Tuesday Watch

Weekend Headlines
Bloomberg:
- Wal-Mart Stores(WMT) said May same-store sales in the US rose about 2.3%, as higher gasoline and utility prices cut into customers’ paychecks.
- Advanced Micro Devices(AMD), Intel’s only competitor in personal computer microprocessors, will spend $2.5 billion to increase output from its two German plants.
- Richard Kinder, co-founder, chairman and CEO of Kinder Morgan(KMI), owner of 40,000 miles of pipelines in the US and Canada, is leading a group that has proposed to buy the company for $100 a shares or about $13.4 billion.
- Japanese stocks fell after government reports on industrial production and consumer spending pointed to slowing growth in the world’s second-largest economy.

Wall Street Journal:
- Donald Evans, former US commerce secretary, is the favorite to succeed John Snow as the nation’s treasury secretary.

NY Times:
- Some lawmakers say legal charges should be filed against media companies, including newspapers, for publishing classified information that harms national security.
- The US coal industry and utilities are moving ahead with plans to build power plants fueled by coal, which the US has sufficient supplies of for at least 200 years.
- The Internet Movie Database, an online guide to cinema and television, may boost its role in parent Amazon.com’s(AMZN) media retail as it develops a service to download movies and same them to DVDs.
- Senator John Kerry is still fighting to prove his military record is accurate almost two years after it was challenged during his failed 2004 presidential campaign.
- Iranian President Ahmadinejad seeks to consolidate power in the presidential office with full support from Iran’s highest authority, chief cleric Ali Khamenei, in a manner unseen in the 27-year history of the Islamic republic.
- Chicago may pass an ordinance requiring large retailers such as Wal-Mart Stores(WMT) and Home Depot(HD) to pay workers $10 an hour plus 43 an hour of benefits.
- Iran seems to be slowing its drive to enrich uranium, a sign it may be softening its position in the standoff over the country’s nuclear development or running into technical difficulties.

Alpha:
- When it comes to pure wealth creation – arguably the biggest motivation for the majority of hedge fund managers, times have never been better.

Denver Post:
- Qwest Communications(Q), AT&T(T), Sprint Nextel(S) and Verizon Communications(VZ) are bidding on a federal project called Networx worth $20 billion.

Barron’s:
- Small-cap companies are expected to outpace big-caps by 4% to 5% this year on faster growth than their larger counterparts, citing Merrill Lynch’s Satya Pradhuman.

San Jose Mercury News:
- Cisco Systems(CSCO) and other computer network-equipment makers may benefit if Internet service providers split their services into tiers.

Focus Magazine:
- McDonald’s(MCD) CFO Paull said the Chinese market may eventually be able to support as many as 10,000 of its restaurants, more than 13 times the number it already has there.

Les Echos:
- SAP AG(SAP) CEO Henning Kagermann said in an interview that his company held preliminary merger talks with Microsoft Corp.(MSFT).

Sueddeutsche Zeitung:
- Biogen Idec(BIIB) can spend at least $2 billion in cash to grow in cancer and neurology markets.

Financial Times:
- Advertising spending on the Internet may surpass spending on ads in national newspapers this year.
- A World Bank report warns that recent stock market falls have increased investor nervousness about the fragility of emerging markets.

Weekend Recommendations
Barron's:
- Had positive comments on (PHG) and (IDT).
- Had negative comments on (SCI).

Morgan Stanley:
- Rated (FMCN) Overweight.

Night Trading
Asian indices are -.25% to +.25% on average.
S&P 500 indicated -.21%.
NASDAQ 100 indicated -.26%.

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US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Before the Bell CNBC Video(bottom right)
Global Commentary
Asian Indices
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In Play
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Daily Stock Events
Macro Calls
Rasmussen Consumer/Investor Daily Indices
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Earnings of Note
Company/Estimate
- (FRE)/1.39
- (MCDTA)/.04
- (REY)/.36
- (SMTC)/.18
- (SRZ)/.26

Upcoming Splits
- (NICE) 2-for-1
- (TLM) 3-for-1
- (HES) 3-for-1
- (CNX) 2-for-1
- (KEX) 2-for-1
- (MDR) 3-for-2
- (NUE) 2-for-1

Economic Releases
10:00 am EST
- Consumer Confidence for May is estimated to fall to 100.0 versus a reading of 109.6 in April.

