Durable Goods Orders Fall in May after Large April Upward Revision

- Durable Goods Orders for May fell 2.8% versus estimates of a 1% decline and an upwardly revised 1.1% gain in April.

- Durables Ex Transports for May fell 1% versus estimates of a .2% gain and an upwardly revised 2.5% increase in April.

BOTTOM LINE: Orders for US durable goods fell more than forecast in May, Bloomberg reported. The decline was spurred by fewer orders for aircraft, metals and machinery. May’s decline wasn’t a big surprise considering the prior two months’ gains were the best since August/September 2005. Total orders have never been up for four consecutive months since record-keeping began in 1992. Non-defense capital goods orders ex aircraft, a gauge of future business spending, fell 3% after a 2.3% surge the prior month. Unfilled orders for those goods rose .6%. Manufacturers had a 1.46 months’ supply of durable goods on hand at the current sales pace in May, unchanged from April. I continue to believe manufacturing will help boost US economic growth back to 3+% this quarter on inventory rebuilding and a subsiding of auto production cutbacks.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- General Motors’(GM) Cadillac luxury-vehicle division is considering hybrid versions of all its models.
- A unit of General Electric(GE), the world’s biggest maker of power generators, will invest in three windparks in New York State, its first wind energy investment there.
- Shares of Cameco Corp.(CCJ), the world’s largest uranium producer, fell the most in eight months on concern that the price of uranium has peaked.
- Countrywide Financial Corp.(CFC) called “unfounded” market speculation that the company was the subject of raids by federal authorities.
- North Korea is “committed” to scrapping its nuclear program and is “positive” about its relations with the US and the international community, a group of European Union lawmakers told reporters in Seoul today.
- Japan’s retail sales unexpectedly rose for the first time in eight months, signaling spending by consumers may drive second-quarter economic growth.

Wall Street Journal:
- Apple’s iPhone is a breakthrough smart phone with some flaws, according to a review by Walter S. Mossberg. The “simply beautiful” handheld computer, set to go on sale June 29, offers the “best Web browser,” the biggest and highest-resolution screen and better battery life than key competitors, according to the review, also written by Katherine Boehret.

Late Buy/Sell Recommendations
Citigroup:
- (TSO) and (VLO) are downgraded to Sell and (SUN) is lowered to Hold. We are lowering ratings across the board for the US refiners. Valuations have moved within striking distance of levels we believe take full account of structural changes that have underpinned our positive view since early 2007. But from here the balance of risk has moved to the downside. Share price appreciation has benefited from a number of transitory factors that have inflated earnings expectations beyond levels we believe can reasonably be viewed as repeatable.
- Reiterated Buy on (NKE), target $65.

Morgan Stanley:
- Reiterated Outperform on (ORCL), target $24.

Night Trading
Asian Indices are -1.0% to -.25% on average.
S&P 500 indicated -.09%.
NASDAQ 100 indicated -.10%.

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Economic Releases
8:30 am EST
- Durable Goods Orders for May are estimated to fall -1.0% versus a .8% gain in April.
- Durables Ex Transports for May are estimated to rise .2% versus a 1.9% increase in April.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil build of 1,500,000 barrels versus a 6,902,000 barrel build the prior week. Gasoline supplies are estimated to rise by 1,000,000 barrels versus a 1,791,000 barrel increase the prior week. Distillate inventories are expected to rise by 500,000 barrels versus a 157,000 barrel build the prior week. Finally, Refinery Utilization is expected to rise by .83% versus a -1.63% decline the prior week.

Other Potential Market Movers
- The weekly MBA Mortgage Applications report, (LUV) analyst meeting, Wachovia CEO Summit and Jeffries Healthcare 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 mixed. The Portfolio is 75% net long heading into the day.

