Stocks Mostly Lower into Final Hour on Dollar Weakness, Profit-Taking

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs and Gaming longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is mildly bearish as the advance/decline line is slightly lower, most sectors are declining and volume is above average. Investor anxiety is slightly above average. Today’s overall market action is mildly bearish. The VIX is rising 1.7% and remains above average at 20.6. The ISE Sentiment Index is around average at 155.0 and the total put/call is below average at .82. Finally, the NYSE Arms has been running high most of the day and is currently 1.22. Fed fund futures currently imply a 78.7% chance for no rate cut and a 20.6% chance for a 25 basis point cut at the June 25 meeting. Investors initial negative reaction to today’s 25 basis point fed funds rate cut and less-hawkish-than-expected FOMC commentary seems overdone to me. The Fed did and said what was necessary to prepare the markets for an end to the long string of rate cuts, which should help strengthen the US dollar further and pressure commodities over the coming weeks. I suspect comments from Fed speakers over the next two months will become increasingly more hawkish as the June meeting approaches. Nikkei futures indicate an +51 open in Japan and DAX futures indicate an +13 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering and less economic pessimism.

Today's Headlines

Bloomberg:
- The cost to protect US corporate bonds from default fell to an almost four-month low after the Fed cut its benchmark interest rate for the seventh time since the global credit turmoil began last year. Credit-default swaps on the Markit CDX North America Investment Grade Index of 125 companies in the US and Canada dropped 4 basis points to 90 basis points as of 2:22 pm in NY, according to Phoenix Partners Group.
- The Fed lowered its main interest rate by a quarter of a percentage point to 2%, the seventh cut since the onset of a global credit squeeze that’s eroded economic growth.
- General Motors(GM), the world’s largest automaker, posted a smaller first-quarter loss than analysts estimated. The stock is surging 12% on the report.
- AMR’s(AMR) American Airlines and British Airways may expand their marketing alliance and include Continental Airlines(CAL) as the carriers seek to boost sales without a merger.
- Chinese banks may risk higher bad loans after posting record profits in 2007, due to tighter credit controls and a slowing economy, the nation’s banking regulator said.

Wall Street Journal:
- Iraq Oil Revenue May Top Outlook. Report Urges Nation To Spend More Cash On Reconstruction.
- Getting to Know John McCain.
- This summer Starbucks(SBUX) is adding a line of smoothie-like drinks.

NY Times:
- Now short sellers are drawing fire once again. Across the world, these market bears are being accused of spreading rumors, persecuting companies and unsettling entire economies. Even on Wall Street, where money is seen as the ultimate measure of success, some wonder whether the shorts have gone too far. Some Wall Street executives question whether unscrupulous short sellers caused the collapse of the investment bank Bear Stearns(BSC). Others complain that shorts have been telling lies about other major firms in an attempt to sink stock prices. “This does beyond rumors,” Senator Chris Dodd said. “This is about collusion.” Concern about short sellers’ growing power gained new urgency last week when the SEC accused a former short seller of spreading false rumors about a big takeover and then profiting from the ploy. On the NYSE, short selling is running near record levels. Just over 4% of all the shares on the Big Board were sold short as of March. That figure excludes many rapid trades made every day. In all, short selling probably accounts for 25% or more of all trading.
- Three rival teams of computer researchers are working on new types of software needed to better use computer chips that can process many tasks at the same time.

TimesOnline:
- Homeowners in the UK will bear the brunt of a City slowdown as Britain takes the biggest hit of the global credit crisis, the chief economist at Goldman Sachs predicted today.

Business Report:
- While rising food prices are causing concern globally, South Africans can expect some relief as local farmers boost production. The crop estimates committee put the crop at 11 million tons, 55% higher than last year’s 7.1 million tons, when drought and lower prices produced only a modest crop. The wheat planting season was also under way in Argentina and Australia, which last year was seriously affected by drought. Expectations of improved supply as the year progresses are reflected in the difference between international spot wheat prices and prices for December.

Xinhua:
- China’s biggest trade fair received fewer buyers from developed economies and triggered fewer orders because of weak consumer demand in export markets, citing Xu Bing, a spokesman for the organizers. Visits from Japanese buyers plunged 28%.

Azzaman:
- Iraq’s Kirkuk crude oil exports to the Turkish Mediterranean port of Ceyhan climbed to 430,000 barrels a day in April. Iraq built its Ceyhan crude stocks to 4.5 million barrels because there were no attacks against the pipeline or major disruptions this month. Iraq exported 323,000 barrels a day of Kirkuk crude in March.

Ynet News:
- Speaking at a conference in Gaza, Mahmoud al-Zahar warns Israel Hamas has 200,000 suicide bombers waiting to attack.

