Today's Headlines

Bloomberg:
- The Bancrofts, Dow Jones’(DJ) controlling shareholders, said they are still working on a proposal to send to Rupert Murdoch’s News Corp.(NWS/A) designed to protect the Wall Street Journal’s editorial independence.
- The prosecutor in the Duke University lacrosse case said he made improper statements to the media that probably violated ethics rules and now have him facing punishment.
- Crude oil in NY is rising to the highest price since September on concern that US refiners will be unable to keep up gasoline demand after cutting plans to expand capacity by 500,000 bpd earlier in the year and after a rash of refining “problems.”
- US Treasuries are rising after a smaller-than-forecast rise in consumer prices boosted the appeal of 10-year notes. The yield has declined 14 basis points from recent highs.
- Home Depot(HD) will receive separate offers of about $10 billion for its contractor-supplies unit from two private-equity groups.
- US economic figures released this week don’t bear out the concerns of some investors that inflation is getting out of control.
- Penn National Gaming(PENN) agreed to be taken private by buyout firms Fortress Investment Group and Centerbridge Partners for $6.1 billion.

Wall Street Journal:
- NYSE Euronext(NYX) executives have said they’re not interested in buying London Stock Exchange Group Plc, which may at some point make it easier for Nasdaq Stock Market(NDAQ) to make a successful approach for the British exchange.
- The SEC’s elimination of the rule against short-selling when a stock is falling may have been spurred by the growth in ETFs. The purpose of the so-called “uptick rule,” which was scrapped this week, was to stop the practice of “bear raids,” heavy selling to drive down a stock’s price.
- AT&T’s contract to offer Apple’s(AAPL) iPhone promises to be a big drawing card for the company’s wireless network. Two-thirds of mobile-phone users surveyed by M:Metrics who said they were interested in the iPhone would be willing to switch to AT&T to get it.
- Microsoft’s(MSFT) $6 billion purchase of aQuantive(AQNT) and Yahoo!’s(YHOO) $680 million acquisition of Right Media are under informal antitrust review by US regulators.
- Financial Times publisher Pearson PLC has in recent weeks been trying to recruit partners to help pursue a purchase of Wall Street Journal publisher Dow Jones(DJ).

AP:
- California Governor Arnold Schwarzenegger told journalists that Latin American immigrants would learn English faster if they spent less time watching, reading and listening to Spanish-language media. Schwarzenegger also said he rarely spoke German when he emigrated to the US from Austria, which forced him to learn English.

USA Today:
- US automakers, who are facing the prospect of legislation to tighten fuel economy rules, have given more than half their contributions this year to Democrats after 12 years of giving heavily to Republicans.

BBC:
- Seven men have been sentenced to as long as 26 years in prison for taking part in a plot to cause explosions in the US and UK.

Expansion:
- Cementos Portland Valderrivas SA, the cement unit of Spanish builder Fomento de Construcciones & Contratas SA, plans to buy Texas Industries(TXI).

Core CPI Decelerates, NY Manufacturing Jumps, Current Account Deficit Widens, Foreign Demand for US Stocks Surges, Production Flat, Confidence Drops

- The Consumer Price Index for May rose .7% versus estimates of a .6% gain and a .4% rise in April.

- The CPI Ex Food & Energy for May rose .1% versus estimates of a .2% increase and a .2% gain in April.

- The Empire Manufacturing Index for June rose to 25.8 versus estimates of 11.3 and a reading of 8.0 in June.

- The 1Q Current Account Deficit rose to -$192.6 billion versus estimates of -$201.0 billion and a downwardly revised -$187.9 billion in 4Q.

- Net Long-term TIC Flows for April rose to $84.1 billion versus estimates of $72.0 billion and a downwardly revised $51.2 billion in March.

- Industrial Production for May was unch. versus estimates of a .2% gain and a downwardly revised .4% increase in April.

- Capacity Utilization for May fell to 81.3% versus estimates of 81.6% and a downwardly revised 81.5% in April.

- The preliminary Univ. of Mich. Consumer Confidence reading for June fell to 83.7 versus estimates of 87.8 and a reading of 88.3 in May.

