Tuesday Watch

Late-Night Headlines
Bloomberg:
- The US Treasury is less likely to label China a currency manipulator in a report on exchange-rates that it may publish this week after the G-7 last month called for faster yuan gains, Bank of America said.

Financial Times:
- Apple Computer(AAPL) has renewed contracts with Vivendi SA’s Universal Music Group, Warner Music Group, EMI Group and Sony BMG Music Entertainment to offer songs through its iTunes digital store for 99 cents each.
- Walt Disney(DIS) has agreed to distribute movies and consumer products in Vietnam as part of its global expansion drive.
- PricewaterhouseCoopers LLP, the world’s biggest accounting firm, wants a plan to harmonize US and international accounting standards to be abandoned.
- Acer Inc., the world’s fourth-biggest personal-computer maker, plans to sell flat-screen televisions worldwide within nine months as global PC growth slows.

Ming Pao Daily:
- Yanzhou Coal Mining Co.(YZC), China’s largest coal producer, plans to almost triple its annual production by 2010.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are +.25% to +.75% on average.
S&P 500 indicated +.09%.
NASDAQ 100 indicated +.25%.

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Earnings of Note
Company/EPS Estimate
- (ASF)/.34
- (ADM)/.46
- (BWNG)/-.24
- (CMX)/.50
- (CBG)/.36
- (CEPH)/.62
- (CKP)/.15
- (CNA)/.86
- (DWA)/.00
- (DUK)/.49
- (EDS)/.08
- (EMR)/1.00
- (ETR)/.87
- (EOP)/.23
- (FPL)/.48
- (IT)/.03
- (GET)/.07
- (GNSS)/.05
- (HLT)/.18
- (IACI)/.27
- (IRM)/.21
- (LTR)/2.18
- (MLM)/.56
- (MAS)/.46
- (PPC)/-.32
- (KWK)/.35
- (SAFC)/1.37
- (SIRI)/-.35
- (JOE)/.28
- (STA)/1.29
- (TBL)/.45
- (TXU)/1.08
- (VZ)/.59
- (VNO)/.87

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- Pending Home Sales for March are estimated to fall .5% versus a .8% drop in February.

Afternoon
- Total Vehicle Sales for April are estimated to remain at 16.6M versus 16.6M in March.
- Domestic Vehicle Sales for April are estimated to rise to 13.3M versus 13.1M in March.

BOTTOM LINE: Asian indices are mostly higher, boosted by automaking stocks in the region. I expect US equities to open mixed and to trade modestly lower into the afternoon. The Portfolio is 25% net long heading into the day.

Stocks Finish at Session Lows on Increasing Worries Over Fed Rate Hikes

Indices
S&P 500 1,305.19 -.41%
DJIA 11,343.29 -.21%
NASDAQ 2,304.79 -.77%
Russell 2000 761.12 -.45%
Wilshire 5000 13,203.34 -.37%
S&P Barra Growth 606.69 -.40%
S&P Barra Value 696.34 -.43%
Morgan Stanley Consumer 609.36 -.02%
Morgan Stanley Cyclical 853.32 +.43%
Morgan Stanley Technology 541.85 -.42%
Transports 4,669.91 +.12%
Utilities 394.02 -.87%
Put/Call .89 +3.49%
NYSE Arms 1.01 -7.31%
Volatility(VIX) 12.53 +8.11%
ISE Sentiment 176.00 +5.39%
US Dollar 86.28 +.20%
CRB 355.22 +1.52%

Futures Spot Prices
Crude Oil 73.70 unch.
Unleaded Gasoline 214.66 +2.75%
Natural Gas 6.69 +2.14%
Heating Oil 205.88 +2.28%
Gold 656.50 -.56%
Base Metals 215.77 -.16%
Copper 330.70 -.41%
10-year US Treasury Yield 5.14% +1.75%

Leading Sectors
Oil Service +2.19%
Energy +1.55%
Defense +.87%

Lagging Sectors
Oil Tankers -1.02%
REITs -1.31%
I-Banks -3.17%

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In Play

Afternoon Recommendations
Merrill Lynch:
- Added (ADBE) to Focus List.

Afternoon/Evening Headlines
Bloomberg:
- Federal Reserve interest-rate policy is “very close” to a level that’s “properly calibrated” to the outlook for moderating economic growth, Atlanta Fed President Guynn said.
- Left-wing Bolivian President Evo Morales took control of the country’s oil and gas fields and gave foreign energy companies operating in the country 180 days to agreed to new contracts with state-run Petroliferos Fiscales Bolivianos.
- Supporters of immigrant rights rallied across the US today to demand that Congress give millions of undocumented workers a change to gain legal status.
- UnitedHealth Group(UNH) said its board discontinued equity-based awards for CEO McGuire and COO Hemsley.
- The percentage of speculative-grade bonds at distressed levels fell to an eight-year low last month as economic growth helped companies improve their creditworthiness, S&P said.
- About 11% of Americans age 12 to 19 have high blood glucose levels that may increase their risk of developing Type 2 diabetes, heart disease or stroke, a study said.

CNBC:
- “Federal Reserve Chairman Ben Bernanke told me over the weekend that the media and the markets basically got it wrong last week in speculating that the Fed is done raising interest rates,” said Maria Bartiromo.

