US Growth at Robust Levels, Inflation in Check, Confidence Still Irrationally Low, Manufacturing Slowing

- Advance 1Q GDP rose 4.8% versus estimates of a 4.9% increase and a 1.7% gain in 4Q.
- Advance 1Q GDP Price Index rose 3.3% versus estimates of a 2.7% gain and a 3.5% rise in 4Q.
- Advance 1Q Personal Consumption rose 5.5% versus estimates of a 5.0% increase and a .9% gain in 4Q.
- 1Q Employment Cost Index rose .6% versus estimates of a .9% gain and a .8% rise in 4Q.
- Final Univ. of Mich. Consumer Confidence for April fell to 87.4 versus estimates of 89.0 and a prior estimate of 89.2.
- Chicago Purchasing Manager for April fell to 57.2 versus estimates of 58.0 and a reading of 60.4 in March.

BOTTOM LINE: The US economy expanded in the first quarter at an annual pace of 4.8%, the fastest in more than two years, led by resurgent consumer spending and the biggest jump in business investment since 2000, Bloomberg said. A healthy labor market and rising wages boosted shopping at retailers and auto dealers, while businesses purchased equipment and software at the fastest pace since before the bursting of the stock market bubble in 2000. Nominal GDP rose at an 8.2% annual pace to $13 trillion. The 5.5% gain in consumer spending was the highest since the third quarter of 2003 and significantly above the long-term average of 3.3%. Business spending on new equipment and software rose 16.4%, the most since the first quarter of 2000. The core PCE index, the Fed’s favorite inflation gauge decelerated to 2.0% from 2.4% during the fourth quarter. I expect GDP growth to moderate to average levels through year-end as a slowdown in consumer spending more than offsets increased business spending.

Confidence among US consumers declined this month as rising gas prices siphoned money from people’s wallets, Bloomberg reported. The decline was muted by a strong job market and the fastest economic growth in 2 years. The current conditions component of the index, which reflects American’s perceptions of their financial situations and whether they believe it is a good time to buy large items, rose to 109.2 from 109.1 in March. The expectations component of the index fell to 73.4 from 76 the prior month. I still expect this reading to join the Conference Board’s Consumer Confidence reading and reach cycle highs by year-end as stocks rise, housing moderates to more healthy levels, energy prices fall from current levels, the job market remains healthy, interest rates remain low and the situation in Iraq improves.

Manufacturing growth in the Chicago area slowed in April from the highest level this year as orders eased, Bloomberg reported. The new orders component of the index fell to 60.8 from 62.2 the prior month. The employment index fell to 47.2 this month from 55.6 in March. The prices paid index rose to 77.2 from 71.1 in March. Finally, the measure of order backlogs fell to 44.8 from 51.6 in March. I expect manufacturing to slow from recent robust rates as economic growth slows to average levels. I continue to believe the most cyclical stocks that have recently posted the strongest gains are at the greatest risk of underperforming going forward.

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Friday Watch

Late-Night Headlines
Bloomberg:
- China Petroleum & Chemical Corp., Asia’s biggest oil refiner, said profit fell 3.6% in the first quarter as state curbs on fuel prices prevented it from passing on record crude costs.
- China’s decision to raise lending rates and further restrict bank lending will damp property sales and prices, deterring investment from abroad and putting developers under financial strain, analysts and executives said.
- The yen fell after Chief Cabinet Secretary Shinzo Abe and Heizo Takenaka, the minister of internal affairs, said mild deflation persists in Japan.
- Oil fell for a fifth straight day in NY as speculation increased production at US refineries will replenish gasoline supplies before the peak summer driving season.

Business Week:
- Tribune Co.(TRB), whose shares are down 28% in the past year, is a potential takeover target, citing Lawrence Haverty of Gabelli Global Multimedia Trust.
- Infocrossing Inc.(IFOX), which provides information technology outsourcing services, may rise because it may be a takeover target and its earnings are expected to increase, citing Sidoti’s David Gold.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are -1.50% to +.25% on average.
S&P 500 indicated -.20%.
NASDAQ 100 indicated -.48%.

