Stocks Finish Modestly Lower on Light Volume Consolidation

Indices
S&P 500 1,190.01 -.34%
DJIA 10,457.80 -.44%
NASDAQ 2,050.12 -.56%
Russell 2000 606.40 -1.07%
DJ Wilshire 5000 11,729.34 -.43%
S&P Barra Growth 576.17 -.36%
S&P Barra Value 609.33 -.32%
Morgan Stanley Consumer 587.54 -.40%
Morgan Stanley Cyclical 719.07 -.74%
Morgan Stanley Technology 477.14 -.64%
Transports 3,599.49 -.91%
Utilities 362.48 -.28%
Put/Call 1.02 +37.84%
NYSE Arms .84 -16.05%
Volatility(VIX) 12.58 -.87%
ISE Sentiment 156.00 +2.63%
US Dollar 86.35 -.02%
CRB 299.24 +.85%

Futures Spot Prices
Crude Oil 50.96 +2.60%
Unleaded Gasoline 145.10 +1.70%
Natural Gas 6.30 -.69%
Heating Oil 142.50 +2.73%
Gold 419.50 +.14%
Base Metals 121.84 +.22%
Copper 141.95 unch.
10-year US Treasury Yield 4.08 +1.47%

Leading Sectors
Oil Tankers +1.83%
Oil Service +1.71%
Energy +1.18%

Lagging Sectors
Semis -1.10%
Airlines -1.23%
Steel -2.82%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on ALK.
- Rated AEP, DUK and ED Underperform.
- Rated NRG, ETR Outperform.

Afternoon/Evening Headlines
Bloomberg:
- Ratings on Fox’s “American Idol” television show surged last night and a large audience for tonight’s finale probably will help the network win the closest May audience-ratings period ever among younger viewers.
- Northrop Grumman and General Dynamics would simultaneously build versions of the Navy’s DD(X) destroyer under a service proposal intended to reduce long-term costs, the Navy’s top acquisition officer said.

CNBC:
- Investors are becoming more confident that inflation in the US “won’t run away” as oil and commodity prices fall, PIMCO Managing Director William Gross said.

Gannett News:
- International Brotherhood of Teamsters President Hoffa broke with other labor union leaders Tuesday and commended President Bush’s efforts to discuss possible remedies to the looming Social Security crisis.

Chicago Tribune:
- McDonald’s seeks to lure younger, more tech-savvy customers by offering them the ability to surf the Internet, download music and burn CDs in a test restaurant in a Chicago suburb.

BOTTOM LINE: The Portfolio finished unchanged today as gains in my Internet/Networking longs and Steel shorts offset losses in my Wireless and Homebuilding longs. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was weak today as the advance/decline finished lower, sector performance was mixed and volume was light. Measures of investor anxiety were mostly lower into the close. Overall, today’s market action was slightly negative considering the bounce from early session lows. Today’s afternoon strength bodes well for further gains tomorrow. Long-term rates look like they have begun the counter-trend rally I expected as the 10-year T-note yield hit 4.0% this morning and finished at 4.08%. I still expect rates to breach the 4.0% level over the coming weeks. As well, the spread between the November crude contract and the spot price has narrowed from $4.15 a week ago to $1.55 currently. As this spread evaporates over the coming weeks, I expect the second leg down in oil prices to begin. I still believe crude will touch $35/bbl. during the second half of the year and average $30-$35/bbl. next year.

Stocks Falling Mid-day on Light Volume as Energy Prices Rise

Indices
S&P 500 1,186.62 -.62%
DJIA 10,432.40 -.67%
NASDAQ 2,043.25 -.90%
Russell 2000 606.38 -1.07%
DJ Wilshire 5000 11,701.55 -.67%
S&P Barra Growth 574.57 -.63%
S&P Barra Value 607.78 -.58%
Morgan Stanley Consumer 589.17 -.23%
Morgan Stanley Cyclical 717.45 -.96%
Morgan Stanley Technology 474.95 -1.10%
Transports 3,594.06 -1.07%
Utilities 361.79 -.47%
Put/Call .84 +13.51%
NYSE Arms .98 -2.04%
Volatility(VIX) 13.00 +2.44%
ISE Sentiment 158.00 +3.95%
US Dollar 86.32 -.06%
CRB 299.25 +.85%

