Sunday, February 29, 2004

Chart of the Week

Bloomberg Home Builders Index 1 Year Candlestick Chart

BOTTOM LINE: The Directional Movement Indicator, which has been the most accurate predictor of short-term trading moves in this index, turned sharply higher last week. A clean break above 256, where the index now resides, combined with a continuation of the recent fall in interest rates should allow this sector to regain its market leadership role.

Weekly Market Outlook

The major U.S. indices should rise modestly this week on a spate of economic reports and more earnings announcements from key consumer-related stocks. Personal Spending/Income, ISM Manufacturing/Prices Paid, ISM non-manufacturing, Productivity, Factory Orders and Employment are the major reports scheduled for release. Hovnanian(HOV), Cablevision(CVC), B.J.'s Wholesale Club(BJ), Chico's FAS(CHS), Costco(COST), Saks Fifth Avenue(SKS) and Staples(SPLS) are some of the key stocks that report earnings this week.

The reports with the greatest probability of moving the markets this week are the ISM, Productivity and Employment releases. Economists are projecting that the economy added 125K jobs in February, more than in any month since 2000. As well, the ISM factory index for February is projected to register a very strong 62 on the heels of a 63.6 reading in January, the highest level since 1983. Finally, the revised Productivity reading for the 4th quarter is expected to have risen 2.7%.

BOTTOM LINE: Lower-than-expected readings from the ISM and Employment reports could pressure the market modestly. However, this would also result in a breakdown in interest rates to a new lower trading range. I expect both readings to come in about as expected. I believe we will see a break-out employment report in the near future, but likely not this month. The final reading on 4th quarter Productivity will likely come in as expected, since this is a revised number. At this stage in the recovery, it is good to see productivity falling. It increases the likelihood for future employment growth. Overall, I expect next week's numbers to confirm the recent positive comments from Greenspan, strong consumer spending reports and strength in corporate spending, within the context of a low-interest rate environment. However, if I am wrong about the timing of the employment break-out coming later in the year and Friday's report were to show much greater-than-expected labor growth, a significant sell-off in the bond market would likely occur which could potentially pressure stocks in the short-run.

Market Week in Review

S&P 500 1,144.94 +.07%

The major U.S. indices continued their consolidation last week, as strength in homebuilders, restaurants, retailers and commodity-related companies was offset by weakness in technology and defense stocks. Significantly better-than-expected earnings reports from Ingram Micro(IM), Marvell(MRVL), Novellus(NVLS) and Autodesk(ADSK) could not stem the wave of profit-taking that has engulfed tech shares recently. As well, defense stocks remained week as the discontinuation of the Comanche helicopter program by the U.S. Army led to speculation of future cancellations.

Homebuilders reemergence as a leadership group came on the heels of a great earnings report from bell-weather Toll Brothers(TOL), strong retail spending reports, falling interest rates and short-covering. Retailers and Restaurants rose on positive words from Alan Greenspan about the financial health of the U.S. consumer, positive reports from Wal-Mart and Target, the anticipation by investors of imminent tax-cut stimulus and very strong retail spending reports. Commodity-related shares continued their rolls as market leaders. Better than expected U.S. and Japanese economic reports, along with increasing demand from China will continue to push commodity prices higher in the intermediate-term.

BOTTOM LINE: Overall, last week was a pretty good week for the bulls. I view the recent rotation out of the "overvalued" tech shares and into many other sectors as very positive for the long-term health of this bull market. Many stocks outside of the tech sector had an excellent showing for the week. Moreover, with all of the strong economic reports released and commodity prices continuing their relentless rise, it is remarkable that interest rates actually fell and seem to be on the verge of a technical breakdown. The bears will say that we had these positive reports and the market couldn't move, but that is an incorrect evaluation of the current situation, in my opinion. The major indices have risen so far, so fast, it is healthy for the market to pause and consolidate before continuing higher.

Saturday, February 28, 2004

Economic Week in Review

ECRI Weekly Leading Index 133.70 +.60%

The Conference Board's Consumer Confidence Index came in at 87.3 vs. expectations of 92.5 and a reading of 96.8 the prior month. This was the largest monthly drop since before the Iraq war began. At the same time, spending at U.S. retail stores in the week ended last Sat. rose 5.6% from a year earlier, according to the Instinet Research Redbook weekly sales report.

Durable Goods Orders fell 1.8% in January vs. expectations of a 1.4% gain and 1.6% growth the prior month. Excluding Transportation, which fell because of a significant decline in aircraft orders, the index rose 2.0% vs. expectations of a 1.8% rise and 1.7% growth last month. Orders for communications equipment rose 73.3%, the most since Jan. 1997. A measure for the demand for business equipment rose for the eighth time in nine months, the best performance since 1994. The inventory-to-sales ratio held at a record low of 1.4 months. "Replenishing inventories will make for a sizeable contribution to growth in the first quarter," said Bill Sharp, an economist at JP Morgan. Deutshe Bank's chief fixed-income economist said, "A meaningful pick-up in hiring cannot be far away with capital spending growing at an annualized 15-20 percent rate this quarter."

The U.S. economy expanded at a 4.1% annual rate in the 4th quarter, faster than the initial estimate, because businesses increased spending to rebuild inventories and buy equipment and software, the Commerce Department said. Therefore, last year's second half GDP growth rate of 6.1% was the strongest six months since the first half of 1984. The personal consumption expenditures price index, a measure of inflation tied to spending, which is watched closely by Greenspan, gained at a very low .7% annual pace.

The Chicago Purchasing Manager's Index declined to 63.6 in Feb. vs. expectations of 63.5 and a reading of 65.9 last month. The index has now held above 60 for 4 straight months, a stretch not seen since 1994-95. The employment component of the index rose to 54.8 this month, its highest reading since 1998. The Univ. of Michigan Consumer Confidence Index fell to 94.4 in Feb. vs. expectations of 94.0 and a reading of 103.8 last month.

During the course of the week, several comments came from Fed officials. Fed Governor Bies said that recent data suggest job growth may "pick up, perhaps substantially, over the course of this year." Greenspan said consumer debt burdens aren't a threat to the U.S. economic expansion because interest costs have fallen and financial obligations as a ratio to income aren't rising. Greenspan did say renters may be having more credit problems because they can't take advantage of rising property values to increase their wealth and sometimes have large student loans. Greenspan also said that "the U.S. economy appears to have made the transition from a period of sub-par growth to one of more vigorous expansion." He urged Congress to cut spending in order to retain tax cuts that stimulate the economy. Finally, Greenspan said "any tax increase large enough to reduce the deficit would pose significant risks to economic growth."

BOTTOM LINE: The very strong retail spending reports released last week lead me to believe that the consumer is quite confident about their financial situation. It is likely that politics and the mainstream media's focus on the current job situation led to the lower consumer confidence readings. The economy is doing very well right now and is poised to post the best year of growth in over 2 decades. Very strong consumer spending and the recent pick-up in corporate spending, with little inflation, strenthen this view. Employment is always a lagging economic indicator and to focus on this one data point is like looking in the rear-view mirror of an automobile while driving. I would be very worried if 4-6 months from now significant job creation hadn't materialized. All signs point to the contrary as of now.

Weekly Scoreboard*

S&P 500 1,144.94 +.07%
Dow 10,583.92 -.33%
NASDAQ 2,029.82 -.40%
Russell 2000 585.56 +.98%
Wilshire 5000 11,172.88 +.26%
Volatility(VIX) 14.55 -10.35%
AAII Bullish % 41.58 -26.34%
US Dollar 87.31 +.24%
CRB 272.90 +3.57%

Futures Spot Prices
Gold 396.80 -.43%
Crude Oil 36.16 +5.73%
Natural Gas 5.42 +4.45%
Base Metals 113.05 +.92%
10-year US Treasury Yield 3.97% -3.05%
Average 30-year Mortgage Rate 5.58% unch.

Leading Sectors
Homebuilders +7.11%
Restaurants +3.50%
Iron/Steel +3.26%

Lagging Sectors
Semis -1.48%
Software -1.55%
Defense -1.70%

*% Gain or loss for the week

Friday, February 27, 2004

Friday Close

S&P 500 1,144.94 unch.
NASDAQ 2,029.82 -.14%

Leading Sectors
Homebuilders +2.75%
Iron/Steel +2.03%
Fashion +1.22%

Lagging Sectors
Airlines -.66%
Hospitals -.72%
Semis -1.49%

Crude Oil 36.16 +1.83%
Natural Gas 5.42 +.46%
Gold 396.80 +.33%
Base Metals 113.05 +.13%
U.S. Dollar 87.31 -.40%
10-Yr. Long-Bond Yield 3.97% -1.57%
VIX 14.55 -1.89%
Put/Call .72 +14.29%
NYSE Arms 1.33 +51.14%

After-hours Movers
None of Notes

Janney Montgomery cut ILXO to Hold from Buy. Goldman Sachs recommends buying the Yen vs. the Euro. GS also recommending to go long Puts on June WTI crude with a 29.00/bbl. strike. Goldman expects crude to reach $26.00/bbl. by June. GS is revising their average summer NYMEX natural gas price forecast up by $.75/mmBtu to $5.25/mmBtu.

After-hours News
U.S. stocks were mixed today, as semis led tech lower with most other sectors showing strength. The yield on the U.S. 10-yr. Treasury note fell today as the revised GDP deflator showed little inflation. As well, Fed Governor Bernanke told reporters yesterday the Fed will be "patient and watch the data to see how things continue" on inflation. The U.S. Congressional Budget Office says that President Bush's budget request to Congress would cut the deficit in half by 2007. Deutsche Bank's 40-story tower next to the World Trade Center site will be sold to New York state for $90M and demolished to make more room for redevelopment at Ground Zero.

