Today's Headlines

Bloomberg:
- China’s benchmark Shanghai Composite Index slumped to an eight-year low on concern that the second phase of the government’s plan to cut its shareholdings will result in a flood of poor-quality stock.
- US Commerce Secretary Carlos Gutierrez called on China to crack down harder on copyright piracy and open its markets further to US products or risk a protectionist backlash that would hurt both economies.
- Sun Microsystems agreed to buy Storage Technology for $4.1 billion.
- US retailer from Target to Neiman Marcus posted better-than-expected sales gains in May as bigger paychecks overcame the effect of cold weather on spending.
- Motorola had its credit rating raised by Moody’s for the first time in 17 years, reflecting greater-than-expected gains in sales and profit.
- The US dollar fell the most in six weeks against the euro as strategists said a three-week decline in US Treasury yields made US debt less attractive to international investors.

Wall Street Journal:
- A European Union antitrust investigation into US-based Johnson & Johnson’s proposed $25.4 billion takeover of Guidant is focused on whether the merger would damage smaller competitors and keep prices high for cardiovascular devices.
- China’s government is trying to control the spread of Christianity that has increased the number of Catholics and Protestants to 45 million from six million 25 years ago.
- SBC Communications and other providers are regaining customers who want landline service because of lower pricing and better transmission than on cell phones.
- US homeowners are increasingly finding that installing solar-powered electricity generators can pay off, as states including California, NY and Texas now offer loans, rebates and other programs.
- The link between Viagra and vision defects is far from certain, citing ophthalmologists.
- Orlando, Florida, travelers may speed through airport security as early as next month with the help of a $79.95 identity card.
- Psychemedics Corp., PharmChem’s Phamatech and Q3 Innovations may benefit from increasing demand for their in-home drug-testing kits as parents watch for drug use in their children.
- Merck will begin television, radio and print advertisements this week in the first corporate brand campaign in the drugmaker’s 144-year history.
Cnet Networks is offering plot summaries, photographs and video clips of television shows from the 1940s to the present on a Web site called TV.com.

NY Times:
- The rejection of the European Union’s proposed constitution by French and Dutch voters this week reflected growing dissatisfaction with the continent’s leaders.
- Yahoo! plans to revive the live concert television show “PepsiSmash” on its Internet site through a collection of short video segments available on demand.
- Richard Braddock, the former president of Citicorp and former chairman of Priceline.com, has been named chairman of FreshDirect, a NY-based Internet grocer, signaling a possible move toward an IPO.

Boston Globe:
- Biogen Idec has told the FDA that a fourth patient may have developed a rare neurological disorder after being treated with the multiple sclerosis drug Tysabri.

Washington Post:
- A US rule that took effect yesterday requires all companies and individuals to destroy private consumer information obtained from credit bureaus and other information providers.

San Francisco Chronicle:
- A California bill aimed at permitting doctor-assisted suicide was rescued from likely defeat in the Sate Assembly when the authors used a parliamentary move to shift the bill to the Senate.

AP:
- South Korean cloning science specialist Hwang Woo Suk said he wants to open a stem-cell bank this year to help speed the search to grow replacement tissue.

AFP:
- Boeing may book more aircraft orders this year than Airbus SAS.

Financial Times:
- Western observers are underestimating problems in the Chinese economy, even as Chinese entrepreneurs step up their criticisms of internal barriers to doing business in the country, said Yasheng Huang, an associate professor in the MIT’s Sloan School.

Moscow Times:
- Starbucks opened its first store in Moscow amid a trademark dispute with an eponymous Russian company.

Globe and Mail:
- Lowe’s is preparing to expand into Canada.
- E*Trade Financial may revive merger discussions with TD Waterhouse after Ameritrade Holding said it’s in talks to buy Waterhouse after Ameritrade Holding said it’s in talks to buy Waterhouse’s US assets.

Labor Costs Rise, Factory Orders Accelerate and Oil Inventories Rise

- Final 1Q Non-farm Productivity rose 2.9% versus estimates of a 3.0% rise and a 2.6% prior estimate.
- Final 1Q Unit Labor Costs rose 3.3% versus estimates of a 2.2% increase and a 2.2% prior estimate.
- Initial Jobless Claims for last week rose to 350K versus estimates of 325 and 325K the prior week.
- Continuing Claims rose to 2602K versus estimates of 2581K and 2570K prior.
- Factory Orders for April rose .9% versus estimates of a 1.1% gain and an upwardly revised .7% increase in March.
- Summary of Weekly Petroleum Data for the Week Ending May 27, 2005.
- The EIA said crude inventories rose 1.49M barrels versus estimates of a 250K rise. Distillate fuel inventories rose 783K barrels versus estimates of a 1.45M barrel rise. Gasoline inventories rose 1.3M barrels versus estimates of a 400K rise. Natural Gas inventories rose 86 bcf to 1778 bcf versus estimates of a rise of 89 bcf.

