PPI Above Estimates, NY Manufactuing Gauge Rebounds Sharply, International Demand for US Assets Healthy, Weekly Retail Sales Surge

- The Producer Price Index for March rose 1.1% versus estimates of a .6% decline and a .3% rise in February.

- The PPI Ex Food & Energy for March rose .2% versus estimates of a .2% gain and a .5% rise in February.

- Empire Manufacturing for April rose to .6 versus estimates of -17.0 and a reading of -22.2 in March.

- Net Long-term TIC Flows for February rose to $72.5 billion versus estimates of $60.0 billion and $57.1 billion in January.

BOTTOM LINE: Headline US producer prices rose more than expected, while core prices decelerated, Bloomberg reported. Core prices rose 2.7% year-over-year. Food prices rose 1.2%, with rice surging 8.7%, the most since 2002. Wholesale energy costs rose 2.9%. Passenger car prices fell .2%, while the cost of light trucks declined .3%. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 2 basis points to 2.35%. However, it remains well below the 2.68% seen a few weeks ago. I still believe inflation fears have peaked for the year and gauges will show substantial moderation by year-end.

Foreign buying of US financial assets rose more than expected in February as international investors purchased Treasuries and agency debt, Bloomberg reported. International purchases of US stocks rose by a net $6 billion. Private investors bought a net $76.7 billion in long-term securities, compared with a net $23.9 billion in January. Foreigners bought a net $19.3 billion of corporate bonds, versus $4.2 billion the prior month. The difference between the trade gap and securities purchased by international investors is an indication of how easily the US can finance its external obligations. I expect foreign demand for US assets to remain strong over the long-term.

A measure of manufacturing in NY state unexpectedly jumped in April as new orders and shipments surged, Bloomberg reported. The Prices Paid component rose to 57.3 versus 50.6 the prior month. The New Orders component rose to .06 from -4.7 the prior month. The Shipments component jumped to 17.5 versus -5.2 in March. The Inventories component rose to -4.2 from -4.5 prior. The Employment component fell to zero from 4.5 in March. Moreover, weekly retail sales rose 2.0% this week, the best showing since the holiday shopping season during the week of December 4th last year. This is up from a .5% increase the week ended March 4^th. This is only one week, but is still a substantial improvement from the month of February, especially considering the unseasonably cold and wet weather in much of the country during that week. Overall, economic data have been showing modest economic improvement of late.

Bull Radar

Style Outperformer:

Large-cap Value (+.68%)

Sector Outperformers:

HMOs (+2.08%), Banks (+.71%) and Steel (+.68%)

Stocks Rising on Unusual Volume:

RF, PZE, MTB, TLM, PHG, ADTN, FSLR, AXYS, RDY, CSIQ, EXPO, SURW, INFY, QMAR, IIIN, NTRS, TTES, ACGY, CTSH, WFSL, ASTI, PRSC, BOLT, JASO, GEOY, ANSS, ISRG, RC, KFS, PZE, AZN, VQ and ODC

Stocks With Unusual Call Option Activity:

1) WLP 2) STT 3) HNT 4) SIGM 5) TLM

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- French Finance Minister Christine Lagarde said investors haven’t grasped the magnitude of the Group of Seven’s shift in stance on exchange rates, likening its significance to the 1985 Plaza Accord.
- Petroleo Brasileiro SA’s(PBR) offshore Carioca prospect may hold 33 billion barrels of oil, enough to supply every refinery in the US for six years, making it the third-largest oil field ever discovered. “That whole area off the coast of Brazil is becoming a new oil province,” said Dick Gibson, a geologist who’s been advising oil and natural gas producers since 1975. “We think this is part of a major transformation of Petrobras, which could lead to it becoming a much larger company in terms of production and reserves over the next 5-10 years,” Merrill Lynch analysts wrote.
- Bear Stearns(BSC) eked out a profit in the three months leading up to its demise in March. First-quarter net income fell 79% to $115 million, or 86 cents a share.
- Compuware(CPWR) jumped 17% in after-hours trading. The US supplier of business software reported preliminary fourth-quarter net income of 22 cents a share. That topped the 20 cent average estimate from analysts.
- Crocs(CROX) said it will fire its 600 Canadian plant workers after lowering annual earnings and sales forecasts as consumer spending slowed. The shares plunged 25% in after-hours trading.
- China, Iran, Saudi Arabia and Pakistan carried out most of the known executions worldwide in 2007, Amnesty International said in a report that called upon governments to openly publish numbers of those killed. “Amnesty International can confirm at least 470 executions by China – the highest overall figure,” the charity said. The true figure “is undoubtedly much higher.”
- Australia’s benchmark interest rate at the highest in 12 years is exerting a “significant restraining influence” on households and businesses, central bank board members judged at their last meeting two weeks ago.
- The United Kingdom property market slump deteriorated in March to the worst since records began in 1978 as mortgage lending dried up, a survey of real-estate professionals showed.
- Two panels appointed by Treasury Secretary Henry Paulson advised hedge funds to adopt guidelines including increased disclosure and strengthened management of risk in the aftermath of the rout in credit markets.
- Delta Air(DAL) agreed to acquire Northwest Air(NWA) in a $3.1 billion stock deal that would create the world’s largest carrier and may unleash more industry consolidation.
- The Philippines is more at risk than Indonesia as record food and energy prices threaten budget targets and cause currencies to decline, according to Thomas Byrne, senior vp at Moody’s Investors Service.