Futures Spot Prices
Crude Oil 51.35 +3.48%
Unleaded Gasoline 146.20 +2.47%
Natural Gas 6.33 -.30%
Heating Oil 143.50 +3.45%
Gold 418.60 +.22%
Base Metals 121.84 +.22%
Copper 141.80 +.93%
10-year US Treasury Yield 4.05% +.57%

Leading Sectors
Oil Tankers +2.36%
Oil Service +1.48%
Energy +1.05%

Lagging Sectors
Hospitals -1.37%
Semis -1.72%
Steel -3.02%

BOTTOM LINE: The Portfolio is lower mid-day on losses in my Internet, Wireless and Homebuilding longs and Oil Tanker shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is weak, almost every sector is lower and volume is very light. Measures of investor anxiety are mixed. Today’s overall market action is mildly negative, given last week’s gains, rising energy prices, disappointing Fed comments and the light-volume nature of today’s decline. Oil gains will likely prove fleeting as prices drop next week after the Memorial Day weekend. I expect US stocks to rise modestly into the close on short-covering and a decline in energy prices from session highs.

Today's Headlines

Bloomberg:
- France’s rejection of the European Union’s constitution would be “disastrous,” casting doubt on the future of European integration, Luxembourg Prime Minister Jean-Claude Juncker said.
- Business confidence in Germany, Europe’s largest economy, unexpectedly fell to a 21-month low in May, amid concern about the deteriorating growth outlook.
- Nokia lost market share for the first quarter in four to Motorola and Samsung Electronics, Gartner said. The researcher raised its full-year sales forecast for the industry.
- Merrill Lynch chief economist Rosenberg slashed his forecast for the 10-year T-note’s yield at year-end to 3.8% from 4.4% on indications inflation will slow.
- Ford Motor agreed to take back 24 plants form former auto-parts unit Visteon.
- Bostonians are still wearing winter fleece as they endure a May like few others in memory. Average daily high temperatures are running 8.7 degrees below normal for the month.
- Democrats won’t offer a plan to solve the Social Security crisis, a House Democratic leader said.
- China should move “as expeditiously as possible” to float its currency to help correct the US imbalance of trade, Fed Governor Bernanke said.
- Sales of Coke and Pepsi may be banned from schools by the Connecticut legislature today in what would be the first such state-wide prohibition because of concern that the soft drinks contribute to obesity in children.
- Crude oil is rising above $51/bbl. in NY after an Energy Dept. report that US crude inventories unexpectedly declined as refineries boosted gasoline production before the Memorial Day holiday.

Wall Street Journal:
- Bain Capital LLC and Game Plan LLC would bunch the 30 National Hockey League teams into three groups based on market value if their $4 billion bid for the league is successful.
- ICAP Plc, the world’s biggest broker of trades between banks, may try to make a “transformative acquisition” to increase its share of trading in bond, currency and derivatives markets.
- Rising oil prices make profit harder to find for US gasoline retailers because the outlets are reluctant to quickly pass along higher costs to customers.
- L-3 Communications Holding is closer to an agreement to acquire defense contractor Titan Corp. for a share price in the “mid-$20 range.”
- A US housing boom is benefiting some poor urban neighborhoods that have been overlooked until now, such as in Baltimore.
- GM may soon carry out a more ambitious reorganization than any undertaken hitherto, by splitting off GMAC, its profitable finance unit.
- Calpine is likely to announce today a reorganization that will include asset sales and cutting debt by $3 billion, or 16%, by the end of the year.
- Firsthand Capital Management wants to start an ETF that tracks the performance of 30 technology stocks in the S&P 500 deemed most likely to move higher.

NY Post:
- Time Warner’s AOL may gain exclusive access to SonyBMG’s music for its video-on-demand service.

LA Times:
- Video-game developers such as Electronic Arts, Activision and THG Inc. face a possible strike after unions set authorization votes during the next two weeks to press for a greater share of profits.

AP:
- Abu Musab al-Zarqawi, leader of Al-Qaeda in Iraq, fled the nation to a “neighboring country” with two doctors who are treating him for gunshot wounds to his lung, citing an Islamic Web site.

Financial Times:
- Hedge Funds are underestimating the risks of investing in high-yield bonds, and the financial markets will be jolted if the bonds return to their historic default rates, said Steven Rattner, managing principal of Quadrangle Group.

AFP:
- North Korea denied it was planning on carrying out a nuclear test, though the country is still hesitant to rejoin six-country talks on ending its nuclear program, a Czech delegation said it was told during a visit to the North Korean capital.

