Today's Headlines

Bloomberg:
- Emerging-market stocks are headed for the biggest monthly drop in more than 3 ½ years as the prospect of higher interest rates and a slump in prices of commodities caused some investors to pull out of the riskiest markets from India to Russia.
- ADC Telecom offered about $2 billion in stock to take over Andrew Corp.(ANDW).
- Mortgage applications in the US declined last week to the lowest level in four year as higher borrowing costs hurt home purchases and refinancing.
- More than 84,000 people in 145 countries will take the CFA exams this year, as record profits drive both investment banks and job candidates to try to boost their competitiveness.
- Crude oil fell for the first time in a week and gold declined after the US offered to join European talks with Iran if the country halts uranium enrichment.
- Fed policy makers were unsure three weeks ago about how much further to raise interest rates.

Wall Street Journal:
- India has the largest number of people with HIV/AIDS, exceeding the previous record set by South Africa, citing a UN report.
- Advanced Micro Devices(AMD) expects some personal-computer makers to soon begin selling systems based on a new group of technologies for managing digital media in the home as its seeks to compete with Intel’s(INTC) Viiv home entertainment product.
- Vonage Holdings(VG), whose shares dropped after an IPO last week, has offered to pay its underwriters back if its Internet phone customers refuse to make good on agreements to buy shares.

Weeden & Co.:
- Bill Gross, manager of the world’s biggest bond fund, cut his holdings of emerging-market debt.

Chicago Manufacturing Very Strong

- Chicago Purchasing Manager for May rose to 61.5 versus estimates of 56.0 and a reading of 57.2 in April.

BOTTOM LINE: Manufacturing in the Chicago area unexpectedly accelerated this month, and orders placed with factories were the highest in more than a year, Bloomberg said. The purchasers’ orders measure rose to 69.6, the highest since March 2005. The employment component of the index rose to 52.8 from 47.2 the prior month. The Prices Paid Index fell to 76.9 from 77.2. I continue to believe manufacturing will decelerate over the coming months as US growth slows to average rates. The Prices Paid component has likely peaked for this cycle.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Fidelity Magellan, the second-largest fund managed by Fidelity Investments, gave up $96.3 million in potential fees because the three-year return trailed its benchmark.
- Fidelity Investments pulled in $5.8 billion in April, its biggest monthly sales tally in a decade, as investors rushed to put money into four funds that were closing.
- Mirant Corp.(MIR) said it is proposing to acquire NRG Energy(NRG) for about $8 billion a week after NRG rejected the takeover proposal without engaging in discussions.
- The London Metal Exchange starting tomorrow will allow screen trading of its contracts during the Asian day to attract more business from countries including China.
- Asian stocks slumped, headed for the biggest monthly slide since the Sept. 11 terrorist attacks in 2001.

Chicago Tribune:
- Chicago asked today for proposals for construction of a citywide wireless Internet service, citing Mayor Daley.

Financial Times:
- GlaxoSmithKline Plc(GSK) will hand management of half of its new drug discovery projects to outside scientists and partners within 10 years, citing the company’s head of research and development.

Shanghai Securities News:
- China’s foreign exchange regulator plans to impose “strict” rules to control capital inflows into real estate.
- The China Foreign Exchange Trade Center and the National Interbank Funding Center may introduce a system for trading dollar-denominated bonds in the country.

Late Buy/Sell Recommendations
Needham:
- Rated (NFLX) Buy, target $37.

Lehman Brothers:
- Raised (SIRI) to Overweight, target $6.50.

Night Trading
Asian Indices are -2.0% to -1.25% on average.
S&P 500 indicated +.13%.
NASDAQ 100 indicated +.16%.

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Earnings of Note
Company/EPS Estimate
- (NDN)/.07
- (ADCT)/.29
- (CMVT)/.19
- (CPRT)/.38
- (DBRN)/.26
- (HOV)/1.43
- (NOVL)/.03
- (TIF)/.28

Upcoming Splits
- (HES) 3-for-1
- (CNX) 2-for-1
- (KEX) 2-for-1
- (MDR) 3-for-2
- (NUE) 2-for-1
- (CBG) 3-for-1
- (GDI) 2-for-1
- (HOC) 2-for-1
- (UAG) 2-for-1

Economic Releases
10:00 am EST
- Chicago Purchasing Manger for May is estimated to fall to 56.0 versus a reading of 57.2 in April.

