Incomes Rise More Than Estimates, Spending as Expected, Core Inflation Decelerates, Chicago PMI Rises Again, Confidence Extraordinarily Depressed

- Personal Income for April rose .2% versus estimates of a .1% gain and an upwardly revised .4% increase in March.

- Personal Spending for April rose .2% versus estimates of a .2% rise and a .4% gain in March.

- The PCE Core for April rose .1% versus estimates of a .1% gain and a .2% rise in March.

- The Chicago Purchasing Manager Index for May rose to 49.1 versus estimates of 48.5 and a reading of 48.3 in April.

- The final reading for the Univ. of Mich. Consumer Confidence reading for May came in at 59.8 versus estimates of 59.5 and a prior estimate of 59.5.

BOTTOM LINE: Personal income for April rose more than economists expected as spending met estimates and a gauge of inflation decelerated, Bloomberg reported. The PCE Core, the Fed’s favorite inflation gauge, rose 2.1% year-over-year, down from 2.5% during February of last year and below the 20-year average of 2.4%. Spending on services, which account for almost 60% of all outlays, increased .1% for the second straight month. The Treasury said last week that it had sent $4.9 billion in tax rebates in the fourth week of the program, bringing the total distributed so far to $45.7 billion. More than $110 billion will eventually be sent. I expect spending and income to accelerate modestly into year-end and inflation to decelerate meaningfully from current levels.

A measure of US business activity accelerated in May. The survey suggests export demand is bringing in new orders and kept manufacturing from slowing as much as prior economic slowdowns. The New Orders component surged to 56.1, the highest since December, versus 53.0 in April. The Order Backlog component jumped to 46.8 from 39.5 the prior month. The Inventories component fell to 42.2 from 51.9 the prior month. The Employment component of the index rose to 41.2 from 35.3 the prior month. The Prices Paid component rose to 87.5 from 82.9 in April. I expect manufacturing to continue to improve through year-end on inventory rebuilding, a falling prices paid component, an end to the American Axle strike, fiscal/monetary stimuli, an end to credit turmoil and strong exports.

Confidence among US consumers fell in May to the lowest level in 28 years, Bloomberg reported. The Expectations component fell to 51.1, the lowest since October 1990. The Present Situation component, which gauges consumer attitudes towards their current financial situation, actually rose to 73.3 from 71.7. I still expect confidence to improve meaningfully through year-end as the job market improves, extreme housing fears subside, energy/food prices fall, election uncertainty ends, inflation decelerates, interest rates remain relatively low, stocks rise, the US dollar strengthens and the effects of fiscal/monetary stimuli take hold.

Bull Radar

Style Outperformer:

Mid-cap Growth (+.83%)

Sector Outperformers:

Alternative Energy (+1.83%), Construction (+1.65%) and Networking (+1.41%)

Stocks Rising on Unusual Volume:

MRVL, GMXR, GDP, FSLR, CLWR, CBEY, HMC, TM, CMC, STP, CLF, UBB, DELL, WIND, DTSI, ENER, JRJC, CTRN, IMCL, JOYG, JASO, VOCS, DAKT, SPWR, VDSI, ATHN, RIGL, NDAQ, HRS, HXL and PVA

Stocks With Unusual Call Option Activity:

