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Monday Watch

Weekend Headlines
Bloomberg:
- Dollar Bulls Gain Control as Futures Signal Euro Close to Peak.
- China's inflation accelerated to 8.5%, close to the fastest pace in 11 years, underscoring the government's challenge of taming prices without triggering an economic slump as export demand fades.
- Nicholas Maounis, the hedge-fund manager whose Amaranth Advisors LLC collapsed under a record $6.6 billion loss in 2006, is seeking to start a new firm, according to a note sent yesterday to his former investors.
- Wheat fell 2.4% on Friday after the government said world wheat production will rise to a record. US winter-wheat output will rise 17% to 1.78 billion bushels, compared with last year’s freeze-damaged harvest, the US Dept. of Agriculture said.
- FedEx Corp.(FDX) said fourth-quarter profit will miss its forecast after surging fuel prices raised costs by at least $100 million more than estimated.
- US and European officials signaled satisfaction that the US dollar is stabilizing after Group of Seven policy makers expressed concern a month ago about its decline.
- European 10-year government bonds posted their biggest weekly advance in five years as traders increased best the region’s central bank will cut interest rates to spur the economy.
- Clinton Will Stay in Race, Spokesman Wolfson Says. Clinton is trying to persuage party leaders to allow delegations from Florida and Michigan to participate in the national convention and help her secure the nomination. Clinton’s campaign is lobbying the DNC, which plans to debate the issue at a meeting on May 31. Clinton won’t consider the race over until “one candidate gets to 2,209, which is the number of delegates needed with Florida and Michigan,” campaign spokesman Wolfson said. “We believe Florida and Michigan ought to be counted,” he said. Clinton campaign chairman Terry McAuliffe said on “Meet the Press” that he believes Clinton will be ahead in the popular vote and will be within 100 on the delegates, counting the Michigan and Florida Primary results.
- Australia May Produce Biggest Canola Crop in 9 Years on better weather.

Wall Street Journal:
- Barack Obama picked up a raft of superdelegate endorsements Friday and Saturday and campaigned in Oregon as if he already were running against Republican John McCain, not Hillary Clinton, his rival for the Democratic nomination.
- A House committee has begun an investigation into speculation in energy markets, including the role of investment banks, and is planning to hold hearings in May and June. In particular, lawmakers are taking aim at hedge funds and investment banks, blaming them for playing a pivotal role in pushing crude-oil prices to record levels.

Barron’s:
- Credit-default swaps, which represent bets on the default risk of various debt issues, remain an obscure corner of the global-finance market, inhabited mostly by big banks and brokerages, hedge funds and other institutions. In the decade since credit default swaps were invented, the market has exploded in size, to some $62 trillion of CDS deals outstanding from just $1 trillion in 2000. Beyond concerns about its size, the CDS market seems to have become a weapon of mass speculation that is destabilizing international debt and even equity markets. Some suggest a deliberate attempt by bearish investors to sow doubt about a company’s financial condition played a role in sending credit default insurance to once-unimaginable heights during the first quarter. In the CDS market, a well-placed rumor of trouble, or snippet of negative analysis, can have an outsized impact on positions. Buying CDS protection is the ultimate bear bet, and the incentive of CDS holders to accentuate the negative, particularly to the financial press, is almost irresistible. There are intimations that such activity occurred. NY Insurance Superintendent Eric Dinallo saw fit during a mid-February CNBC interview to tell William Ackman, head of NY hedge fund Pershing Square Capital Mgmt., to be careful with some of his criticisms of monoline bond insurers Ambac(ABK) and MBIA(MBI). Dinallo cited a NY State law that prohibits false statements about the financial condition of state-regulated insurance companies. A clutch of hedge funds have enjoyed huge returns in the past six months or so from the galvanic moves in CDS prices triggered by the collapse in the subprime mortgage market and the resulting credit crunch. Among hedge funds, two big winners last year were Passport II Global and Balestra Capital, Nos. 1 and 2 in Barron’s annual survey of the top 75 hedge funds, with returns of 219% and 199%, respectively. Timely CDS purchases also contributed greatly to the $12 billion in returns that John Paulson of Paulson & Co. rang up last year. The key question for Ambac and MBIA in recent months wasn’t their survival, as the CDS market implied, but whether rating agencies might lower the credit ratings on the companies’ all-important insurance units from triple-A to double-A. In the worst cast scenario, both companies would have prospered from the momentum of large and continuing investment income and premium flow from their books of long-term insurance contracts. Both companies would have had the claims-paying ability to meet all their obligations, while also returning $30 a share or more in capital to their shareholders in less than 10 years. Dinallo perhaps put the issue best in a letter to Congress: “A move from AAA to AA still leaves a highly solvent, financially strong financial guarantor insurer, particularly when compared to the vast majority of other regulated insurers.” What makes CDS trading in Ambac and MBIA so intriguing is that major owners of the CDS positions have been waging open rather than clandestine war against the two companies. The charge is being led by Ackman of Pershing Square, who has been betting against the monolines for the better part of six years. Ackman has become less openly hostile towards the two companies of late, but now appears to be using surrogates in the media and elsewehre, such as the New Republic’s editor in chief Martin Peretz, to paint a bleak picture of the future for the two companies. To Ackman, credit-defaults swaps are “great, great instruments.” It remains to be seen whether credit-default swaps, which often trade on raw emotion, also are good for investors in general. (very good article)