BOTTOM LINE: A measure of consumer prices in the US rose less than forecast in May, bearing out the Fed’s view that broader inflation pressures would moderate as the economy cooled, Bloomberg reported. The core CPI year-over-year rose 2.2%, well below the long-term average of 3.0% and down from 2.9% in September of last year. Energy prices jumped 5.4% versus a 2.4% gain in April. Gasoline costs surged 11%. Food prices rose .3% versus a .4% gain in April. Owner’s equivalent rent, which makes up 30% of the core reading, rose just .1%, the smallest gain since June 2005. Clothing prices fell .3% for the second month in a row. Auto prices fell .2% during the month. I continue to believe inflation concerns have peaked for this cycle, inflation measures will continue to show meaningful deceleration through year-end and long-term rates will fall from current levels as growth decelerates again in 3Q.

Factories in NY state expanded at the fastest rate in a year in June, as gains in new orders and shipments signaled a pickup in manufacturing is being sustained, Bloomberg said. The new orders component rose to 17.2 versus 8.02 the prior month. The prices paid component of the index rose to 42.6 versus 34.4 the prior month. The component measuring the outlook for the next 6 months fell to 44.1 from 49.8 the prior month. I continue to believe manufacturing will help boost overall economic growth back around 3% or slightly higher this quarter on substantial inventory rebuilding.

The current account deficit widened to $192.6 billion last quarter because of higher oil prices and an increase in government transfer payments overseas, Bloomberg said. Former Fed Chairman Greenspan said that China’s economic growth is likely to slow at some point and that he wouldn’t worry about China potentially selling holdings of US Treasuries. I expect the current account deficit to only improve modestly over the intermediate-term as slower growth in emerging markets mostly offsets lower energy prices.

Foreign buying of US financial assets accelerated in April on the second-biggest net purchase of equities, Bloomberg reported. International purchases of US stocks rose a net $27.4 billion, just off the all-time high of $27.6 billion. US investors bought a net $13.3 billion of overseas assets in April versus $47.4 billion the prior month. Japan, the largest foreign owners of US Treasury securities increased its holdings by $3.2 billion. Caribbean banking centers, which analysts link to hedge funds, sold a net $4.3 billion during the month. I continue to believe foreign demand for US assets will remain strong over the intermediate-term as the US dollar firms and emerging market growth wanes.

Industrial production in the US stalled last month as mild weather reduced demand for electricity and manufacturers of cars and machinery scaled back, Bloomberg reported. Utility production fell 1.3% versus a 3.4% gain in April. Production of computers and peripheral equipment rose 1.4% versus a 1% gain in April. Capacity utilization at 81.3% is right near the long-term average of 81.1% and well below the 85.1% seen in 1994. I expect industrial production to rise next month on further inventory rebuilding.

US consumer confidence fell this month on interest rate, gasoline and housing concerns, Bloomberg reported. However, lower confidence isn’t preventing Americans from shopping as the recent retail sales report showed retail sales jumped in May by the most in more than a year. Low unemployment, low interest rates, rising stock prices and wage growth substantially above most measures of inflation continue to give consumers the power to spend. Consumers said they expect inflation to rise 3% over the next five years, down from expectations of 3.1% in May’s report. The current conditions component of the index fell to 100.2 versus 105.1 the prior month. Gas prices are averaging $3.11 this month versus $3.12 in May and a high of $3.23 on May 23. I continue to believe both measures of consumer confidence will make new cycle highs over the intermediate-term as energy prices fall, interest rates decline, inflation decelerates further, stocks rise more, housing sales stabilize at relatively high levels and the job market remains healthy.

