Stocks Finish Near Session Lows on Profit-taking and Higher Energy Prices

Indices
S&P 500 1,501.19 -.13%
DJIA 13,383.84 +.28%
NASDAQ 2,525.29 -.83%
Russell 2000 814.18 -.99%
Wilshire 5000 15,085.00 -.25%
Russell 1000 Growth 589.39 -.38%
Russell 1000 Value 866.30 -.02%
Morgan Stanley Consumer 737.72 +.07%
Morgan Stanley Cyclical 1,056.21 +.38%
Morgan Stanley Technology 601.26 -.96%
Transports 5,126.27 +.16%
Utilities 529.90 +.30%
MSCI Emerging Markets 124.98 +.06%

Sentiment/Internals
Total Put/Call .92 +6.98%
NYSE Arms .84 +2.08%
Volatility(VIX) 14.01 +.36%
ISE Sentiment 127.0 -20.13%

Futures Spot Prices
Crude Oil 63.04 +.93%
Reformulated Gasoline 230.20 +.03%
Natural Gas 7.85 -1.22%
Heating Oil 188.93 +1.21%
Gold 673.20 +.46%
Base Metals 276.02 -.59%
Copper 353.0 +.94%

Economy
10-year US Treasury Yield 4.70% +1 basis point
US Dollar 81.77 -.35%
CRB Index 310.48 +.46%

Leading Sectors
Road&Rail +1.28%
Telecom +.83%
Steel +.77%

Lagging Sectors
REITs -1.56%
Computer Hardware -1.67%
Airlines -2.05%

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Afternoon Recommendations
Merrill Lynch:
- Reiterated Buy on (TXI).

Afternoon/Evening Headlines
Bloomberg:
- US Senator Charles Grassley proposed legislation that would subject hedge funds to stricter oversight and routine inspections, reinstating rules struck down by a federal court last year. The measure would require hedge-fund managers with at least 15 investors and more than $50 million in assets to register with the SEC. Grassley, citing the collapse of Amaranth Advisers LLC in September, said he’s concerned that increasing investments in hedge funds by pension funds could jeopardize American’s retirement savings.
- Sugar plunged to a 23-month low after C. Czarnikow Sugar Ltd., the world’s biggest broker of the sweetner, said a 2007 global surplus will be larger than estimated. The commodity has plunged 26% just this year.
- Federal Reserve officials raised concerns about deflation as early as November 2001, about a year-and-a-half before they disclosed to the public that interest-rate policy was responding to “an unwelcome” fall in inflation. “I think we are moving gradually from a disinflationary process toward a situation where we could experience outright deflation,” then-Chairman Greenspan told the FOMC meeting that month, according to transcripts released today in Washington.
- XM Satellite Radio Holdings(XMSR) suspended the hosts of the “Opie & Anthony” morning show for 30 days because they aired crude remarks about raping First Lady Laura Bush and Secretary of State Condoleezza Rice.
- Limited Brands(LTD) agreed to sell a majority of its Express unit and put its Limited Stores up for sale after first-quarter profit fell to half the company’s previous forecast.
- Applied Materials(AMAT) said fiscal second-quarter profit was little changed because of costs to close a business and acquire another. The shares fell 4% in after-hours trading.

Reuters:
- AT&T(T) may extend its satellite TV partnership with EchoStar Communications(DISH) into its territory in the southeastern US, citing an AT&T executive.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Computer longs and Retail longs. I added to my (EEM) short and to my (IWM)/(QQQQ) hedges 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 lower, most sectors fell and volume was above average. Measures of investor anxiety were about average into the close. Today's overall market action was bearish as the major averages and breadth finished near session lows. Too many market leading stocks gathered downside traction as the day progressed. Technology and small-cap shares were especially weak. Talk of this turning into a Nifty 50 type narrow market advance is way too premature, in my opinion. Cumulative breadth just made a record high a few days ago and the ValueLine Geometric Index, the best gauge of the broad market, is still performing in line with the S&P 500 year to date. The DJIA is up 7.4% year to date vs. a 6.6% gain in the S&P 500. My intraday gauge of investor angst finished only around average levels, notwithstanding today’s declines. I suspect we will see some more mixed-to-weaker trading in the near-term.

