US Economic Growth Slowing, Not Plunging

- Advance 1Q GDP rose 3.1% versus estimates of a 3.5% increase and a 3.8% gain in 4Q.
- Advance 1Q Personal Consumption rose 3.5% versus estimates of a 3.2% increase and a 4.2% gain in 4Q.
- Advance 1Q GDP Price Deflator rose 3.2% versus estimates of a 2.1% increase and a 2.3% gain in 4Q.
- Initial Jobless Claims for last week rose to 320K versus estimates of 320K and 299K the prior week.
- Continuing Claims fell to 2555K versus estimates of 2644K and 2631K prior.

Bottom Line: The GDP report showed business spending on equipment and software rose at the slowest pace in 2 years and inventories increased by the most since the second quarter of 2000. This leads me to believe economic growth began to slow to below-average levels in March. The fact that the GDP deflator only rose 3.2% when commodities were near all-time highs is a positive. The deflator has risen around this rate 4 other times just since 2000. It rose 3.6% in March 2000. The trade deficit also pressured GDP as oil imports soared. I continue to believe declining commodity prices will help boost GDP growth in the second half of the year. I want to reiterate that I believe economic growth is slowing, not plunging. Recent housing data show booming sales and low supply, which should boost housing starts over the coming months. Moreover, personal consumption beat estimates and also illustrates the continuing strength of the consumer.

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Chart of Interest

Thursday Watch

Late-Night Headlines
Bloomberg:
- BHP Billiton, the world's biggest mining company, had its second-highest quarterly iron ore production ever after expanding mines to meet rising demand from Asian steelmakers.
- Crude oil is falling in Tokyo and NY as rising US inventories ease concerns that refiners won't have enough supply to meet summer demand for gasoline.

Wall Street Journal:
- NY Democratic Attorney General Spitzer is investigating possible discriminatory practices in fixing interest rates and fees charged on mortgage loans.

Financial Times:
- Europe's drug industry is becoming increasingly less innovative than its US counterpart and must change its research and health care systems to catch up.

Business Standard:
- Las Vegas Sands is proposing to spend more than $2 billion on a casino and resort in Singapore with a colonial-era theme.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on DO, BXP and ENH.
- Reiterated Underperform on BE and SIAL.

Night Trading
Asian Indices are -.50% to +.75% on average.
S&P 500 indicated +.03%.
NASDAQ 100 indicated -.07%.

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Earnings of Note
Company/EPS Estimate
AET/1.07
ANDW/.11
ABX/.06
BZH/1.17
BDK/1.34
BMY/.34
CMCSA/.10
DOW/1.05
EMN/1.24
EL/.51
XOM/1.20
IVX/.14
KLAC/.56
K/.59
LIZ/.65
NXTL/.41
NOC/.91
PTEN/.31
SIRI/-.15
WEN/.40

Splits
None of note

Economic Releases
8:30 EST:
- Advance 1Q GDP is estimated to rise 3.5% versus a 3.8% increase in 4Q.
- Advance 1Q Personal Consumption is estimated to rise 3.2% versus a 4.2% increase in 4Q.
- Advance 1Q GDP Price Deflator is estimated to rise 2.1% versus a 2.3% gain in 4Q.
- Initial Jobless Claims for last week are estimated to rise to 320K versus 296K the prior week.
- Continuing Claims are estimated to rise to 2644K versus 2638K prior.

10:00 EST:
- Help Wanted Index for March is estimated at 41 versus a reading of 41 in February.

BOTTOM LINE: Asian indices are mixed as concerns over slower exports offset optimism over declining energy prices. I expect US equities to open modestly lower on a lower-than-expected GDP reading. However, stocks may rally later in the day as investors begin to anticipate less hawkish comments from the Fed. The Portfolio is 50% net long heading into tomorrow.

Stocks Finish Modestly Higher on Lower Energy Prices

Indices
S&P 500 1,156.38 +.40%
DJIA 10,198.80 +.47%
NASDAQ 1,930.43 +.16%
Russell 2000 587.14 -.09%
DJ Wilshire 5000 11,382.91 +.30%
S&P Barra Growth 559.04 +.31%
S&P Barra Value 593.01 +.50%
Morgan Stanley Consumer 574.10 +.38%
Morgan Stanley Cyclical 697.86 -.56%
Morgan Stanley Technology 438.82 +.04%
Transports 3,417.54 +.38%
Utilities 368.24 +.72%
Put/Call 1.07 +42.67%
NYSE Arms .96 -45.92%
Volatility(VIX) 14.87 -.27%
ISE Sentiment 161.00 +25.78%
US Dollar 84.12 +.19%
CRB 305.88 -1.26%