MarketWatch.com:
- AIG(AIG) may have huge gains in second quarter: analyst. A big chunk of first-quarter losses have already reversed, FBR analyst says.
- Developers in China are also feeling the pinch from tighter lending standards and the swing from a seller’s to a buyer’s market. Many of China’s big cities are reporting softening prices and slumping transaction volumes. While few analysts expect an all-out housing crash, the day of reckoning could be at hand for hundreds, even thousands, of smaller developers that leveraged up on land purchases and expanded into new geographic areas amid easy credit.

NY Times:
- From Capitol Hill to Wall Street to the campaign trail, the recent surge in oil prices is quickly threatening to supplant the mortgage crisis as the country’s leading economic issue. While no one disputes that China and other emerging economies are craving more crude, the stunning rise of oil from $62 a year ago is hard to explain as only a matter of supply and demand. After all, analysts have noted adequate inventories. Buying oil futures has become a way for hedge funds, pension funds and other institutional investors to offset their exposure to dollar-based assets. And many speculators have followed the market’s momentum, aggravating the trend. In the first quarter of 2008 alone, commodity assets under management rose $30 billion to $225 billion. Five years ago total commodity assets under management equaled just $20 billion. Based on traditional fundamentals like the cost of finding, producing and shipping crude, oil should be in the mid-$60s, says William H. Brown III, an independent energy consultant in Chappaqua, NY, who monitors investment flows in the energy sector. “I’m not blaming anyone,” he says, “but this price is hard to justify.” Last Wednesday, Senate Democrats proposed legislation that, among other things, would impose substantially higher margin requirements on oil traders, in an effort to dampen speculation. It faces fierce opposition from industry advocates, like James E. Newsome, president of the NY Mercantile Exchange and former leader of the Commodity Futures Trading Commission. Raising margin requirements – even temporarily – might at least be worth a try.
- More Americans are using public buses and trains to get to work this year as higher gasoline prices force them from their vehicles, citing statistics and interviews.
- Legg Mason Inc.(LM) stockpicker Bill Miller, whose fund beat the S&P 500 for 15 consecutive years, is rethinking his investment strategy as the global economy declines.
- In the Age of TiVo and Web Video, What Is Prime Time? The missing six million viewers who were watching prime television last May and have disappeared this year are still watching, but on their own terms.

Factset Research:
- An oil bubble to rival the internet boom.

Washington Post:
- Iraqi Agreement May End Baghdad Fighting.

Business Week:
- Facebook: Friends with Money. The social network taps a fresh source of funds for $100 million and will buy more servers to support its growth in users and applications.

GreenCar.com:
- General Motors(GM) Aims for $1 Per Gallon Cellulosic Ethanol.

