Productivity Accelerates, Service Sector Expanding, ADP Employment Jumps

- Final 1Q Non-farm Productivity rose 2.6% versus estimates of a 2.5% gain and prior estimates of a 2.2% increase.

- Final 1Q Unit Labor Costs rose 2.2% versus estimates of a 2.0% gain and prior estimates of a 2.2% increase.

- ISM Non-Manufacturing for May came in at 51.7 versus estimates of 51.0 and a reading of 52.0 in April.

- ADP Employment Change for May was +40K versus estimates of -30K and an upwardly revised +13K in April.

BOTTOM LINE: US worker productivity in the first quarter accelerated more than previously estimated, Bloomberg reported. Labor costs climbed at a revised 2.2% pace, the same as estimated and down from a 4.7% gain in 4Q 07. Unit labor costs account for about two-thirds of the cost to produce a good or service. Productivity at non-financial corporations, a gauge closely watched by former Fed chairman Greenspan and other policy makers, surged at a 4.6% rate during 1Q, almost twice as much as during 4Q 07. I still expect unit labor costs to remain muted and productivity to remain healthy over the intermediate-term.

US service industries, which make up almost 90% of the US economy, continued to expand in May, Bloomberg reported. The New Orders component rose to 53.6, the highest this year, versus 50.1 in April. The Employment component fell to 48.7 from 50.8 the prior month. The Prices Paid component increased to 77.0 versus 72.2 the prior month. I expect the ISM Non-Manufacturing Index to accelerate further this month and to continue to modestly improve through year-end on decelerating inflation, rising consumer confidence, a firmer job market, fiscal/monetary stimuli, relatively low interest rates and rising stock prices.

Companies in the US unexpectedly added jobs in May by the most since January, Bloomberg reported. As well, the ADP report does not include government jobs. Services providers added 77,000 workers and construction jobs declined by 13,000. Financial Services companies added 5,000 jobs. Large companies cut payrolls by 18,000, while small companies added 61,000 jobs in May. I expect Friday’s jobs report to modestly exceed estimates of -60,000 and the job market to show further improvement through year-end.

Bull Radar

Style Outperformer:

Large-cap Growth (+.74%)

Sector Outperformers:

Airlines (+3.26%), I-Banks (+2.41%) and Semis (+2.08%)

Stocks Rising on Unusual Volume:

WBMD, HMC, SWKS, VRSN, XLNX, NSANY, ORCC, DIS, GEOY, NGPC, AEHR, HOGS, BOBE, DSCP, AUXL, NVEC, NVTL, CPRT, AMWD, UCBI, CHKP, ACIW, ALTR, MDCO, SKYW, VRSN, KNDL, WFMI, GES, SJM, LEH and KCP

Stocks With Unusual Call Option Activity:

1) STT 2) HOT 3) GT 4) SBUX 5) MHP

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Bill Gross said on CNBC that Federal Reserve Chairman Bernanke’s decision to say the central bank will “carefully monitor” the dollar was intended to stabilize the relationship between oil and the currency. Pimco is avoiding US government debt and is instead investing in bonds sold by “banks and investment banks that have come under the guarantee – quote, unquote – of the Fed’s discount window,” Gross said.
- Yahoo Inc.(YHOO) CEO Yang is facing increasing shareholder pressure to sell the Internet company he helped found or step aside.
- Moody’s Investors Service, S&P and Fitch Ratings are near an agreement with NY Attorney General Andrew Cuomo to end an investigation into the credit-rating companies’ role in the subprime-mortgage crisis.
- Trichet Foiled as European Consumers Reduce Spending, Except on Lipstick.
- New Zealand central bank Governor Alan Bollard may be pushing the economy into a recession by keeping interest rates at a record to fight inflation, ignoring factory closures and slumping consumer spending.
- Lehman Brothers(LEH) denied borrowing from the Federal Reserve today and said the firm’s cash holdings have increased.
- Barack Obama was poised to clinch the Democratic presidential nomination tonight as Hillary Clinton told colleagues she is open to running as the party’s vice presidential candidate.

Wall Street Journal:
- Is there an oil bubble that is about to burst? Some big voices on Wall Street think so, predicting the oil market could tilt sharply south soon if the US dollar strengthens and demand for crude oil weakens in some key consuming countries. Tightness on the supply side could also ease, they say, as some big refineries and new oil fields come onstream over the next few months and the outlook for the Chinese economy clouds over.
- China Restricts Protests And Media in Quake Zone.
- Lehman Brothers(LEH), facing a sharp decline in its stock that will make it more difficult to raise fresh capital, did an about-face and began using its own money to buy back its plummeting shares.

MarketWatch.com:
- The investment flood into commodity indexes bears eerie similarities to the craze for portfolio insurance that led to the stock-market crash of 1987, according to hedge fund investor George Soros, who warned that the rush into oil has created a “bubble.” “In both cases, the institutions are piling in on one side of the market and they have sufficient weight to unbalance it,” said Soros. “If the trend were reversed and the institutions as a group headed for the exit as they did in 1987, there would be a crash.” Traders took today’s moves by the CFTC, which will make it more difficult for financial investors to sidestep limits on speculation, as possibly curbing demand. “These kinds of dramatic moves” surprised traders, said Mike Zuzolo, senior analyst at brokerage Risk Management Commodities. “At first glance it looks like they’re targeting long-only index funds.”

