Tuesday Watch

Late-Night Headlines
Bloomberg:
- Police officers can end a high-speed chase that threatens innocent bystanders by forcing a fleeing suspect’s car to crash, the US Supreme Court ruled.
- Microsoft Corp.(MSFT), citing today’s victory in the US Supreme Court, will ask judges to cut more than $1 billion from jury verdicts the company lost in two other patent cases.
- George Soros’s money management firm hired Mark Malloch Brown, the former deputy secretary general of the United Nations, as vice chairman to help with investments in emerging markets.
- Anadarko Petroleum Corp.(APC), a US oil and natural-gas producer, said first-quarter profit fell 84% on lower oil and natural-gas prices.
- Japanese wages fell for a fourth month in March, signaling that growth in consumer spending in the world’s second-biggest economy will be limited.
- Pakistan and Afghanistan will boost anti-terrorism cooperation, denying sanctuary to gunmen and cutting off funds to extremists, the country’s presidents Pervez Musharraf and Hamid Karzai said after meeting in Turkey.
- Crude oil is falling a second day in NY on speculation US stockpiles rose to a five-month high last week as US refinery “fires” and “breakdowns” cut demand.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on Corning(GLW), target $29. Circuit City(CC) lowered their F1H08 guidance, citing weak TV sales in April. According to the company, the weakness was due to the overall market condition and company specific issues. Our retailing team called Best Buy(BBY) and was informed by BBY that it had not seen material changes from their expectation, and they will not revise their guidance. We believe that CC’s weakness is mostly company-specific. On the recent earnings conference call, BBY indicated that the sales of flat-panel TVs were strong and they were gaining market share. We still think the market condition for GLW’s LCD business is healthy.

Night Trading
Asian Indices are -.75% to -.25% on average.
S&P 500 indicated +.07%.
NASDAQ 100 indicated +.05%.

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Earnings of Note
Company/EPS Estimate
- (ASF)/.33
- (ACS)/.80
- (NLY)/.23
- (ADM)/.61
- (ADP)/.66
- (AVP)/.32
- (BWLD)/.52
- (CBG)/.15
- (CEC)/.99
- (CEPH)/.89
- (CEN)/.30
- (CMG)/.32
- (COCO)/.14
- (DIVX)/.14
- (DWA)/.08
- (EMR)/.60
- (EOG)/1.02
- (FLS)/.56
- (GET)/.12
- (GBE)/-.07
- (HC)/.15
- (IVGN)/.77
- (KCP)/.16
- (KMI)/1.69
- (LIZ)/.60
- (MRO)/1.96
- (MAS)/.26
- (MHS)/.74
- (MET)/1.28
- (MYGN)/-.25
- (NMX)/.57
- (OII)/.51
- (PPC)/-.15
- (PG)/.74
- (Q)/.09
- (RCL)/.06
- (RUTH)/.28
- (SAF)/1.63
- (SIRI)/-.11
- (SOHU)/.17
- (JOE)/.09
- (TUES)/.05
- (UA)/.20
- (WBMD)/.01
- (YUM)/.63

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- Pending Home Sales for March is estimated to rise .1% versus a .7% gain in February.
- ISM Manufacturing for April is estimated to rise to 51.0 versus a reading of 50.9 in March.
- ISM Prices Paid for April is estimated to rise to 67.5 from 65.5 in March.

Afternoon:
- Total Vehicles Sales for April are estimated to fall to 16.2M versus 16.3M in March.

BOTTOM LINE: Asian indices are lower, weighed down by automaker and technology stocks in the region. I expect US equities to open mixed and to weaken modestly into the afternoon. The Portfolio is 75% net long heading into the day.

Stocks Finish at Session Lows on Profit-taking and Mixed Economic Data

Indices
S&P 500 1,482.37 -.78%
DJIA 13,062.91 -.44%
NASDAQ 2,525.09 -1.26%
Russell 2000 814.57 -1.82%
Wilshire 5000 14,914.85 -.91%
Russell 1000 Growth 584.62 -1.02%
Russell 1000 Value 852.19 -.64%
Morgan Stanley Consumer 732.55 -.66%
Morgan Stanley Cyclical 1,000.55 -1.28%
Morgan Stanley Technology 593.42 -1.19%
Transports 5,037.35 -1.66%
Utilities 519.25 -.98%
MSCI Emerging Markets 121.44 -1.07%

Sentiment/Internals
Total Put/Call .94 -6.0%
NYSE Arms 1.45 +18.20%
Volatility(VIX) 14.22 +14.2%
ISE Sentiment 121.0 -11.03%

Futures Spot Prices
Crude Oil 65.61 -1.26%
Reformulated Gasoline 244.05 +3.35%
Natural Gas 7.85 +.19%
Heating Oil 191.35 unch.
Gold 680.30 -.21%
Base Metals 270.44 +.75%
Copper 354.20 +.18%