Stocks Finish Slightly Lower on Weakness in Commodity Stocks and Lingering Housing Worries

Indices
S&P 500 1,492.89 -.32%
DJIA 13,337.66 -.11%
NASDAQ 2,574.16 -.11%
Russell 2000 826.13 -.16%
Wilshire 5000 15,043.04 -.34%
Russell 1000 Growth 590.79 -.32%
Russell 1000 Value 851.68 -.40%
Morgan Stanley Consumer 726.53 +.09%
Morgan Stanley Cyclical 1,063.97 -1.05%
Morgan Stanley Technology 617.93 -.24%
Transports 5,076.57 -.94%
Utilities 487.84 -.13%
MSCI Emerging Markets 129.99 -.35%

Sentiment/Internals
Total Put/Call 1.08 -2.70%
NYSE Arms 1.24 -7.51%
Volatility(VIX) 18.89 +13.45%
ISE Sentiment 143.0 +8.33%

Futures Spot Prices
Crude Oil 67.94 -1.79%
Reformulated Gasoline 224.89 -2.33%
Natural Gas 6.85 -1.27%
Heating Oil 199.71 -2.22%
Gold 644.30 -1.59%
Base Metals 252.70 +1.82%
Copper 332.85 -2.05%

Economy
10-year US Treasury Yield 5.08% unch.
US Dollar 82.32 unch.
CRB Index 310.73 -.80%

Leading Sectors
Internet +1.53%
Drugs +.86%
Restaurants +.64%

Lagging Sectors
Oil Service -1.85%
Steel -1.93%
Gold -2.64%

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Afternoon Recommendations
Deutsche Bank:
- Rated (RYL) Buy, target $52.

Citigroup:
- Reiterated Buy on (MO).

Afternoon/Evening Headlines
Bloomberg:
- Bear Stearns(BSC) probably won’t bail out the second of its money-losing hedge funds, Merrill Lynch(MER) analyst Guy Moszkowski said, a day after sounding the alarm that investors couldn’t “rule out” such a rescue.
- Bear Stearns(BSC) said it will put up $1.6 billion to rescue one of its money-losing hedge funds, half as much as it offered last week, after raising additional money through asset sales.
- NY harbor conventional gasoline’s discount to futures widened for a second day and reformulated gasoline’s premium declined as traders may be anticipating lower prices next month.
- The Intl. Monetary Fund said it will consider whether to sell gold and invest the proceeds in interest-bearing accounts during a board meeting next month.
- The SEC has undertaken about a dozen probes involving collateralized loans, Chairman Christopher Cox said.
- US steel stocks fell after Arcelor Mittal, the world’s biggest steelmaker, was downgraded by Merrill Lynch(MER) to neutral on concern that steel prices may decline.
- US steel imports reached the highest this year in May as countries including China and South Korea exported more of the metal, an industry group said. Chinese imports were 85% higher than a month earlier, the group said. “The surge in steel imports from China to over 500,000 net tons in May, which equates to an annualized rate in excess of 6 million tons, is of particular concern to domestic steel producers,” Andrew Sharkey, CEO of the institute said.
- Oracle Corp.(ORCL) said fourth-quarter profit rose 23%, beating analysts’ estimates, buoyed by database sales and recent acquisitions. The stocks is rising .23 to $19.39 in after-hours trading.
- Nike Inc.(NKE) said fourth quarter profit climbed 32% on a weaker dollar and increased US clothing and equipment sales. The stock is surging 5.2% in after-hours trading.
- Apple’s(AAPL) iPhone already has people lining up at two Apple stores in New York, four days before the device is scheduled to be released.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Internet longs, Medical longs and Commodity shorts. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was slightly negative today as the advance/decline line finished mildly lower, sector performance was mostly negative and volume was above average. Measures of investor anxiety were high into the close. Today's overall market action was mildly bearish. Cyclicals undperformed meaningfully today as commodity-related stocks (-1.75% to -3.25%) remained under significant pressure for the second day in a row. The two main sources of inflation over the last few years have been commodities and housing. While a significant hurricane could temporarily send energy prices higher, I suspect almost every commodity has already seen its highs for the year. This should help spur another substantial deceleration in inflation readings during the third quarter. I still believe that the 10-year yield has peaked for the year, as well. Google (GOOG) continues to trade very well. The stock looks like it is coiling before another surge higher. It remains my largest equity long position. According to sentimenTrader.com, the All-Index, All-Product Dollar-Weighted Stochastic is now at an extreme level that is normally associated with meaningful market bottoms. At 90.9, this chart shows that it is at the extremes it hit during the trough of the February/March pullback. Readings at 80 or above are historically followed by a 13.6% gain in the S&P 500 89% of the time on average over the next 12 months.