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Earnings of Note
Company/EPS Estimate
- (ADP)/.63
- (AXL)/.19
- (AVP)/.26
- (CVX)/1.78
- (CEG)/.66
- (COCO)/.16
- (CVH)/.73
- (CMI)/2.62
- (IDXX)/.55
- (ITT)/.61
- (MXRE)/.89
- (OSTK)/.-64
- (SWX)/1.03
- (VMSI)/.11

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Advance 1Q GDP is estimated to rise 4.9% versus a 1.7% gain in 4Q.
- Advance 1Q GDP Price Index is estimated to rise 2.7% versus a 3.5% increase in 4Q.
- Advance 1Q Personal Consumption is estimated to rise 5.0% versus a .9% increase in 4Q.
- 1Q Employment Cost Index is estimated to rise .9% versus a .8% increase in 4Q.

9:45 am EST
- Final Univ. of Mich. Consumer Confidence for April is estimated to fall to 89.0 versus a prior estimate of 89.2.

10:00 am EST
- Chicago Purchasing Manager for April is estimated to fall to 58.0 versus a reading of 60.4 in March.

BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and technology stocks in the region. I expect US equities to open lower and to maintain losses into the afternoon. The Portfolio is 50% net long heading into the day.

Stocks Finish Mostly Higher on Dovish Fed Comments, Falling Energy Prices and Declining Long-term Rates

Indices
S&P 500 1,309.72 +.33%
DJIA 11,382.51 +.25%
NASDAQ 2,344.95 +.49%
Russell 2000 761.40 -.50%
Wilshire 5000 13,235.29 +.22%
S&P Barra Growth 611.23 +.24%
S&P Barra Value 695.99 +.42%
Morgan Stanley Consumer 610.07 +.66%
Morgan Stanley Cyclical 847.10 -.71%
Morgan Stanley Technology 5550.12 +.89%
Transports 4,670.13 -.65%
Utilities 396.97 +1.17%
Put/Call .75 -30.56%
NYSE Arms 1.0 +9.49%
Volatility(VIX) 11.84 +.68%
ISE Sentiment 159.00 -18.88%
US Dollar 86.63 -.68%
CRB 345.69 -1.95%

Futures Spot Prices
Crude Oil 70.90 -.10%
Unleaded Gasoline 206.50 -.33%
Natural Gas 6.75 -.73%
Heating Oil 198.03 -.27%
Gold 636.50 +.03%
Base Metals 216.12 -3.58%
Copper 320.70 +.82%
10-year US Treasury Yield 5.07% +.82%

Leading Sectors
Banks +1.97%
Software +1.43%
Biotech +1.32%

Lagging Sectors
Gold & Silver -3.55%
Steel -5.46%
HMOs -5.94%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- China, which unexpectedly raised its benchmark lending rate yesterday, may follow with more measures aimed at cooling the world’s fastest-growing major economy.
- Former Enron Corp. Chairman Kenneth Lay acknowledged his son was among short sellers of the company’s stock, a group of investors the executive blamed at his fraud trial for destroying the company.
- Nokia(NOK) agreed to pay $253 million to InterDigital Communications(IDCC) to end a dispute over phone technology.
- More than 1,100 people wanted for sex crimes were arrested in a 27-state sweep of fugitives, US officials said.
- Oil fell for a fourth day on speculation that increased operating rates at US refineries will replenish gasoline supplies before the peak-demand summer driving season.
- President Bush returned to the hurricane-battered Gulf Coast today to thank volunteers helping rebuild the region.
- The Univ. of Penn.’s Wharton School, the US’s oldest business college, has the best undergraduate business program in the nation, a new poll says.
- Nasdaq Stock Market(NDAQ) raised $691.2 million through a stock sale intended to pay for its minority stake in London Stock Exchange Plc.
- President Bush’s administration said it wants authority to raise fuel-economy standards for cars.
- Microsoft(MSFT) said third-quarter profit rose 16% on orders for database programs. Earnings this year and next may miss some analysts’ estimates.