Economy
10-year US Treasury Yield 4.62% -7 basis points
US Dollar 81.45 -.10%
CRB Index 312.71 -.47%

Leading Sectors
Telecom -.03%
Foods -.32%
Drugs -.42%

Lagging Sectors
Biotech -1.90%
Oil Service -1.91%
Homebuilders -2.44%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Crude oil fell on worries over global demand and profit-taking by investment funds.
- Circuit City Stores(CC) said it expects to post a first-quarter loss of as much as $90 million before taxes as rivals cut prices on flat-panel television sets. The stock fell 8.8% in after-hours trading.
- Barton Biggs, managing partner of Traxis Partners LLC, said the Dow Jones Industrial Average may rise as much as 19% this year and argued that shares of the largest US companies are “very cheap” relative to other asset classes. “Markets in general are going higher, but I think large caps in particular – particularly in the US – are going to do even better than the S&P 500 or a broader index of the market,” said Biggs, 74, a former Morgan Stanley strategist who left to run the $1.84 billion hedge fund four years ago. The DJIA is up 5.7% so far this year.

Nikkei English News:
- Japan’s Financial Services Agency will ask hedge funds operating in the country to submit annual reports as part of an effort to monitor their increasing activity.

BOTTOM LINE: The Portfolio finished lower today on losses in my Retail longs, Semi longs, Biotech longs and Medical longs. I added to my (EEM) short and added (IWM)/(QQQQ) hedges in the final hour, thus leaving the Portfolio 75% 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 about average. Measures of investor anxiety were above average into the close. Today's overall market action was bearish. After such a good month, it isn't surprising to see short-term trading oriented investors taking profits and putting out new shorts. The NYSE Arms Index was at above-average levels throughout most of the day. The VIX rose 14.2% and the ISE Sentiment Index fell 11% to a below average 121.0. With the 10-year yield falling another 7 basis points, small caps and cyclicals underperforming and oil declining, it appears another bout of economic jitters is also underway that may last a few days.

Stocks Lower into Final Hour on Profit-taking, Mixed Economic Data

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Retail longs, Semi longs and Medical longs. I added to my Under Armour(UA) long and to an existing short today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, sector performance is mostly negative and volume is below average. I added a bit to my Under Armour (UA) long ahead of tomorrow morning's earnings report. Bearishness is high on the stock ahead of the report. Under Armour's open interest put/call is currently 2.09, just off record highs of 2.50 set last week. As well, short interest is a record 8.65 million shares, or 35% of the float. Under Armour is the type of stock that should flourish in the current macro environment. I expect the stock to rise tomorrow, notwithstanding any initial morning weakness related to profit-taking. The AAII percentage of Bulls fell 16.4%, to 39.2%, and the AAII percentage of Bears soared 28.3%, to 37.9% last week. These readings came as the DJIA was blowing through another record high, which is remarkable. Over the weekend, I expected to see quite a few headlines regarding the piercing of the 13,000 barrier on the Dow, instead the headlines were overwhelmingly negative and focused on how "poorly" the U.S. economy was performing. As well, many suggested that only large U.S. companies with substantial emerging market exposure are doing well, yet many U.S .small-caps and most mid caps continue to outperform large caps, and the cumulative advance-decline line is at a record high. I continue to believe that overall investment sentiment regarding U.S. stocks has never been worse in history with stocks up this much and the DJIA at a record high. There is still a high wall of worry for stocks to climb substantially from current levels.

Today's Headlines

Bloomberg:
- Deutsche Boerse AG, operator of the Frankfurt stock exchange, agreed to buy International Securities Exchange Holdings(ISE), the second-largest US options market, for about $2.8 billion in cash.
- China, the world’s largest steel producer, will introduce export licenses for some steel products from May 20 to rein in shipments which more than doubled in the first quarter.
- US Treasury 10-year notes rose the most in almost seven weeks after the measure of inflation favored by the Fed policy makers showed core consumer prices were stable in March.
- Prince Harry will serve in Iraq despite the risk of him being killed or kidnapped by insurgents, UK General Sir Richard Dannatt, Chief of the General Staff said.
- Apple Inc.(AAPL) may repeat iPod magic with Apple TV, according to Bear Stearns(BSC) analysts. “Apple TV along with iTunes has the potential to emerge as a new means for purchasing, storing and accessing video in the same way iPod/iTunes and MP3 players have become a new way to purchase, store and listen to music,” writes Kunal Madhukar, analyst at Bear Stearns in NY, in a research note.
- Yahoo!(YHOO) plans to acquire the remain stake in Right Media it doesn’t already own for $680 million in cash and stock, aiming to increase online advertising sales.
- Alltel Corp.(AT) shares rallied to a six-year high on speculation that the largest regional wireless carrier in the US may be an acquisition target.
- US newspaper circulation fell 2.1% in the six months through March as the LA Times and Washington Post lost readers, the Newspaper Assoc. of America said.
- Merrill Lynch(MER) said it may buy back as much as $6 billion of its stock.