BOTTOM LINE: Asian Indices are mostly lower, weighed down by cyclical shares in the region. I expect US stocks to open modestly lower and to rise into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the week.

Weekly Outlook

Click here for The Week Ahead by Reuters

There are a number of economic reports of note and a few significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. - US Markets Closed

Tues. - Consumer Confidence

Wed. - Chicago Purchasing Manager, Minutes of May 10 FOMC Meeting

Thur. - Final 1Q Non-farm Productivity, Final 1Q Unit Labor Costs, Initial Jobless Claims, Continuing Claims, Construction Spending, Pending Home Sales, ISM Manufacturing, ISM Prices Paid, Total Vehicle Sales

Fri. - Change in Non-farm Payrolls, Unemployment Rate, Change in Manufacturing Payrolls, Average Hourly Earnings, Factory Orders

Some of the more noteworthy companies that release quarterly earnings this week are:

Mon. - US Markets Closed

Tues. - Freddie Mac(FRE), McData Corp.(MCDTA), Reynolds & Reyolds(REY), Sunrise Senior Living(SRZ)

Wed. - ADC Telecom(ADCT), Comverse Technology(CMVT), Copart Inc.(CPRT), Dress Barn(DBRN), Hovnanian Enterprises(HOV), Novell Inc.(NOVL), Tiffany & Company(TIF)

Thur. - Ciena Corp.(CIEN), Dollar General(DG), HJ Heinz(HNZ)

Fri. - None of note

Other events that have market-moving potential this week include:

Mon. - US Markets Closed

Tue. - None of note

Wed. - Bear Stearns Biotech Confab, Citigroup Semi Conference

Thur. - Citigroup Semi Conference, CSFB Environmental & Engineering Services Conference

Fri. - None of note

BOTTOM LINE: I expect US stocks to finish the week mixed as weaker economic data and mixed Fed commentary offset short-covering, bargain hunting and declining long-term rates. My trading indicators are still giving mostly bearish signals and the Portfolio is 100% net long heading into the week.

Chart of Interest

Market Week in Review

S&P 500 1,280.16 +1.04%*



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was modestly bullish. The advance/decline line rose, most sectors gained and volume was above-average on the week. Measures of investor anxiety were mostly lower. However, the AAII % Bulls fell to 33.4% and is approaching depressed levels, which is a big positive.

The average 30-year mortgage rate rose to 6.62% which is 141 basis points above all-time lows set in June 2003. I still believe housing is in the process of slowing to more healthy sustainable levels. Data this week gave more credence to the “soft landing” scenario. This will likely result in the slowing of consumer spending, and thus US GDP growth, back to around average rates over the coming months. US economic growth soared 5.3% during the first quarter.

The benchmark 10-year T-note yield fell 1 basis point on the week as economic data were mixed, inflation readings were around estimates, the US dollar rose and Fed members made mixed comments. I still believe inflation concerns have peaked for the year as investors begin to anticipate slower economic growth, unit labor costs remain subdued and the mania for commodities continues to reverse course.

Unleaded Gasoline futures rose this week and are now 26.6% below September 2005 highs even as refinery utilization remains below normal as a result of the hurricanes last year, a significant amount of Gulf of Mexico oil production remains shut-in and fears over future production disruptions persist. The EIA reported this week that gasoline supplies rose again as demand continued to wane. This is a result of conservation, substitution and demand destruction. The elevated level of gas prices related to shortage speculation and crude oil production disruption speculation should further dampen demand over the coming months, sending gas prices back to reasonable levels.

Natural gas inventories rose less than expectations this week, however supplies are 50% above the 5-year average, near an all-time record high for this time of year, even as some daily Gulf of Mexico production remains shut-in. Natural gas prices have plunged 61.7% since December 2005 highs. Notwithstanding this collapse, industrial demand for natural gas has shown few signs of increasing. US oil inventories are still approaching 9-year highs. Since December 2003, global oil demand is down .24%, while global supplies have increased 4.94%. Moreover, worldwide inventories are poised to begin increasing at an accelerated rate over the next year. I continue to believe oil is priced at extremely elevated levels on fear and record speculation by investment funds, not fundamentals. As the fear premium in oil dissipates back to more reasonable levels and supplies continue to rise, crude oil should head meaningfully lower over the intermediate-term.

