Today's Headlines

Bloomberg:
- Italy’s new government will renew the country’s partnership with the US through a united Europe that will be an ally in facing threats of terrorism and nuclear proliferation, Foreign Minister Massimo D’Alema said.
- Increases in consumer prices throughout the country are becoming more frequent as soaring energy costs bubble up to the surface, the Fed’s Beige Book said.
- US Treasury two-year note yields suffered their biggest decline since July, sending yields to the highest in more than five and a half years, as May consumer prices increased more than forecast.
- Former President Clinton and his wife, NY Senator Hillary Clinton, earned more than $8 million last year form speeches and book royalties, records released today show.
- US money-market funds increased assets to a three-year high this month as investors fled falling global stock markets.
- Democratic political activist and billionaire hedge fund investor George Soros failed in a bid to overturn an insider-trading conviction at France’s highest appeals tribunal.
- Boeing(BA) won an order for 20 787-9 planes from Singapore Airlines worth an estimated $4.52 billion, trumping rival Airbus SAS’s A350 airliner.
- VeraSun Energy, the second-largest US ethanol producer, and its shareholders raised $419.8 million, more than expected, in an IPO that will help finance new plants to meet rising demand.

- President Bush said the new Iraqi government has the desire and will to take control of their country and he vowed to resist domestic political pressure to cut back US involvement.

Wall Street Journal:
- The American Medical Association, the leading US medical profession group, wants sodium levels in processed and restaurant foods cut by at least 50% in the next 10 years.
- As electronic trading replaces the trading floor, where brokers shouted prices and used hand signals, products such as “MarketSound” are gaining popularity. The software used patented algorithms that produce natural-sounding voices and activity that rise and fall in line with gains, losses and volume of the real exchanges.
- US children from low-income families receive backpacks filled with food on Fridays to ensure they eat over the weekend.
- Investors have withdrawn $8.5 billion in the past three weeks from mutual funds that invest in developing-country stocks, citing EmergingPortfolio.com Fund Research.
- More than 20 US states have passed legislation requiring that a growing percentage of electricity come from renewable energy sources, resulting in energy projects worth $475 million.

NY Times:
- Google(GOOG) plans to open a computing-data center containing tens of thousands of computers about 80 miles east of Portland, Oregon, this year.

NY Post:
- Michaels Stores(MIK) is being pursued by several groups of buyout firms.

CPI Rises on Increased Rental Costs

- The Consumer Price Index for May rose .4% versus estimates of a .4% gain and a .6% rise in April.
- The CPI Ex Food & Energy for May rose .3% versus estimates of a .2% gain and a .3% rise in April.

BOTTOM LINE: Rising gasoline costs and rents propelled consumer prices higher last month, Bloomberg reported. Gasoline prices rose 4.9% for the month. Food prices rose .1%. Rental prices rose .6%, the most since 1990. However, this is a byproduct of a weakening housing market. I continue to believe inflation fears have peaked for the year as unit labor costs remain subdued, economic growth slows and commodity prices continue to fall.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Abu Bakar Bashir, the Idonesian Muslim cleric convicted of being involved in the 2002 Bali bombings that killed 202 people, was released from prison after serving only two years in jail.
- Crude oil is falling for a third day in NY on speculation that demand for the fuel is slowing.
- Copper futures in Shanghai plunged by the daily maximum allowable limit for a fourth day amid concerns that rising interest rates may slow demand for the metal used in pipes and wires. Copper has plunged 32% from May 15 highs.
- Steel-product output in China, the world’s biggest maker and user of the alloy, rose 27% to a record last month.
- iSuppli raised its LCD-TV panel shipment forecast for 06 to 46.7M from 42M.
- Japan’s Nikkei 225, on course for its biggest quarterly drop in almost five years, may decline further because of a slowdown in economic and earnings growth, according to JPMorgan’s Hajime Kitano.

Commerical Times:
- AU Optronics(AUO) won orders from Sony(SNE) to make liquid-crystal displays for televisions.

Beijing Times :
- China’s capital lifted a 20-month ban on live poultry sales and downgraded its bird flu alert.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are -.25% to +1.25% on average.
S&P 500 indicated +.25%.
NASDAQ 100 indicated +.44%.

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Earnings of Note
Company/EPS Estimate
- (KV/A)/.20
- (ROLL)/.33

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Economic Releases
8:30 pm EST
- The Consumer Price Index for May is estimated to rise .4% versus a .6% gain in April.
- The CPI Ex Food & Energy for May is estimated to rise .2% versus a .3% gain in April.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude drawdown of 700,000 barrels. Gasoline supplies are expected to rise 1,400,000 barrels. Distillate inventories are estimated to rise 1,250,000 barrels. Finally, refinery utilization is expected to rise 0.40%.