BOTTOM LINE: The Portfolio finished the day about even. I covered a few cyclical shorts and sold some technology longs near the close to reposition the Portfolio, while maintaining 75% net long market exposure. Bonds are on the verge of breaking out technically. This is very strange considering the continued strength in commodities prices and all of the recent talk of inflation worries. The rotation out of tech and into consumer cyclicals seems to have a little further to go. With interest rates dropping and tax stimulus coming, investors are betting the valuations in retail and homebuilding are too low relative to tech. I expect tech to regain its leadership role in the 2nd quarter.

Mid-day Update

S&P 500 1,147.89 +.26%
NASDAQ 2,030.70 -.07%

Leading Sectors
Homebuilders +2.37%
Iron/Steel +2.11%
HMO's +1.28%

Lagging Sectors
Hospitals -.25%
Airlines -.68%
Semis -1.50%

Crude Oil 36.10 +1.66%
Natural Gas 5.46 +1.28%
Gold 396.80 +.33%
Base Metals 113.05 +.13%
U.S. Dollar 87.39 -.32%
10-Yr. Long-Bond Yield 3.98% -1.28%
VIX 14.36 -3.17%
Put/Call .84 +33.33%
NYSE Arms 1.10 +25%

Market Movers
SPW -19.8% on 4Q estimate miss, weak outlook and multiple downgrades.
DNA +5.2% on U.S. approval to sell its Avastin colon-cancer drug.
ILXO +16.7% on takeover by Genzyme, GENZ -5.4%.
MRVL +5.1% on strong 4Q, raised 1Q guidance and 2-for-1 split announcement.
RDY -13.0% after the Indian drugmaker was barred by a U.S. appeals court from selling a version of Pfizer's hypertension drug Norvasc.
PDE -13.1% after weak 4Q and downgrade by Merrill.
ADSK +9.3% after significantly beating 4Q estimates and raising 1Q guidance significantly, multiple upgrades.

Economic Data
Revised GDP was 4.1% vs. expectations of 3.8%.
Revised Personal Consumption was 2.7% vs. expectations of 2.6%.
Revised GDP Price Deflator was 1.2% vs. expectations of 1.1%.
Univ. of Mich. Consumer Confidence for Feb. was 94.4, ahead of the 94.0 estimate.
Chicago Purchasing Manager Index for Feb. was 63.6 vs. 63.5 estimates.

Goldman positive on MRVL, raising estimates and reiterating outperform. GS reiterates Outperform on SNDK after Analyst Day. Citi Smith Barney positive on BRCM and MRVL.

Mid-day News
U.S. stocks are mixed this afternoon, as technology shares' weakness is offset by broad strength in the rest of the market. The Supreme Court will discuss whether to take a case by the Department of Justice questioning the legality of certain Class II slot machines, with a decision expected to be published on Monday, March 1. If the S.C. decides to take the case, it may potentially take away one of the slot makers growth opportunities, according to Goldman Sachs. Autodesk(ADSK) CEO said on CNBC that customer demand is very strong. Iraq plans to boost crude-oil exports to pre-war levels of 2.2 million barrels a day by late March or early April. The U.S. dollar will continue to weaken through year-end according to traders and strategists surveyed by Bloomberg. The Chicago Purchasing Manager's Index held close to its highest level in almost 10 years. As well, a measure of employment showed more companies are adding jobs in the area. The judge in the Martha Stewart trial dismissed a securities fraud charge, the most serious offense in the indictment.

BOTTOM LINE: The Portfolio is about even on the day. I haven't made any trades yet. Market exposure equals 75% net long. I will likely sell a few of my tech positions and rotate into a more consumer cyclicals, keeping market exposure at 75% net long.

Friday Watch

Earnings Announcements

None of note

Economic Data
4Q revised GDP estimated at 3.8% from 4.0% actual.
4Q revised Personal Consumption estimated at 2.6% vs. 2.6% actual.
4Q revised GDP Price Deflator estimated at 1.1% vs. 1.0% actual.
University of Michigan Consumer Confidence for Feb. estimated at 94.0 vs. 93.1 prior month.
Chicago Purchasing Manager's Index for Feb. estimated at 63.5 vs. 65.9 last month.

Late-Night News
Japanese Industrial Production rose 3.4% in January vs. expectations of 2.5%. Pimco purchased about $3B of U.S. Treasury inflation-linked securities at the government's January auction, anticipating a return of inflation. Disney may be interested in buying InterActiveCorp(IACI) to discourage Comcast, Business Week reported. George Soros raised his stake in Valentis(VLTS) to 20%, Business Week said. Disney said that more than 30% of its shareholders may not back Chairman and CEO Eisner at next week's meeting, the WSJ reported. China's growing demand for cars is causing global rubber prices to surge. Michelin and Bridgestone said they will raise prices to compensate. Investors are becoming increasingly concerned about junk bonds, Citi Smith Barney said.

Late-Night Trading
Asian markets are mostly up, ranging from +.50% to +2.0%.
S&P 500 indicated +.22%.
NASDAQ indicated +.30%.

BOTTOM LINE: The strength in Japan, Korea and Hong Kong tonight bodes well for tech stocks tomorrow. It is likely that Consumer Confidence will fall below expectations again and I will closely watch the market's reaction to this news. The Chicago Purchasing Manager's report should meet or beat expectations. The Portfolio remains 75% net long and I will likely make some trades tomorrow on the long side.

Thursday, February 26, 2004

Thursday Close

S&P 500 1,144.91 +.11%
NASDAQ 2,032.57 +.47%

Leading Sectors
Homebuilders +3.55%
Networking +1.46%
Gaming +1.38%

Lagging Sectors
Drugs -.17%
Papers -.34%
Defense -.65%

Crude Oil 35.37 -.39%
Natural Gas 5.41 +.26%
Gold 395.90 +.10%
Base Metals 112.90 +.13%
U.S. Dollar 87.66 +.47%
10-Yr. Long-Bond Yield 4.03% +.67%
VIX 14.83 -.67%
Put/Call .63 -17.11%
NYSE Arms .88 +12.82%

After-hours Movers
ADSK +12.6% after significantly beating 4Q estimates and raising guidance substantially.
MCDTA +7.0% after beating 4Q and reiterating 1Q guidance.
CHINA +2.9% after strong 4Q.
ILXO +17.45% on $1B takeover offer by Genzyme. GENZ -4.3%.
MRVL +4.9% on strong 4Q and 2-for-1 split announcement.

Goldman Sachs reiterates Attractive rating on AMR and raises estimates as strengthening demand offsets higher oil prices.

After-hours News
U.S. markets finished mostly higher today, as strength in homebuilding and technology shares offset weakness in the defense sector. After the close, Business Objects(BOBJ) pulled out of 2 investor conferences next week, leading traders to speculate a secondary is coming. The U.S. may limit exports of scrap steel to ensure that the raw material used to make steel bars and other products is in sufficient supply to meet domestic demand, citing the Korean Trade Promotion Agency. Four Season may offer to buy Savoy Group, the owner of London's Claridge's hotel, for as much as $1.5 billion, the London-based Times said. Genentech said it won U.S. approval for its Avastin drug, the first caner drug that chokes off a tumor's blood supply. The U.S. Justice Department will seek to block Oracle's $9.4B hostile bid for Peoplesoft. "A more meaningful pick-up in hiring cannot be far away, as capital spending is now growing at a 15-20% rate in the current quarter," said Deutshe Bank's Joseph LaVorgna. As well, Fed Governor Susan Bies, in a speech to the NY Forecasters Club, said "job growth may pick-up perhaps substantially over the course of the year."

BOTTOM LINE: The Durable Goods report makes me more confident in my 5%+ GDP prediction for 1Q. I am seeing comments by CEO's that lead me to believe that they FINALLY believe in the strength of the recovery. Their confidence, combined with recent data points showing a stretched labor force and some supply shortages, lends more credence to recent Fed talk of a pick-up in job creation soon. I didn't make any change today, thus leaving the Portfolio with 75% net long market exposure.

Mid-day Update

S&P 500 1,145.34 +.15%
NASDAQ 2,032.69 +.48%

Leading Sectors
Homebuilding +2.05%
Networking +1.78%
Gaming +1.24%

Lagging Sectors
Drugs -.14%
Papers -.47%
Defense -.73%

Crude Oil 35.27 -1.15%
Natural Gas 5.32 +1.99%
Gold 395.00 -.28%
Base Metals 112.90 +.13%
U.S. Dollar 87.63 +.44%
10-Yr. Long-Bond Yield 4.05% +1.15%
VIX 14.81 -.80%
Put/Call .64 -15.79%
NYSE Arms .70 -10.26%

Market Movers
DRI +7.0% on 3Q outlook and multiple upgrades.
DCGN +26.1% on the announcement of a 7-year agreement with Merck to develop new medicines.
FCS +6.4% on upgrade to Outperform by Thomas Weisel.
NOVN +20.9% on better-than-expected 4Q and upgrade from W.R. Hambrecht.
SBUX -3.88% after saying recent strong trends aren't sustainable.
CENX -11.6% on better-than-expected 4Q earnings, but J.P. Morgan downgrades on outlook.
Homebuilders up across the board on TOL earnings.

Economic Data
Durable Goods orders fell 1.8%, below expectations of a gain of 1.4%.
Durable Goods ex transportation rose 2.0% vs. expectations of 1.8%.
Initial Jobless Claims rose to 350K last week vs. expectations of 345K.
New Home Sales were 1106K vs. expectations of 1075K.
Help Wanted Index was 38 last months vs. expectations of 39.

Morgan Stanley cut CHTR to Underweight. IRF raised to Outperform at Thomas Weisel. NXTL cut to Neutral at CSFB. Goldman says INTC and AGR/A are favorites coming out of their tech conference. JWN cut to In-line at Goldman. TIF raised to Outperform at GS on improvement in Japan. GS reiterated Outperform on SYMC and raised estimates. Finally, GS upgraded WMT to Outperform. Citi Smith Barney is upgrading NSM to 1H. Citi reiterating Buy on AFCI and raising earnings estimates. Citi also positive on EXTR. Citi says it is still early in semi equipment cycle and sell-off is buying opportunity.