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Friday Watch

Late-Night Headlines
Bloomberg:
- A Senate panel introduced legislation to force private equity firms to pay taxes as corporations instead of as partnerships when they sell shares to the public, a move that may affect firms that want to mimic a tax-saving structure being planned by Blackstone Group LP.
- The Bank of Japan kept interest rates unchanged for a fifth meeting as it awaits more evidence on the economy’s strength after consumer prices fell for a third month.
- China’s factory and property investment surged, adding to speculation that an interest-rate increase is imminent after exports, industrial production and inflation accelerated.
- Hamas forces took control of the Gaza Strip in fighting with Fatah loyalists, a Palestinian government minister said, after President Mahmoud Abbas dissolved the government formed by the factions.
- Higher energy costs have twice the impact on food prices than corn, the primary feedstock for ethanol produced in the US, according to a study released today and completed by John Urbanchuck, an economist at LECG LLC.
- Hertz Global Holdings(HTZ), the second-largest US car-rental company, plans to add 3,400 of Toyota Motor’s(TM) Prius gasoline-electric cars to its fleet as customers seek more fuel-efficient vehicles.
- The Senate released a $14 billion energy tax plan that extends by two years a tax credit for renewable electricity sources like wind and geothermal and offers incentives for biofuels.
- Nintendo Co. extended the lead of its Wii video-game console over Sony Corp.’s PlayStation 3 and Microsoft’s Xbox 360, selling more than 338,000 machines in the US in May.
- China Agri-Industries Holdings, the country’s leading bio-fuel producer, said it plans to build a plant to make fuel ethanol from sweet potato in eastern China’s Xuzhou city.
- The US Congress will pass a measure to prod China to raise the value of its currency after the US Treasury’s declined to label the country as a currency manipulator, House Speaker Nancy Pelosi predicted.
- The six-week global bond market-rout may be doing Ben S. Bernanke and Jean-Claude Trichet a favor. The higher market rates, if they continue, mean pricier loans for homes and credit cards, and will make it more expensive for companies to invest and make acquisitions. That in turn may limit the need for Federal Reserve Chairman Bernanke and European Central Bank President Trichet to raise interest rates to cool inflation pressures amid the strongest global economy in a generation.
- Senators, spurred by President Bush’s pledge to provide $4.4 billion for border security, reached an agreement to rescue a proposed overhaul of US immigration law.

Financial Times:
- Sony Corp.(SNE) Chairman Howard Stringer is considering cutting the price of the company’s PlayStation 3 video-game console to compete with rival Nintendo’s Wii player.

China Securities Journal:
- Conditions are “ripe” for China to scrap interest tax on bank deposits to boost returns on savings and slow stock investment.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (CHTR), target raised to $5.30.

Morgan Stanley:
- Reiterated Buy on (ADBE), target raised to $48.

Business Week:
- Shares of VCA Antech(WOOF) will rise 19% in the next year, citing Piper Jaffray analyst Michael Cox.
- Eastman Kodak’s(EK) shares are as much as 18% undervalued, and the stock could rise next year when restructuring costs are a thing of the past, according to Gregory MacArthur of Investment Advisor Viewpoint 2000.
- Bio-Reference Labs(BRLI), the third-largest US clinical test company, will benefit from specialty testing.

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Asian Indices are +.25% to +.75% on average.
S&P 500 indicated -.06%.
NASDAQ 100 indicated -.04%.

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Economic Releases
8:30 am EST
- The Consumer Price Index for May is estimated to rise .6% versus a .4% gain in April.
- The CPI Ex Food & Energy for May is estimated to rise .2% versus a .2% gain in April.
- Empire Manufacturing for June is estimated to rise to 11.5 versus a reading of 8.0 in May.
- The 1Q Current Account Deficit is estimated to widen to -$201.0 billion versus -$195.8 billion in 4Q.

9:00 am EST
- Net Long-term TIC Flows for April are estimated to rise to $72.0 billion versus $67.6 billion in March.

9:15 am EST
- Industrial Production for May is estimated to rise .2% versus a .7% gain in April.
- Capacity Utilization for May is estimated at 81.6% versus 81.6% in April.

10:00 am EST
- The Preliminary Univ. of Mich. Consumer Confidence reading for June is estimated to fall to 87.9 versus 88.3 in May.

Other Potential Market Movers
- The Fed’s Lockhart speaking, Fed’s Bernanke speaking, Fed’s Yellen speaking, RBC Global Mining/Materials Conference and Needham Biotech/Medical Tech Conference could also impact trading today.

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

Stocks Finish Higher on Stable Rates, Bargain-hunting, Short-Covering

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Stocks Jumping into Final Hour on Stable Long-term Rates, Short-Covering, Bargain-hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Software longs, Computer longs, Medical longs and Retail 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, almost every sector is rising and volume is above average. Intel (INTC) is hitting a 17-month high today. DRAM prices appear to be turning up. As well, I have read several stories about an impending shortage of some flat-panel television components this fall as sales soar. This is very significant. The Morgan Stanley Tech Index is already 9% higher year-to-date, slightly outperforming the broad market, even with cyclical tech dragging. These stocks have large weightings in the tech indices. Growth tech is on fire and will remain so through year-end. I continue to believe a substantial downturn in inventories and a pick-up in sales will lead to a strong second-half for cyclical tech. Get ready now for a barn-burner of a second-half for all of tech. I will be surprised if the Morgan Stanley Tech Index isn't up at least 20% by year-end. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering and bargain-hunting ahead of tomorrow’s CPI report.