Stocks Finish Near Session Highs as Energy Prices Reverse

Indices
S&P 500 1,197.62 +.64%
DJIA 10,537.60 +.76%
NASDAQ 2,071.24 +1.03%
Russell 2000 614.70 +1.37%
DJ Wilshire 5000 11,813.30 +.72%
S&P Barra Growth 579.56 +.59%
S&P Barra Value 613.55 +.69%
Morgan Stanley Consumer 589.26 +.29%
Morgan Stanley Cyclical 724.86 +.81%
Morgan Stanley Technology 482.37 +1.10%
Transports 3,636.22 +1.02%
Utilities 363.33 +.23%
Put/Call .76 -25.49%
NYSE Arms .65 -22.24%
Volatility(VIX) 12.24 -2.70%
ISE Sentiment 167.00 +7.05%
US Dollar 86.85 +.58%
CRB 300.09 +.28%

Futures Spot Prices
Crude Oil 50.96 -.04%
Unleaded Gasoline 144.75 -.29%
Natural Gas 6.12 -3.02%
Heating Oil 144.22 +.97%
Gold 417.70 -.07%
Base Metals 122.18 +.28%
Copper 144.50 -.31%
10-year US Treasury Yield 4.07% -.24%

Leading Sectors
Airlines +4.76%
Steel +2.90%
Homebuilders +2.68%

Lagging Sectors
Retail -.08%
Broadcasting -.12%
Gold & Silver -1.03%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on MO, TMK and Underperform on RAI.
- Rated Auto Parts sector Cautious.
- Rated JCI, DCN, BWA Outperform.
- Rated ARM, LEA, GM and DPH Underperform.

Afternoon/Evening Headlines
Bloomberg:
- US President Bush pledged the US will provide $50 million in direct aid to the Palestinian Authority, saying Palestinian leader Mahmoud Abbas is moving forward with reforms he promised.
- GLG Partners LP, Europe’s largest hedge fund manager, posted a 6.7% decline in its $3 billion convertible bond arbitrage fund in May, extending the loss for the year to 14.2%.
- President Jacques Chirac pleaded with voters to endorse Europe’s constitution in a May 29 referendum, saying the treaty will allow France to meet the challenges of globalization without giving up its welfare system.
- A US Senate panel approved creation of a $140 billion fund for asbestos-exposure victims that would end litigation that has bankrupted 77 companies.
- Smoking among Americans fell in 2003 to a new low of 21.6%.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet, Homebuilding and Computer longs. I added to a few lagging longs in the afternoon and began adding some oil service shorts, thus leaving the Portfolio 100% net long. One of my new shorts is RIG and I am using a $51.75 stop-loss on this position. The tone of the market was positive today as the advance/decline finished higher, almost every sector was higher and volume was light. Measures of investor anxiety were lower into the close. Overall, today’s market action was positive considering the major averages and breadth finished near session highs. In my opinion, long-term investors should always consider tech stocks after substantial declines. Since Jan. 31, 1991, the Morgan Stanley tech index has returned 1,914.12% vs. a return of 349.62% for the S&P 500 during the same time period. This includes the bursting of the largest tech bubble in U.S. financial market history.

Stocks Quietly Higher Mid-day on Upward GDP Revision

Indices
S&P 500 1,196.92 +.58%
DJIA 10,518.24 +.58%
NASDAQ 2,068.20 +.88%
Russell 2000 613.06 +1.10%
DJ Wilshire 5000 11,804.16 +.64%
S&P Barra Growth 579.49 +.58%
S&P Barra Value 612.88 +.58%
Morgan Stanley Consumer 589.03 +.25%
Morgan Stanley Cyclical 724.79 +.80%
Morgan Stanley Technology 481.76 +.97%
Transports 3,639.92 +1.12%
Utilities 364.48 +.55%
Put/Call .74 -27.45%
NYSE Arms .56 -32.86%
Volatility(VIX) 12.13 -3.58%
ISE Sentiment 172.00 +10.26%
US Dollar 86.87 +.60%
CRB 300.13 +.31%

Futures Spot Prices
Crude Oil 51.45 +.92%
Unleaded Gasoline 145.50 +.23%
Natural Gas 6.26 -.87%
Heating Oil 145.10 +1.58%
Gold 417.60 -.31%
Base Metals 122.18 +.28%
Copper 144.70 +1.94%
10-year US Treasury Yield 4.07% -.19%

Leading Sectors
Homebuilders +2.82%
Steel +2.47%
Airlines +2.24%

Lagging Sectors
Papers +.10%
Food +.10%
Gold & Silver -.26%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Internet, Semiconductor and Homebuilding longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is strong, almost every sector is higher and volume is light. Measures of investor anxiety are lower. Today’s overall market action is positive, given last week’s gains, rising energy prices and an upward revision to 1Q GDP. Through April, U.S. short-biased hedge funds have returned on average 17.65%, according to Hennessee. This is the best four-month performance for this style since the period around the 9/11 attacks. Record-high short interest, combined with profit protection by the shorts should cushion any pullbacks over the coming months. I expect US stocks to rise modestly into the close on short-covering and more optimism.