Mid-day News
U.S. stocks are mostly higher Thursday afternoon, as shares of homebuilders rose on Toll Brother's earnings and tech shares continued their oversold bounce. Defense shares are pressuring the Dow. An Illinois couple is suing the federal government over restrictions on purchasing prescription drugs in Canada. Diane Swonk, chief economist for Bank One, told CNBC that U.S. manufacturers are seeing bottlenecks because they don't have enough workers, raw materials or supplies. Infineon Tech, the world's third largest chipmaker, is struggling with delivery problems as demand surpassed the company's capacity the CEO said. JC Penney's CEO said on CNBC it is attracting more younger customers. The U.S. lifted its ban on American travel to Libya to reward it for agreeing to dismantle nuclear programs. Disney's ABC network, last in ratings among the top 4, is getting a record average of $1.5M for 30 second commercials on its Sunday broadcast of the Academy Awards.

BOTTOM LINE: The Portfolio is having a very good day today as my shorts are down and longs are up. I have not made any changes yet and continue to maintain market exposure of 75% net long. I may close out some profitable shorts later as I uncover new long opportunities. The tone of the market is much better the last 2 days, I am not ruling out the possibility that the recent correction has run its course.

Thursday Watch

Earnings Announcements

None of note

Economic Data
Durable Goods Orders expected to increase 1.4% in January vs. .3% in December.
Weekly Initial Jobless Claims estimated at 345K vs. 344K the prior week.
New Home Sales estimated at 1075K in January vs. 1060K in December.
Help Wanted Index estimated at 39 in January vs. 38 in December.

Late-Night News
Microsoft Corp.'s Japanese unit was raided by Japan's Fair Trade Commission for suspected violation of the nation's Antimonopoly Law. China warned of escalating tension if Taiwan President Chen Shui-bian holds a public referendum on China relations in tandem with the March 20 presidential election, the official China Daily reported. Japanese retail sales post biggest gain in 7 years. More Americans are traveling overseas recently, as passport applications rose 13% from Oct. to this week, on pace to set an annual record, the Wall Street Journal said. Samsung, Hynix, Infineon and Micron are among companies that are being investigated by a federal grand jury in San Francisco for accusations of price-fixing, the WSJ said. Soaring U.S. lumber prices shouldn't affect homebuilders because they buy at volume discounts and lock in prices as much as a year in advance, the Journal reported.

Late-Night Trading
Asian markets are mostly up, ranging from -.50% to +1.25%.
S&P 500 indicated +.10%.
NASDAQ indicated +.14%.

BOTTOM LINE: I expect to see a follow-through rally tomorrow on a strong durable goods report, better-than-expected earnings and a continuation of the oversold bounce from tech. I may take the Portfolio up to 100% net long, depending on the morning's opportunities.

Wednesday, February 25, 2004

Wednesday Close

S&P 500 1,143.67 +.40%
NASDAQ 2,022.98 +.87%

Leading Sectors
Networking +2.84%
Disk Drives +2.65%
Semis +1.82%

Lagging Sectors
Fashion -.08%
Broadband -.17%
Telecom -.35%

Crude Oil 35.70 +.06%
Natural Gas 5.23 +.23%
Gold 396.80 +.18%
Base Metals 112.75 +1.25%
U.S. Dollar 87.25 +1.28%
10-Yr. Long-Bond Yield 4.01% -.29%
VIX 14.93 -6.10%
Put/Call .76 unch.
NYSE Arms .78 -45.45%

After-hours Movers
SBUX -3.77% after CEO said February same-store sales growth of 13% and 32% revenue growth isn't sustainable.
VTS +6.1% after significantly beating 2Q earnings/sales estimates.
MW +3.6% after beating 4Q estimates.
OPEN +6.25% after beating 4Q earnings estimates and raising 1Q guidance.

Goldman Sachs says that Pizza Hut's new pre-packaged salads for delivery will be supplied entirely by PFGC's Fresh Express Business. They reiterate their "Outperform" and expect 25% upside over the next 12 months. GS also thinks CCL's guidance is conservative. Goldman views CMX as the best positioned pharmaceutical benefit manager because of its specialty offerings and growing blue chip customer base. reported that chip-equipment maker Novellus Systems raised its expectations for orders, sales and earnings in a mid-quarter update.

After-hours News
U.S. stocks finished the day stonger on fairly light volume. Strong earnings reports and optimistic comments from Alan Greenspan sparked the rise. After the close, Treasury Secretary John Snow said China has pledged to end its currency's peg with the dollar, helping U.S. manufacturing firms' competitiveness. Illinois named Isle of Capri, Harrah's Entertainment and Midwest Gaming as finalists for a casino gaming license it's selling, Reuters reported. The U.S. Justice Department has requested information from Nextel Communications, Motorola and Verizon for an antitrust probe of the push-to-talk mobile-phone market dominated by Nextel. CALPERS will withhold votes for the re-election to the board of Disney CEO Eisner.

BOTTOM LINE: I made some buys in the afternoon and covered a short, bringing the Porfolio's market exposure up to 75% net long. My short-term indicators are still giving sell signals. However, I am anticipating some follow-through to this rally as end-of-the-month positioning occurs and tech bounces from oversold levels. I concentrated my buys in tech, beaten-up chinese cyclicals and retail.

Mid-day Update

S&P 500 1,143.05 +.34%
NASDAQ 2,017.74 +.61%

Leading Sectors
Networking +2.02%
Disk Drives +1.87%
I-Banks +1.44%

Lagging Sectors
Iron/Steel -.32%
Broadcasting -.42%
Homebuilders -.91%

Crude Oil 35.60 +2.95%
Natural Gas 5.16 +1.63%
Gold 396.40 -2.08%
Base Metals 112.75 +1.25%
U.S. Dollar 87.21 +1.24%
10-Yr. Long-Bond Yield 4.00% -.38%
VIX 15.42 -3.02%
Put/Call .81 +6.58%
NYSE Arms .74 -48.25%

Market Movers
RMBS +6.8% on belief that its recent courtroom victory will survive appeal.
IM +13.3% after significantly beating 4Q estimates and raising 1Q forecasts.
ESRX +4.7% after beating 4Q estimates and strong 04 outlook.
ESI, CECO, APOL, COCO and STRA all down after federal agents served ESI with a search warrant at its corporate offices. The warrant is related to information and documents on retention rates, student placement, recruitment, attendance and admissions.
STZ -10.5% after saying a recent secondary will lower 05 earnings.
CMTL +11.7% after raising 2Q and full-year 04 estimates.
GLDB +14.1% on takeover by DLJ Merchant Banking, Cypress Group and other investors.
CURE -14.6% after disappointing 4Q, weak guidance and announcing their 11th acquisition in a few years.

Economic Data
Existing Home Sales were 6.04M for January vs. an estimate of 6.25M.

IM raised to "Buy" at First Albany. ESRX, AEOS raised to "Outperform" at Wachovia. EMC added to focus list at J.P. Morgan. XLNX raised to "Overweight" at Lehman. AMD raised to "Buy" at Oppenheimer. Goldman raising rating on HD to "Outperform." GS says to buy CSCO and NT at current levels. Also, GS says to buy YHOO at these prices. Goldman says DOX has emerged from telecom downturn in strongest competitive position in its history. GS also saying wireless infrastructure spending continues to pick-up steam and should remain a revenue driver for semi companies in 04. Finally, GS thinks semis remain in trading range through mid-04. is positive on TK, TNP and SJH on high energy prices. Citi Smith Barney says conditions remain strong for Semi. Equipment companies. Citi also raising SBUX price target to $45 and reiterating "Buy" before February sales figures. Citi says to buy ACS on weakness. Merrill Lynch "Focus 1" stock is CIN.

Mid-day News
U.S. stocks are higher mid-day on strong reports from Ingram Micro and Tiffany & Co., as well as continued optimism on the prospects for the U.S. economy by Alan Greenspan. TXN is saying VOIP is being deployed by cable companies in much larger volumes than previously. Jim Cramer, of, is saying recent talk by the mainstream press of a bubble cannot be backed up with facts. Cramer also saying Ingram Micro's report bodes very well for tech. Fidelity doesn't plan to offer hedge funds, as it could result in a conflict of interest with their mutual funds. Clear Channel plans to impose new standards to prevent its stations from airing indecent content. The U.S. dollar is gaining on talk of an interest rate cut by the European Central Bank and strong U.S. growth prospects. Greenspan said the U.S. economy has made the transition from a period of sub-par growth to one of more vigorous expansion. He also recommended spending cuts instead of tax increases to cut the deficit. Thousands of drugs will be required to have bar codes on their labels similar to those used in grocery stores, the FDA said. The SEC proposed a mandatory 2% redemption fee on short-term mutual fund trades. States that offer college scholarships can deny them to students majoring in theology without violating their constitutional rights, the U.S. Supreme Court ruled. Worldwide semi sales will rise 23% this year, outpacing their 03 gain of 14%, researcher Gartner said.

BOTTOM LINE: The Portfolio is having a good day today notwithstanding its relatively low market exposure of 25% net long, as the shorts are up less than the longs. Greenspan reiterated again that the economy was on pace to grow vigorously in 04. Employment has always been a lagging indicator, usually improving 6-9 months after vigorous GDP growth. U.S. GDP growth only started to accelerate substantially in the 3Q of 03 due to corporate scandals, Sept. 11th and the War with Iraq. Moreover, the U.S. overcapacity issue which was created by the excesses and corruption of the later part of the 90's, delayed vigorous economic growth and is now affecting job creation. Too many companies with bad business models and inexperienced management were created during the bubble to target inflated markets, thus creating artificially high employment. This overcapacity in the labor markets had to be worked off with time and increased demand. With GDP growth the best in 2 decades stimulating demand, the timing now seems right to expect better labor conditions in the very near future. I would like to see the market strengthen throughout the day before increasing the Portfolio's market exposure. I will look to add names in retail, oil service and tech if this occurs.

