Personal Income Surges, Spending Jumps, Core Inflation Tame, Confidence Depressed

- Personal Income for May rose 1.9% versus estimates of a .4% gain and an upwardly revised .3% increase in April.

- Personal Spending for May rose .8% versus estimates of a .7% gain and an upwardly revised .4% increase in April.

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

- Final Univ. of Mich. Consumer Confidence for June was 56.4 versus estimates of 56.7 and prior estimates of 56.7.

BOTTOM LINE: US consumer spending rose more than forecast in May as tax rebates drove the biggest gain in incomes in almost three years, Bloomberg reported. This data indicates that 2Q GDP will accelerate from 1Q’s 1.0% rate. Americans used their stimulus checks to buy electronics, clothes and furniture, according to the data. Economists at Morgan Stanley estimated 2Q growth at 1.6%, up from a prior estimate of a .8% gain. Disposable income, or the money left over after taxes, surged 5.7%, the most since May 1975. The US savings rate jumped to 5%, the highest since March 1995. About $70.8 billion worth of tax rebate checks were distributed through June 20, which leaves about $37 billion left to hit. The core PCE, the Fed’s preferred gauge of inflation, rose 2.1% year-over year versus the 20-year average of 2.4% and down from 2.5% in February of last year. I expect incomes and spending to exceed estimates again for June and core inflation to remain tame. The US Dollar Index is .08% lower and the 10-year yield is declining 3 basis points on today’s reports. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 1 basis point to 2.55%, which is around the average for the last four years. This is also still down 13 basis points from 2.68% on March 13^th.

Bull Radar

Style Outperformer:

Large-cap Growth (+.04%)

Sector Outperformers:

Oil Service (+1.11%), Energy (+.89%) and Road & Rail (+.62%)

Stocks Rising on Unusual Volume:

GRS, HMY, SWC, KWK, PDO, BBL, AGU, HES, ASMI, CYMI, DLB, ANDE, HUSA, UMBF, NUVA, WTFC, GOLD, AAUK, ASTE, ATPG, NCTY, PAAS, FSYS, BABY, SHLD, DBTK, AREX, TSCO, AZZ, ACN and NAVZ

Stocks With Unusual Call Option Activity:

1) CFC 2) AEO 3) TWX 4) GLW 5) GW

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Friday Watch

Late-Night Headlines
Bloomberg:
- Asian stocks fell, putting the region’s benchmark index on course for its worst first half since 1992, on concern accelerating inflation and rising fuel prices will erode economic growth and profits.
- Corporate bond sales in dollars, euros and yen by Asian companies have plunged 60% this year, as rising inflation and slowing economic growth douse credit demand.
- New Zealand's economy contracted last quarter, putting the nation on the brink of its first recession in 10 years as soaring credit costs damp domestic demand and a drought crimps exports.
- Crude oil fell in NY, retreating from the record $140.39 a barrel reached yesterday, as the US House of Representatives approved a bill aimed at curbing excessive energy-market speculation. The bill, which passed 402-19, would require the Commodity Futures Trading Commission to consider using position limits, or constraints on the size of the stake each speculative investor can own, and raising margin requirements, the amount of money required to trade. The vote came after the record was set. Prices veered 43.4 percent from the 30- day average yesterday, the highest volatility in 16 months, according to Bloomberg data. Emergency powers have been invoked four times since the CFTC was formed in 1976.
- The number of travelers over the US Fourth of July holiday will decline for the first time this decade after gasoline rose to a record, AAA said.
- Apple’s(AAPL) iPhone Retains Allure Among Early Buyers. Bradley Wilson was one of thousands who lined up to buy the iPhone the day it went on sale in June 2007. He’s ready to camp out again next month when Apple Inc.(AAPL) starts selling a faster, cheaper model.
- President Luiz Inacio Lula da Silva said Brazil will at least triple its oil reserves by exploring a new offshore area that includes the Western Hemisphere’s largest discovery since 1976.
- Federal Reserve officials are reviewing regulations that limit investment firms’ stakes in banks in an effort to channel more capital into the US banking system.
- Record oil prices are “a blessing in disguise” for Asian economies and currencies as high transport costs will coerce the region to become less reliant on exports and more on local demand, Morgan Stanley said.

Wall Street Journal:
- Carlyle Group and other private-equity firms are “ready and willing” to invest in struggling financial institutions and face regulatory hurdles, Carlyle’s Olivier Sarkozy and Randal Quarles wrote. Buyout firms have more than $400 billion to invest.
- An inquiry into drug industry pricing by the European Union investigators is expanding. Trading firms and drug wholesalers were sent questionnaires in recent weeks asking about distribution methods used by drugmakers and whether they are blocking competitors.

CNBC.com:
- An investor has sued a Greenwich hedge fund management firm, accusing its operators of siphoning off money and enriching themselves at the expense of investors. Westerly Capital sued Windmill Management LLC, manager of SageCrest hedge fund, and operators Alan and Philip Milton and Richard Weyand in Stamford Superior Court earlier this month.

