PPI Rises More Than Etimates on Energy, Job Market Still Healthy

- The Producer Price Index for May rose .9% versus estimates of a .6% gain and a .7% increase in April.

- PPI Ex Food & Energy for May rose .2% versus estimates of a .2% gain and unch. in April.

- Initial Jobless Claims for last week fell to 311K versus estimates of 312K and 311K the prior week.

- Continuing Claims are estimated at 2487K versus estimates of 2503K and 2530K prior.

BOTTOM LINE: Prices paid to US producers rose more than forecast in May, reflecting a fourth consecutive jump in fuel costs that threatens a broader pickup in inflation, Bloomberg reported. The core PPI rose 1.6% year-over-year in May versus a 1.5% gain in April. Energy prices jumped 4.1% in May versus a 3.4% gain in April. However, food prices fell .2% in May, led by the largest decline in vegetable prices in 5 years. Excluding food and energy, intermediate goods prices rose .4% in May versus a .8% gain in April. Passenger car prices fell .2% versus a 1% decline in April, while light truck prices fell .1% versus a .5% decline in April. Computer prices fell 2% versus a 1.8% decline. The Fed said in its Beige Book report yesterday that “District reports generally did not indicate an increase in overall price pressures.” I suspect the PPI is reaching its peak rate of increase for the year this month or next and will show substantial deceleration by year-end.

The number of Americans filing first-time claims for unemployment benefits held at 311,000 for a second week, pointing to a buoyant labor market, Bloomberg said. The four-week average of jobless claims rose to 311,250. Rising wages and job growth continue to support consumer spending. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, held steady at a historically low 1.9%. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- The yen traded near the weakest against the dollar since December 2002 as investors were enticed by the yield advantage on US Treasuries over Japanese debt.
- The chief US negotiator on dismantling North Korea’s nuclear bomb program said he expects progress on the issue “very soon” and plans talks with Japan, South Korea and China next week.
- China’s Premier Wen Jiabao said monetary policy needs a “moderate tightening” to prevent the economy from overheating, suggesting the central bank may raise interest rates.
- Brazil, the world’s biggest producer of sugarcane-based ethanol, plans to increase the required blend of the biofuel in domestic gasoline to 25% from 23% as farmers harvest a record crop and prices fall.
- Hyperion Resources Inc., a closely held Dallas-based investment firm, said it may build an oil refinery in South Dakota to capitalize on record gasoline prices.
- Teck Cominco Ltd., the world’s second-largest zinc producer, expects to triple gold output and double copper production in five years as it opens new mines.
- A US congressional panel narrowly approved a measure that delays permits for drilling for oil and gas on federal lands. “We believe that the net effect of this bill will be to make it much more difficult to produce oil and natural gas in the United States at a time when global demand is driving prices higher,” said Richard Ranger, upstream manager for the American Petroleum Institute.
- Crude steel output in China, supplier of a third of the world’s steel, rose 15.7% in May to a record. Output of steel products, including cold-rolled coils, rose 19.6% from a year earlier.
- New Zealand retail sales fell the most since February 2004, suggesting the central bank’s three-year battle to quell inflation by raising interest rates is starting to cool demand.

Wall Street Journal:
- JPMorgan Chase(JPM) agreed to move some operations and possibly it headquarters to the World Trade Center site.
- Sprint Nextel(S) is looking at new ways to fund its WiMax wireless broadband network, including teaming up with Clearwire Corp.

NY Times:
- Kellogg Co.(K) said it plans to stop advertising its products to children younger than 12 unless the foods meet nutritional guidelines.

Informa Global Markets:
- Bear Stearns(BSC) is seeking bids on $3.8 billion of residential mortgage-backed securities. The bonds are rated AAA to AA. The list is considered “mammoth” by industry standards and may be the result of an “unwind of mortgage exposure” by some investor.

Financial Times:
- Third Point LLC, a NY hedge fund run by Daniel S. Loeb, will today announce plans to list a $665-931 million fund in London. The listing of Third Point Offshore Investors, which will be based in Guernsey and invest exclusively in Third Point’s main hedge fund, is expected to attract mostly new European equity investors.

Shanghai Securities News:
- The People’s Bank of China should increase deposit rates and push up money market rates to mop up cash in the financial system, citing a State Council researcher. The central bank should raise the one-year deposit rate by between .27 percentage points and .54 percentage points, Chen Daofu wrote.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (MSFT), target $36.
- Reiterated Buy on (SKS), target $24.
- We view eBay(EBAY) and Google(GOOG) as relatively interdependent. eBay has consistently been one of GOOG’s largest customers, accounting for perhaps 2% of Google’s gross revenue and profits in 2006. And Google has been one of eBay’s largest providers of leads, currently accounting for 5% of its traffic. We anticipate current tensions subsiding, but acknowledge long-term competitive/cooperative dynamics.