Wall Street Journal:
- Immigrant activists plan to demonstrate on May Day to put pressure on Congress to adopt more favorable immigration laws.
- Hedge fund leveraging through which investors place large bets without actually putting down any money has regulators worried because no one knows how much there is.
- Marathon Oil(MRO) is betting on increased demand for diesel from cars and light trucks because of the fuel’s higher efficiency over gasoline.
- Jones Apparel Group(JNY) is acting like a private equity firm over the possible sale of the Barneys NY chain of luxury department stores.
- UnitedHealth Group(UNH), Humana(HUM) and other companies that expanded into Medicare are fighting to defend their business as Democrats try to slash the payments insurers get.

NY Times:
- Melamine, a chemical linked to tainted pet foot that has killed dogs and cats in the US, is commonly added to animal feed in China as a counterfeit protein, citing interviews with Chinese workers familiar with the process.

Baltimore Sun:
- Duke University’s Fuqua School of Business will punish 34 first-year MBA students after it learned they collaborated on a take-home exam.

NY Post:
- Wal-Mart Stores(WMT) plans to open smaller stores in urban areas to spur revenue, citing analysts.
- Pure Digital Technologies plans to put on sale tomorrow a tiny camera device known as Flip Video that allows users to instantly edit and download footage to YouTube and other Internet sites.
- Fresh Pet, a Secaucus, NJ-based company, plans to sell a new line of refrigerated, pre-cooked dog food following the recall of more than 60 million containers of pet food.

AP:
- Google Inc.(GOOG) is partnering with four US states to develop a search engine to make public records more accessible over the Internet.

USA Today:
- PepsiCo Inc.(PEP) will top the US Environmental Protection Agency’s list of “green power” companies because it will buy credits to subsidize production of renewable energy.
- A majority of the 100 top-grossing US law firms reported 2006 profits of more than $1 million per equity partner.

Dagens Nyheter:
- Ericsson AG(ERIC) is in better shape today than it ever was after emerging from the industry slump a few years ago, former CEO Hellstroem said.

Kargozaraan:
- Iran has expelled about 20,000 Afghan immigrants from Sistan-Baluchistan province in the past eight days.

Personal Incomes Higher, Spending Lower, Inflation Gauge Decelerates Further, Chicago Area Activity Decelerates, Construction Spending Decelerates

- Personal Income for March rose .7% versus estimates of a .6% increase and an upwardly revised .7% gain in February.
- Personal Spending for March rose .3% versus estimates of a .5% gain and an upwardly revised .7% increase in February.
- The PCE Core for March was unch. versus estimates of a .1% gain and a .3% increase in February.
- Chicago Purchasing Manager for April fell to 52.9 versus estimates of 54.0 and a reading of 61.7 in March.
- Construction Spending for March rose .2% versus estimates of a .1% gain and an upwardly revised 1.5% increase in February.

BOTTOM LINE: Personal spending in the US rose less than forecast, while incomes gained more than estimates and the Fed’s favorite inflation gauge eased in March, Bloomberg reported. The Fed’s recent Beige Book survey said generally positive retail sales were offsetting slower growth in manufacturing in most regions and that most regions reported tight labor market conditions. The unemployment rate is matching a five-year low and wages/salaries gained the most in six years during the first quarter. The Core PCE, the Fed’s favorite inflation gauge decelerated further. The gauge is now rising at a 2.1% year-over-year rate versus the 20-year average of 2.5%. I continue to believe wages will continue growing well above most measures of inflation, thus powering spending and helping sustain economic growth.

A measure of business activity in the Chicago region fell this month from the highest level in almost two years, Bloomberg reported. The report indicates that companies are still increasing production and spending after holding back to work down inventories. The inventories component of the index fell to 43.2 from 48.8 the prior month. The prices paid component rose to 64.9 versus 59.1 in March. However, the employment component rose to 50.5 from 45.0 the prior month. Considering last month saw one of the largest jumps in US history in this index, a large drop was expected. I continue to believe US economic growth will grind slowly higher over the remainder of the year.

Construction spending in the US rose for a second month in March as work on office buildings, hotel and schools increased, Bloomberg said. Private residential construction spending fell 1.0% in March versus a 1.8% gain the prior month. While overall construction spending is holding up, residential construction will continue to mute activity as homebuilders work down inventories.

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