Durables Rebound, New Home Sales Remain Strong and Crude Inventories Fall

- Durable Goods Orders for April rose 1.9% versus estimates of a 1.3% rise and an upwardly revised 1.6% decline in March.
- Durables Ex Transportation for April fell .2% versus estimates of a 1.0% rise and an upwardly revised .2% gain in March.
- New Home Sales for April rose to 1316K versus estimates of 1325K and a downwardly revised 1313K in March.
- Summary of Weekly Petroleum Data for the Week Ending May 20, 2005.
- The EIA reported crude inventories fell 1.69M barrels versus estimates of a 1.5M barrel build. Distillate fuel inventories rose 1.9M barrels versus estimates of a 538K build. Gasoline inventories rose 609K versus estimates of a 600K rise.

BOTTOM LINE: The rise in bookings for items made to last at least three years was the biggest since November and spurred by demand for machinery, computers and aircraft. With consumers still spending and interest rates low, businesses are likely to keep replacing trucks, machinery and computers to meet demand. Orders for transportation equipment rose 8.2% after declining 6.5% in March. Bookings for vehicles increased 3.4% and aircraft orders surged 28% after slumping 22% the previous month. Machinery orders increased 2.2% last month after declining 4.9% in March. Orders for computers rose 16% last month after falling 5.3%. Orders for defense hardware fell 15% last month, following an 8.3% increase. Excluding defense, orders excluding transportation in April rose 2.3%, the most since November 2004. Finally, bookings for non-defense capital goods excluding aircraft, a proxy for future business investment, gained 1.6% last month, the most since January.

US new home sales increased in April to a record pace as historically low interest rates and job gains spurred sales. New home sales so far this year have averaged a 1.27M rate versus last year’s record 1.2M. Job growth, rising incomes and mortgage rates near a four-decade low will continue fueling home sales and thus construction will continue adding to economic growth. Sales rose in two of the four regions in April. Sales surged 37.2% in the Northeast and rose 2.8% in the West. Sales fell 5.3% in the South and declined .5% in the Midwest. The median price rose to $230,800, a 3.8% rise from the same month last year. I continue to believe there is not a housing bubble in most parts of the country. Yes prices are elevated in many parts of the country and there are some bubbles, but a median gain of 3.8% over the last year hardly characterizes a nation-wide bubble.

Crude inventories are still near six-year highs and 5% above the average level over the last 5 years. I continue to expect an accelerated decline in oil prices during the second half of the year as global demand decelerates, the US dollar stays firmer and OPEC pumps near 30-year high levels.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Man Group Plc, the world's largest publicly traded hedge fund manager, may report its smallest full-year earnings increase since 2000 after a decline in performance-related fees.

Wall Street Journal:
- The number of US millionaire households rose 21% last year, reaching an all-time record 7.5 million due to gains in stocks, real estate and other investments.

Financial Times:
- American International Group attorneys are examining whether the world's largest insurer can lay claim to $16 billion worth of company stock owned by Starr International.

Commercial Times:
- Taiwan Semiconductor Manufacturing may see its wafer shipments rise 17% in the third quarter form the second quarter, more than the originally expected 15%.

Seoul Economic Daily:
- Samsung Electronics may invest $15 billion in its non-memory chip business.

Shanghai Daily:
- DuPont plans to more than double its investment in China by 2010.

China Daily:
- China may face more "safeguard" measures imposed by other members of the World Trade Organization to limit imports of Chinese textiles.

Kyodo News:
- China issued a strong warning to the North Korean government not to test a nuclear weapon.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on TAP.

Night Trading
Asian Indices are -1.0% to unch. on average.
S&P 500 indicated -.23%.
NASDAQ 100 indicated -.26%.

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Earnings of Note
Company/EPS Estimate
CWTR/.11
DLTR/.26
MIK/.29
WIND/.02

Splits
UGI 2-for-1

Economic Releases
8:30 EST
- Durable Goods Orders for April are estimated to rise 1.3% versus a 2.3% decline in March.
- Durables Ex Transportation for April are estimated to rise 1.0% versus a .5% decline in March.

10:00 EST
- New Home Sales for April are estimated to fall to 1328K versus 1431K in March.

BOTTOM LINE: Asian indices are lower amid worries over US Fed comments and rising energy prices. I expect US equities to open modestly lower. However, stocks may gain later in the day on better-than-expected economic reports, short-covering and lower energy prices. The Portfolio is 100% net long heading into the day.