BOTTOM LINE: The Portfolio finished lower today on losses in my Internet longs, Networking longs and Energy-related shorts. I added to my (IWM) and (QQQQ) shorts in the final hour, thus leaving the Portfolio 25% net long. The tone of the market was negative today as the advance/decline line finished lower, sector performance was mostly negative and volume was above average. Measures of investor anxiety were mixed into the close. Overall, today's market performance was bearish. I continue to believe the Fed has their finger on the “pause trigger,” but won’t pull until signs of slowing economic growth are evident.

Stocks Modestly Higher into Final Hour Even as Oil and Long-term Rates Rise

BOTTOM LINE: The Portfolio is about even into the final hour as gains in my Semi longs and Retail longs are offsetting losses in my Energy-related shorts. I added to my (IWM) and (QQQQ) shorts today, thus leaving the Portfolio 50% net long. The tone of the market is neutral as the advance/decline line is modestly lower, sector performance is mostly positive and volume is about average. The energy sector saw the greatest increase in net insider selling in the S&P 500 last week. Insiders sold $364,392,555 worth of stock, while only buying $4,734,854. The industrial sector saw the second-greatest amount of net insider selling. Insiders sold $265,133,591 worth of stock, while purchasing $5,045,250. This corresponds with my view that the most economically sensitive stocks, which have recently seen huge price spikes, will underperform as economic growth slows over the coming months. I expect US stocks to trade mixed into the close from current levels as strong economic data offset the rise in energy prices and long-term rates.

Today's Headlines

Bloomberg:
- Yahoo!(YHOO) added a section with reviews and advice on consumer technology to lure advertisers including Hewlett-Packard(HPQ) and Verizon Wireless(VZ).
- Boeing(BA) agreed to buy airplane-parts distributor Aviall Inc.(AVL) for about $1.7 billion, expanding in a market that is growing more than twice as fast as Boeing’s aircraft unit.
- Aramark Corp.(RMK), operator of campus cafeterias and stadium concession stands, said an investor group led by CEO Neubauer offered $32 a share to take the company private.
- Kerzner Intl.(KZL), the owner of the Atlantis casino-resort in the Bahamas, said a group of investors including its chairman increased their buyout offer to $3.2 billion.
- US Treasuries are falling for the first time in three days after US economic data came in above expectations.
- Crude oil is rising in NY on speculation that the dispute over Iran’s pursuit of nuclear technology may lead the producer to cut supplies.
- Federal Reserve interest-rate policy is “very close” to a level that’s “properly calibrated” to the outlook for moderating economic growth, Atlanta Fed President Jack Guynn said.
- Stephen Roach, chief global economist at Morgan Stanley, is becoming more optimistic after years of warning of impending world economic disaster.

Wall Street Journal:
- CBS Corp.(CBS) and Clear Channel(CCU) have agreed with MSpot Inc., a mobile-phone content provider, to make some of their biggest sports radio stations available on cell phones.
- Thousands of Internet sites are using generic-sounding names to attract advertising and viewers.
- US technology start-ups are benefiting from a boom in so-called “angel investments” by executives from companies such as Google(GOOG) who’ve cashed in stock options.
- Investors are increasingly buying stock of companies that have filed for bankruptcy protection, instead of making a more traditional purchase of bonds.
- Level 3 Communications(LVLT) today plans to say it’s buying TelCove Inc., a closely held rival, for about $1 billion.

NY Times:
- Google(GOOG) is alleging that Microsoft(MSFT) is unfairly using its new Internet browser to direct users to its MSN search service, bringing up the matter with the US Justice Dept. and the European Commission.
- Starbucks(SBUX) signed an agreement with the William Morris Agency to find movies and books to promote.
- Ford Motor(F) is considering producing a reality television show.

Incomes Strong, Spending Brisk, Inflation Contained, Manufacturing Surges

- Personal Income for March rose .8% versus estimates of a .4% gain and a .3% rise in February.
- Personal Spending for March rose .6% versus estimates of a .4% increase and a .2% rise in February.
- The PCE Core(M-o-M) for March rose .3% versus estimates of a .2% rise and a .1% gain in February.
- Construction Spending for March rose .9% versus estimates of a .4% gain and a 1.0% rise in February.
- ISM Manufacturing for April rose to 57.3 versus estimates of 55.0 and a reading of 55.2 in March.
- ISM Prices Paid for April rose to 71.5 versus estimates of 70.0 and a reading of 66.5 in March.

BOTTOM LINE: Americans increased spending more than expected in March, encouraged by higher wages that more than offset higher energy prices, Bloomberg reported. The core PCE, the Fed’s favorite inflation gauge, rose more than expected, but is still only 2% higher from the same month in 2005. Moreover, personal incomes are up 6% from a year ago, twice the amount of most inflation measures. This helps explain Wal-Mart’s(WMT) very strong 6.8% April sales gain even as gas prices surged. I expect income growth to remain healthy over the intermediate-term, while spending will likely slow to average rates.

Construction spending in the US rose twice as much as forecast in March as homebuilding remained strong and local governments spent more on hospitals and police stations, Bloomberg reported. I expect construction spending to decelerate through year-end as the effects of hurricane rebuilding subside and homebuilding slows.

Manufacturing growth in the US accelerated last month as companies stepped up production to meet demand, Bloomberg said. The new orders component of the index fell to 57.6 from 58.4 the prior month. The employment component of the index rose to 55.8 versus 52.5 the prior month. I expect manufacturing to slow back to more average levels through year-end as inventory rebuilding subsides and demand slows.

Links of Interest

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