Friday Watch

Late-Night Headlines
Bloomberg:
- The euro traded near the lowest in 10 days against the dollar and was headed for its biggest weekly loss in five on concern Europe's economy is faltering.
- Oil prices may fall further next week on speculation US refiners have enough supplies to meet demand after inventories rose to the highest in almost three years, a Bloomberg survey shows.

NY Times:
- Neiman Marcus Group is set to receive bids today from three private-equity investor groups, who are expected to offer $95 to $105 a share to buy the luxury retailer.

Financial Times:
- China police have text-messaged warnings to more than 30 million mobile-phone users as part of a campaign to avert any more anti-Japan protests during the weeklong Labor Day holiday that begins May 1.

London-based Times:
- GlaxoSmithKline Plc said a US court has granted a ruling which may help its defense in a dispute with the IRA that could cost the company $7.8 billion.

Standard:
- China has told local governments to implement rules allowing overseas companies to set up their own distribution systems.

China Securities Journal:
- China has established the basic conditions to adopt a more flexible exchange rate and may allow the yuan's value to fluctuate by "several percentage points" at any time.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on K, GNW, IDIX and KLAC.
- Reiterated Underperform on CTL, MRO and PFG.
- Reiterated Attractive view of Hospital sector.

Business Week:
- Starbucks shares may rise as much as 24% by the end of the year because of growth in earnings.
- Sun Microsystems may be taken private by buyout firm Silver Lake Partners for as much a $5.50 a share, citing an unidentified hedge-fund manager close to Sun Chief Executive Scott McNealy and Silver Lake.
- Dow Jones may become the target of a buyout if the stock continues to fall.
- GM may be forced to restructure the company within five years by having fewer brands and few models, or face the risk of bankruptcy.

Night Trading
Asian Indices are -1.0% to -.75% on average.
S&P 500 indicated +.03%.
NASDAQ 100 indicated unch.

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Earnings of Note
Company/EPS Estimate
AXL/.26
APC/2.00
ADM/.40
CAH/.89
CEN/.16
CVX/1.37
CCU/.13
ITT/1.04
TKTX/-.59

Splits
KBH 2-for-1

Economic Releases
8:30 EST:
- Personal Income for March is estimated to rise .4% versus a .3% increase in February.
- Personal Spending for March is estimated to rise .4% versus a .5% gain in February.
- PCE Deflator(YoY) for March is estimated to rise 2.5% versus a 2.3% increase in February.
- PCE Core(YoY) for March is estimated to rise 1.7% versus a 1.6% gain in February.
- 1Q Employment Cost Index is estimated to rise 1.0% versus a .8% increase in 4Q.

9:45 EST:
- Final Univ. of Mich. Consumer Confidence for April is estimated to rise to 88.8 versus a prior estimate of 88.7.

10:00 EST:
- Chicago Purchasing Manager for April is estimated to fall to 62.5 from 69.2 in March.

BOTTOM LINE: Asian indices are lower on more worries over slowing global growth. I expect US equities to open modestly lower on continuation of today's late afternoon decline. The Portfolio is 25% net long heading into tomorrow.

Stocks Fall on Worries Over Slowing Global Growth and a Bounce in Energy Prices

Indices
S&P 500 1,143.22 -1.14%
DJIA 10,070.37 -1.26%
NASDAQ 1,904.18 -1.36%
Russell 2000 575.02 -2.06%
DJ Wilshire 5000 11,245.73 -1.21%
S&P Barra Growth 552.38 -1.19%
S&P Barra Value 586.57 -1.09%
Morgan Stanley Consumer 569.88 -.74%
Morgan Stanley Cyclical 689.40 -1.21%
Morgan Stanley Technology 433.28 -1.26%
Transports 3,388.58 -.85%
Utilities 366.75 -.40%
Put/Call 1.12 +4.67%
NYSE Arms 2.10 +117.79%
Volatility(VIX) 16.86 +13.38%
ISE Sentiment 165.00 +2.48%
US Dollar 84.35 +.27%
CRB 304.40 -.48%

Futures Spot Prices
Crude Oil 51.90 +.56%
Unleaded Gasoline 154.70 +.33%
Natural Gas 6.78 -.15%
Heating Oil 148.50 +.75%
Gold 432.80 -.30%
Base Metals 123.61 +.06%
Copper 144.00 -.21%
10-year US Treasury Yield 4.14% -1.87%

Leading Sectors
Drugs +.02%
Hospitals -.05%
Telecom -.45%

Lagging Sectors
Steel -3.11%
Networking -3.21%
Oil Tankers -4.26%

Evening Review
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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on NFX, XOM, AET and MSFT.
- Reiterated Underperform on HC.

