Stocks Slightly Lower into Final Hour on Profit-taking, Record Energy Prices

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Alternative Energy longs, Networking longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly bearish as the advance/decline line is slightly lower, sector performance is mixed and volume is above average. Investor anxiety is slightly above average. Today’s overall market action is mildly bullish. The VIX is rising 1.4% and remains above average at 16.5. The ISE Sentiment Index is below average at 121.0 and the total put/call is about average at .91. Finally, the NYSE Arms has been running above average most of the day and is currently 1.15. Given this morning’s mostly disappointing economic data, recent market gains, dollar weakness and oil’s surge to record levels, today’s market performance is more impressive. I continue to believe recent market action indicates the many bears are running low on firepower and should be very concerned. Market leading stocks are relatively strong again. A number of technology and commodity stocks are breaking out of recent ranges. The S&P 500 is very close to breaking above its 200-day moving average at 1,428. I still think a reversal lower in oil will result in a convincing break above this level, which could come as early as next week. The European Financial Sector Credit Default Swap Index is falling another 1.33 basis points to 57.04 basis points, which is down from a high of 131.41 on March 21^st. The TED spread is also falling 3 basis points today to .86, which is down from 2.40 in August of last year. (ISRG) is breaking free of its recent trading range and bumping up against its 50-day moving average. I suspect the stock will break above this level next week and test its all-time highs during 4Q. Nikkei futures indicate a +110 open in Japan and DAX futures indicate a +84 open in Germany on Monday. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering and diminishing credit market angst.

Today's Headlines

Bloomberg:
- Fannie Mae(FNM) will stop requiring bigger down payments in regions where home prices are dropping.
- Saudi Arabia, the world’s largest exporter, will increase crude production by 300,000 bpd next month in response to rising demand from its customers and a request by President Bush to ease the strain of record oil prices.
- Crude oil rose above $127/bbl. after Goldman Sachs(GS), one of the world’s largest commodities traders, boosted its second-half price forecast for crude to $141/bbl.
- India’s inflation rate unexpectedly rose to 7.83%, the highest in 3 ½ years, adding pressure on the central bank to raise borrowing costs further to tame prices.
- Osama bin Laden marked the 60^th anniversary of the creation of Israel by pledging to fight the Jewish state and Western powers, in the latest audio message purportedly from the al-Qaeda leader.

NY Post:
- Yahoo! executives are scrambling to finalize a search-advertising pact with Google(GOOG) in the face of a fresh challenge to its independence from billionaire investor Carl Icahn.

Dow Jones:
- Morgan Stanley(MS) Private Equity, the buyout unit of the world’s second-biggest securities firm, will close its first round of money-raising in July at about $2.5 billion for its main buyout fund.

Reuters:
- Sluggish gold sales during the Akshaya Tritiya festival, normally seen as an auspicious time to buy the metal, provide the latest evidence of high prices hurting demand form the world’s top consumer. Weak demand during the May 7-8 festival could also point to poor demand in the festivals and wedding season, which starts in September. Imports of gold have plummeted this year because of high prices, falling to 42 tons in January-March, down 76% from a year ago, Bombay Bullion Assoc. says.

Financial Times:
- Chip Mason, chairman of Legg Mason(LM), said there was a bubble in commodities and oil prices, and the stock market would not recover until those prices came down. "Most things that we deal with in life from a business standpoint have some reality to cost . . . but, when you get to certain commodities, oil being one, it doesn't seem to have any relationship to production costs. The cost to create a barrel of oil is still in the $40s . . . Yet the price has gone up immensely. I would think the oil industry would be a little concerned right now. The price has gotten to a point where they're creating economic imbalances. They're causing the poor countries to suffer a lot. They're causing major economies to go through big shifts," he said.

Bear Radar

Style Underperformer:

Small-cap Value -1.08%

Sector Underperformers:

Retailirlind (-2.48%), Banks (-2.25%) and Airlines (-1.98%)

Stocks Falling on Unusual Volume:

ALD, TRMA, ASTI, ERTS and URBN

Stocks With Unusual Put Option Activity:

1) SOLF 2) CONN 3) MYGN 4) AUO 5) TTWO

Housing Starts Rise, Confidence Still Depressed

- Housing Starts for April rose to 1032K versus estimates of 939K and 954K in March.

- Building Permits for April rose to 978K versus estimates of 915K and 932K in March.

- Preliminary Univ. of Mich. Consumer Confidence for May fell to 59.5 versus estimates of 62.0 and a reading of 62.6 in April.

BOTTOM LINE: Construction of US single-family houses in April fell to the lowest level in 17 years, even as building of condominiums and townhouses rebounded, Bloomberg reported. Starts jumped 24% in the Midwest, 19% in the West and 3.6% in the South. They fell 13% in the Northeast. Residential construction has subtracted from overall US economic growth since the first quarter of 2006. Despite this rebound, construction will remain muted over the intermediate-term as homebuilders work down inventories.

US consumer confidence fell to a 28-year low as gas prices continued to rise to records this month, Bloomberg reported. The Expectations component of the index fell to 51.7 from 53.3 in April. The Current Conditions component of the index fell to 71.7 versus 77.0 in April. Regular unleaded gasoline prices reached a record $3.79 a gallon at the pump yesterday, and are up 24% just this year. Despite this, retail sales have improved meaningfully of late and $90 billion in tax rebate checks have yet to hit. According to Bankrate.com, the average fixed rate 30-year mortgage is falling 6 basis points today to 5.80%, down from 6.12% on March 6^th and down from a high of 6.42% on June 14^th, 2007. Saudi Arabia just announced that they will pump an extra 300,000 barrels of oil per day in June. Saudi currently produces 9.12 million bpd and has the spare capacity to produce 11.1 million bpd. The ECRI Weekly Leading Index was flat this week at 133.50. However, it has risen during four of the last six weeks and is up from a low of 129.50 the week of March 28^th. I still think consumer confidence gauges will improve meaningfully into year-end as election uncertainty ends, energy prices fall, housing fears subside, fiscal/monetary stimuli hit, the American Axle strike ends, interest rates remain low, inflation decelerates, stocks rise, credit market turmoil ends, the US dollar rises and the job market improves.

Bull Radar

Style Outperformer:

Mid-cap Value (-.35%)

Sector Outperformers:

Oil Service (+1.83%), Energy (+1.62%) and Steel (+1.44%)

Stocks Rising on Unusual Volume:

CPE, RDC, UPL, KGC, AAP, BMC, SAN, UBB, OTEX, STM, TITN, WGOV, JRJC, BIDZ, CYBS, ZOLT, AMLN, SRCL, NTES, ZOLL, HERO, EFUT, SOLF, DRYS, TBSI, EGLE, NNDS, SBUX, OSTK, DNEX, HRS, SAN, SHI and CEP

Stocks With Unusual Call Option Activity:

1) ESI 2) BCSI 3) HRS 4) FFIV 5) JCG

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