Wednesday Watch

Earnings Announcements

None of note

Economic Data
Existing Homes Sales expected at 6.25M for Jan. vs. 6.47M in Dec.

SPOT cut to "Sell" at Merrill.

Late-Night News
The U.S. may keep interest rates low for an "extended period of time" because of continuing signs of disinflation, said the Fed's Broaddus in an interview with Dow Jones Newswires. Broaddus said the Fed's preferred measure of inflation, the personal consumption expenditure index minus food and energy, is still rising at a rate well below 1%. As long as that is the case the Fed can maintain an accommodative policy, he said. He also stated that he expects U.S. GDP growth of between 4.5-5% for 04. The IMF is saying the Japanese economy will growth 3% this year, significantly stronger than previous forecasts. Ukrainian border guards stopped a man trying to take 450 grams of uranium into Hungary, the AP said.

Late-Night Trading
Asian markets are mixed, ranging from -.50% to +.25%.
S&P 500 indicated +.04%.
NASDAQ indicated +.07%.

BOTTOM LINE: It will be interesting to see the market's reaction to the statements made by Broaddus. He replaced the phrase "can be patient" with "extended period of time" again. He also reiterated strong growth forecasts and a pick-up in job growth. Current market valuations are low(S&P 500 P/E=18 on 04 estimates) relative to interest rates at 46-yr. lows, economic growth is at 20-year highs, corporate profitability is near all-time highs, inflation is historically low, job growth is accelerating, significant tax cut stimulus is coming and the Fed is saying they are on hold for "an extended period of time." These are all very postive characteristics of the current investment envionment. I expect the current correction will likely be mild and set the stage for a move through recent highs within a few months.

Tuesday, February 24, 2004

Tuesday Close

S&P 500 1,139.09 -.17%
NASDAQ 2,005 -.10%

Leading Sectors
Oil Service +1.84%
Telecom +.96%
Homebuilders +.73%

Lagging Sectors
I-Banking -1.25%
Broadband -1.50%
Fashion -1.51%

Crude Oil 34.58 unch.
Natural Gas 5.10 +.57%
Gold 404.40 -.10%
Base Metals 111.36 +1.09%
U.S. Dollar 86.15 -.87%
10-Yr. Long-Bond Yield 4.02% -.29%
VIX 15.90 -2.39%
Put/Call .76 +24.59%
NYSE Arms 1.43 +17.21%

After-hours Movers
SMTC +4.21% after beating 4Q estimates and raising 1Q guidance. Also, announced $50M stock buyback plan.
RMBS +7.4% after Judge Stephen McGuire released the public version of his initial decision in the Rambus antitrust case.
IM +12.4% after world's biggest computer distributor significantly beat 4Q earnings/sales estimates and raised 1Q guidance substantially.
APSG -3.74% after slightly missing 1Q estimates.
EPIQ -8.7% after missing 4Q estimates by .03.
DMRC -4.89% after missing 4Q estimates and raising 04 guidance.

After-hours News
U.S. stocks fell modestly, pushing the S&P 500 and DJIA down for a 5th straight day, the longest losing streak since January 03. A larger-than-expected fall in the Conference Board's Consumer Confidence Index was the likely catalyst. After the close, Henry Herrmann, CIO at Waddell & Reed, told CNBC he expects the economy to begin adding 150,000-250,000 jobs/month very soon. The CEO of Nautilus said he expects earnings to grow 15% the next 2 years, 3 times the market's growth, as health clubs update their equipment and baby boomers purchase it for their homes. The U.S. Senate voted to block a bill supported by health-care providers that would limit medical malpractice awards in the delivery of babies. Goldman continues to be positive on cell-tower stocks, saying that the perception of the damage done by consolidation is worse than reality and that AMT should rise over 20% during the next 12 months. The latest weekly survey by the Intl. Council of Shopping Centers says chain-store sales were up 8.3% vs. a year ago. Moreover, ShopperTrak said retail sales for the month of February are poised to rise 20.3%.

BOTTOM LINE: February's exceptionally strong retail numbers confirm my suspicion that the recent fall in Consumer Confidence is a result of politics and the mainstream media's constant focus on the jobs reports. These are short-term problems in my opinion. I took a position in AMAT near the close today and will use a close below $21 as my stop. The Portfolio's net long exposure is now 25%. The NASDAQ made a stand today at 2000 and should rise tomorrow on the Ingram Micro report. I will look to add selective longs on the open.

Mid-day Update

S&P 500 1,142 +.12%
NASDAQ 2,009.86 +.12%

Leading Sectors
Oil Service +1.74%
Homebuilders +1.26%
Telecom +1.25%

Lagging Sectors
Defense -.78%
I-Banks -.79%
Fashion -1.51%

Crude Oil 34.49 +.29%
Natural Gas 5.12 -.23%
Gold 404.10 +1.20%
Base Metals 111.25 +.99%
U.S. Dollar 86.14 -.89%
10-Yr. Long-Bond Yield 4.02% -.48%
VIX 15.96 -2.03%
Put/Call .72 +18.03%
NYSE Arms 1.10 -9.8%

Market Movers
NFLX -11.45% on lowered guidance due to higher marketing costs associated with subscriber growth.
CPN -9.4% on cancellation of $2.3B offering. It will explore different options to address debt payment due in November that could result in bankruptcy.
MOSY +85.9% on SNPS buyout. SNPS -14.95%.
KCI +32.0% on strong demand for I.P.O.
ZRAN +13.6% after meeting 4Q estimates and raising 1Q sales guidance.
GDT +7.58% after obtaining the rights to co-promote JNJ's drug-coated stent.
SEE +6.07% on upgrade from CSFB to "Outperform."
ODSY -27.3% after lowering 1Q guidance.

Economic Data
Conference Board Consumer Confidence came in at 87.3 vs. expectations of 92.0.

Accenture CFO, giving the keynote dinner comments at the Goldman Sachs Tech conference yesterday, indicated that his software project pipeline was at a 3-yr. high. GS is recommending VRTS, says estimates are conservative for 04 and reiterates $37 target. GS says communications semi biz is fast improving on the back of carrier capex that looks to be up in 04 and that high foundry utilization is causing lead times to increase and wafer costs to be very firm. GS likes small-cap Oil & Gas E&P companies, KWK and TBI. is reporting that the SG Cowen biotech team thinks that Genentech's(DNA) new cancer drug, Avastin, will significantly beat expectations after FDA approval in March. James Creamer of is buying NT here as he thinks tech selling is overdone. Citi Smith Barney initiating WTW with a "Buy" and $46 target ahead of earnings release tonight. Citi is adding WC to focus list, replacing KELYA. BSX raised to "Buy" at UBS. ZRAN raised to "Sector Outperform" at CIBC. ELBO, GME raised to "Buy" at Bank of America. VZ, AWE raised to "Overweight" at Morgan Stanley, PCS, NXTL, FON and T cut to "Underweight." OATS cut to "Sell" at Merrill, GDT raised to "Buy."

Mid-day News
U.S. stocks are mixed in mid-day trading, as a muted rebound in tech and a strong healthcare sector are offset by weakness in industirals. Attempts to stop U.S. jobs from going to other countries may raise a debate in Congress over the entire concept of free trade, South Carolina Democratic Congressman told CNBC. Fidelity Investments almost tripled sales last year after it cut prices, added funds and won customers fleeing firms sued by regulators for illegal trading. The E.U. halted imports of U.S. birds and eggs after Texas flu cases discovered. CIA director George Tenet says the U.S. faces "a heightened risk of poison attacks" from al-Qaeda.

BOTTOM LINE: The bounce I was expecting in technology occurred, but was rather weak. Thus, I have not added any new longs. The Portfolio is still 20% net long. I will closely monitor late-day action for any signs of strength. The consumer confidence number's weakness is a result of politics and I believe it will start improving again in the near future.

Tuesday Watch

Earnings Announcements

ACAM 5-for-1

Economic Data
Conference Board Consumer Confidence estimated at 92.0 vs. 96.8 last month.

Goldman Sachs raised estimates for COH and made positive comments. GS also saying that defense stocks are overreacting to the Comanche cancellation. Goldman says tone from 1st day of its tech conference is broadly positive. GS saying VZ is their favorite RBOC and SBC is attractive with a yield of 5.2%. SAP CEO says quarter is tracking to plan. GS says CSCO, JNPR, NT, MOT, CIEN, TLAB and SONS all speak tomorrow. Finally, Goldman expects crude oil to trade down to the mid-$20/bbl range this summer as record levels of production and seasonal declines in demand lead to faster-than-normal stock builds. is saying AMCC may enter Host Bus Adapter market, hurting EMLX and QLGC.

Late-Night News
Pakistan called on the intl. peacekeeping force in Afghanistan to help secure the border area and stop the movement of suspected Taliban and al-Qaeda fighters, AFP reported. John Varley, CEO of Barclays Plc, says recent merger activity in the U.S. was a "wake up call" for Barclays and other banks to work to keep their place in the market, the Financial Times said. Sony and Sanyo are raising prices on cell-phone batteries due to higher cobalt costs. Taiwan's United Microelectronics is raising prices of semiconductors because production cannot meet demand. Lehman Brothers and Xinhua Financial Network will team up to produce an index tracking the performance of China's domestic bonds. Chickens on a farm in Texas tested positive for a more virulent form of bird flu than was reported last week and are the first such U.S. cases in about 2 decades. MSFT has secured a deal with RSA Security to allow Windows users to access its secure network systems. FleetBoston may be sued as soon as today by regulators for alleged trading abuses in its mutual fund unit.