Afternoon/Evening Headlines
Bloomberg:
- The Chicago Board of Trade, the second-biggest US futures exchange, plans an IPO in the second half of this year as it tries to duplicate the success of bigger rival the Chicago Merc.
- Microsoft said third-quarter earnings almost doubled as legal costs fell and sales of programs to run networks increased. Revenue next year may beat analysts’ expectations.
- Boeing must compete again for US Air Force work worth over $3 billion to upgrade avionics on C-130 transports because of a conflict of interest in the original contract.

AP:
- Judy Woodruff, anchor of CNN’s “Inside Politics” program, is leaving CNN in June when her contract expires.

Financial Times:
- Debt market investors are becoming more selective about which bonds they buy from countries that share the euro ahead of a French referendum on the EU constitution.

BOTTOM LINE: The Portfolio finished substantially higher on gains in my Commodity-related shorts. I added a few ETF shorts from various sectors in the afternoon, thus leaving the Portfolio 25% net long. The tone of the market deteriorated meaningfully into the afternoon as the advance/decline finished at its daily lows, almost every sector fell and volume was average. Measures of investor anxiety were mostly higher. Overall, today’s market action was negative. Investors are pricing in the possibility the US is slipping into recession. I strongly believe this is not the case. Growth is slowing, but not plunging. This “soft patch” will be deeper and last a bit longer than last year’s, however I continue to believe economic growth will pick back up in the second half. Modest growth, lower inflation, low long-term interest rates, a firmer dollar and lower commodity prices will make for a much better second half in US stocks. Sentiment has become much too negative and valuations are very reasonable considering fundamentals. Oil below $50/bbl. or less hawkish comments from the Fed should boost sentiment substantially.

Stocks Lower Mid-day on Worries Over Slowing Global Growth

Indices
S&P 500 1,149.60 -.59%
DJIA 10,131.89 -.67%
NASDAQ 1,915.29 -.78%
Russell 2000 579.12 -1.30%
DJ Wilshire 5000 11,305.96 -.68%
S&P Barra Growth 555.67 -.60%
S&P Barra Value 589.47 -.60%
Morgan Stanley Consumer 573.27 -.14%
Morgan Stanley Cyclical 693.55 -.62%
Morgan Stanley Technology 436.01 -.64%
Transports 3,414.66 -.08%
Utilities 369.68 +.40%
Put/Call .91 -14.95%
NYSE Arms 1.56 +61.98%
Volatility(VIX) 15.71 +5.65%
ISE Sentiment 184.00 +14.29%
US Dollar 84.30 +.21%
CRB 303.68 -.73%

Futures Spot Prices
Crude Oil 50.85 -1.57%
Unleaded Gasoline 150.25 -2.56%
Natural Gas 6.72 -.96%
Heating Oil 146.00 -.95%
Gold 432.60 -.35%
Base Metals 123.61 +.06%
Copper 144.50 +.14%
10-year US Treasury Yield 4.19% -.66%

Leading Sectors
Airlines +1.74%
Drugs +.44%
Hospitals +.27%

Lagging Sectors
Steel -2.07%
Homebuilders -2.31%
Oil Tankers -2.76%

BOTTOM LINE: US stocks are lower mid-day, spurred by worries over slowing global growth. The Portfolio is substantially higher on gains in my Base Metal and Energy-related shorts. I have not traded today, thus leaving the Portfolio 50% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is about average. Measures of investor anxiety are mixed. Today’s overall market action is negative, considering lower energy prices, lower long-term rates, a rising US dollar and a mildly disappointing GDP report. The fact that the US dollar is rising today given the GDP report, that Europe’s growth may turn negative and that the French will likely vote “no” to the EU constitution bodes well for a firmer dollar in the near-term. A firm US dollar, slowing global demand and OPEC pumping at 30-year highs will continue to pressure crude prices. I expect US stocks to trade modestly higher into the close on short-covering, lower energy prices, a firmer dollar, lower long-term interest rates and bargain-hunting.