USA Today:
- Small businesses explore huge potential of Web, tech services.

Forbes:
- Networking Stocks Come Calling. The index has outperformed the Nasdaq on a daily relative-strength basis since early April.

SmartMoney.com:
- Columnist Defends View on Housing Market. Last week in this column I committed the sin of daring to say something mildly bullish about the housing market. That’s heresy, downright blasphemy, in the eyes of those who adhere to the religion of bearishness.

Reuters:
- EnCana Corp.(ECA), Canada’s biggest energy company, said on Sunday it plans to split into two separate oil and natural gas firms in an effort to wring out more value with crude prices at record highs.
- Short interest on the Nasdaq was effectively unchanged over the last two weeks of April, despite the rebound in stocks and improving credit market conditions. Shorts built bets against regional banks during the period.

Financial Times:
- Morgan Stanley(MS) will on Monday announce that it has raised a $4 billion private equity fund dedicated to infrastructure projects.
- Fitch Ratings has warned that second thoughts from recent fund of hedge fund investors could potentially see $50 billion pulled from the hedge fund industry, laying bare liquidity mismatches that have been growing for the past three years.
- The recent turmoil in Asian stock markets, which has seen shares in Shanghai halved in value in six months does seem to have unnerved some investors in Asia-focused hedge funds.

TimesOnline:
- HSBC Holdings Plc, Europe’s biggest bank, will announce bad-debt charges at its US business of $3.5 billion to $4 billion.

Sunday Telegraph:
- Best Buy Co.(BBY) plans to open up to 200 stores in the UK as part of its joint venture with Carphone Warehouse Group Plc, making it one of the country’s largest non-food retailers.
- Morgan Stanley(MS) is raising $10 billion to start a new global real-estate fund that will invest in distressed and property assets to tap the fallout from a seizure in international credit markets.

Asia Times Online:
- As much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds. I has nothing to do with the convenient myths of Peak Oil. It has to do with control of oil and it price. How?

The Economic Times:
- India’s Real Estate Prices Drop 15-20% During 1Q.

Nikkei:
- Nissan Motor Co. and NEC Corp. will jointly spend about $194 million for the world’s first mass production of lithium-ion batteries for hybrid and electric cars. The two companies plan to build by next year a plant capable of making enough batteries for 60,000 electric cars each year.

Haaretz:
- Lebanese Prime Minister Fuad Sinora on Sunday branded the militant Hezbollah group as worse than Israel, saying “even the Israeli enemy never dared to do to Beirut what Hezbollah has done.”

Weekend Recommendations
Barron's:
- Made positive comments on (SVU), (DPS), (CSCO), (MNST), (MS), (AIG) and (CAM).
- Made negative comments on (GME).

Citigroup:
- Removed (CF) from Top Picks Live, maintained Buy.
- Reiterated Buy on (HOLX), target $36.

Night Trading
Asian indices are -.25% to +.25% on avg.
S&P 500 futures +.19%.
NASDAQ 100 futures +.25%.

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Earnings of Note
Company/Estimate
- (RDN)/-2.13
- (HOC)/.17
- (PMI)/-1.96
- (KDE)/-.07
- (MBI)/-1.21
- (SPF)/-1.52
- (CPN)/.05
- (S)/.02
- (CLWR)/-.89
- (LDK)/.41
- (FLR)/1.26
- (CUZ)/-.02
- (NUAN)/.18
- (BYI)/.47
- (CKEC)/-.34
- (BE)/-.12
- (XMSR)/-.40
- (JASO)/.10
- (ZOLT)/.22
- (MDR)/.54

Upcoming Splits
- (CLF) 2-for-1

Economic Releases
2:00 pm EST
- The Monthly Budget Statement for April is estimated at +$160.0B versus +$177.7B in March.

Other Potential Market Movers
- The Fed’s Lockhart speaking, Fed’s Evans speaking, (RIMM) capital markets day, CLSA China Forum, Goldman Consumer Products Conference and the UBS Global Financial Services Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by financial and mining shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 75% net long heading into the week.

