Thursday Watch

Late-Night Headlines
Bloomberg:
- Ford Motor(F) will offer no-interest financing on almost all models, as well as up to $1,000 to pay for fuel.
- Copper may lead a drop in metal prices, falling by as much as 30%, as its surge to a record has outpaced demand, said Richard Elman, CEO of Noble Group Ltd., a supplier of commodities. “It’s fairyland: we think, ultimately, prices will come back to reality,” said Elman.
- Japan’s debt rating outlook was raised to “positive” from “stable” by Moody’s Investors Service, which said the country’s economic prospects have improved under Prime Minister Koizumi’s government.

South China Morning Post:
- China ordered an immediate ban on the approval of land for building villas and low-density housing.

Sankei:
- The US and Japan have heightened surveillance of North Korea because it is preparing to launch a long-range ballistic missile.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are +.25% to +.75% on average.
S&P 500 indicated +.11%.
NASDAQ 100 indicated +.08%.

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Earnings of Note
Company/EPS Estimate
- (BBOX)/.74
- (BF/A)/.54
- (CIEN)/.00
- (DG)/.16
- (HNZ)/.49
- (JTX)/1.62
- (PLL)/.38
- (NX)/1.08
- (VIP)/.71
- (WIND)/.04

Upcoming Splits
- (CBG) 3-for-1
- (GDI) 2-for-1
- (HOC) 2-for-1
- (UAG) 2-for-1
- (BRY) 2-for-1
- (MFC) 2-for-1

Economic Releases
8:30 am EST
- Final 1Q Non-farm Productivity is estimated to rise 3.9% versus prior estimates of a 3.2% gain.
- Final 1Q Unit Labor Costs are estimated to rise 1.8% versus prior estimates of a 2.5% gain.
- Initial Jobless Claims for last are estimated to fall to 320K versus 329K the prior week.
- Continuing Claims are estimated to fall to 2413K versus 2420K prior.

10:00 am EST
- Construction Spending for April is estimated to remain unchanged versus a .9% gain in March.
- Pending Home Sales for April are estimated to fall 1.0% versus a 1.2% decline in March.
- ISM Manufacturing for May is estimated to fall to 55.6 versus a reading of 57.3 in April.
- ISM Prices Paid for May is estimated to rise to 74.6 versus a reading of 71.5 in April.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of 1,000,000 barrels. Gasoline supplies are estimated to rise by 1,400,000 barrels. Distillate inventories are expected to rise by 1,500,000 barrels. Refinery Utilization is estimated to rise .78%. Finally, natural gas supplies are expected to rise by 85 bcf.

Afternoon:
- Total Vehicle Sales for May are estimated to fall to 16.5M versus 16.7M in April.

BOTTOM LINE: Asian indices are higher, boosted by exporting stocks in the region after the US dollar rose. I expect US equities to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.

Stocks Finish Higher on Short-covering, Bargain Hunting and Lower Energy Prices

Indices
S&P 500 1,270.09 +.81%
DJIA 11,168.31 +.67%
NASDAQ 2,178.88 +.65%
Russell 2000 721.01 +1.40%
Wilshire 5000 12,802.45 +.92%
S&P Barra Growth 587.72 +.65%
S&P Barra Value 680.63 +.97%
Morgan Stanley Consumer 605.49 +.59%
Morgan Stanley Cyclical 835.13 +1.06%
Morgan Stanley Technology 501.91 +.48%
Transports 4,669.65 +1.98%
Utilities 406.17 +1.44%
Put/Call .92 -21.37%
NYSE Arms .57 -74.29%
Volatility(VIX) 16.44 -11.90%
ISE Sentiment 90.00 -13.46%
US Dollar 84.67 +.46%
CRB 344.87 -.87%

Futures Spot Prices
Crude Oil 71.36 +.10%
Unleaded Gasoline 209.50 -.03%
Natural Gas 6.40 +.33%
Heating Oil 199.73 +.10%
Gold 650.50 +.23%
Base Metals 230.41 -1.05%
Copper 361.70 -.19%
10-year US Treasury Yield 5.12% +.87%

Leading Sectors
Oil Service +3.13%
Airlines +2.81%
Steel +2.34%

Lagging Sectors
REITs +.01%
Homebuilders -.02%
Networking -.08%

Evening Review
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Afternoon Recommendations
CIBC:
- Upgraded (T) to Sector Outperformer, target $35.