Stocks Mostly Lower into Final Hour on Profit-taking and Higher Energy Prices

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Computer longs and Retail longs. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are lower and volume is above average. Johnson Redbook weekly retail sales rose 2.7% this week. This is up from +0.2%, unchanged, +0.1% and +0.1% over the last four weeks. As well, this is just slightly below the 50-week average of +2.9%. I suspect with expectations dramatically lowered for the retail group, sales will actually exceed expectations this summer. If gas prices are peaking for the year right about now, as I suspect, retail sales should move back above average levels this fall. The Morgan Stanley Retail Index is still 6.3% higher year-to-date, despite the recent pullback in the stocks on consumer collapse fears. As well, the ABX-HE-BBB-07-01 subprime index, the source of much angst during the blow-off top in subprime fears in March, made a higher high yesterday and is up 17.6% from its lows. This is a big positive. I expect US stocks to trade mixed into the close from current levels as profit-taking and higher energy prices offsets better economic data and buyout speculation.

Today's Headlines

Bloomberg:
- Japan’s lower house passes a bill to extend its deployment in Iraq for two years, ensuring the country’s continued commitment to the US effort.
- NYC apartment prices rose 23% over the past year, citing a study by the Real Estate Board of NY. The average price of an apartment sold in the five boroughs was $745,000 last quarter, with units in Manhattan selling for more than $1.1 million, the study showed.
- Federal Reserve Chairman Bernanke said regulators must use insider-trading laws to prevent abuses in the expanding market for credit-default swaps and other derivatives.
- Crude oil rose above $63 a barrel in NY after Royal Dutch Shell Plc announced an additional cut in Nigerian output.
- Confidence among US homebuilders this month unexpectedly fell to the lowest in eight months.
- Ingersoll-Rand(IR) may sell or spin off the Bobcat construction-equipment unit to focus on its more stable cooling, industrial and security divisions.
- Mergers and acquisitions, fueled by corporate deals in Europe and US buyouts, reached the $2 trillion market today, 60% ahead of last year’s record pace.

Wall Street Journal:
- Cerberus Capital Management LP’s decision to buy 80.1% of DaimlerChrysler AG’s Chrysler unit for $7.4 billion was seen by investors as a vote of confidence in the US care industry.
- IAC/Interactive Corp.(IACI), parent of Ticketmaster, is buying a stake in Front Line Management, which represents artists including singers Christina Aguilera and Neil Diamond.
- Text Messages are the latest political tool of presidential candidates.

NY Times:
- Hotel companies have started nearly 30 new brands since 2005, as boutique-like residences are being opened to attract younger travelers, citing PricewaterhouseCoopers LLP.

AP:
- Iranian parliamentary members are collecting signatures with a view to establishing an Iran-US friendship committee in the Islamic Republic’s parliament, citing a lawmaker.
- Walt Disney(DIS) will unveil an interactive television channel to promote its theme parks and travel business.

Financial Times:
- General Electric(GE) may have received four bids for its plastics unit, including one from Saudi Basic Industries, the biggest public company in the Mideast.

Daily Telegraph:
- PayPal, the online payments company owned by EBay Inc.(EBAY), is being turned into a bank to strengthen its European business and to ward off a challenge from Google Inc.(GOOG), citing Brent Bellm, PayPal’s European chief.

Consumer Prices Decelerate, NY Manufacturing Improves, Foreign Demand for US Assets Strong

- The Consumer Price Index for April rose .4% versus estimates of a .5% gain and a .6% rise in March.
- The CPI Ex Food & Energy for April rose .2% versus estimates of a .2% gain and a .1% increase in March.
- Empire Manufacturing for May came in at 8.0 versus estimates of 8.0 and a reading of 3.8 in April.
- Net Long-term TIC Flows for March rose to $67.6 billion versus estimates of $71.0 billion and $58.1 billion in February.

BOTTOM LINE: Prices paid by US consumers rose less than forecast in April, suggesting inflation may be abating, Bloomberg reported. Core prices in the 12 months ended in April were up 2.3%, the smallest gain in a year, which means fuel costs aren’t filtering through the economy. The Consumer Price Index for April rose 2.6% year over year, down from a 4.7% increase in September 2005. This is also below the 20-year average of 3.1%. Moreover, the CPI has only been lower during four other brief periods since the mid-1960s. Energy prices rose 2.4% versus a 5.9% gain in March. The price of gas rose throughout the month, ending at $2.97/gallon, near the record $3.06 reached during the aftermath of Hurricane Katrina. Unusually low gasoline refinery utilization as a result of a rash of nationwide “outages” has been the driving force behind the recent rise in gas prices. Clothing prices fell .3% during the month versus a 1.0% decline the prior month. Auto prices were unchanged during the month. I continue to believe inflation concerns have peaked for this cycle as global growth slows, unit labor costs remain subdued and the mania for commodities continues to reverse course.