Weekly Outlook

Click here for Wall St. Week Ahead by Reuters.

Click here for stocks in focus for Monday by MarketWatch.

There are several economic reports of note and a number of significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. – Monthly Budget Statement

Tues. – Weekly retail sales reports, Import Price Index, Advance Retail Sales, IDB/TIPP Economic Optimism Index, Business Inventories

Wed. – Weekly EIA energy inventory report, weekly MBA mortgage applications report, Consumer Price Index,

Thur. – Initial Jobless Claims, Empire Manufacturing report, Net Long-term TIC Flows, Industrial Production, Capacity Utilization, Philly Fed, NAHB Housing Market Index

Fri. – Housing Starts, Building Permits, Univ. of Mich. Consumer Confidence

Some of the more noteworthy companies that release quarterly earnings this week are:

Mon. – Calpine(CPN), MBIA Inc.(MBI), Standard Pacific(SPF), Sprint Nextel(S), Clearwire(CLWR), Cousins Properties(CUZ), LDK Solar(LDK), Bally Technologies(BYI), Nuance Communications(NUAN), Flour Corp(FLR), Carmike Cinamas(CKEC), JA Solar(JASO), BearingPoint(BE), XM Satellite(XMSR), McDermott(MDR)

Tues. – VeraSun Energy(VSE), Liz Claiborne(LIZ), Wal-Mart(WMT), TJX Cos(TJX), Fossil Inc.(FOSL), Applied Materials(AMAT), Electronic Arts(ERTS), Whole Foods(WFMI), DISH Network(DISH)

Wed. – Freddie Mac(FRE), Jack in the Box(JBX), Ctrip.com(CTRP), Agilent Technologies(A), Teekay Corp.(TK), Sina Corp.(SINA), Deere & Co.(DE), Macy’s Inc.(M)

Thur. – Urban Outfitters(URBN), Blockbuster(BBI), Kohl’s(KSS), BMC Software(BMC), Nordstrom(JWN), Advance Auto Parts(AAP), Blackstone Group(BX), Netease.com(NTES), Compuware Corp.(CPWR), Hewlett Packard(HPQ), Autodesk(ADSK), JC Penney(JCP)

Fri. – Abercrombie(ANF), Focus Media(FMCN), Salesforce.com(CRM), PetSmart(PETM)

Other events that have market-moving potential this week include:

Mon. – Fed’s Lockhart speaking, Fed’s Evans speaking, (RIMM) capital markets day, CLSA China Forum, Goldman Consumer Products Conference, UBS Global Financial Services Conference

Tue. – Fed’s Hoenig speaking, Fed’s Yellen speaking, Fed’s Plosser speaking, Fed’s Warsh speaking, Fed’s Bernanke speaking, Fed’s Pianalto speaking, (GM) conference, (OI) analyst meeting, (JKHY) analyst conference, (SFG) analyst meeting, Goldman Power/Utility Conference, UBS Global Financial Services Conference, Bank of America Healthcare Conference, Robert W. Baird Growth Stock Conference, Merrill Global Metals/Mining/Steel Conference, Merriman Curhan Ford Clean Tech Conference, Morgan Stanley Communications Conference, CSFB Semi/Hardware Conference

Wed. – Fed’s Lockhart speaking, Fed’s Kroszner speaking, Fed’s Rosengren speaking, (AFL) analyst meeting, (NBL) analyst meeting, (ITRI) analyst meeting, (ERIC) capital markets day, Robert W. Baird Growth Stock Conference, CSFB Special Situations Conference, Bank of America Health Care Conference, Merrill Lynch Global Metals/Mining/Steel Conference, CSFB Semi/Hardware Conference, Morgan Stanley Communications Conference, UBS Global Financial Services Conference, Goldman Power/Utility Conference

Thur. – Fed’s Bernanke speaking, Fed’s Evans speaking, (UNP) analyst conference, (AFL) analyst meeting, (ACS) investor conference, Bank of America Health Care Conference, Robert W. Baird Growth Stock Conference, Canaccord On-Demand Software Conference, Merrill Lynch Global Engineering/Construction Conference, BMO Ag/Protein Conference

Fri. – (ONNN) analyst meeting

BOTTOM LINE: I expect US stocks to finish the week mixed as a stronger US dollar, lower energy prices and mostly positive earnings reports offset hawkish Fed commentary and more shorting. My trading indicators are giving mostly bullish signals and the Portfolio is 75% net long heading into the week.