Late-Night Trading
Asian markets are mostly down, ranging from -.75% to -1.25%.
S&P 500 indicated -.01%.
NASDAQ indicated unch.

BOTTOM LINE: I will likely add a couple of longs on any weakness in the morning as I believe the major averages are due for an oversold bounce, especially technology. The Portfolio is 20% net long currently. Consumer cyclicals should continue to outperform ahead of tax stimulus, better employment and relatively low interest rates. While I expect the averages to bounce, my indicators are still on short-term sell signals. The current consolidation will likely resume later in the week or next week.

Monday, February 23, 2004

Monday Close

S&P 500 1,140.99 -.27%
NASDAQ 2,007.52 -1.49%

Leading Sectors
Fashion +.78%
Energy +.6%
Restaurants +.58%

Lagging Sectors
Broadcasting -2.23%
Semis -2.74%
Disk Drives -3.27%

Crude Oil 34.40 +.15%
Natural Gas 5.14 +.16%
Gold 399.00 -.08%
Base Metals 110.16 -1.66%
U.S. Dollar 86.94 -.34%
10-Yr. Long-Bond Yield 4.03% -1.51%
VIX 16.29 +1.56%
Put/Call .61 -29.07%
NYSE Arms 1.22 -18.12%

After-hours Movers
NOVL +3.48% after reporting in-line 1Q and slight revenue shortfall.
ZRAN +5.6% after missing 4Q estimates and lowering 1Q guidance.
SNPS -10.1% after beating 1Q estimates, but lowering 04 guidance and announcing 2 acquisitions.
ODSY -13.0% after meeting 4Q estimates, but lowering 04 guidance.

After-hours News
U.S. stocks fell for the 4th straight day on light volume, led by computer related companies as investors shifted out of last year's best performers and into consumer cyclicals. After the bell, Libya said it is dismantling its weapons program and helping experts determine if more technology and expertise has been trafficked, the AP reported. Atlanta-based Delta said it created 1,000 call-center jobs last year in India, saving $25M in 03, thus allowing it to hire 1,200 more U.S. employees in reservations and sales. Moody's said it lowered its rating on $350M of debt of LaBranche & Co., the biggest specialist on the NYSE, to junk status to reflect the costs of its pending $63.5M settlement with regulators. Deutshe Bank is hiring 10 senior investment bankers from CSFB to beef up its technology i-banking practice. Goldman Sachs is saying DELL remains positive on overall IT spending and its growth opportunities. James Cramer of is saying it is too late to sell tech and is slowly starting to make some selective buys.

BOTTOM LINE: It was a bad day for the NASDAQ and technology shares, however volume was light and areas such as retail, restaurants, financials and energy showed relative strength. In the later part of the day, I increased the Portfolio's market exposure to 20% net long by covering a few of my winning semi shorts. My short-term indicators are still giving sell-signals, however overbought/oversold readings are leading me to anticipate an oversold bounce in tech. Moreover, the MSH index is down 6.2% from its high and right around the 50-day moving avg. where it has found support 3 other times in the last year.

Mid-day Update

S&P 500 1,140.08 -.35%
NASDAQ 2,012.51 -1.25%

Leading Sectors
Fashion +.78%
Restaurants +.57%
Energy +.51%

Lagging Sectors
Defense -1.95%
Disk Drives -2.49%
Semis -2.56%

Crude Oil 34.40 +.44%
Natural Gas 5.12 -1.41%
Gold 399.50 +.38%
Base Metals 110.16 -1.66%
U.S. Dollar 86.85 -.45%
10-Yr. Long-Bond Yield 4.07% -.66%
VIX 16.52 +2.99%
Put/Call .58 -32.5%
NYSE Arms 1.27 -14.77%

Market Movers
QCOM +5.64% on boosting 2Q forecast significantly.
LOW -2.7% on profit-taking as 4Q beat expectations and raised 1Q guidance.
CMOS -12.4% on $660M offer to buy NPTest, a 29.3% premium.
VRTX +12.6% after saying an experimental drug reduced the growth of pancreatic and colon tumors in animal studies.
INTC -2.3% after saying that 2003 profit would have been 18% less if they had accounted for options as an compensation expense.
TXU +6.73% after hiring the former CFO of Entergy as CEO.

Morgan Stanley thinks the oil service sector is getting ready for another leg up. MS sees flatish vehicle sales in the next 6-9 months. MS also raised price target for TK to $70 from $62. Goldman Sachs is bullish on IGT, HET, CZR and STN. Citigroup Smith Barney says INTC and TXN generate less profit per sales dollar now than in the past, while NSM, AGR/A, LLTC and MXIM appear more efficient this cycle. Citi still likes vertically integrated semi companies with margin leverage that can drive EPS meaningfully higher, INTC, FCS, CY and MU. Citi is also positive on HMO's, favorites are ATH, WLP and UNH. Finally, Citi is positive on consumer cyclicals due to easy comps, tax benefits, lack of war, no SARS and improved hiring prospects. COMS was cut to "Equal Weight/Neutral" at Lehman. EDS was cut to "Sell" at Deutsche Bank.

Economic Data
None of Note. Greenspan said consumers' ability to handle debt is in good shape, with debt service levels flat over the last 2 years. Greenspan said the ratio of net worth to income is currently somewhat higher than its long-term average. He also said rising credit card use isn't a financial weakness. Finally, he said a rise in renter's debt may be of concern.

Mid-day News
U.S. stocks are falling mid-day, led by weakness in technology shares. Intel said 04 gross margins will be about 62%, five percentage points wider than in 03. Wal-Mart Stores said February sales at stores open at least a year are rising near the high end of its expectations. The U.S. is sending 50 marines to guard the Haiti embassy, according to Sky News. The U.S. Army plans to cancel the Boeing/United Technologies Comanche helicopter program. There is significant insider buying in TYC and CVG in the latest report from Bloomberg. Soybeans are hitting a 15-yr. high on concern for crops in Brazil. U.S. 4Q Online commerce rose 25% to $17.2B, 4 times as fast as all retail sales.

BOTTOM LINE: The Portfolio, positioned market neutral, is having a good day as my shorts are dropping more than my longs. The weakness in tech is broad-based. I may close a couple of profitable shorts later in the day as my indicators are showing tech is getting oversold near-term.

Monday Watch

Earnings Announcements

MSCC 2-for1, MICC 4-for-1

Economic Data
None of note. Greenspan is speaking at 9:30 EST at the Credit Union National Association Government Affairs Office in Washington.

Weekend News
The U.K. government will recruit 1,000 new staff members for the MI5 intelligence agency to fight terrorism, taking its numbers back to Cold War levels. DaimlerChrysler and Volkswagen plan to renew efforts to sell diesel-engine cars in the U.S., the Washington Post reported. Yahoo! CEO Semel says the company's future is almost exclusively on the Internet and not in partnerships with movie studios, record label or t.v. networks, the NY Times said. Kodak will launch an online photo service for camera phones, the AP said. Nokia has made the first mobile-phone handset that can access the Internet using short range wireless technology, called Wi-Fi, rather than rely on a cellular network, the Wall Street Journal said. Nokia also says sales of its N-Gage products are below expectations, the Financial Times reports. Russia's government said it wants state-run OAO Transneft to build a crude oil pipeline to the Pacific coast so that sales can be opened to all buyers, including the U.S. and Japan. Tokyo-Mitsubishi says the U.S. dollar's drop versus the Yen may have ended. Prices of U.S. hot-rolled steel are up 66% since June, Meps Intl. said. Pakistan is planning a military offensive in the coming weeks to expel al-Qaeda and Taliban forces along its Afghan border, the NY Times reported. According to, there is now a 62% chance of catching Bin Laden this year, up 16 percentage points today.

Weekend Recommendations
Guests on "Forbes on Fox" made positive comments on KFT and CVS. They also speculated that PCS, BEAS and VRTS could all be takeover targets. On "Cashin' In", PNX, SPI, ADM and UTX were talked up, while TASR was panned. Barron's had positive comments on MSFT and the possibility of it announcing a large dividend/buyback. TGT was also mentioned positively. It had negative analysis on TIVO, NFLX, AMAT, GTW and the NASDAQ. Merrill Lynch is recommending investors increase their exposure to Japanese stocks, Bloomberg reported.

Late-Night Trading
Asian indices are down modestly with the exception of the Nikkei, which is up 1.4%.
S&P 500 indicated +.16%.
NASDAQ indicated +.24%.

BOTTOM LINE: I am not sure how much the capture of Bin Laden would help U.S. stocks. My gut feeling is that a rally of 1-2% on the news would occur, followed by profit-taking, leaving the indices up modestly.

Sunday, February 22, 2004

Weekly Outlook

Investors will focus on another round of economic data and earnings reports from many retailers next week. In addition to these reports, Fed Chairman Alan Greenspan will be speaking on Mon. and Fri. The Sunday Express is reporting that Bin Laden is cornered in a mountainous area in northwest Pakistan, near the Afghan border. Quoting a U.S. intelligence source, it said Bin Laden and 50 fanatical henchmen were inside an area 16 kilometers wide and deep. is showing the chances of catching Bin Laden this year are now 55.0%. This would likely result in a mildly positive response from the markets. As well, is showing President Bush's chances of re-election increased to 65.0% after Ralph Nader announced his candidacy over the weekend.

BOTTOM LINE: Major U.S. indices will likely fall or remain in a trading range through next week. Most of the short-term indicators I follow are giving negative readings. The Portfolio is now market neutral. I will most likely sell into any substantial rallies next week. I will closely watch the market's reaction to what should be very positive news from the economic front and the retailing sector. I am still very bullish for the year, but I am not going to fight the tape. Right now we are in a correction/consolidation phase and the Portfolio is positioned accordingly.