Night Trading
Asian Indices are +.50% to +1.25% on average.
S&P 500 indicated -.03%.
NASDAQ 100 indicated +.08%.

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Earnings of Note
Company/EPS Estimate
- (ADBE)/.35
- (BSC)/3.51
- (DLM)/.21
- (EFX)/.54
- (FORR)/.13
- (FRE)/1.14
- (GS)/4.78
- (PIR)/-.28
- (TBL)/.15

Upcoming Splits
- (ADVNA) 3-for-2
- (BNHN) 3-for-2
- (BWLD) 2-for-1
- (MIDD) 2-for-1
- (PEBK) 3-for-2

Economic Releases
8:30 am EST
- The Producer Price Index for May is estimated to rise .6% versus a .7% gain in April.
- The PPI Ex Food & Energy for May is estimated to rise .2% versus unch. in April.
- Initial Jobless Claims for last week are estimated to rise to 312K versus 309K the prior week.
- Continuing Claims are estimated to fall to 2503K versus 2535K prior

Other Potential Market Movers
- The weekly EIA natural gas inventory report, (SYMC) Analyst Meeting, (MAT) Analyst Meeting, (GD) Analyst Meeting, BOJ Policy Meeting, Bank of America Homebuilders Conference, Morgan Stanley Small-cap Executive Conference, RBC Global Mining/Materials Conference, Needham Biotech/Medical Tech Conference, CSFB Software Conference, Merrill Lynch Global Transport Conference, Thomas Weisel Alternative Energy Conference and Goldman Sachs Global Healthcare Conference could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by technology and automaker stocks in the region. I expect US equities to open modestly higher and to maintain or build on gains into the afternoon. The Portfolio is 100% net long heading into the day.

Stocks Finish at Session Highs on Large Reversal Lower in Lont-term Rates and Positive Economic Data

Indices
S&P 500 1,515.67 +1.52%
DJIA 13,482.35 +1.41%
NASDAQ 2,582.31 +1.28%
Russell 2000 832.54 +1.32%
Wilshire 5000 15,259.05 +1.43%
Russell 1000 Growth 598.03 +1.36%
Russell 1000 Value 869.99 +1.51%
Morgan Stanley Consumer 737.42 +1.11%
Morgan Stanley Cyclical 1,076.04 +2.06%
Morgan Stanley Technology 612.05 +1.36%
Transports 5,080.45 +1.71%
Utilities 498.13 +2.04%
MSCI Emerging Markets 127.03 +1.18%

Sentiment/Internals
Total Put/Call .95 -13.64%
NYSE Arms .46 -61.29%
Volatility(VIX) 14.73 -11.64%
ISE Sentiment 137.0 +26.85%

Futures Spot Prices
Crude Oil 66.08 +1.12%
Reformulated Gasoline 215.08 +.74%
Natural Gas 7.61 -.90%
Heating Oil 196.05 +2.43%
Gold 655.20 +.32%
Base Metals 250.37 -.73%
Copper 330.70 +.61%

Economy
10-year US Treasury Yield 5.20% -9 basis points
US Dollar 83.04 +.18%
CRB Index 311.68 +.64%

Leading Sectors
Oil Service +2.94%
REITs +2.20%
Utilities +2.04%

Lagging Sectors
Gaming +.18%
Airlines -.06%
HMOs -.72%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Steel Dynamics(STLD) agreed to buy closely held galvanizing company The Techs for $360 million.
- US Energy Secretary Bodman said he has “concerns” about lower refinery output. Refinery Utilization fell .4% to 89.2% of US capacity last week. It was the lowest since May 4 and the lowest utilization rate in 15 years for the second week in June. This decline in utilization comes on top of a recent report that said refiners cut expansion plans by 500,000 barrels per day earlier this year partly due to worries over “demand.”
- Orange-juice futures fell to the lowest in almost 15 months on forecasts for rain in the biggest orange-growing county in Florida.
- A US Army Humvee explodes into a swirl of brown smoke. A tank catches fire in an anonymous urban neighborhood. Masked men yell “God is most great” as they fire mortars form a field at unseen targets.
- Sanofi-Aventis SA’s diet drug Acomplia shouldn’t be approved for sale in the US because the company hasn’t proved its benefits outweigh its risk, an advisory panel said.
- Hoku Materials, a wholly-owned subsidiary of Hoku Scientific(HOKU) established to manufacture polysilicon for the solar market, and Suntech Power(STP) today announced the signing of a definitive contract for Hoku’s sale and delivery of polysilicon to Suntech over a ten-year period. The stock soared 81% in after-hours trading.
- US 10-year Treasuries surged the most since February after yields at a five-year high convinced speculators that rising borrowing costs will curb the economy and inflation.
- The US SEC increased restrictions on naked short selling after companies accused traders of using the tactic to manipulate share prices.