Market Week in Review

S&P 500 1,388.28 -1.81%*

Click here for the Weekly Wrap by Briefing.com.

*5-Day Change

Weekly Scoreboard*

Indices
S&P 500 1,388.28 -1.81%
DJIA 12,745.88 -2.39%
NASDAQ 2,445.52 -1.27%
Russell 2000 720.05 -.78%
Wilshire 5000 13,985.25 -1.47%
Russell 1000 Growth 582.37 -.91%
Russell 1000 Value 753.50 -2.21%
Morgan Stanley Consumer 686.48 -2.1%
Morgan Stanley Cyclical 983.36 -.94%
Morgan Stanley Technology 584.03 -1.34%
Transports 5,193.98 -2.15%
Utilities 508.79 -2.77%
MSCI Emerging Markets 147.06 -1.31%

Sentiment/Internals
NYSE Cumulative A/D Line 59,155 -.29%
Bloomberg New Highs-Lows Index -182
Bloomberg Crude Oil % Bulls 36.0 +63.6%
CFTC Oil Large Speculative Longs 257,908 +6.84%
Total Put/Call .93 +3.33%
OEX Put/Call 1.02 -45.2%
ISE Sentiment 123.0 -.81%
NYSE Arms 1.53 +68.47%
Volatility(VIX) 19.41 +6.77%
G7 Currency Volatility (VXY) 10.89 +5.01%
Smart Money Flow Index 8,815.72 -1.58%
AAII % Bulls 52.81 -.90%
AAII % Bears 24.72 -6.08%

Futures Spot Prices
Crude Oil 126.19 +8.14%
Reformulated Gasoline 320.17 +7.86%
Natural Gas 11.58 +7.35%
Heating Oil 364.80 +13.33%
Gold 886.50 +3.18%
Base Metals 250.09 +.03%
Copper 371.25 -2.75%
Agriculture 417.33 +1.74%

Economy
10-year US Treasury Yield 3.77% -9 basis points
10-year TIPS Spread 2.42% +6 basis points
TED Spread 1.00 -28 basis points
N. Amer. Investment Grade Credit Default Swap Index 103.88 +19.43%
Emerging Markets Credit Default Swap Index 228.12 +4.19%
Citi US Economic Surprise Index -32.30 +44.5%
Fed Fund Futures 12.0% chance of 25 cut, 88.0% chance of no cut on 6/25
Iraqi 2028 Govt Bonds 70.54 +.18%
4-Wk MA of Jobless Claims 367,000 +.7%
Average 30-year Mortgage Rate 6.05% -1 basis point
Weekly Mortgage Applications 655,400 +15.6%
Weekly Retail Sales +1.6%
Nationwide Gas $3.67/gallon +.05/gallon.
US Heating Demand Next 7 Days 21.0% above normal
ECRI Weekly Leading Economic Index 133.50 +1.29%
US Dollar Index 73.05 -.61%
Baltic Dry Index 10,221 +8.28%
CRB Index 427.48 +4.74%

Best Performing Style
Mid-cap Growth +.07%

Worst Performing Style
Large-cap Value -2.21%

Leading Sectors
Steel +5.53%
Oil Service +5.39%
Disk Drives +3.5%
Construction +2.36%
Computer Hardware +2.02%

Lagging Sectors
Retail -4.7%
Banks -6.10%
I-Banks -6.18%
Insurance -6.84%
Airlines -9.84%

One-Week High-Volume Gainers

One-Week High-Volume Losers

*5-Day Change

Stocks Finish Lower, Weighed Down by Drug, Construction and Homebuilding Shares

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