Wall Street Journal:
- Google(GOOG) Seeks a Leading Role in China. Google Inc. aims to become a market leader in China’s Internet-search market in about five years, said Kai-Fu Lee, president of the company’s Greater China operation. Google also is exploring investments in Chinese companies that focus on social networking and mobile Internet as part of its strategy to expand in China.
- The dust-up over Senator Barack Obama’s remarks about rural America is forcing both Democratic candidates to talk about guns, abortion and family values – issues that don’t win them many votes among the social conservatives they are trying hard to court in the Rust Belt, South and West.

MarketWatch.com:
- Chinese investors wait in vain for government help. Focused on inflation, financial authorities resist calls to cut trading taxes. Frustrated mainland Chinese investors, who have watched the country’s main stock market in Shanghai plummet more than 40% since October, have been wondering when their typically hands-on government will move to reverse the fall. The word from Beijing: It just might not.
- Seemingly endless food-safety scandals have left Chinese consumers wary and opened the door for such foreign supermarket operators as France’s Carrefour, Britain’s Tesco and US giant Wal-Mart(WMT), writes Bruce McLaughlin, a Hong Kong alalyst.

NY Times:
- New Ways to Store Solar Energy for Nighttime and Cloudy Days.

Forbes.com:
- Everywhere you turn this year, Apple’s(AAPL) machines are on the march. Apple’s iPhone is continuing to gobble up the smart phone market. Apple’s PCs and notebook computers – long relegated to a niche status – are tearing off big gobs of the PC market. Even Apple’s least successful effort – Apple TV – has rivals such as Blockbuster(BBI) scrambling to blunt Apple’s attack.
- Google’s(GOOG) Cloud Attack On Microsoft(MSFT).

USA Today.com:
- Wal-Mart(WMT) agrees to toughen policies for gun sales.
- Big retailers seek teens(and parents).

Reuters:
- Continental Airlines(CAL) and United Airlines(UAUA) have laid most of the groundwork for a merger and could have a deal ready “pretty quickly” if Delta and Northwest announce a tie-up.

Late Buy/Sell Recommendations
Citigroup:
- Maintained Buy on (NTRI), raised estimates, target $29.
- Google’s(GOOG) US market share, according to comScore, increased 53 basis points in March M/M to a record high 59.8%(up 520 basis points Y/Y). GOOG’s query growth of 30% Y/Y market an acceleration vs. February’s 26% Y/Y growth. We were somewhat surprised at the March uptick, especially since the company had previously alluded that the unusual Easter timing could impact search activity.
- Reiterated Buy on (GET), target $50.

Night Trading
Asian Indices are -.25% to +1.0% on average.
S&P 500 futures +.11%.
NASDAQ 100 futures +.21%.

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Earnings of Note
Company/EPS Estimate
- (USB)/.63
- (FRX)/.78
- (PII)/.47
- (JNJ)/1.20
- (MTB)/1.55
- (RF)/.48
- (MI)/.52
- (CSX)/.73
- (LLTC)/.48
- (ADTN)/.26
- (WM)/-1.13
- (STX)/.69
- (INTC)/.28
- (STT)/1.30

Upcoming Splits
- (CHDX) 3-for-2

Economic Releases
8:30 am EST
- The Producer Price Index for March is estimated to rise .6% versus a .3% gain in February.
- The PPI Ex Food & Energy for March is estimated to rise .2% versus a .5% increase in February.
- Empire Manufacturing for April is estimated to rise to -17.0 versus -22.2 in March.

9:00 am EST
- Net Long-term TIC Flows for February are estimated to fall to $60.0 billion versus $62.0 billion in January.

1:00 pm EST
- The NAHB Housing Market Index for April is estimated at 20.0 versus 20.0 in March.

Other Potential Market Movers
- The weekly retail sales reports, (JCP) analyst meeting and SunTrust Robinson Humphrey Institutional Conference could also impact trading today.

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

Stocks Finish Slightly Lower, Weighed Down by Financial, Homebuilding Shares

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In Play

Stocks Slightly Lower into Final Hour on Another Jump in Oil and Financial Sector Angst

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Computer longs, Software longs, Alternative Energy longs and Emerging Market shorts. I have not traded today, thus leaving the Portfolio 75% net long. The overall tone of the market is mildly bearish as the advance/decline line is lower, sector performance is mixed and volume is below average. Investor anxiety is above-average. Today’s overall market action is neutral. The VIX is rising 2.7% and remains above average at 24.1. The ISE Sentiment Index is a low 111.0 and the total put/call is an above-average 1.02. Finally, the NYSE Arms has been running above-average most of the day and is currently 1.11. Considering the news today in the financial sector and the rise in oil, the broad market is holding up better than I would have expected. The (XLF) is at session lows, down 2.7%, and has declined for five straight days ahead of key earnings reports. Given how much bad news is already priced into the financials, I would expect the (XLF) to hold the $24-24.25 level. Growth stocks are outperforming value stocks, with many market leaders actually higher on the day. Moreover, the food, airline, road & rail, retail, hospital, computer service, networking, oil service, energy, utility and defense sectors are all higher for the day. Recent market action indicates to me that the bears are running low on firepower. I still expect stocks to recoup much of last week’s losses later this week. Nikkei futures indicate an +60 open in Japan and DAX futures indicate an +70 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close on short-covering and bargain hunting.