Saturday, February 21, 2004

Market Week in Review

S&P 500 1,144.11 -.69%

U.S. stocks declined last week, led by technology shares amid concerns about valuations, a rising dollar and rising interest rates. Without so much as a 5% correction in over a year, U.S. stocks will likely decline or consolidate in the short-term. As well, the NASDAQ is up 90% over the last 15 months, its 4th best cyclical showing ever and is due for a correction. Small-cap growth stocks bore the brunt of the selling as investors became more risk adverse on inflation fears.

Merger and acquisition activity continues to accelerate in 04. Cingular's $41B takeover of AT&T wireless and National City's buy of Provident Financial for $2.1B highlighted the week in M&A.

On the earnings front, bell-weather U.S. market leaders Deere & Co., Broadcom and Applied Materials all significantly beat expectations. Analysts boosted 04 estimates for all 3 substantially, lowering their valuation on 04 estimates. Wal-Mart, the world's largest retailer, also reported good 4th quarter profits up 8.5% and raised 1st quarter guidance. Intuit and Hewlett Packard met expectations, but were conservative in their guidance, leading to their shares' decline.

BOTTOM LINE: I think the market's decline last week was mainly a result of profit-taking after an exceptional run. Investor concerns over inflation seem pre-mature considering interest rates barely moved last week, hovering near 46-yr. lows. The rise in the dollar was not significant considering the size of its decline over the last year. Energy prices, while a concern longer term, will likely fall or move sideways into the spring, as weather improves. Corporate profitability growth is near historic highs, resulting in rapidly falling valuations for U.S. stocks. For these reasons, I view the current consolidation/correction as only temporary.

Economic Week in Review

ECRI Weekly Leading Index 132.90+.99%

The holiday-shortened week began on Tues. with the Empire Manufacturing, Industrial Production and Capacity Utilization reports. The Empire Manufacturing report rose in February to a record 41.1 vs. expectations of 37.0. The report showed 52.5% of the company's surveyed said business improved from January, while 10.5% saw deterioration. The survey's hiring index for the next 6 months jumped to 36.2, the highest since the report began in 01. U.S. industrial production rose .8% in January, meeting expectations, while capacity utilization increased to 76.2 vs. expectations of 76.4. Record-low inventories relative to sales have prompted factories to speed up assembly lines to meet demand.

Housing starts retreated from their highest level in 20 years to a 1.9M-unit annual rate last month vs. expectations of 2M, on record cold temperatures in many parts of the country. The average temperature in the Northeast was almost 8 degrees colder than normal. As well, building permits declined to 1.9M vs. expectations of 1.91M.

The number of Americans filing initial unemployment claims fell last week to 344K, better than expectations of 355K and close to a 3-yr. low. The number of people continuing to collect jobless benefits rose to 3.19M vs. expectations of 3.11M. The index of leading U.S. economic indicators rose .5% in January meeting expectations. Jose Rasco, a senior economist at Merrill Lynch, said the rise could be attributed to the rise in the avg. work week, consumer sentiment, soaring stocks and falling jobless claims. The Philly Fed Index fell to 31.4 this month vs. expectations of 35.0. However, this was the first time since 1984 that the index came in above 30 for 3 consecutive months and the survey's measure of the length of the work week was the highest since record-keeping began in 1968.

The Consumer Price Index climbed .5% in January vs. expectations of a .3% rise. Ex food and energy, the index climbed .2% vs. expectations of .1%. The energy component of the index increased 4.7%, the most since the Iraq war began, on cold weather and increased demand from the U.S. and China. However, the core CPI only gained 1.1% for all of 03, the smallest annual rise in inflation in 43 years.

Federal Reserve Governors were unusually vocal last week. Their statements all seemed to focus on a few main themes. On the positive side, they said a substantial increase in hiring is on the horizon, tax cuts and interest rates at 46-yr. lows are boosting GDP growth significantly, they can remain "patient" with respect to raising rates and that overseas outsourcing has been going on for a long time and that it is good for the U.S. in the long-run. On the negative side, they said that U.S. workers were under-educated, persistently high energy prices were becoming a major concern and that inflation may become a problem in the future.

BOTTOM LINE: The avg. work week is increasing, productivity is declining and GDP growth is accelerating which should result in an accelerated rate of hiring. Tax cuts of $37B more than last year at this time are about to hit U.S. consumers' pockets. Interest rates are at 46-yr. lows and show no sign of moving up significantly. A recent survey of Global Economic Confidence by the Intl. Chamber of Commerce is at a 10-yr. high and their Overall Global Economic Climate index is at its best level since 1984. These findings were based on the responses of 1,114 "economic experts" in 92 countries. Fed Fund Futures are predicting the Fed to stay on hold until October. Finally, foreign governments and investors added 23% to their net holdings of U.S. securities in 03 even with a declining U.S. dollar, interest rates at historic lows and rising deficits. These are all reasons to be very positive for the direction of the U.S. economy in 04.

Weekly Scoreboard*

S&P 500 1,144.11 -.69%
Dow 10,619.03 -.70%
NASDAQ 2,037.93 -1.72%
Russell 2000 579.89 -2.17%
Wilshire 5000 11,143.58 -.85%
Volatility(VIX) 16.04 +4.77%
AAII Bullish % 56.45 +.62%
US Dollar 87.24 +2.37%
CRB 264.25 -.28%

Futures Spot Prices
Gold 398.00 -3.84%
Crude Oil 34.26 +2.58%
Natural Gas 5.19 -4.8%
Base Metals 112.02 +2.25%
10-year US Treasury Yield 4.09% +1.24%
Average 30-year Mortgage Rate 5.58% -1.41%

Leading Sectors
Fashion +2.53%
Papers +1.89%
HMO's +1.51%

Lagging Sectors
Telecom -2.74%
Disk Drives -3.23%
Networking -3.8%

*% Gain or loss for the week

Friday, February 20, 2004

Friday Close

S&P 500 1,144.11-.26%
NASDAQ 2,037.93-.39%

Leading Sectors
Oil Service+.05%

Lagging Sectors

Crude Oil 34.26-1.10%
Natural Gas 5.19-.80%
Gold 398.00-3.00%
Base Metals 112.02-.8%
U.S. Dollar 87.15+1.5%
10-Yr. Long-Bond Yield 4.09%+1.53%
VIX 16.04+1.52%
Put/Call .86+28.4%
NYSE Arms 1.49+53.6%

After-hours Movers
None of Note

After-hours News
The U.S. markets ended down modestly after a late-day surge on positive comments from members of the Federal Reserve. This surge came on the heels of an intense mid-day sell-off on inflation fears. Later in the afternoon, Alan Greenspan said outsourcing hasn't hurt the U.S. economy and he sees employment rising "more quickly" before long. He also said protectionism won't save jobs and that demand is declining for low-skilled labor. The Fed's Bernanke said high energy costs will eventually hurt GDP growth if they persist and that hiring will strengthen this year on substantial U.S. growth and low inflation. Texas became the 4th state to report a case of bird flu this month. CNBC says the current unemployment rate of 5.6% is lower than the avg. unemployment rate for any 10-yr. period during the last three decades. CNBC also said that the NASDAQ is up 95% in the last 15 months, the 4th best cyclical move on record. Rumors are flying that Ralph Nadar will make an announcement soon that he plans to run for President.

BOTTOM LINE: I covered a few profitable shorts during the late afternoon rally, taking the Portfolio's market exposure back to market neutral. The volatility caused by option expiration likely masked underlying weakness that will resurface sometime next week. My short-term indicators continue to give a sell signal for the NASDAQ and are close to giving a sell for the S&P 500, as well. Thus, I will keep the Portfolio's market exposure close to market neutral, as I expect a continuation of the recent weakness in the short-term.

Mid-day Update

S&P 500 1,142.25-.44%
NASDAQ 2,028.62-.85%

Leading Sectors

Lagging Sectors
Disk Drives-1.92%

Crude Oil 35.47-1.47%
Natural Gas 5.18-1.05%
Gold 399.50-2.63%
Base Metals 111.94-.87%
U.S. Dollar 87.11+1.47%
10-Yr. Long-Bond Yield 4.09%+1.38%
VIX 16.31+3.23%
Put/Call 1.0+49.2%
NYSE Arms 1.72+77.3%

Market Movers
BEAS+4.5% on better-than-expected 4Q and multiple upgrades.
TASR+6.9% on positive reception from investor conference.
BCSI+16.5% on very strong 3Q report, significantly above expectations.
CEGE+12.1% on optimism over lung cancer vaccine.
VAPH+25% on 3-for-1 split announcement.
KVHI-10.8% on 4Q report below expectations.
UVN-4.8% on weak 1Q guidance.

Morgan Stanley says demand for semis in Asia is stronger than seasonal in 1Q, capital spending plans are conservative. MS also says JWN had best 4Q margin performance in 10 years. MS raising price target on UTX to $110 from $100. 9 of 14 insurance companies that MS follows beat 4Q expectations by a significant margin. Goldman Sachs believes the U.S. Treasury yield curve will flatten in 04, benefiting ALL, AIG, C, MWD and STT. This would hurt FTN, NCC, JP, NFB and FNM. GS would buy HPQ at current levels. GS positive on newspaper stocks in 04. GS also like JWN, saying it is in the early stages of a dramatic systems-enhanced turnaround. Finally, GS raised WMT to "Outperform" from "In-line." Smith Barney says to switch from Copper to Aluminum stocks. Likes AA and AL. SB also likes CCI on significantly better-than-expected earnings. SB also positive on WMT, saying it will benefit from improved apparel offerings and tax cut spending. is negative on RMBS, saying INTC will use a new standard for memory that relies on a technology different than that offered by RMBS. MU was cut to "Neutral" at CSFB. BEAS raised to "Buy 2" at UBS.

Economic Data
Consumer Price Index rose .5% vs. .2% last month.
CPI Ex Food and Energy rose .2% vs. .1% last month.