2:00 am EST
- Minutes of May 10 FOMC Meeting

BOTTOM LINE: Asian indices are sharply lower, weighed down by exporting and commodity stocks in the region. I expect US equities to open lower and to rise slightly into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

Stocks Finish Sharply Lower on Economic Worries

Indices
S&P 500 1,259.88 -1.58%
DJIA 11,094.43 -1.63%
NASDAQ 2,164.74 -2.06%
Russell 2000 711.04 -2.54%
Wilshire 5000 12,686.26 -1.62%
S&P Barra Growth 583.92 -1.60%
S&P Barra Value 674.11 -1.57%
Morgan Stanley Consumer 601.92 -1.12%
Morgan Stanley Cyclical 826.36 -1.93%
Morgan Stanley Technology 499.49 -2.15%
Transports 4,578.80 -2.07%
Utilities 400.39 -.93%
Put/Call 1.17 +58.11%
NYSE Arms 2.23 +252.05%
Volatility(VIX) 18.66 +30.86%
ISE Sentiment 101.00 -30.82%
US Dollar 84.35 -.81%
CRB 347.88 +.02%

Futures Spot Prices
Crude Oil 71.90 -.18%
Unleaded Gasoline 214.00 -.46%
Natural Gas 6.13 +.20%
Heating Oil 200.39 +1.18%
Gold 662.00 +.23%
Base Metals 232.86 -3.46%
Copper 368.90 +.41%
10-year US Treasury Yield 5.07% +.52%

Leading Sectors
Broadcasting +.12%
HMOs -.38%
Hospitals -.80%

Lagging Sectors
Internet -3.75%
Airlines -3.92%
Steel -5.04%

Evening Review
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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Emerging-market stocks resumed their decline on concern global growth will slow.
- Engelhard Corp.(EC), inventor of the catalytic converter, accepted a sweetened $5 billion takeover offer from BASF AG of Germany, ending five months of negotiations that began with a hostile bid.
- The US dollar fell the most in six weeks against the euro on speculation Treasury secretary nominee Henry Paulson won’t trey to stop a slide in the US currency.

CNBC:
- Quest Diagnostics(DGX) may make a counteroffer for Fisher Scientific(FSH), which agreed this month to be bought by Thermo Electron, Mergermarket.com reported.

BOTTOM LINE: The Portfolio finished lower today on losses in my Networking longs, Semi longs and Medical longs. I added to my (EEM), (IWM) and (QQQQ) shorts in the final hour, thus leaving the Portfolio 50% net long. The tone of the market was negative today as the advance/decline line finished substantially lower, almost every sector fell and volume was below average. Measures of investor anxiety were higher into the close. Overall, today's market performance was bearish. The market's inability to even stage a modest bounce today was telling. As well, the 10-year yield remained higher throughout the day, even as stock losses worsened. A retest of recent equity lows appears imminent as economic data disappoint. On the positive side, today's sell-off was accompanied by below-average volume and measures of investor angst were elevated. The NYSE Arms closed at a very high 2.23. Moreover, the ISE Sentiment Index closed down 31%, to a depressed level. Tomorrow's Chicago Purchasing Manager report and Fed minutes may further stoke recession fears. I continue to believe U.S. growth is just slowing, not plunging, and that the recent correction presents a very attractive opportunity for longer-term investors.

Stocks Sharply Lower Into Final Hour on Higher Energy Prices and Long-term Rates

BOTTOM LINE: The Portfolio is lower heading into the final hour on losses in my Semi longs, Networking longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is substantially lower, almost every sector is lower and volume is light. Emerging market stocks are once again underperforming. The iShares MSCI Emerging Markets Index (EEM) is 3.6% lower. I expect EEM to take out its 200-day moving-average over the coming weeks. I am still short EEM. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain hunting.