Futures Spot Prices
Crude Oil 51.35 -.50%
Unleaded Gasoline 153.47 -.47%
Natural Gas 6.77 -.29%
Heating Oil 147.55 +.10%
Gold 433.50 -.14%
Base Metals 123.54 -.87%
Copper 144.40 unch.
10-year US Treasury Yield 4.22% -.98%

Leading Sectors
HMOs +3.28%
Papers +2.06%
Telecom +1.71%

Lagging Sectors
Oil Service -3.33%
Gold & Silver -4.02%
Steel -4.79%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on BHI, WLP, AHC and CL.
- Reiterated Underperform on KEA, BA, RAI and ALB.

Afternoon/Evening Headlines
Bloomberg:
- UK Prime Minister Blair cast doubt on Britain joining the euro currency while he is in office as he seeks a third term in a May 5 general election.
- Ministers from Caribbean countries said their tourism-dependent economies might be hurt by new US rules requiring US citizens traveling to the Caribbean to carry passports.
- Hedge funds attracted a record $27.4 billion from institutional and wealthy investors in the first quarter, helping to push assets to more than $1 trillion for the first time, according to Hedge Fund Research.
- Tenet Healthcare said it received a notice that US regulators plan to recommend civil action related to the company’s financial reporting of Medicare and managed-care payments.
- Crude oil fee almost $3 a barrel in NY, the biggest decline this year, after the Energy Dept. reported that US inventories jumped to the highest in almost 3 years and President Bush spoke on ways to cut energy prices.

BOTTOM LINE: US stocks finished modestly higher today on falling energy prices and long-term interest rates. The Portfolio finished substantially higher on gains in my Commodity-related shorts. I added a few new Energy-related shorts in the afternoon, thus leaving the Portfolio 50% net long. One of my new shorts is OMM and I am using a $19.75 stop-loss on this position. The tone of the market remained slightly positive into the afternoon as the advance/decline finished modestly lower, most sectors were higher and volume was average. Measures of investor anxiety were mostly lower. Overall, today’s market action was slightly positive. I expect tomorrow’s GDP report to fail to meet expectations. This may spur a further decline in commodity prices.

Stocks Gaining Mid-day on Falling Energy Prices

Indices
S&P 500 1,156.71 +.43%
DJIA 10,194.66 +.42%
NASDAQ 1,932.99 +.29%
Russell 2000 589.33 +.28%
DJ Wilshire 5000 11,390.65 +.37%
S&P Barra Growth 559.28 +.35%
S&P Barra Value 593.17 +.53%
Morgan Stanley Consumer 573.71 +.30%
Morgan Stanley Cyclical 697.67 -.60%
Morgan Stanley Technology 438.91 +.06%
Transports 3,416.55 +.35%
Utilities 368.90 +.90%
Put/Call 1.15 +53.33%
NYSE Arms 1.12 -37.26%
Volatility(VIX) 14.86 -.34%
ISE Sentiment 161.00 +25.78%
US Dollar 84.12 +.19%
CRB 306.23 -1.15%

Futures Spot Prices
Crude Oil 51.57 -4.85%
Unleaded Gasoline 155.50 -4.31%
Natural Gas 6.78 -4.78%
Heating Oil 148.40 -1.59%
Gold 434.10 -1.12%
Base Metals 123.54 -.87%
Copper 144.30 -1.16%
10-year US Treasury Yield 4.23% +.-.79%

Leading Sectors
HMOs +2.75%
Papers +2.05%
Telecom +1.52%

Lagging Sectors
Oil Service -2.30%
Steel -4.18%
Gold & Silver -4.24%

BOTTOM LINE: US stocks are modestly higher mid-day, spurred by lower long-term interest rates and energy prices. The Portfolio is higher on gains in my Homebuilding longs and Base Metal shorts. I exited a few longs as they hit stops this morning and added some new Gaming and Internet longs, thus leaving the Portfolio 75% net long. One of my new longs is VRSN and I am using a $27 stop-loss on this position. The tone of the market is neutral as the advance/decline line is slightly lower, most sectors are rising and volume is above average. Measures of investor anxiety are mostly lower. Today’s overall market action is modestly positive, considering lower energy prices, lower long-term rates, a firmer US dollar, disappointing durable goods orders and the recovery from morning losses. I expect US stocks to trade modestly higher into the close on short-covering, lower energy prices, lower long-term interest rates and bargain-hunting.