Stocks Mixed into Final Hour as Falling Energy Prices Offset Lingering Sub-Prime Worries

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Internet longs, Medical longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is slightly negative as the advance/decline line is mildly lower, sector performance is mildly negative and volume is above average. Merrill Lynch is reiterating its buy on Bear Stearns (BSC), stating that concerns over its hedge funds are overblown. As well, Reuters is reporting that the U.S. House Financial Panel Chair is saying BSC's hedge fund difficulties won't lead to serious financial market problems. It is interesting to note that, with the recent renewed spike in housing worries, the November home price futures remain firm at $215,000. This indicates only a 1.8% drop in home prices from current levels. Moreover, the November futures are up from about $211,250 in April. The Case-Shiller Housing Index is up about 125% over the last decade. I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower energy prices and bargain-hunting.

Today's Headlines

Bloomberg:
- BlackRock Inc., the largest publicly-traded US asset manager, said it agreed to buy the funds of funds arm of Quellos Group LLC for as much as $1.7 billion. The business includes funds investing in hedge funds and private-equity funds.
- Freddie Mac(FRE) Treasurer Timothy Bitsberger said the subprime mortgage slump is “severe but contained.”
- Bear Stearns Cos.’(BSC) bailout of two money-losing hedge funds won’t reduce earnings at the fifth-biggest US brokerage, Lehman Brothers(LEH) said.
- Apple’s(AAPL) iPhone customers, who will shell out as much as $600 for the handset this week, will pay less for service than other phone users.
- The SEC today announced settled enforcement actions against London-based hedge fund adviser GLG Partners, LP for illegal short selling in connection with 14 IPOs.
- Copper declined in NY on signs that consumption may be slowing in China, the world’s largest user of the metal, and the US, the second-biggest.
- BP Plc, Europe’s second-largest oil company, food maker Associated British Foods Plc and chemicals producer DuPont Co. will build a biofuels plant in England as demand for renewable energy jumps.
- Crude oil is falling $1.45/bbl. on forecasts that an EIA report will show US oil and fuel inventories rose again. US oil inventories are now at levels last seen in May 1998 when oil was around $10-$12/bbl.
- Gold is falling to a three-month low in NY, and silver tumbled to the lowest since January on speculation that investors will seek higher returns from US Treasury bonds.

Wall Street Journal:
- CEOs of US financial-services companies are looking for ways to save free-trade agreements by helping those who have lost jobs or are poorly paid because of the accords. The Financial Services Forum, which represents the executives, wants to head off protectionist legislation that could hurt the US economy.
- A high percentage of US oil refineries are idled for “maintenance,” which means industry profits and gasoline prices will be high in the country this summer.
- The American Bankers Assoc. and America’s Community Bankers announced yesterday that they’ve agreed to merge, citing the two organizations.
- Tyson Foods(TSN) might become more appealing to investors if its plan to change itself from a seller of unbranded chicken, beef and pork to a packaged-food company succeeds.
- Microsoft(MSFT) and VMware Inc., a US developer of so-called “virtualization” software, are gearing up for a battle that might give companies more freedom to choose alternatives to Microsoft’s products.

NY Times:
- The US Homeland Security Dept. is testing s so-called virtual border in southern Arizona made of 100-foot-tall towers with radar and camera equipment.
- The US’s Case Foundation is allowing the public to decide who should benefit from some of its money, to inspire new ideas for improving communities. The foundation, begun by America Online founder Steve Case and his wife Jean, is asking individuals and local not-for-profit bodies to submit ideas.
- The US Energy Department will announce today that it’s setting up three research centers charged with bringing to market fuels derived from plants, citing Raymond Orbach, the under secretary of energy for science.
- Andreas Bechtolsheim, a co-founder of Sun Microsystems(SUNW), plans to present today a supercomputer that may be the world’s fastest when it’s installed at the Texas Advanced Computer Center this year.
- AFL-CIO opposition to immigration reform legislation before the Senate outweighs support from nearly all other unions, which could pressure some Democrats to vote against it.

Washington Post:
- Latin Labor Solutions International, an American-founded company operating in Mexico, provides several thousand temporary Mexican workers with a legal passageway to the US every year.

CNBC:
- Dow Jones(DJ) and News Corp.(NWS/A) have reached an agreement on editorial board independence at the Wall Street Journal.

Financial Times:
- Franklin Resources(BEN) of the US, the world’s biggest fund manager by market capitalization, is planning a push in the UK, citing an interview with CEO Johnson.