1) MAS 2) NT 3) HK 4) CIT 5) DELL

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Friday Watch

Late-Night Headlines
Bloomberg:
- Thomas Lee, chief US equity strategist at JPMorgan Chase(JPM), says banks may follow credit swap rally. (video)
- Countrywide Financial Corp.(CFC) rose 8.2% in NY trading after setting June 25 as the date for shareholders to vote on the $4 billion takeover by Bank of America(BAC).
- US asset-backed commercial paper increased $9.6 billion, or 1.3%, to a seasonally adjusted $753.5 billion for the week ended May 28, the Federal Reserve said today in Washington. That’s the biggest gain since the week ended Jan. 16, based on revised numbers from the Fed.
- The financial industry will be reshaped by a “significant pickup” in takeovers when stronger banks emerge as acquirers as soon as the end of this year, according to Merrill Lynch(MER) President Gregory Fleming.
- Crude oil was little changed in NY after falling more than $4 a barrel yesterday, the biggest drop since March, on signs that record prices will prompt US consumers to reduce fuel purchases. “There’s a lot of demand destruction taking place,” said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. Crude oil inventories declined 8.88 million barrels last week. The decline was caused by “temporary delays” in unloading tankers, the energy dept. said.
- Gold tumbled the most in almost six weeks as the US dollar rallied, reducing the appeal of the precious metal as an alternative investment. “With the dollar stabilizing, gold could fall quite a bit,” said Matt Zeman, a metals trader at LaSalle Futures Group in Chicago. “There’s a lot of talk about inflation, which works both ways for gold. If the Fed does start tightening, that will strengthen the dollar and could really pop the commodity bubble.” The metal is “$150 to $200 an ounce above what I call fundamental value, a level that I would argue jewelry demand would support the market,” John Reade, an analyst at UBS AG in London, said today. “Fundamentals do not support gold at $900 an ounce.”
- Vietnam’s stocks may extend their longest losing streak in 4 ½ years after a computer glitch caused a three-day halt in the world’s worst performing stock market of 2008. The benchmark VN Index may today add to its 55% plunge this year after the government said prices jumped the most since at least 1992, Morgan Stanley said the nation is heading for a currency crisis similar to Thailand’s baht in 1997, and Fitch Ratings cut Vietnam’s debt outlook. The following is a chronology of events related to the development of the Vietnam stock market:
- Dell Inc.(DELL), the world’s second-largest personal-computer maker, reported a first-quarter profit that exceeded analysts’ estimates, sending the shares 9.9% higher in after-hours trading.
- Marvell Technology Group Ltd.(MRVL), the maker of telecommunications chips for the BlackBerry and Apple Inc.’s(AAPL) iPhone, reported first-quarter profit and sales that beat analysts’ estimates. The stock soared 15.8% in after-hours trading.
- J. Crew Group(JCG) fell 14.9% in after-hours trading after forecasting full-year profit lower than its previous prediction on lower sales of shorts and T-shirts.
- The US dollar headed for a second monthly advance against the yen and euro as rising stocks and declining crude oil brightened the outlook for the US economy, the world’s biggest oil importer.
- Japan’s household spending declined at the fastest pace in 19 months and unemployment rose as higher energy and raw-material costs discouraged companies from hiring. Industrial production fell.
- Federal Reserve Board Vice Chairman Donald Kohn raised the possibility of giving Wall Street securities firms permanent access to loans from the central bank, as long as regulators tighten oversight of the companies.
- UK consumer confidence dropped in May to the lowest level since Margaret Thatcher was ousted from office in 1990, as people became more pessimistic that the economy will slip into a recession, GfK NOP Ltd. said.

MarketWatch.com:
- Investment bank hedges crumble in second quarter. Results from Lehman(LEH), Morgan Stanley(MS), Goldman(GS) will be weak, analysts say.
- Gold newsletters remain too bullish, despite recent weakness in the commodity.

CNBC.com:
- Wall Street Job Cuts Won’t Go as Deep as Feared.

BusinessWeek.com:
- Hot Growth, Against the Odds. Here is BusinessWeek’s list of fastest growing small companies.
- Welcome to the Weekend Web. When they use their mobile phones to go online, Americans flock to different sites than when they surf from their computers. Meet the mobile Web.

Forbes.com:
- China’s Inflation Policy Spells Trouble.

ConsumerAffairs.com:
- Did Wall Street Wreck The Economy? Congress, regulators start to connect the dots. While consumers face skyrocketing gasoline prices, the economy is struggling to overcome the wave of foreclosures caused by the subprime meltdown and collapse of the housing market. Could the two economic misfortunes have a common thread? If so, that thread may lead to Wall Street. Rep. John Larson told the NY Times that he may introduce legislation next month that would essentially ban over the counter trading of most energy futures by speculators who, like day traders, are simply buying and selling pieces of paper, not taking delivery of the oil and gas supplies whose prices they are impacting.

Reuters:
- US stocks could be close to an “important bottom” as moves by the Federal Reserve and the government to spur the economy begin to work, the manager of one of Fidelity Investments’ best-known funds said. Harry Lange, who has managed the $40.5 billion Magellan fund since 2005, also said he began buying brokers and commercial banks before the end of March because they had reached “attractive valuations.”