BOTTOM LINE: Productivity rose in the first quarter at the fastest pace in 9 months. Productivity gains exceeded 4.0% in each of the last three years. At no time in history had there even been back-to-back increases greater than 4.0%. The year-over-year increase in unit labor costs was 4.3%, the most since the third quarter of 2000. While this increase is higher than I would like to see, there is little evidence that these costs are being passed to the consumer. Moreover, increasing labor costs haven’t pressured corporate profits to any extent. US corporate profits grew 4.5% in the first quarter and accounted for the largest share of the US economy since early 1967. I also expect moderating job gains over the coming months to dampen labor costs somewhat going forward.

The number of Americans filing first-time applications for jobless benefits rose last week to a 2-month high as a result of temporary layoffs in the automobile industry. Even with the increase last week, claims have averaged 328,000 so far this year, down from 343,000 for all of 2004, when the job market was the strongest in five years. The four-week moving average of claims, a less volatile measure, rose to 334,500 from 331,000. The four-week moving average of continuing claims rose to 2.59 million, from 2.586 million. The insured unemployment rate, which moves with the US unemployment rate, held at 2.0%.

US factory orders rose the most since November, spurred by demand for autos, aircraft and computers. Excluding transportation equipment, orders fell .2%. Orders for capital goods excluding aircraft, a proxy for future business investment, rose 1.7% in April after declining 1.6% in March. I continue to expect overall weaker factory activity as companies cut inventory to healthier levels.

Oil is steady even with another rise in inventories during the seasonably strong driving period. The perception that demand will accelerate in 4Q from last year’s rates is propping up energy. I continue to believe this perception will change over the coming months, resulting in a substantial fall in crude prices.

Links of Interest

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Thursday Watch

Late-Night Headlines
Bloomberg:
- Microsoft agreed to change its Windows XP operating software to address fresh antitrust concerns that traces of programs consumers choose to hide still appear on their computer screens.
- SEC Chairman Donaldson's resignation may spark a battle to reduce the agency's reach over corporate America and Wall Street.

Wall Street Journal:
- Citigroup is in discussion to exchange its Smith Barney mutual fund business with Legg Mason.

AP:
- President Bush will nominate California Republican Representative Christopher Cox to be the new chairman of the SEC, replacing William Donaldson.

Economic Daily News:
- Nvidia Corp. and ATI Technologies have chosen Taiwan Semiconductor Manufacturing as their only supplier of chips that use 90-nanometer technology.

People's Daily:
- Property prices and transaction volume in 11 major Chinese cities fell after the government unveiled measures last month to curb real estate speculation.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on SBUX, FMD, CAL, MDT and ARO.

Night Trading
Asian Indices are -.25% to +.75% on average.
S&P 500 indicated +.02%.
NASDAQ 100 indicated +.03%.

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Earnings of Note
Company/EPS Estimate
JTX/1.38
SFL/.50
TTWO/-.13

Splits
COP 2-for-1
EGN 2-for-1
RESP 2-for-1

Economic Releases
8:30 EST:
- Final 1Q Non-farm Productivity is estimated to rise 3.0% versus a prior estimate of a 2.6% increase.
- Final 1Q Unit Labor Costs is estimated to rise 2.1% versus a prior estimated of a 2.2% gain.
- Initial Jobless Claims for last week are estimated to rise to 325K versus 323K the prior week.
- Continuing Claims are estimated to rise to 2581K versus 2574K prior.

10:00 EST:
- Factory Orders for April are estimated to rise 1.1% versus a .1% gain in March.

BOTTOM LINE: Asian indices are mostly higher, spurred by gains in exporting and energy shares in the region. I expect US equities to open mixed as optimism over an end to Fed rate hikes offsets higher energy prices. The Portfolio is 100% net long heading into the day.

Stocks Close Higher Even as Energy Prices Finish at Session Highs

Indices
S&P 500 1,202.22 +.90%
DJIA 10,549.87 +.79%
NASDAQ 2,087.86 +.95%
Russell 2000 623.74 +1.14%
DJ Wilshire 5000 11,884.67 +.90%
S&P Barra Growth 581.29 +.96%
S&P Barra Value 616.42 +.84%
Morgan Stanley Consumer 588.30 +.65%
Morgan Stanley Cyclical 726.43 +.85%
Morgan Stanley Technology 484.69 +1.22%
Transports 3,633.86 +.95%
Utilities 368.54 +.93%
Put/Call .68 -29.90%
NYSE Arms .80 -48.30%
Volatility(VIX) 12.36 -7.0%
ISE Sentiment 131.00 -31.77%
US Dollar 88.11 +.40%
CRB 304.33 +1.16%