Deutsche Bank:
- Rated (DTAS) Buy, target $15.
- Rated (FWRD) Buy, target $42.

Afternoon/Evening Headlines
Bloomberg:
- Futures traders raised bets that the Fed will increase its benchmark interest rate to 5.25% in June after minutes of the central bank’s May 10 meeting said inflation was more than the Fed expected.
- US Treasuries fell as minutes of the Fed’s most recent meeting on monetary policy increased concern that policy makers may continue hiking the benchmark Fed Funds rate.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Networking longs, Medical longs and Retail longs. I did not trade in the final hour, thus leaving the Portfolio 50% net long. The tone of the market was positive today as the advance/decline line finished higher, almost every sector rose and volume was about average. Measures of investor anxiety were mostly lower into the close. Overall, today's market performance was mildly bullish. While the major averages finished with decent gains, I would like to see healthier underlying action. Trading was choppy and incoherent throughout most of the day. The concerns I spoke of in my prior post still persist. The 10-year yield finished near session highs at 5.12%. On the positive side, the ISE Sentiment Index made a 52-week low of 89.0. The CRB Index is back below its 50-day moving-average. The SOX finished with a 1.77% gain and Small-caps outperformed the broad market, rising 1.4%.

Stocks Slightly Higher into Final Hour on Bargain Hunting and Falling Energy Prices

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Medical longs, Networking longs and Retail longs. I have not traded today, thus leaving the Portfolio 50% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are gaining and volume is about average. So far, the major averages are holding onto slight gains. However, I am seeing too many negatives to expect this bounce to gain substantial upside traction. Any sustainable rally can't be led by commodity stocks, in my opinion. I find it highly unlikely the Fed will cease raising rates with the 10-year yield approaching recent highs and oil above $70 per barrel. Finally, while breadth is OK today, a number of market-leading stocks are lower or barely rising. I plan to remain nimble, but a test of recent lows still looks likely. I expect US stocks to trade mixed into the close from current levels as lower energy prices offset higher long-term rates.

Today's Headlines

Bloomberg:
- Emerging-market stocks are headed for the biggest monthly drop in more than 3 ½ years as the prospect of higher interest rates and a slump in prices of commodities caused some investors to pull out of the riskiest markets from India to Russia.
- ADC Telecom offered about $2 billion in stock to take over Andrew Corp.(ANDW).
- Mortgage applications in the US declined last week to the lowest level in four year as higher borrowing costs hurt home purchases and refinancing.
- More than 84,000 people in 145 countries will take the CFA exams this year, as record profits drive both investment banks and job candidates to try to boost their competitiveness.
- Crude oil fell for the first time in a week and gold declined after the US offered to join European talks with Iran if the country halts uranium enrichment.
- Fed policy makers were unsure three weeks ago about how much further to raise interest rates.

Wall Street Journal:
- India has the largest number of people with HIV/AIDS, exceeding the previous record set by South Africa, citing a UN report.
- Advanced Micro Devices(AMD) expects some personal-computer makers to soon begin selling systems based on a new group of technologies for managing digital media in the home as its seeks to compete with Intel’s(INTC) Viiv home entertainment product.
- Vonage Holdings(VG), whose shares dropped after an IPO last week, has offered to pay its underwriters back if its Internet phone customers refuse to make good on agreements to buy shares.

Weeden & Co.:
- Bill Gross, manager of the world’s biggest bond fund, cut his holdings of emerging-market debt.

Chicago Manufacturing Very Strong

- Chicago Purchasing Manager for May rose to 61.5 versus estimates of 56.0 and a reading of 57.2 in April.

BOTTOM LINE: Manufacturing in the Chicago area unexpectedly accelerated this month, and orders placed with factories were the highest in more than a year, Bloomberg said. The purchasers’ orders measure rose to 69.6, the highest since March 2005. The employment component of the index rose to 52.8 from 47.2 the prior month. The Prices Paid Index fell to 76.9 from 77.2. I continue to believe manufacturing will decelerate over the coming months as US growth slows to average rates. The Prices Paid component has likely peaked for this cycle.

Links of Interest

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