Manufacturing in NY state expanded at a faster rate for the second straight month in May as orders and shipments improved, Bloomberg reported. The New Orders component of the index rose to 8.0 from 3.9 prior. The Inventories component fell to zero, which indicates supplies stopped accumulating. The Future Conditions component of the index soared to 49.8 in May, the highest since August 2005, from 33.9 the prior month. This was the largest jump in this component since October 2001. The Prices Paid component fell to 34.4 from 40.5 the prior month. I continue to believe manufacturing is adding to overall economic growth this quarter, after subtracting in 1Q on substantial inventory de-stocking.

Net international buying of US long-term securities rose in March, led by purchases of Treasuries and agency bonds, Bloomberg said. International purchases of US stocks rose to a net $14.8 billion in March versus $13.5 billion in February. I continue to believe foreign demand for US assets will remain strong.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- The Fed’s Fisher said he expects US economic growth to “pick up in future quarters” and that he is hopeful inflation will moderate.
- Japan’s machinery orders fell unexpectedly for a second month in March, highlighting concern among manufacturers.
- Bank of Communications Ltd. shares surged 86% on their first day of trading in Shanghai, riding a market rally that’s made Chinese stocks the world’s most expensive. The Shanghai-based company has a market capitalization of $67.7 billion based on today’s pricing.
- China Shenhua Energy Co., the nation’s largest coal producer, increased coal production 6.1% in April.
- Shanghai copper futures are falling by the 4% daily limit amid speculation that demand will slow in China, the world’s biggest consumer of the metal.

ABC News:
- Former House Speaker Newt Gingrich said he may seek the 2008 Republican presidential nomination.

American Banker:
- Ohio’s attorney general plans to sue mortgage lenders and Wall Street firms over subprime mortgage defaults on behalf of both borrowers and the Ohio Public Employees Retirement System.

Financial Times:
- Companies in the EU may face more impromptu checks of their employees’ documents as part of a crackdown on illegal immigration, citing proposals from EU Justice Commissioner Franco Frattini.

London-based Times:
- Dow Jones’(DJ) board has a fiduciary duty to hold talks with News Corp.(NWS/A) over its $5 billion bid for the media company, citing Institutional Shareholder Services.

Securities Times:
- China’s securities regulator has ordered the country’s fund management companies to not get involved in speculation of shares. Fund managers must be mindful of “liquidity risks” and are barred from owning more stocks than they’re capitalized for. Fund managers are banned from offering stock tips to relatives or friends.

Commercial Times:
- Qualcomm Inc.(QCOM) may order about 20% more from Taiwan Semiconductor Manufacturing and Advanced Semiconductor Engineering in the second half of the year over the first.

China Securities Journal:
- China’s securities watchdog issued draft regulations allowing mutual funds to manage private assets for the first time.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (MGA), target $100.

Morgan Stanley:
- The People’s Bank of China 1Q Monetary Policy Report flags the authorities’ concern about the risk of a generalized overheating. We sense that PBOC is preparing the market for further hikes of the base lending and deposit rates in the near-term. We forecast at least two additional rate hikes in the remainder of the year, with the next one likely to come as early as in a matter of weeks.

Night Trading
Asian Indices are -.50% to +.25% on average.
S&P 500 indicated -.14%.
NASDAQ 100 indicated -.18%.

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Earnings of Note
Company/EPS Estimate
- (AMAT)/.28
- (CPWR)/.16
- (FIG)/.26
- (FOSL)/.20
- (FRE)/1.14
- (HD)/.59
- (SGR)/.19
- (TDS)/.24
- (TJX)/.38
- (TSAI)/.31
- (WMT)/.68

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Consumer Price Index for April is estimated to rise .5% versus a .6% gain in March.
- The CPI Ex Food & Energy for April is estimated to rise .2% versus a .1% gain in March.
- Empire Manufacturing for May is estimated to rise to 8.0 versus a reading of 3.8 in April.

9:00 am EST
- Total Net TIC Flows for March are estimated to fall to $45.0 billion versus $94.5 billion in February.

1:00 pm EST
- The NAHB Housing Market Index for May is estimated at 33 versus 33 in April.

Other Potential Market Movers
- The Fed’s Lockhart speaking, Fed’s Bernanke speaking, Fed’s Minehan speaking, Fed’s Mishkin speaking, Fed’s Geithner speaking, Fed’s Hoenig speaking, weekly retail sales reports, IBD/TIPP Economic Optimism Index, UBS Alternative Energy Conference, CSFB Semi & Supply-Chain Summit, Merrill Lynch Global E&C/Infrastructure Conference, Oppenheimer Moving Beyond Voice Conference, UBS Global Financial Services Conference, Deutsche Bank Tech Conference, Morgan Stanley Communications Conference could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by commodity and technology stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the day.