile phones within the next few years.

Nikkei English News:
- Sony Corp.(SNE), Matsushita Electric Industrial and three other Japan-based consumer electronics companies will start an Internet video-on-demand service to be used on flat-panel televisions.

Import Prices Rise, Retail Sales Jump, Business Inventories Rise as Sales Increase

- The Import Price Index for May rose .9% versus estimates of a .3% gain and a 1.4% increase in April.

- Advance Retail Sales for May rose 1.4% versus estimates of a .6% gain and a -.1% decline in April.

- Retail Sales Less Autos for May rose 1.3% versus estimates of a .7% increase and a .1% gain in April.

- Business Inventories for April rose .4% versus estimates of a .3% gain and unch. in March.

BOTTOM LINE: Prices of goods imported into the US rose more than forecast in May on higher prices for oil and industrial supplies, Bloomberg said. Compared with a year earlier, prices of imported goods rose 1.1% in May versus a 2.1% year-over-year increase in April. The price of imported petroleum and petroleum products rose 2.7% in May versus a 6.6% increase the prior month. Prices of goods from China rose .3% in May. I continue to believe inflation measures will further decelerate through year-end.

Retail sales in the US rose by the most in more than a year in May, easing concern that record gas prices and a slowdown in housing would damage consumer spending, Bloomberg reported. More jobs, higher stock prices and wages rising more than inflation are helping to boost spending. The increase in sales was the largest since January 2006. As well, sales excluding gas rose the most since July of last year and sales at dept. stores jumped 1.3%, the most since October 2005. I continue to believe consumer spending will bounce back to above-average levels before year-end as gas prices fall, interest rates head back down, inflation decelerates further, stocks rise more, unemployment remains historically low, housing sales stabilize at relatively high levels and wages continue to outpace inflation.

Inventories at US businesses rose more than forecast in April as sales increased, signaling companies will probably ramp up orders as demand improves, Bloomberg reported. At the current sales pace, the amount of goods on hand fell to 1.27 months’ worth, the lowest since August of last year, from 1.28 months in March. Inventory de-stocking subtracted 1 percentage point from 1Q gdp growth. I suspect inventory rebuilding will help boost economic growth back around 3% this quarter.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Copper prices fell in Asia on speculation interest rates will increase in China, curbing demand in the world’s largest user of the metal.
- Asian currencies slid, paced by the Indonesian rupiah, the Malaysian ringgit and the Philippine peso, after former Fed Chairman Greenspan predicted a slump in emerging-market debt.
- The US dollar traded at an 11-week high against the euro as speculation the Federal Reserve won’t cut interest rates helped push US bond yields to a five-year high.

Wall Street Journal:
- The Bush administration will reject demand that it name China a manipulator of its currency.

Financial Times:
- Apple Inc.(AAPL) will today announce a deal to embed its iTunes internet music download service into the Bebo social networking website.

Commercial Times:
- AU Optronics Corp.(AUO) received more third-quarter orders than it can meet, a trend that may extend into the final three months of the year.

Late Buy/Sell Recommendations
Citigroup:
- The Global Tech team is introducing a new product that represents a dynamic compilation of its highest conviction ideas from around the world. US tech high conviction buys include (ADBE), (AKAM), (CTSH), (DST), (FNSR), (GOOG), (HPQ), (INTC), (ISIL), (KLAC), (QLGC) and (SNPS).

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Asian Indices are -.75% to -.25% on average.
S&P 500 indicated -.01%.
NASDAQ 100 indicated -.04%.

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Earnings of Note
Company/EPS Estimate
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Economic Releases
8:30 am EST
- The Import Price Index for May is estimated to rise .3% versus a 1.3% gain in April.
- Advance Retail Sales for May are estimated to rise .6% versus a -.2% decline in April.
- Retail Sales Less Autos for May are estimated to rise .7% versus unch. in April.

10:00 am EST
- Business Inventories for April are estimated to rise .3% versus a -.1% decline in March.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -275,000 barrels versus an 112,000 barrel build the prior week. Gasoline supplies are expected to rise by 1,500,000 barrels versus a 3,510,000 barrel build the prior week. Distillate inventories are estimated to rise by 1,650,000 barrels versus a 1,864,000 increase the prior week. Finally, Refinery Utilization is estimated to rise .7%.

2:00 pm EST
- The Fed’s Beige Book report.

Other Potential Market Movers
- The weekly MBA Mortgage Applications report, (APA) Investor Conference, Needham Biotech/Medical Tech Conference, CSFB Software Conference, Merrill Lynch Global Transport Conference, Thomas Weisel Alternative Energy Conference and Goldman Sachs Global Healthcare Conference could also impact trading today.

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

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.