Mid-day News
U.S. stocks fell as comments from Hewlett Packard about computer-industry growth, higher-than-expected inflation readings, options expiration and plain profit-taking weighed on shares. AMG Data reporting Equity funds had net cash inflows of $3.6B for the week ended February 18. TXN announced 21M share buyback. Morgan Stanley says that 87.5% of the S&P 500 either met or beat earnings expectations in 4Q, only 12.5% disappointed. Earnings growth was 27.8% on avg. 78% of information tech companies surprised on the up-side with 54.3% average earnings growth. Japan raised its terror alert to the highest level. The Fed's Poole said slowing rates of productivity growth combined with strong economic growth should lead to "substantial gains" in payroll employment growth in 04. President Bush named FDA commissioner Mark McClellan to lead Medicare, as it rolls out expanded prescription drug coverage for seniors.

BOTTOM LINE: The market was looking for a reason to decline today and the CPI report was the catalyst. This report resulted in an increase in the U.S. dollar, interest rates and worries that the Fed was getting behind the curve on inflation. With base metal and energy prices soaring on US/Chinese demand, the Fed may have to raise rates sooner rather than later. I added a few more shorts on the open and the Portfolio is now 20% net short. The put/call and trin readings are at levels that suggest we are getting close to a short-term bottom. I may take some profits in a few of my better shorts on the close. If the U.S. dollar continues to rally next week, we may get the first 5%+ correction in the S&P in over a year, as a rising dollar hurts U.S. multi-nationals.

Friday Watch

Earnings Announcements

None of Note

Economic Data
Consumer Price Index estimated up .3% in Jan. vs. a .2% rise in Dec.
CPI Ex Food and Energy estimated up .1% in Jan. vs. a .1% rise in Dec.

Late-night News
Tivo's(TIVO) shares will climb as it attracts more subscribers, Business Week reported in its "Inside Wall Street" column. The column also said Net2Phone Inc.'s(NTOP) shares may reach $11 in a year. Bird Flu killed a cat for first time, Thailand's Nation reports. The book-to-bill ratio for North American chip-tool makers was 1.18 in January, lower than the 1.23 reported in December., reporting from the Enercom Oil Service Conference, said the CEO of Patterson-UTI(PTEN) stated that declining natural gas production rates and increasing demand will translate into "a lot more drilling" this year. As well, the CEO of Unit Corp.(UNT) said for natural gas production just to remain stable, the number of drilling rigs in North Amer. will have to reach 1,100 from 950 currently. also reported that Nabors(NBR), Precision Drilling(PDS) and Grey Wolf(GW) will also benefit directly. Indirect beneficiaries include GRP, SII, BHI, SLB and HAL.

Late-Night Trading
Asian markets are down, ranging from -.25% to -1.25%.
S&P 500 indicated -.08%.
NASDAQ indicated -.07%.

BOTTOM LINE: Asian markets are weaker across the board with tech leading the way down. With option expiration tomorrow, volatility should remain through early next week. I plan to add a few shorts into any rally tomorrow, taking my net market exposure to 20% net short. The Portfolio is currently market neutral.

Thursday, February 19, 2004

Thursday Close

S&P 500 1,147.06-.41%
NASDAQ 2,045.96-1.47%

Leading Sectors

Lagging Sectors

Crude Oil 35.85-.42%.
Natural Gas 5.24+.08%
Base Metals 112.92+.3%
Gold 411.10+.19%
U.S. Dollar Index 85.73-.15%
10-Yr. Long-Bond Yield 4.03% unch.

After-hours Movers
COX+1.79% after announcing Disney's ESPN renewed its distribution agreements with Cox and Charter(CHTR). Cox said the agreement was for 9 years and rates will increase 7% annually vs. 20% increases under the old contract.
WFII-9.8% after meeting 4Q estimates, lowering 1Q guidance and filing for a shelf registration for as much as $200M in securities.
BEAS+3.2% after better-than-expected 4Q earnings/sales and raising 1Q sales guidance. Integration sales climbed 40% sequentially which bodes well for later quarters.
BCSI+11.5% after significantly beating 3Q estimates.

After-hours News
Goldman Sachs says Disney parks in Orlando and Anaheim tracking above expectations and may signal a recovery in Theme Parks. Goldman also says communications end markets should provide most upside potential for semis and account for 21% of semiconductor consumption. Their favorite picks are MRVL and AGR/A. Carly Fiorina, Hewlett Packard's CEO, reiterated her conservative guidance for the year, saying "if the economy continues to improve, 4% IT spending growth is possible." The U.S. will mail $37B more in tax refunds to Americans in the next three months than it did at the same time last year because of new tax cuts taking affect, the Treasury Dept. said. Bill Sullivan, senior economist at Morgan Stanley, says this could add 1-2% onto GDP growth during this period. China may let domestic securities companies raise money from bond sales starting next month. Indian stocks attracted a record $7B from foreign investors last year as its main exchange, The Mumbai, soared 72%. KPMG is being investigated by the U.S Attorney's office, reported CNBC.

BOTTOM LINE: Today was a bad day for the Bulls. Strong earning's reports and the good job's data today should have propelled the market higher. Instead, a weak rally through mid-day turned nasty in the final 90 minutes. I took the Portfolio to market neutral(longs-shorts=0), as I sold longs and added shorts in the tech sector. Today's action clearly shows we are still in a consolidation/correction phase. I expect more down-side in the short-term before another test of the recent highs.

Mid-day Update

S&P 500 1,155.99+.61%
NASDAQ 2,079.69+.15%

Leading Sectors
Disk Drives+2.01%

Lagging Sectors

Crude Oil 35.80+.99%
Natural Gas 5.21-2.73%
Gold 411.90-.22%
Base Metals 112.92+.3%
U.S. Dollar 85.81-.15%
10-Yr. Long-Bond Yield 4.04%-.24%

Market Movers
ELN+16.4% on continued strength from accelerated ms drug schedule and positive comments from CSFB.
OVTI+20.6% on significantly better-than-expected 3Q report and raised 4Q guidance.
NXTL-2.3% on good 4Q, but mixed guidance.
PIXR+4.4% on talk of distribution contract with MGM.
PNRA-10.4% on 4Q sales below expectations and didn't raise guidance.
INTU-5.9% on beating 2Q expectations, but lowering 3Q guidance.

Morgan Stanley saying steel trade balance is best in 12 years, strengthening domestic steel market with no increase in U.S. consumption. MS also raising BRCM price target to $55. Goldman saying to buy LOW $60 calls ahead of earnings release. DHI cut to "Underperform" at CSFB. CTX raised to "Overweight" at JP Morgan. OVTI raised to "Strong Buy" at Needham. WMT raised to "Buy" at AG Edwards.

Economic Data
Initial jobless claims came in at 344K, better than the 355K estimate.
Continuing claims were 3186K vs. an estimate of 3105K.
Leading indicators met expectations of .5%
Philly Fed of 31.4 was below expectations of 35.

Mid-day News
U.S. stocks rose after companies such as Applied Materials gave forecasts that surpassed analyst estimates, providing reassurance that earnings will increase fast enough to justify further gains in share prices. EMC is saying corporate spending on tech is improving. Sales of homes in the San Francisco bay area reached a 15-year high last month. Former Enron CEO Skilling surrendered to the FBI this morning and will appear in court today. Initial jobless claims are now close to a 3-year low. Freddie Mac say 30-yr. mortgage rate fell to 5.58% this week.

BOTTOM LINE: I am disappointed with the relative weakness in the tech sector today. I am in the process of reducing my exposure in this area. This will take the Portfolio down to about 75% net long. I will then decide later in the day whether or not to add long positions in other sectors or keep my overall market exposure at current levels. AMAT is a prime example of what is going on with the overall market right now. Its P/E on 04 estimates was 35 before its earnings release. It is now around 22 as a result of significantly beating expectations. The current market P/E of 18 on 04 estimates is most likely inaccurate. Analysts have clearly underestimated the leverage in most company's business models. This means the current P/E for 04 estimates is likely below 15, near the market's long-term average. I contend that with interest rates at 46-year lows and corporate profitability near all-time highs the overall market deserves a premium valuation relative to its historical average. This is the main reason why I am very bullish on 04.

Thursday Watch

Earnings Announcements

SNDK 2-for-1

Economic Data
Initial Jobless claims estimated at 355K vs. 363K last week.
Continuing claims estimated at 3105K vs. 3083K last week.
Leading Indicators estimated at .5% vs. .2% last month.
Philadelphia Fed. estimated at 35.0 vs. 38.8 last month.

Late-night News
North Korea is willing to discuss its highly enriched uranium program with the U.S. during six-nation talks to be held in Beijing next week. Guidelines for fining passengers who carry prohibited items on airplanes have been released by the Transportation Security Admin. Howard Dean dropped out of the presidential race. The U.S. will work with the Afghan government to try to meet the deadline of June this year for holding presidential and parliamentary elections. Iran shut the offices of 2 newspapers that published a letter by lawmakers criticizing Iran's supreme leader for allowing unfair elections to be held.

Late-Night Trading
Asian markets are mixed, ranging from +.5% to -.5%.
S&P 500 indicated +.24%.
NASDAQ indicated +.36%.

BOTTOM LINE: The major U.S. indices should rally tomorrow given the positive news in the tech sector after the close. A weak rally or sell-off on this news would most likely mean a continuation of the current consolidation. A strong rally tomorrow should eventually lead to a move through recent highs. The Portfolio is 100% net long, thus I will closely monitor the open tomorrow for any signs of weakness and cut market exposure accordingly.

Wednesday, February 18, 2004

Wednesday Close

S&P 500 1,151.82-.45%
NASDAQ 2,076.47-.19%

Leading Sectors

Lagging Sectors
Oil Service-1.78%

Crude Oil 35.45 unch.
Natural Gas 5.36+.17%
Base Metals 112.58+.13%
U.S. Dollar Index 85.83-.13%
10-Yr. Long-Bond Yield 4.04% unch.