BOTTOM LINE: The Portfolio finished higher today on gains in my Computer longs, Retail longs, Semi longs and Energy-related shorts. I added to my (IWM) and (QQQQ) shorts in the final hour, thus leaving the Portfolio 50% net long. The tone of the market was slightly negative today as the advance/decline line finished modestly lower, sector performance was mostly positive and volume was very heavy. Measures of investor anxiety were mostly higher into the close. Overall, today's market performance was neutral. Breadth was weak throughout the day and finished negative as cyclicals underperformed. Notwithstanding the low VIX, intraday volatility is increasing. On the positive side, outside of commodities, most sectors rose on heavy volume. Moreover, it appears to me that Bernanke has much better "vision" than Greenspan which should result in some P/E multiple expansion. His comments make a hard landing in housing less likely.

Stocks Higher into Final Hour as Energy Prices Fall and Fed Members Make Dovish Comments

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Semi longs, Computer longs and Energy-related shorts. I covered some of my (IWM) and (QQQQ) shorts today, thus leaving the Portfolio 75% net long. The tone of the market is slightly positive as the advance/decline line is about even, sector performance is mostly positive and volume is very heavy. Natural gas is trading down $0.48 to $6.79. I expect it to break its recent low of $6.70 in the near future. There is no sign of a substantial pick-up in industrial demand for the commodity, even as prices have plunged 58% from highs. I expect US stocks to trade mixed-to-higher into the close from current levels on lower long-term rates and declining energy prices.

Today's Headlines

Bloomberg:
- Siemens AG, Europe’s largest engineering company, agreed to buy Diagnostics Products(DP) for about $1.86 billion in cash to bolster its medical division, the manufacturer’s most profitable unit.
- China’s central bank unexpectedly raised its benchmark interest rate for the first time since October 2004 to cool the world’s fastest-growing major economy.
- Zinc and copper tumbled and oil extended declines after China raised its key interest rate, prompting speculation increased borrowing costs will curb demand for commodities in the world’s fastest-growing economy.
- Fed Chairman Bernanke gave his strongest signal yet that the central bank may pause in its cycle of interest rate increases.
- Exxon Mobil(XOM) said first-quarter profit rose 6.9% to $1.37/share, .10 lower than analyst estimates.
- Treasuries due in five years or less jumped after Fed Chairman Bernanke said the central bank may slow the pace of interest-rate increases.

Wall Street Journal:
- IBM(IBM) will offer a smaller version of its mainframe computers, designed for small-to medium-sized businesses.
- Toyota Motor(TM), Honda Motor and Nissan Motor are giving US executives more influence over decision-making in Japan.
- Time Warner(TWX) plans to start television production of reality shows and less costly cable programs at Warner Bros.
- Fiber optic spare capacity is being gradually filled as a result of the growth in Internet traffic though there is still too much excess capacity around.
- Google’s(GOOG) new Web-based shareable calendar is easy to use and avoids the need to reload or switch to a new page every time a change is needed or an appointment has to be added.
- Verizon Wireless(VZ) has adopted strict decency standards for the music, video and games that can be downloaded onto its cell phones.

Legal Week:
- The US’s 50 biggest law firms generated combined revenue of $36 billion last year, an increase of 12% on the previous year, according to a survey.

NY Times:
- Some US companies’ shareholders for the first time are organizing as they seek more say in executive pay practices and director elections.
- Walt Disney(DIS) and CBS Corp.(CBS) have met with Univision Communications(UVN) over a possible buyout offer.
- General Electric(GE) plans to invest $75 million to build the world’s largest solar energy plant with PowerLight Corp. in Serpa, Portugal.

San Francisco Chronicle:
- California’s income tax collections for April are $1.5 billion higher than Republican Governor Schwarzenegger and independent analysts expected, and lawmakers are debating how to use the surplus.

EE Times:
- Samsung Electronics won orders to supply media processors for Apple Computer’s(AAPL) next line of iPod music players at the expense of PortalPlayer(PLAY).

Arab News:
- Saudi Arabian Mining Co. plans to increase its gold production by 20% as prices for the precious metal soar, citing the CEO.

Il Sole 24 Ore:
- UniCredit SpA’s Pioneer division will make more acquisitions in the US after the purchase of Vanderbilt Capital Advisors LLC.