BusinessWeek.com:
- ICANN, the nonprofit that oversees Net addresses, has approved an unlimited number of new suffixes in a move that could help business.

CNNMoney.com:
- Fed up with record gas prices, drivers often scapegoat big oil companies for high prices at the pump, but in a recent survey, more Americans directed their scorn towards Washington lawmakers. According to a Consumer Reports Auto Pulse Survey released Thursday, 77% of consumers said the root of high gas prices lies with the government's failure to implement an effective energy policy.

AP:
- FPL Group Inc.(FPL), the biggest US operator of wind-power facilities, plans a $2 billion wind farm in North Dakota. It would be built on 250 square miles in Oliver and Morton counties and involve some 667 wind turbines.
- A recent AP-Yahoo poll, conducted by Knowledge Networks, found only 53% of Democrats who favored Hillary Clinton for the nomination two months ago now back Barack Obama for president. 23% plan to vote for Republican John McCain, 16% are undecided, 5% plan to vote for Ralph Nader and 3% plan to vote for someone else. The poll also found that choosing Clinton as No. 2 would appear to be a wash for Obama's candidacy. Overall, 28 percent said they would be more likely to vote for the Democratic ticket if Clinton were the nominee, 25 percent said they would be more likely to vote for the Republican ticket if Clinton were the nominee, and 47 percent said it wouldn't make much difference.

Reuters:
- Inflation has firms rethinking Made in China.
- US Senate blocks Medicare bill with HMO cuts. By one vote, Senate Republicans on Thursday blocked a bill to shave billions of dollars from health plans that contract with the federal Medicare program and avert a pay cut for doctors. On a 59-40 count, mostly Democratic backers fell shy of the 60 needed to clear a procedural roadblock and move towards final congressional passage of the measure earlier approved by the House of Representatives.

Financial Times:
- Verizon Communications(VZ) has stepped up the pressure on Vodafone to sell out of Verizon Wireless, their mobile joint venture, saying that the second largest US telecom company intends to be “the hunter” in future industry consolidation.

Daily Telegraph:
- Gordon Brown has vowed to break Britain’s dependence on oil and to convert the country to a greener way of life. He promised to drive through changes aimed at replacing the old fossil fuels - coal, gas and oil - with 21st century clean and renewable technologies. An estimated £100 billion will be spent over the next 12 years converting to a low carbon economy involving a 10-fold increase in power generation from renewable sources.

Late Buy/Sell Recommendations
CSFB:
- Rated (RIMM) Underperform, target $100.
- Reiterated Outperform on (BAM), target $40.
- Rated (MOT) Underperform, target $7.50.
- Rated (QCOM) Outperform, target $60.

Night Trading
Asian Indices are -3.0% to -1.0% on average.
S&P 500 futures +.25%.
NASDAQ 100 futures +.21%.

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Earnings of Note
Company/EPS Estimate
- (KBH)/-.94
- (AZZ)/.54
- (SCS)/.22

Upcoming Splits
- (PDO) 5-for-4

Economic Releases
8:30 am EST
- Personal Income for May is estimated to rise .4% versus a .2% gain in April.
- Personal Spending for May is estimated to rise .7% versus a .2% gain in April.
- The PCE Core for May is estimated to rise .2% versus a .1% gain in April.

10:00 am EST
- Final Univ. of Mich. Consumer Confidence for June is estimated at 56.7 versus 56.7 in May.

Other Potential Market Movers
- The UBS Global Insurance Conference and JPMorgan Global Tobacco Conference could also impact trading today.

BOTTOM LINE: Asian indices are sharply lower, weighed down by automaker and technology shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.

Stocks Finish at Session Lows, Weighed Down by Financial, Homebuilding, Technology, Airline, Gaming Shares

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In Play

Stocks Sharply Lower into Final Hour on Surge in Commodity Prices, Global Growth Concerns

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Alternative Energy longs, Computer longs and Gaming longs. I added to my (IWM/QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 50% net long. The tone of the market is very negative as the advance/decline line is substantially lower, almost every sector is falling and volume is above average. Investor anxiety is high. Today’s overall market action is very bearish. The VIX is rising 11.7% and remains above average at 23.60. The ISE Sentiment Index is low at 99.0 and the total put/call is high at 1.11. Finally, the NYSE Arms has been running very high most of the day and is currently 2.02. The Euro Financial Sector Credit Default Swap Index is rising 8.03% today to 93.93 basis points. This index is still up from a low of 52.66 on May 5^th, but down from 129.46 basis points on March 20^th. However, the North American Investment Grade Credit Default Swap Index is falling 4.2% today to 125.42, which is a positive. The TED spread is rising 6.3% to 1.08. Given record short interest, recent steep stock declines, high investor angst, quarter-end on Monday and the market’s technically oversold state, I suspect a very sharp rally will materialize sometime soon. However, the average Friday has seen the S&P 500 decline -.6% on avg. so far this year and emerging markets are likely to be weak tonight. Thus, a meaningful rally won’t likely materialize until late tomorrow or Monday. Nikkei futures indicate a -270 open in Japan and DAX futures indicate an +15 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain-hunting.