Today's Headlines

Bloomberg:
- Man Group Plc, the world’s largest hedge fund manager, reported its smallest annual earnings gain since 2000 after some of its biggest funds declined in value.
- Elan Corp. CEO Martin said he’s confident the multiple sclerosis drug Tysabri, linked to the death of two patients, will return to the market after a meeting with US regulators mid-year.
- Toll Brothers, the largest builder of luxury homes, said fiscal second-quarter profit more than doubled as the industry’s sales surged to a record.
- The euro is falling to a seven-month low against the US dollar after an opinion poll showed increasing French opposition to the European Union constitution before a referendum on May 29.

Wall Street Journal:
- Seattle-based RealNetworks may not benefit from its efforts to get the European Commission to order Microsoft to change its business practices on selling media-player software.
- A French “no” on the European Union constitution vote Sunday would slow down the decades-long movement toward integration and may force European leaders to rethink the top-down approach of rules coming from Brussels.
- Delta Air Lines Song low-cost airline division is experimenting with promoting rock bands on its airlines, as part of a new venture to distinguish itself from competitors.
- Germany, the Netherlands and Greece are at the forefront of a movement to legalize prostitution in an effort to curb crime.

NY Times:
- Senator Hillary Clinton’s former national finance director accepted secret gifts intended to “buy influence,” citing US prosecutors.
- Iraq’s dominant Shiite Muslim political parties have agreed to give Sunni Muslim Arabs a broader role in writing the country’s constitution, in response to US requests that the minority group be included more.

LA Times:
- Scottish Power’s PPM Energy unit plans to build a $235 million, 150-megawattt wind farm in northern California’s Solano County capable of generating power for 112,500 homes.

USA Today:
- Tax collections by US states rose to a record $600 billion last year, up 7.2% from 2003 and the biggest jump since 2000.

AP:
- Afghanistan confiscated 40 tons of opium, the raw material for heroin, in the first five months of this year.

1Q Growth Revised Higher, Inflation Decelerating, Job Market Still Healthy

- Preliminary 1Q GDP rose 3.5% versus estimates of a 3.6% increase and a prior estimate of 3.1%.
- Preliminary 1Q Personal Consumption rose 3.6% versus estimates of a 3.5% gain and a prior estimate of 3.3%.
- Initial Jobless Claims for last week fell to 323K versus estimates of 325K and 322K the prior week.
- Continuing Claims fell to 2574K versus estimates of 2582K and 2596K the prior week.
- The Help Wanted Index for April came in at 39 versus estimates of 40 and a reading of 39 in March.

BOTTOM LINE: The US economy expanded at a greater rate in the first quarter than the government originally expected. An improving trade deficit and strong consumer spending helped spur the increase. The 10-year average rate of US growth, which includes the “bubble years,” is 3.3%. Investment in housing accelerated. Residential housing construction rose at an 8.8% annual rate in the quarter, the best since mid-2004. The prior estimate was 5.7%, and it compares with 3.4% for the fourth quarter. The personal consumption expenditures prices index, the Fed’s favorite inflation measure, rose 2.1%, slower than the 2.7% in the fourth quarter. Corporate earnings adjusted for the value of inventories and depreciation of capital expenditures rose 4.5%, compared with a hurricane-distorted 13.5% in the fourth quarter of 2004.

The four-week moving average of jobless claims rose to 330,500 from 330,000. The four-week moving-average of continuing claims rose to 2.587M, from 2.582M, which was a four-year low. The insured unemployment rate, which tends to move with the US unemployment rate, held at 2%. I expect job growth to moderate over the coming months.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- The US dollar is rising against the euro and the yen in Europe on expectations a US government report today will show the economy grew faster in the first quarter than initially estimated.

Digi Times:
- Taiwan Semiconductor's plants will be used to 90% of their capacity in the period from between 78% and 80% in the first half. United Microeletronics' capacity use will rise to 80% from 60%. The two companies are the world's largest suppliers of made-to-order chips.

Financial Times:
- Blackstone Group LP is seeking to raise a record $11 billion buyout fund.

London-based Times:
- Former French finance minister Nicolas Sarkozy, who now heads President Jacques Chirac's ruling UMP party, accepts that France will vote "no" in a referendum on the European Union constitution.

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

Night Trading
Asian Indices are unch. to +.25% on average.
S&P 500 indicated +.01%.
NASDAQ 100 indicated -.03%.

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Earnings of Note
Company/EPS Estimate
CHS/.25
CA/.20
ELBO/.14
DRL/.46
DG/.22
HNZ/.62
PDCO/.39
TECD/.60
TIVO/-.11
TOL/1.79

Splits
NFX 2-for-1
WTNY 3-for-2

Economic Releases
8:30 EST
- Preliminary 1Q GDP is estimated to rise 3.6% versus a prior estimate of a 3.1% gain.
- Preliminary 1Q Personal Consumption is estimated to rise 3.5% versus a prior estimate of a 3.5% increase.
- Initial Jobless Claims for last week are estimated to rise to 325K versus 321K the prior week.
- Continuing Claims are estimated to fall to 2583K versus 2601K prior.

10:00 EST
- The Help Wanted Index is estimated to rise to 40 versus a prior reading of 39.

BOTTOM LINE: Asian indices are mostly higher on gains in tech shares in the region. I expect US equities to open modestly higher and to build on gains later in the day on an upward revision to 1Q GDP, a stronger US dollar and short-covering. The Portfolio is 100% net long heading into the day.