2:00 pm EST
- Fed’s Beige Book

BOTTOM LINE: Asian indices are higher, boosted by exporting and financial stocks in the region. I expect US equities to open modestly higher and to build on gains into the afternoon, finishing higher. The Portfolio is 50% net long heading into the day.

Stocks Finish Lower, Led by Continuing Plunge in Commodity Shares

Indices
S&P 500 1,223.69 -1.03%
DJIA 10,706.14 -.80%
NASDAQ 2,072.47 -.90%
Russell 2000 672.72 -1.53%
Wilshire 5000 12,267.38 -1.16%
S&P Barra Growth 568.07 -.74%
S&P Barra Value 653.69 -1.32%
Morgan Stanley Consumer 593.55 -.42%
Morgan Stanley Cyclical 777.04 -1.29%
Morgan Stanley Technology 472.60 -.87%
Transports 4,441.32 -.39%
Utilities 406.72 -1.46%
Put/Call 1.40 +48.94%
NYSE Arms 1.32 -46.29%
Volatility(VIX) 23.81 +13.60%
ISE Sentiment 127.00 -1.55%
US Dollar 86.47 +.72%
CRB 330.23 -2.41%

Futures Spot Prices
Crude Oil 68.29 -.39%
Unleaded Gasoline 204.50 -.33%
Natural Gas 6.15 -.11%
Heating Oil 192.80 -.19%
Gold 566.40 -.07%
Base Metals 196.82 -5.40%
Copper 301.00 -.02%
10-year US Treasury Yield 4.96% -.32%

Leading Sectors
Telecom +.31%
HMOs unch.
Drugs -.26%

Lagging Sectors
Alternative Energy -3.66%
Gold & Silver -3.71%
I-Banks -4.77%

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Afternoon Recommendations
SmithBarney:
- Rated (CAH) Buy, target $83.
- Rated (ABC) Buy, target $49.

Afternoon/Evening Headlines
Bloomberg:
- UK Prime Minister Tony Blair said it would be a mistake for the government to withdraw British soldiers from Iraq, citing Blair.
- Emerging-market stocks fell to the lowest in more than six-months as investors dumped riskier assets on concerns over higher interest rates. The Morgan Stanley Emerging Markets Index has plunged 25% since peaking on May 8.
- US Treasury 10-year notes rose, pushing their yield to a two-month low on speculation the Fed will keep inflation from accelerating.
- The US dollar rose a seventh straight day against the euro, prompting a $45 plunge in the price of gold to $566/oz.
- Oil fell to a three-week low as speculators sold ahead of tomorrow’s inventory data and other commodities plunged.

Wall Street Journal:
- General Motors’(GM) CEO Wagoner said fixing the company’s finances is more important than remaining the world’s largest automobile seller.

BOTTOM LINE: The Portfolio finished higher today on gains in my Retail longs, Computer longs, Energy-related shorts and Base Metal shorts. I covered some of my (QQQQ) and (IWM) shorts in the final hour, thus leaving the Portfolio 50% net long. The tone of the market was very negative today as the advance/decline line finished substantially lower, almost every sector fell and volume was very heavy. Measures of investor anxiety were mostly higher into the close. Overall, today's market performance was mildly bearish, however there were again some positives. A number of market-leading stocks finished higher as the leadership change away from commodities/cyclicals intensified. The CBOE total put/call finished at 1.4, an elevated level. The NYSE Arms closed at 1.32, an above-average level. The VIX surged another 14% and the ISE Sentiment Index remains depressed at 127.0. Investor sentiment remains very depressed considering the macro backdrop. I suspect the CPI and the Fed's Beige Book report may result in a nice bounce in the major averages tomorrow.

Stocks Rebounding into Final Hour as Commodities Plunge

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Computer longs, Index ETF shorts, Energy-related shorts and Base Metal shorts. I took profits in some of my (QQQQ) and (IWM) shorts this morning and then added back to them, thus leaving the Portfolio 25% net long. The tone of the market is very negative as the advance/decline line is substantially lower, most sectors are declining and volume is very heavy. Gold is now trading down the most since 1991, falling 5.8%, according Bloomberg. The metal is now down 22% from its high a few weeks ago. As I forecast a few weeks ago, I continue to believe inflation fears have peaked for the year. A significant change for the positive is now under way. The negativity bubble is poised to burst, but it has sucked in so many that few see what is happening, in my opinion. I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower energy prices and bargain hunting.