Bear Radar

Style Underperformer:

Mid-cap Value +.07%

Sector Underperformers:

Papers (-1.58%), Tobacco (-.79%) and Construction (-.73%)

Stocks Falling on Unusual Volume:

SOHU, CBI, SGY, BDE, RAI, SVVS, HTCH, RSTI, VPRT, SWIR, GRMN, FEIC, ADVS, HSII, ELON, HW, JLL, CL and TNB

Stocks With Unusual Put Option Activity:

1) JBHT 2) OTEX 3) JCG 4) RDC 5) AEO

1Q GDP Rises, 1Q Inflation Decelerates, Chicago PMI Rises, ADP Employment Unexpectedly Increases

- Advance 1Q GDP rose .6% versus estimates of a .5% gain and a .6% increase in 4Q.

- Advance 1Q Personal Consumption rose 1.0% versus estimates of a .7% increase and a 2.3% gain in 4Q.

- Advance 1Q GDP Price Index rose 2.6% versus estimates of a 3.0% gain and a 2.4% increase in 4Q.

- Advance 1Q Core PCE rose 2.2% versus estimates of a 2.2% increase and a 2.5% gain in 4Q.

- The 1Q Employment Cost Index rose .7% versus estimates of a .8% gain and a .8% increase in 4Q.

- The Chicago Purchasing Manager Index for April rose to 48.3 versus estimates of 47.5 and a reading of 48.2 in March.

- The ADP Employment Change for April was +10K versus estimates of -60K and +3K in March.

BOTTOM LINE: The US economy expanded at a .6% annual pace in the first quarter, Bloomberg reported. The Fed’s preferred inflation gauge, the core pce, rose at a 2.2% pace, down from 2.5% in 4Q. Investment in residential construction projects fell at an annual rate of 27% during the quarter, the most since 1981. The decline subtracted 1.23 percentage points from GDP. Housing has subtracted from growth since 1Q of 2006. Companies built back depleted inventories slightly at a $1.8 billion annual rate during 1Q, after an annualized decline of $18.3 billion in 4Q. Inventory re-building added .8 percentage point to growth last quarter. The trade deficit narrowed to an annual pace of $495.9 billion last quarter from $503.2 billion during 4Q. The smaller gap added .2 percent to growth. The ADP Employment report, also released today, showed companies unexpectedly added 10,000 jobs this month. Estimates ranged from a drop of 115,000 to a decline of 20,000. The ADP report only takes into account private employment and does not factor in government hiring. The report showed service providers added 64,000 workers, while construction jobs fell by 28,000. Employment at financial institutions surprisingly rose by 2,000. Small companies added 42,000 workers, while large ones pared their workforces by 18,000. According to Intrade.com, the odds the US enters recession this year are plunging to 31% today from 79% last month. I expect Friday’s jobs report to also exceed estimates of -75K. Many of the bears that currently dominate investor/media psychology in today’s “US negativity bubble” have been saying for over two years the US economy was plunging into a very bad recession and bear market. The DJIA is now only 7.4% from its all-time high. I still expect fiscal/monetary stimuli, a stronger US dollar, lower energy/food prices, decelerating inflation, better consumer sentiment, an improving job market, rising stock prices, less housing-related fear, an end to the credit market turmoil, relatively low interest rates, an end to the election uncertainty and an end to the American Axle strike to boost the economy further over the coming months.

The Chicago PMI, a measure of US business activity, rose slightly and came in above economists’ estimates in April, Bloomberg reported. The Employment component of the index fell to 35.3 from 44.6 the prior month. The New Orders component fell to 53.0 from 53.9 the prior month. The Inventories component rose to 51.9 from 42.0 the prior month. The Prices Paid component fell to 82.9 from 83.9 in March. Carmakers have been at the center of the decline in manufacturing. The American Axle strike has resulted in GM(GM) partially idling or temporarily closing 30 plants in North America. I expect the Chicago PMI to begin showing expansion again over the coming months on improving demand, an end to the strike and further inventory re-building as companies gain more confidence that the economy is not tipping into recession.

Bull Radar

Style Outperformer:

Mid-cap Growth (+.75%)

Sector Outperformers:

Airlines (+2.96%), Steel (+1.66%) and Internet (+1.47%)

Stocks Rising on Unusual Volume:

CYBS, EQ, CMC, LNC, IMO, OIS, IMMR, OMCL, CGV, ALY, BWLD, ESMK, STAR, REXX, MPWR, PNRA, SIMO, ALGN, DBTK, NETL, MDAS, BMRN, TRLG, GMKT, KNOT, AMED, FSLR, OTEX, MNTA, PLT, TKR, DWA and CMI

Stocks With Unusual Call Option Activity:

1) CBI 2) TLM 3) ALU 4) BMRN 5) CMCSA

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