Financial Times:
- India’s government on Thursday gave its strongest hint yet that it was prepared to take the politically sensitive step of raising domestic fuel prices as it grapples with the soaring cost of oil. Palaniappan Chidambaram, the country’s finance minister, warned that the country needed to start moving its heavily subsidized domestic oil prices in line with global market rates to help avert a liquidity crisis at state-run oil companies, which are facing losses this year of $50 billion. “The goal is to eventually move toward market-determined prices,” Mr. Chidambaram said.
- Britain is better off outside the euro.

TimesOnline:
- One of Wall Street’s main regulators on Thursday unveiled measures to limit speculators trading the price of oil across futures markets. The Commodity Futures Trading Commission has reached an agreement with the Financial Services Authority and the ICE Futures market to force traders using their markets to disclose their trading positions. Traders who have substantial exposure to exchange traded oil contracts will have to report their positions every day. In a joint statement, the CFTC said: “The commission is taking important steps to ensure that the US energy futures markets function properly and operate free from manipulation and abuse.”

Daily Mail:
- Stanley Fink, one of the titans of London’s hedge fund industry and architect of one of its biggest successes, Man Group, is to step down from the biggest successes, Man Group, is to step down fr4om the business at the age of 50.

Sydney Morning Herald:
- Some rail passengers are being left behind on platforms and bus commuters are enduring long waits as motorists baulk at the soaring price of petrol and switch to public transportation.

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

Night Trading
Asian Indices are -.25% to +1.0% on average.
S&P 500 futures +.04%.
NASDAQ 100 futures +.25%.

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Company/EPS Estimate
- (TIF)/.41
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- (IART)/.41

Upcoming Splits
- (ATLS) 3-for-2

Economic Releases
8:30 am EST
- Personal Income for April is estimated to rise .1% versus a .3% gain in March.
- Personal Spending for April is estimated to rise .2% versus a .4% gain in March.
- The PCE Core for April is estimated to rise .1% versus a .2% gain in March.

9:45 am EST
- The Chicago Purchasing Manager report for May is estimated to rise to 48.5 versus a reading of 48.3 in April.

10:00 am EST
- Final Univ. of Mich. Consumer Confidence for May is estimated at 59.5 versus a prior estimated to 59.5.

Other Potential Market Movers
- The Fed’s Rosengren speaking, NAPM-Milwaukee, (WY) analyst meeting, Cowen TMT Conference, Sanford C. Bernstein Conference and ASCO 2008 could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by utility and industrial shares in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Higher, Boosted by Transport, HMO, Biotech, Gaming, Financial and Technology Shares

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In Play

Stocks Higher into Final Hour on Falling Commodity Prices, Diminishing Credit Market Angst, Less Economic Pessimism

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Gaming longs, Internet longs, Biotech longs and Software longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is bullish as the advance/decline line is higher, most sectors are rising and volume is around average. Investor anxiety is around average. Today’s overall market action is bullish. The VIX is falling 6.2% and remains above average at 17.88. The ISE Sentiment Index is below average at 127.0 and the total put/call is slightly below average at .84. Finally, the NYSE Arms has been running above average most of the day and is currently 1.11. The AAII % Bulls plunged this week to 31.4% and the % Bears jumped to 45.8%, which is a large broad market positive. The Citigroup US Economic Surprise Index is rising to -11.0 today, up from -100 in March. As well, the EU Index and Japanese Index are still below the US at -26.70 and -26.50, respectively. The US dollar continues to trade very well. The 10-year yield is rising another 8 basis points today, however the 10-year TIPS spread has declined 10 basis points over the last few days to 2.49%, which indicates the rise in the 10-year yield is more a function of diminishing economic worries rather than an increase in inflation expectations. Oil is plunging today despite the large US crude oil inventory drawdown. This is likely due to the fact that US imports of oil are falling as demand declines. The Baltic Dry Index has fallen 4.5% over the last five days. The Bloomberg Base Metals Spot Index is falling another 1.5% today and is down 15.4% since March 6^th. The S&P Goldman Agriculture Spot Index is falling another 1.7% today, dropping below its 200-day moving average, and has plunged 24.2% since February 27^th. We should begin to see meaningfully lower Prices Paid economic data over the coming months and declining inflation expectations as a result. The European Financial Sector Credit Default Swap Index is falling 3.77 basis points today to 66.96 basis points. This is down from 78.0 basis points just 3 days ago. Nikkei futures indicate a +125 open in Japan and DAX futures indicate a +54 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, less economic pessimism, falling energy/food prices and diminishing credit market angst.