Today's Headlines

Bloomberg:
- Jordan’s King Abdullah II said Iraq has made “great strides” since the US-led liberation of the country in March 2003 toppled dictator Saddam Hussein’s regime.
- Japan’s deflation will last for an eighth year, the central bank said, making it less likely it will soon end its policy of keeping rates at zero and pumping cash into the world’s second-largest economy.
- BHP Billiton, the world’s biggest mining company, said third-quarter iron ore production rose 14% to the second-highest ever.
- Confidence in French President Jacques Chirac fell to its lowest since he was re-elected in 2002, after his televised appeal to vote for the European Union constitution failed to win support, an opinion poll showed.
- US House and Senate Republicans reached a tentative agreement on a budget plan for the 2006 fiscal year that trims about $10 billion from spending on the Medicaid health program over five years and calls for about $70 billion in tax cuts.
- Crude oil is falling for a fourth straight day, dipping below $50 a barrel in NY, as a slowdown of the global economy coincides with rising inventories.
- US T-notes are rising after a government report showed the economy expanded at a slower pace than forecast in the first quarter.

Wall Street Journal:
- Iraq’s Daawa party, headed by Prime Minister Ibrahim al-Jaafari, is breaking with its anti-American tradition and cultivating ties with the US in a bid to stabilize the Middle East nation.
- Berkshire Hathaway’s annual meeting on April 30 will take place under a cloud of legal and regulatory scrutiny.
- Marvel Enterprises is setting up a studio to make its own movies based on its characters, and it will distribute them through Viacom’s Paramount Pictures.
- IBM secured a $352 million contract from the Univ. of Pittsburgh Medical Center.
- Emerson Electric, Bristol-Myers Squibb and other US companies are delaying the repatriation of foreign profit pending clarification of new US tax rules.
- Private equity firms such as Carlyle Group, Texas Pacific Group and KKR have been approached by Goldman Sachs and Morgan Stanley about being taken public.
- Apple’s Tiger operating system to retrieve old and missing files is far better than competing built-in search functions on either the Mac or Microsoft’s Windows, Walter Mossberg wrote.
- SBC Communications is to offer exclusive videos and music through an Internet site, called Blue Room.
- UnitedHealth Group plans to track the health risks of drugs based on its members’ medical claims, and market the data to regulators, drug companies and others.

NY Times:
- Internet phone resellers are flourishing as customers flock to buy services that replace more costly and annoying landline phones.
- Sprint Corp. said customers of its high-speed residential Internet service will be able to remotely access video, music and other media files on their home computers with a new service called Personal Media Link.

Tex Report:
- China’s Maanshan Iron & Steel Co. will lower prices of hot-rolled coil by $36 per metric ton for its domestic customers next month.

US Economic Growth Slowing, Not Plunging

- Advance 1Q GDP rose 3.1% versus estimates of a 3.5% increase and a 3.8% gain in 4Q.
- Advance 1Q Personal Consumption rose 3.5% versus estimates of a 3.2% increase and a 4.2% gain in 4Q.
- Advance 1Q GDP Price Deflator rose 3.2% versus estimates of a 2.1% increase and a 2.3% gain in 4Q.
- Initial Jobless Claims for last week rose to 320K versus estimates of 320K and 299K the prior week.
- Continuing Claims fell to 2555K versus estimates of 2644K and 2631K prior.

Bottom Line: The GDP report showed business spending on equipment and software rose at the slowest pace in 2 years and inventories increased by the most since the second quarter of 2000. This leads me to believe economic growth began to slow to below-average levels in March. The fact that the GDP deflator only rose 3.2% when commodities were near all-time highs is a positive. The deflator has risen around this rate 4 other times just since 2000. It rose 3.6% in March 2000. The trade deficit also pressured GDP as oil imports soared. I continue to believe declining commodity prices will help boost GDP growth in the second half of the year. I want to reiterate that I believe economic growth is slowing, not plunging. Recent housing data show booming sales and low supply, which should boost housing starts over the coming months. Moreover, personal consumption beat estimates and also illustrates the continuing strength of the consumer.

Links of Interest

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