Wednesday Watch

Late-Night Headlines
Bloomberg:
- Fidelity Magellan, the second-largest fund managed by Fidelity Investments, gave up $96.3 million in potential fees because the three-year return trailed its benchmark.
- Fidelity Investments pulled in $5.8 billion in April, its biggest monthly sales tally in a decade, as investors rushed to put money into four funds that were closing.
- Mirant Corp.(MIR) said it is proposing to acquire NRG Energy(NRG) for about $8 billion a week after NRG rejected the takeover proposal without engaging in discussions.
- The London Metal Exchange starting tomorrow will allow screen trading of its contracts during the Asian day to attract more business from countries including China.
- Asian stocks slumped, headed for the biggest monthly slide since the Sept. 11 terrorist attacks in 2001.

Chicago Tribune:
- Chicago asked today for proposals for construction of a citywide wireless Internet service, citing Mayor Daley.

Financial Times:
- GlaxoSmithKline Plc(GSK) will hand management of half of its new drug discovery projects to outside scientists and partners within 10 years, citing the company’s head of research and development.

Shanghai Securities News:
- China’s foreign exchange regulator plans to impose “strict” rules to control capital inflows into real estate.
- The China Foreign Exchange Trade Center and the National Interbank Funding Center may introduce a system for trading dollar-denominated bonds in the country.

Late Buy/Sell Recommendations
Needham:
- Rated (NFLX) Buy, target $37.

Lehman Brothers:
- Raised (SIRI) to Overweight, target $6.50.

Night Trading
Asian Indices are -2.0% to -1.25% on average.
S&P 500 indicated +.13%.
NASDAQ 100 indicated +.16%.

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Earnings of Note
Company/EPS Estimate
- (NDN)/.07
- (ADCT)/.29
- (CMVT)/.19
- (CPRT)/.38
- (DBRN)/.26
- (HOV)/1.43
- (NOVL)/.03
- (TIF)/.28

Upcoming Splits
- (HES) 3-for-1
- (CNX) 2-for-1
- (KEX) 2-for-1
- (MDR) 3-for-2
- (NUE) 2-for-1
- (CBG) 3-for-1
- (GDI) 2-for-1
- (HOC) 2-for-1
- (UAG) 2-for-1

Economic Releases
10:00 am EST
- Chicago Purchasing Manger for May is estimated to fall to 56.0 versus a reading of 57.2 in April.

2:00 am EST
- Minutes of May 10 FOMC Meeting

BOTTOM LINE: Asian indices are sharply lower, weighed down by exporting and commodity stocks in the region. I expect US equities to open lower and to rise slightly into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

Stocks Finish Sharply Lower on Economic Worries

Indices
S&P 500 1,259.88 -1.58%
DJIA 11,094.43 -1.63%
NASDAQ 2,164.74 -2.06%
Russell 2000 711.04 -2.54%
Wilshire 5000 12,686.26 -1.62%
S&P Barra Growth 583.92 -1.60%
S&P Barra Value 674.11 -1.57%
Morgan Stanley Consumer 601.92 -1.12%
Morgan Stanley Cyclical 826.36 -1.93%
Morgan Stanley Technology 499.49 -2.15%
Transports 4,578.80 -2.07%
Utilities 400.39 -.93%
Put/Call 1.17 +58.11%
NYSE Arms 2.23 +252.05%
Volatility(VIX) 18.66 +30.86%
ISE Sentiment 101.00 -30.82%
US Dollar 84.35 -.81%
CRB 347.88 +.02%

Futures Spot Prices
Crude Oil 71.90 -.18%
Unleaded Gasoline 214.00 -.46%
Natural Gas 6.13 +.20%
Heating Oil 200.39 +1.18%
Gold 662.00 +.23%
Base Metals 232.86 -3.46%
Copper 368.90 +.41%
10-year US Treasury Yield 5.07% +.52%

Leading Sectors
Broadcasting +.12%
HMOs -.38%
Hospitals -.80%

Lagging Sectors
Internet -3.75%
Airlines -3.92%
Steel -5.04%

Evening Review
Detailed Market Summary
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In Play

Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Emerging-market stocks resumed their decline on concern global growth will slow.
- Engelhard Corp.(EC), inventor of the catalytic converter, accepted a sweetened $5 billion takeover offer from BASF AG of Germany, ending five months of negotiations that began with a hostile bid.
- The US dollar fell the most in six weeks against the euro on speculation Treasury secretary nominee Henry Paulson won’t trey to stop a slide in the US currency.