CNBC.com:
- Dennis Gartman, of the Gartman Letter, thinks the CFTC will change the definition of “hedger”, which could send oil to $100 "so fast it will make your head spin." Gartman would be very careful about being outright long commodities. (video)

c/net:
- Shell station in LA to offer hydrogen.

NY Times:
- In Hiring, Europeans Go Global. As pressure grows on European businesses to go global, European companies are breaking down the glass ceiling that has long reserved their top spots for a local.

FinancialWeek:
- The SEC announced two new deputy enforcement directors on Tuesday, bolstering the division’s management as it grapples with subprime mortgage-related fraud and continues to crack down on insider trading. SEC Chairman Christopher Cox said the enforcement division is putting a special focus on subprime-related investigations, as well as illegal hedge fund activity and insider trading.

AM New York:
- Former President Carter said Tuesday he will endorse Democrat Barack Obama. “The fact is the Obama people already know they have my vote when the polls close tonight,” Carter said.

Reuters:
- With oil prices at historic highs, China is moving full steam ahead with a controversial process to turn its vast coal reserves into barrels of oil. Known as coal-to-liquid (CTL), the process is reviled by environmentalists who say it causes excessive greenhouse gases.
- The market for large leveraged buyouts, virtually stalled by a Wall Street credit crisis, may take a year or more to revive itself, but buyout executives said at a conference on Tuesday they are finding new strategies to deploy cash.
- McCain launches general election bid with eye on oil. “The next president must be willing to break completely with the energy policies not just of the Bush Administration, but the administration that preceded his, and lead a great national campaign to put us on a course to energy independence,” McCain said.

Financial Times:
- Lehman Brothers(LEH) lost $500 million to $700 million on certain hedging positions in the second quarter. The hedging failures will increase overall losses at the bank, which may lead to Lehman raising capital by selling a stake to an outside investor. Insiders said Lehman had opened talks with potential investors including asset managers and Asian banks.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (AMAT), target $25.

Morgan Stanley:
- Reiterated Overweight on (ALTR), boosted estimates, target $26.

Night Trading
Asian Indices are -.50% to +.75% on average.
S&P 500 futures -.03%.
NASDAQ 100 futures +.01%.

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Earnings of Note
Company/EPS Estimate
- (WSM)/.01
- (MATK)/.25
- (ADCT)/.30
- (CMTL)/.56
- (BLUD)/.23
- (VIP)/.49

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Final 1Q Non-farm Productivity is estimated to rise 2.5% versus a prior estimate of a 2.2% increase.
- Final 1Q Unit Labor Costs are estimated to rise 2.0% versus prior estimates of a 2.2% gain.

10:00 am EST:
- The ISM Non-Manufacturing Composite for May is estimated to fall to 51.0 versus a reading of 52.0 in April.

10:30 am EST:
- Bloomberg consensus estimates call for a weekly crude oil inventory build of 400,000 barrels versus an 8,883,000 barrel decline the prior week. Gasoline supplies are expected to rise by 825,000 barrels versus a 3,258,000 decline the prior week. Distillate inventories are estimated to rise by 1,675,000 barrels versus a 1,641,000 barrel increase the prior week. Finally, Refinery Utilization is expected to rise by .50% versus a -.2% decline the prior week.

Other Potential Market Movers
- The Fed’s Lockhart speaking, (NFP) analyst meeting, (SPR) investor day, (BOBE) analyst meeting, ADP Employment Change report, Challenger Job Cuts report, weekly MBA mortgage applications report, Keefe Bruyette Woods Financial Services Conference, JPMorgan Basics/Industrials Conference, KeyBanc Transports Conference, Stephens Investment Conference, Oppenheimer Communications/Tech Conference and UBS Electronic Payments Summit could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by financial and commodity shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the day.

Stocks Finish Lower, Weighed Down by Defense, Commodity, Financial and Gaming Shares

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In Play

Stocks Lower into Final Hour on Financial Sector Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Software longs and Medical longs. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is slightly bearish as the advance/decline line is lower, most sectors are declining and volume is about average. Investor anxiety is slightly above average. Today’s overall market action is mildly bearish. The VIX is rising 1.92% and remains above average at 20.2. The ISE Sentiment Index is low at 110.0 and the total put/call is above average at 1.14. Finally, the NYSE Arms has been running above average most of the day and is currently 1.06. The (XLF) is only down .12% today, notwithstanding rising worries about Lehman(LEH). The European Financial Sector Credit Default Swap Index is increasing another 2.1% today to 72.44 basis points. As well, the TED spread is falling 2.3% today to .83. The 10-year TIPS spread, a good gauge of inflation expectations, is declining to 2.45% on the fall in commodity prices, which is down from 2.59% nine days ago. The decline in commodity prices is a major US broad market positive, however further declines are likely necessary before investors begin to anticipate these positives. A number of sectors are rising today, despite the losses in the major averages. Tech stocks are relatively strong again. One of my longs, (GILD), made a new all-time high today and is up 20.2% year-to-date. This company remains my favorite biotech and the sector should do well going forward given the macro backdrop. Nikkei futures indicate a +6 open in Japan and DAX futures indicate a -28 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting and short-covering.