Futures Spot Prices
Crude Oil 54.27 +4.43%
Unleaded Gasoline 153.50 +4.64%
Natural Gas 6.72 +5.42%
Heating Oil 153.47 +5.88%
Gold 417.60 -.31%
Base Metals 121.70 +.70%
Copper 148.20 +1.75%
10-year US Treasury Yield 3.88% -2.43%

Leading Sectors
Gold & Silver +1.97%
Energy +1.86%
Internet +1.37%

Lagging Sectors
Defense -.31%
Oil Tankers -1.24%
Oil Tankers -1.28%

Evening Review
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In Play

Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on FMD, SBC, UTX and AIG.

Afternoon/Evening Headlines
Bloomberg:
- Dutch voters rejected the European Union’s constitution, dealing a second blow to European integration three days after the treaty was defeated in France, causing the euro to plunge.
- UK Prime Minister Blair came under pressure from European Union leaders not to scrap a British referendum on the EU constitution after the Netherlands became the second country to reject the new rulebook.
- JP Morgan Chase said second-quarter trading results through May 31 were “the worst the firm has experienced in some time.”
- The SEC has asked a US judge to appoint a receiver to take control of Amerindo Investment Advisors, after its two co-founders, Alberto Vilar and Gary Tanaka, were jailed on criminal charges last week.
- Ford Motor and GM, which are losing share to Asian competitors, had US sales declines of more than 11% in May, prompting North American production cuts and increased sales incentives.

Wall Street Journal:
- EBay agreed to buy Shopping.com for about $620 million in cash.

AP:
- Palestinian Authority President Abbas underwent angioplasty yesterday after being admitted to an Amman, Jordan, hospital for fatigue.

Reuters:
- Nextel Communications CEO Donahue expects the mobile-phone company to meet or beat forecasts for this year.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet, Retail and Homebuilding longs. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline finished higher, almost every sector rose and volume was average. Measures of investor anxiety were mostly lower into the close. Overall, today’s market action was modestly positive, considering the Fed’s Fisher’s dovish comments. Rising energy prices likely muted an otherwise more vigorous rally.

Stocks Higher Mid-day on Diminishing Fed Fears and Lower Inflation

Indices

S&P 500 1,204.26 +1.07%

DJIA 10,569.01 +.97%

NASDAQ 2,092.24 +1.14%

Russell 2000 624.09 +1.20%

DJ Wilshire 5000 11,901.87 +1.05%

S&P Barra Growth 581.83 +1.06%

S&P Barra Value 617.62 +1.03%

Morgan Stanley Consumer 587.71 +.55%

Morgan Stanley Cyclical 728.74 +1.17%

Morgan Stanley Technology 486.86 +1.67%

Transports 3,637.89 +1.08%

Utilities 369.52 +1.20%

Put/Call .56 -42.27%

NYSE Arms .62 -59.67%

Volatility(VIX) 12.29 -7.52%

ISE Sentiment 129.00 -32.81%

US Dollar 88.06 +.34%

CRB 303.04 +.74%

Futures Spot Prices

Crude Oil 53.75 +3.43%

Unleaded Gasoline 151.80 +3.61%

Natural Gas 6.62 +3.78%

Heating Oil 152.50 +5.28%

Gold 417.70 -.29%

Base Metals 121.70 +.70%

Copper 148.70 +2.09%

10-year US Treasury Yield 3.90% -1.81%

Leading Sectors

Energy +2.21%

Gold & Silver +2.14%

Gaming +1.78%

Lagging Sectors

Telecom -.15%

Defense -.29%

Oil Tankers -.83%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Internet, Homebuilding, Retail and Wireless longs. I added a number of new longs this morning, thus leaving the Portfolio 100% net long. One of my new longs is GME and I am using a $28 stop-loss on this position. The tone of the market is positive as the advance/decline line is higher, almost every sector is higher and volume is above average. Measures of investor anxiety are mostly lower. Today’s overall market action is positive, given the rise in energy prices and disappointing ISM report. The Fed's Fisher said on CNBC today that "there's room to tighten a little bit further" and that "we're in the eighth inning of rate cycle.” I am more confident than ever that the Fed is almost ready to "pause." However, I would not be surprised to see conflicting comments over the next couple of weeks from Fed speakers. Fisher's comments today were not a mistake or the result of inexperience, in my opinion. They were the first attempt at changing perceptions in an orderly manner before the June 30 meeting. I expect US stocks to trade mixed into the close as rising energy prices and growth worries are offset by lower long-term interest rates, subsiding Fed worries and decelerating inflation.