Gold fell for the week as the US dollar rose, inflation fears subsided and speculators took profits. The US dollar rose and appears to have made at the very least a short-term bottom.

The Internet and Biotech sectors outperformed for the week. These sectors have likely seen their lows for the year and should continue to outperform the broad market through year-end. S&P 500 earnings growth for the 1st quarter was up 16.7% year-over-year, more than double the long-term average and substantially above expectations of 8-9% growth. This marks the 16th consecutive quarter of double-digit profit growth, the best streak since record-keeping began in 1936. The forward p/e on the S&P 500 has contracted relentlessly during this time period and now stands at a very reasonable 14.9.

The average US stock, as measured by the Value Line Geometric Index(VGY), is still up 4.5% so far this year, notwithstanding the recent correction. Moreover, the Russell 2000 Index is up 8.8% year-to-date. In my opinion, the current pullback has provided longer-term investors very attractive opportunities in many stocks that have been punished indiscriminately. However, the most overvalued economically sensitive and emerging market stocks should continue to underperform over the intermediate-term as the manias for those shares subside.

While the major averages have likely bottomed for the year, a test of recent lows could occur over the coming weeks as economic data disappoint. An ensuing Fed pause, lower commodity prices, decelerating inflation readings, lower long-term rates, increased consumer confidence and the realization that growth is only slowing should provide the catalysts for another substantial push higher in the major averages through year-end as p/e multiples begin to expand. I continue to believe the S&P 500 will return a total of around 15% for the year. The ECRI Weekly Leading Index fell again this week and is forecasting healthy, but decelerating, US economic activity.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,280.16 +1.04%
DJIA 11,278.61 +1.21%
NASDAQ 2,210.37 +.75%
Russell 2000 729.55 +.97%
Wilshire 5000 12,895.75 +.94%
S&P Equity Long/Short Index 1,153.54 -2.94%
S&P Barra Growth 593.44 +1.06%
S&P Barra Value 684.83 +1.01%
Morgan Stanley Consumer 608.71 +1.03%
Morgan Stanley Cyclical 842.62 +.93%
Morgan Stanley Technology 510.49 +1.02%
Transports 4,675.64 +1.07%
Utilities 404.16 +1.87%
S&P 500 Cum A/D Line 7,172 +3.0%
Bloomberg Crude Oil % Bulls 30.4 unch.
Put/Call .74 -40.16%
NYSE Arms .65 -26.74%
Volatility(VIX) 14.29 -16.70%
ISE Sentiment 160.00 +14.29%
AAII % Bulls 33.04 -16.12%
AAII % Bears 45.54 +4.35%
US Dollar 85.22 +.44%
CRB 347.82 +2.71%
ECRI Weekly Leading Index 136.90 -.51%

Futures Spot Prices
Crude Oil 71.38 +3.11%
Unleaded Gasoline 213.00 +4.67%
Natural Gas 6.05 +1.17%
Heating Oil 198.65 +3.41%
Gold 652.70 -.56%
Base Metals 241.20 +8.39%
Copper 378.20 +9.10%
10-year US Treasury Yield 5.04 -.20%
Average 30-year Mortgage Rate 6.62% +.3%

Leading Sectors
Steel +3.43%
Internet +3.13%
Oil Service +3.12%
Biotech +2.97%
REITs +2.06%

Lagging Sectors
Hospitals -1.40%
Computer Hardware -2.04%
Restaurants -2.20%
Disk Drives -2.48%
Semis -4.67%

One-Week High-Volume Gainers
One-Week High-Volume Losers

*5-Day % Change

Stocks Higher Heading Into Final Hour on Bargain Hunting and Short Covering

BOTTOM LINE: The Portfolio is higher heading into the final hour on gains in my Retail longs, Semi longs and Medical longs. I covered the remainder of my (IWM) and (QQQQ) shorts today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, almost every sector is higher and volume is below average. The U.S. Dollar Index is rising .6% today. The dollar continues to trade as though at the very least a short-term bottom is in place. This is a positive for equities given the bears' arguments revolving around a collapsing dollar. I expect US stocks to trade mixed-to-higher into the close from current levels on lower long-term rates, a rising dollar, short-covering and bargain hunting.