Friday Watch

Late-Night Headlines
Bloomberg:
- The US, China, Russia and three European powers have agreed on “far-reaching proposals” in an attempt to persuade Iran to curtail its nuclear program.
- NYSE Group(NYX) agreed to buy Euronext NV for $9.96 billion, forming the first transatlantic stock exchange and edging out a rival bid by Deutsche Boerse AG.
- Japanese shares declined after Nikkei English News said prosecutors in Tokyo are examining whether an investment fund overseen by shareholder activist Yoshiaki Murakami violated Japanese securities law.
- Vonage Holdings(VG) customers who want to back out of last week’s IPO by the Internet phone company may have a legal basis for doing so.
- Copper futures in Shanghai fell for a third day on concern a Chinese government agency may sell as much as 100,000 metric tons of the metal from its stockpiles.
- Crude oil may decline for a second week on signs that rising inventories and higher refinery output will meet gasoline demand during the US summer driving season, a Bloomberg survey showed.

Financial Times:
- GlaxoSmithKline Plc(GSK), Europe’s largest drugmaker, plans to bid over $15 billion for Pfizer’s(PFE) consumer health care unit.

Late Buy/Sell Recommendations
ThinkEquity Partners:
- Rated (AIRN) Buy, target $8.
- Rated (MTLK) Buy, target $9.

Merrill Lynch:
- Raised (AUO) to Buy.

Business Week:
- IPass Inc.(IPAS) shares may climb as shareholders urge the software maker to improve corporate governance, citing Eric Appell, an analyst at Merriman Curhan Ford & Co.
- Forest Labs(FRX), maker of drugs for depression, pain and cardiovascular and respiratory disorders, is poised to grow after declining 8.7% this year, citing Kavita Thomas of First Global Markets.

Night Trading
Asian Indices are -.50% to +.50% on average.
S&P 500 indicated -.16%.
NASDAQ 100 indicated -.12%.

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Earnings of Note
Company/EPS Estimate
- None of note

Upcoming Splits
- (BRY) 2-for-1
- (MFC) 2-for-1
- (SCSC) 2-for-1

Economic Releases
8:30 am EST
- The Change in Non-farm Payrolls for May is estimated at 170K versus 138K in April.
- The Change in Manufacturing Payrolls for May is estimated at 5K versus 19K in April.
- The Unemployment Rate for May is estimated at 4.7% versus 4.7% in April.
- Average Hourly Earnings for May are estimated to rise .3% versus a .5% gain in April.

10:00 am EST
- Factory Orders for April are estimated to fall 2.1% versus a 4.1% gain in March.

BOTTOM LINE: Asian indices are mixed as losses in commodity stocks are being offset by gains in exporters in the region. I expect US equities to open modestly lower and to rise into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

***Alert***

Due to a scheduling conflict I am unable to post the Thursday Close. I will post the Friday Watch later this evening. Sorry for the inconvenience.

Stocks Sharply Higher into Final Hour on Falling Commodity Prices, Declining Inflation Concerns, Bargain Hunting and Short-Covering

BOTTOM LINE: The Portfolio is substantially higher into the final hour on gains in my Internet longs, Semiconductor longs, Retail longs and Networking longs. I covered some of my (IWM), (QQQQ) shorts and added to my (TLT) and various commodity shorts today, thus leaving the Portfolio 75% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are higher and volume heavy. Measures of investor anxiety are mostly lower. Today’s overall market action is very bullish given the mostly weaker economic data and decline in commodity prices. For the month of May, the energy industry saw the greatest amount of net insider selling in the S&P 500. Insiders purchased $65,417,391 worth of stock. They sold $2,229,633,318 worth. This is the largest amount of insider selling in energy this cycle. This is especially significant considering it comes ahead of the hurricane season, and most expect to see another spike higher in energy prices during this time. I expect stocks to maintain gains into the close as declining inflation worries, short-covering, bargain hunting and a reversal lower in oil prices offset weaker economic data.

Today's Headlines

Bloomberg:
- Consumers continued spending in May even as gas prices rose, helping many retailers post sales gains that exceeded analyst estimates.
- Nickel plunged the most in 19 months, and copper’s decline reached the trading limit in NY, reviving speculation that the rally in metals may be over.
- Toyota Motor(TM) and Honda Motor increased US sales by more than 15% in May while their biggest US rivals, GM(GM) and Ford(F), posted their fourth consecutive monthly declines.
- Crude oil fell to session lows, reversing $1.55 from session highs as speculators continued to take profits in most commodities.