BOTTOM LINE: The Portfolio finished higher today on gains in my Software longs, I-Banking longs, Medical longs, Biotech longs and Retail longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was very positive today as the advance/decline line finished substantially higher, almost every sector gained and volume was heavy. Measures of investor anxiety were slightly above average into the close. Today's overall market action was very bullish. Cyclicals were especially strong as investors cheered the Beige Book report, which painted a moderate growth/moderate inflation picture. Despite today's sharp jump in stocks and better-than-expected economic data, the 10-year yield finished near session lows, reversing 12 basis points from session highs. Google (GOOG) did not participate today, however, I suspect the stock made a bottom this morning. As for Apple (AAPL), the stock is 101% higher over the last 12 months. I suspect it will consolidate this gain for a bit longer, however, I still expect it to trade substantially higher than current levels before year-end. These two remain my two largest long positions. The S&P 500 successfully held its 50-day moving-average. I suspect that the recent garden-variety pullback we have had is over. The Nikkei futures are indicating an up 200 open in Japan. I expect U.S. stocks and bonds to build on today's gains tomorrow.

Stocks Sharply Higher into Final Hour on Big Reversal Lower in Rates and Strong Economic Data

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Software longs, Medical longs and Retail longs. I covered my remaining (IWM)/(QQQQ) hedge this morning, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, almost every sector is rising and volume is above average. Mortgage applications surged 6.6% this week, with a 7.2% spike in purchase applications even with higher mortgage rates. Notwithstanding today’s strong economic data and a higher-than-expected import price index, the 10-year yield is falling 13 basis points from session highs, to 5.19%. This is the type of action I would expect to see near a top in yield. Gasoline supplies rose less than estimates as refinery utilization remains at historically low levels as a result of a rash of refinery “problems” and the cancellation of a planned 500,000-barrel-per-day increase in refinery capacity earlier this year on "worries over demand." The Fed just released its Beige Book report. Here is a summary via Bloomberg:

1. Some districts reported a stronger economy.
2. Consumer spending was generally up in late April/May.
3. There is continued weakness in residential real estate.
4. The committee saw increasing strength in commercial real estate.
5. Hiring picked up in late April/May.
6. Wage pressures do not seem to have increased.
7. Four districts reported disappointing retail sales.
8. Most areas didn't see a rise in overall price pressures.
9. Most districts reported that manufacturing was up.

Overall, this report paints a picture of moderate growth and inflation, which boosted stocks further. I expect US stocks to trade mixed-to-higher into the close from current levels on falling long-term rates, short-covering and bargain-hunting.

Today's Headlines

Bloomberg:
- The Fed will eventually cut borrowing costs, rather than raise them, having held its target interest rate at 5.25%, said Bill Gross, manager of the PIMCO Total Return fund.
- A group of hedge funds is tell the SEC to be on the lookout for manipulation of bonds backed by subprime mortgages.
- Bank of Canada Governor David Dodge said the dollar’s rise since April to a 30-year high outpaced demand for the country’s products compared with past moves, and repeated he may raise interest rates to cool the economy.
- The Federal Reserve gave a more upbeat assessment of US regional economies, as manufacturing and job growth picked up.
- US 10-year Treasuries surged the most since February as speculators bet that yields at a five-year high will curb the economy and inflation. The 10-year yield is falling 12 basis points from session highs.
- Ihop Corp.(IHP) offered to buy Applebee’s Intl(APPB).
- The yen is falling to the lowest against the US dollar since December 2002 and declined against the euro as Treasury yields near the highest in five years encouraged investment outside Japan.
- Crude oil is rising $.80/bbl. after a government report showed refiners cut production again during driving season.

Wall Street Journal:
- International Lease Finance Corp. may announce next week an agreement to buy at least 50 of Boeing’s(BA) Dreamliners, which would be worth $10 billion at list price.
- Computer “widget” makers may be able to earn more advertising revenue from their applications due to new data to be published today by Web tracking firm comScore Inc.
- Ceridian Corp.’s(CEN) largest stockholder may say he’s opposed to the $5.3 billion sale of the US payroll and human-resources provider and that he’s hired bankers to find a higher bid.

NY Times:
- ConAgra Foods(CAG), which owns brands including Hunt’s, Manwich, Reddi-wip and Slim Jim, is trying to strengthen its product line by making small changes.

NY Post:
- Jones Apparel Group(JNY) is in the final stages of talks to sell its Barneys NY luxury department store chain to Dubai-owned investment company Istithmar PJSC.

Dow Jones:
- European Central Bank Council member Nicholas Garganas said future interest-rate decisions will be based on economic data.

Washington Post:
- Former NY Mayor Rudi Giuliani said that he would make good on 12 campaign promises if elected president in 2008.

LA Times:
- The Los Angeles Police Dept. plans to upgrade its 911 system to accept text messages, photographs and video from mobile phones within the next few years.

Nikkei English News:
- Sony Corp.(SNE), Matsushita Electric Industrial and three other Japan-based consumer electronics companies will start an Internet video-on-demand service to be used on flat-panel televisions.