CNBC:
- Quest Diagnostics(DGX) may make a counteroffer for Fisher Scientific(FSH), which agreed this month to be bought by Thermo Electron, Mergermarket.com reported.

BOTTOM LINE: The Portfolio finished lower today on losses in my Networking longs, Semi longs and Medical longs. I added to my (EEM), (IWM) and (QQQQ) shorts in the final hour, thus leaving the Portfolio 50% net long. The tone of the market was negative today as the advance/decline line finished substantially lower, almost every sector fell and volume was below average. Measures of investor anxiety were higher into the close. Overall, today's market performance was bearish. The market's inability to even stage a modest bounce today was telling. As well, the 10-year yield remained higher throughout the day, even as stock losses worsened. A retest of recent equity lows appears imminent as economic data disappoint. On the positive side, today's sell-off was accompanied by below-average volume and measures of investor angst were elevated. The NYSE Arms closed at a very high 2.23. Moreover, the ISE Sentiment Index closed down 31%, to a depressed level. Tomorrow's Chicago Purchasing Manager report and Fed minutes may further stoke recession fears. I continue to believe U.S. growth is just slowing, not plunging, and that the recent correction presents a very attractive opportunity for longer-term investors.

Stocks Sharply Lower Into Final Hour on Higher Energy Prices and Long-term Rates

BOTTOM LINE: The Portfolio is lower heading into the final hour on losses in my Semi longs, Networking longs and Medical longs. 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 substantially lower, almost every sector is lower and volume is light. Emerging market stocks are once again underperforming. The iShares MSCI Emerging Markets Index (EEM) is 3.6% lower. I expect EEM to take out its 200-day moving-average over the coming weeks. I am still short EEM. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain hunting.

Today's Headlines

Bloomberg:
- The Nasdaq Stock Market(NDAQ) may eject companies under investigation for possible manipulation of stock options paid to executives.
- Crude oil rose to the highest in two weeks as Iran said it is pressing ahead with its nuclear research.
- Henry Paulson, CEO of Goldman Sachs(GS), was picked by President Bush to succeed John Snow at US Treasury secretary.
- Goldman Sachs(GS) Group President Lloyd Blankfein is the frontrunner to succeed Henry Paulson as CEO of the biggest US securities firm by market value.

Wall Street Journal:
- The US Air Transport Stabilization Board, a loan-guarantee program the government started after the Sept.11 terrorist attacks, has made a $300 million profit for US taxpayers.
- Officials in Calabasas, California, who 10 weeks ago banned smoking outdoors except in designated areas, say the rules are having the desired effect, reducing exposure to secondhand smoke.

NY Times:
- Tourists and the businesses that rely upon them found ways to adapt to unusually high gas prices in the US over the Memorial Day weekend. Families sometimes vacationed closer to home or used kayaks and sailboats rather than motorboats.

Boston Globe:
- Infosys Technologies(INFY), Tata Consultancy Services and other Indian companies are hiring US workers to offset labor shortages in India.

LA Times:
- College computer systems are the No. 1 target in the US for computer hackers looking for sensitive personal information, citing ChoicePoint.

al-Hayat:
- The United Arab Emirates plans to raise oil production capacity to 3.5 million barrels a day by 2011, a 37% increase from current levels.

Consumer Confidence Declines

- Consumer Confidence for May fell to 103.2 versus estimates of 100.9 and 109.8 in April.

BOTTOM LINE: Consumer confidence in the US fell from a four-year high in May by the most since Hurricane Katrina battered the Gulf last year and sent energy prices soaring, Bloomberg reported. Optimism about consumers’ present situation fell to 132.5 from 136.2 in the prior month. The proportion of consumers expecting their incomes to rise was 16.6%, the lowest since July 2003. Rising unit labor costs account for two-thirds of inflation. I continue to believe confidence will rebound later this year to cycle highs as stocks rise, long-term rates remain historically low, the labor market remains relatively healthy, inflation decelerates, gas prices fall and irrational pessimism lifts.

Links of Interest

Market Snapshot
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Market Internals
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NYSE OrderTrac
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