Wall Street Journal:
- Goldman Sachs’(GS) board will meet tomorrow to decide whether Lloyd Blankfein, currently No.2 at the world’s largest securities firm, will succeed Henry Paulson as chairman and CEO.
- The US FCC has proposed charges on Internet phone users and some wireless customers to help subsidize telephone services to rural and low-income customers.
- Management-led buyouts in the US have grown in size this year.
- Wal-Mart Stores(WMT) may sell ethanol-based biofuel at company owned gas stations, providing a boost to the market for alternative fuels.
- Goldman Sachs(GS) quit as an adviser to Mirant(MIR) in the US power producer’s $7.86 billion hostile takeover bid for NRG Energy(NRG) that was revealed Tuesday.
- IBM(IBM) and Microsoft(MSFT) are scouring Silicon Valley for start-ups they might work with or acquire.

Washington Post:
- About 170 employees of the Washington Post(WPO) have accepted early retirement offers as the company tries to contain costs at a time when circulation is falling.

LA Times:
- Sony’s(SNE) Connect Internet music store is still losing in its competition with Apple Computer’s(AAPL) iTunes service.

Producitivity Strong, Largest Component of Inflation Decelerates, Jobless Claims Rise, Construction Slows, Housing Weakens, Manufacturing Decelerates

- Final 1Q Non-farm Productivity rose 3.7% versus estimates of a 3.9% increase and a prior estimate of a 3.2% gain.
- Final 1Q Unit Labor Costs rose 1.6% versus estimates of a 1.8% rise and prior estimates of a 2.5% gain.
- Initial Jobless Claims for last week rose to 336K versus estimates of 320K and 329K the prior week.
- Continuing Claims rose to 2433K versus estimates of 2413K and 2414K prior.
- Construction Spending in April fell .1% versus estimates of unchanged and a .9% increase in March.
- Pending Home Sales for April fell 3.7% versus estimates of a 1.0% fall and a 1.3% decline in March.
- ISM Manufacturing for May fell to 54.4 versus estimates of 55.7 and a reading of 57.3 in April.
- ISM Prices Paid for May rose to 77.0 versus estimates of 74.6 and a reading of 71.5 in April.

BOTTOM LINE: The productivity of US workers accelerated last quarter and labor costs slowed over the last year, easing concern that rising wages will fuel inflation, Bloomberg said. Labor costs were up .3% in the 12 months ended in March, matching the smallest gain in more than 12 months. Moreover, unit labor costs fell .6% during the fourth quarter, revised lower from a previously reported gain of 3%. Unit labor costs comprise two-thirds of inflation. In my opinion, it is impossible to make the case for an inflation problem without making the case for a substantial rise in unit labor costs. I continue to believe inflation fears have peaked for the year.

The number of US workers filing first-time applications for state jobless benefits unexpectedly rose to 336,000 last week, signaling the labor market is softening as the economy cools, Bloomberg reported. The four-week moving average, a less volatile measure, rose to 333,500, the highest since October. Hiring has declined significantly at builders, mortgage companies and real estate agencies as housing slows. The unemployment rate for those eligible for benefits, which tracks the US jobless rate, remained at 1.9%. I continue to believe the labor market, while softening, will remain healthy without generating a substantial increase in unit labor costs.

Construction spending in the US fell in April for the first time in almost a year as builders started work on fewer homes, Bloomberg reported. Private residential construction spending fell 1.1%, the largest decrease since January 2004. I expect construction spending to continue to decelerate as increased commercial construction is more than offset by declining residential construction.

Contracts to buy previously owned US homes fell to the lowest level in more than two years in April as rising interest rates and a glut of unsold homes weighed on sales, Bloomberg said. Pending re-sales fell 9.8% in the West, 5.6% in the Midwest and 5.5% in the Northeast. They rose 1.4% in the South. I continue to believe housing is slowing to more healthy sustainable levels, which will result in a slowdown in consumer spending and GDP growth back to average levels from robust rates.

Manufacturing growth in the US slowed last month as energy costs rose and new orders weakened, Bloomberg reported. The new orders component of the index fell to 53.7, the lowest in 12 months. The employment component of the index fell to 52.9 from 55.8 in April. I continue to believe manufacturing will slow to average levels as demand slows. Moreover, the prices paid index has likely peaked for this cycle.

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