After-hours Movers
AMAT+5.4% on better-than-expected 1Q and raised 2Q expectations.
OVTI+18.6% after significantly beating 3Q estimates and raising 4Q guidance.
BRCM+3.3% on conf. call saying its sales for 1Q will be $565M, higher than the $528M forecast.
INTU-5.0% after exceeding 2Q estimates, but lowering 3Q guidance.
ECLG-8.4% after beating 4Q estimates, but lowering 1Q guidance.

After-hours News
Yahoo drops Google and says it will use it's own search software. A Houston grand jury issued a sealed indictment against former Enron CEO Jeff Skilling today, the Houston Chronicle said. Earnings growth for the S&P 500 has only been this high 4 other times in the last 130 years. Market breadth is continuing to expand at a healthy pace, with over 85% of stocks still above their 200-day moving averages, the strongest pace in the past 12 years.

BOTTOM LINE: I took some profits in a few of my basic material stocks and added a couple of tech stocks near the close. The portfolio was down today and is still 100% net long. Semi and Semi equipment stocks should lead the way tomorrow. OVTI, BRCM and AMAT all had very positive things to say on their calls after the close.

Mid-day Update

S&P 500 1,155.06-.16%
NASDAQ 2,080.29 unch.

Leading Sectors

Lagging Sectors
Oil Service-.82%

Crude Oil 35.60+1.17%
Natural Gas 5.39+1.24%
Gold 413.80-.62%
Base Metals 115.72+2.93%
U.S. Dollar 85.23+.31%
10-Yr. Long-Bond Yield 4.01%-2.9%

Market Movers
ELN+30.0% on accelerated schedule for new ms drug.
RMBS+30.0% on dismissal of patent-fraud case, resulting in as much as $3B in royalties.
CMX+4.6% on winning contract from FEP covering 3.9M workers.
MHS-10.7% on losing contract to CMX.
NTES+21.0% on strong earnings report, strength of on-line gaming was big surprise.
BRCM+8.8% on expectations of positive conf. call after close.
NTAP+7.7% on strong 3rd Q and raised 4th Q guidance.

Goldman says Manufacturing sector capex for tech should increase 16% this year, dramatically improving in recent weeks. Goldman raising price forecasts for base metals across the board, favorites are AL, N and AA. Goldman raises rating on PCS to "Outperform" and NXTL raised to "In-Line." Citigroup's favorite semis are CY, FCS, INTC, MU and NSM. Also, Citi says BRCM may acquire PXLW, TRID or GNSS to bolster digital TV offerings. Leerlink raising target on CMX to $45 on massive contract win from Federal Employees Health Benefit Plan. JP Morgan raises VIP to "Overweight" and lowers MBT to "Neutral."

Mid-day News
U.S. stocks are down modestly at mid-day on weaker housing numbers. U.S. housing starts came in at 1903K, below the 1910K estimate. Building permits were 1899K, also failing to meet estimates of 1910K. The shortfall was blamed on cold weather and storms in some parts of the country. Cablevision(CVC) says capital costs low and margins high for VOIP, already seeing 40% direct margins. Copper prices hit an 8-yr. high as basic materials continue their strong advance.

BOTTOM LINE: The stair-step pattern continues as the markets rest after yesterdays strong advance. This is very healthy. I wouldn't be surprised to see a rally later in the day. A lot of stocks are moving up significantly on good news. Breadth is pretty good. My indicators are still on short-term sell in tech, so I will postpone my buying in this area for now. I haven't made any changes today, the Portfolio is currently down for the day and is 100% net long. I don't think the housing numbers are a big deal and I expect the market to resume its upward move shortly.

Wednesday Watch

Earngings Announcements

OVTI 2-for-1

Economic Data
Housing starts estimated at 2000K vs. 2088K last month.
Building Permits estimated at 1910K vs. 1924K last month.

Late-night News
Senator Kerry edged out Senator Edwards in Wisconsin's primary. Thailand reports 7th human death from bird flu. Scott Moritz of says Cingular/AT&T Wireless deal could be huge opportunity for OPWV. Jury finds against Tyson Foods in Cattle price-fixing, Tyson plans appeal.

Late-Night Trading
Asian markets are mostly higher, ranging from +.5% to +1.0%.
S&P 500 indicated +.02%.
NASDAQ indicated +.07%.

BOTTOM LINE: Very little late-night news of any importance. I still expect a pretty good day for the longs tomorrow, led by tech.

Tuesday, February 17, 2004

Tuesday Close

S&P 500 1,156.99+.98%
NASDAQ 2,080.35+1.30%

Leading Sectors

Lagging Sectors

Crude Oil 35.14-.14%
Natural Gas 5.31-.17%
Base Metals 112.43+2.63%
U.S. Dollar Index 84.87-.11%
10-Yr. Long-Bond Yield 4.04%-.05%

After-hours Movers
NTAP+9.5% on exceeding 3Q earnings/sales and raised 4Q guidance.
BRCM+7.1% after setting conference call tomorrow to discuss "stronger business outlook."
EP-11.1% after slashing its assessment of natural gas and oil reserves by 41%.
ANF+5.1% after meeting 4Q earnings/missing sales targets and reaffirming 1Q guidance on price increases for their clothes, baffling analysts.
BRKT+19.4% after significantly beating 4Q earnings estimates and raising 1Q guidance.
DITC+14.7% after beating 3Q estimates and raising 4Q guidance.
NTES+7.7% on excellent 4Q earnings above estimates.
PLAB+7.1% after significantly beating 1Q earnings estimates.
TXCC+5.6% on announcement that Samsung selected it as preferred VLSI component supplier for W-CDMA wireless platforms.

After-hours News
U.S. stocks advanced today on optimism an increase in merger activity is a sign that shares are cheap. Exceedingly strong corporate profits and low interest rates also helped. A U.S. appeals court rejected the challenge to the "Do not call" list. Rambus(RMBS) won a ruling from a U.S. FTC judge that may help it reap as much as $3B/year from semi makers. Japan's economy grew at a 7% annual pace last quarter, the fastest in 13 years. NYSE specialists settled with SEC for $240M.

BOTTOM LINE: Asian indices are indicated higher as prospects for the first synchronized global recovery in decades are brightening. The Portfolio had a very good day, notwithstanding its conservative position at the start of the day. It is now 100% net long. I added long positions in the basic material, overseas telecom and energy-related sectors. I expect more follow-through tomorrow, with tech leading the way after a multitude of good earnings reports after-hours. I may rotate into some tech if my short-term indicators give buy signals on the open.

Mid-day Update

S&P 500 1,156.86+.96%
NASDAQ 2,079.13+1.25%

Leading Sectors

Lagging Sectors

Crude Oil 34.62+.17%
Natural Gas 5.31-3.81%
Gold 416.70+1.44%
Copper 129.9+4.46%

Market Movers
AWE+15.7% on Cingular's $41B takeover bid.
NXTL+6.2% on AWE news and anticipation of strong earnings report.
RTRSY+20.2% on strong earnings and raised guidance.
IDXC+9.2% on Suntrust and Maxim upgrades to "Strong Buy".
SLAB-5.6% on Morgan Stanley downgrade to "Equal-weight".
OMC-2.2% on earnings report that disappointed some.
DE+4.7% on significantly better-than-expected 1st Q earnings and raised guidance.

Morgan Stanley positive on large-cap integrated oil-service companies. INTC developer forum Feb.17-19 is being watched closely. Goldman Sachs has positive comments on AZO. Goldman also saying Oil/E&P shares can rally to peak valuations, up 30% from current levels, and AMAT quarterly report should be VERY strong. Finally, Goldman likes cell-tower stocks as consolidation news is now out. Citigroup raised estimates for Samsung. Also said prices for power amps and linear IC's have risen 80% and 60%, respectively at TXN and NSM. NSM says 6-inch fabs running at full capacity and TXN has extended lead-times to 12-16 weeks from 6-8 weeks. Citigroup says SEBL favorite play on applications recovery. OSI raised to "Buy" at BB&T Capital. CIEN raised to "Buy" at W.R. Hambrecht. UNA raised to "Buy" at Robert Baird.

Mid-day News
U.S. stocks advanced on optimism an increase in mergers is a sign that shares are cheap even after an 11-month rally and corporate profits will keep rising. The Empire Manufacturing reading came in at 42.05, higher than the 37.0 estimates. Industrial Production met expectations, rising .8%. Capacity Utilization rose to 76.2%, modestly below expectations of 76.4%. Foreigners purchases of U.S. debt, corporate bonds and stocks rose by a net $75B in Dec., dispelling the notion that the falling U.S. dollar and larger budget/trade deficits are hurting demand for U.S. assets. Moreover, the report showed foreigners added 23% to their net holdings of U.S. securities for all of 2003. National City agreed to buy Provident Financial for $2.1B.

BOTTOM LINE: A very good day. Only one sector I follow is down today. However, my short-term indicators are still giving sell signals on the NASDAQ and the technology sector, but buys in many other sectors and the broad market. Thus, I have taken my market exposure back to 100%, adding new positions in a variety of sectors, excluding technology.

Tuesday Watch

Earnings Announcements

Economic Data
Empire Manufacturing estimated at 37 vs. 39.2 last month.
Industrial Production estimated at .8% vs. .1% last month.
Capacity Utilization estimated at 76.4% vs. 75.8% last month.

Weekend News
U.N. says bird flu eradication may take years. Disney(DIS) may be worth up to $35/share according to Goldman Sachs and Bear Stearns, the company's advisers. The Democratic Party wants to increase taxes on the wealthy to spend as much as $6B more annually on education, according to the Washington Post. Senator Kerry's chances of winning the Democratic nomination rebounded to 95% over the weekend, as no additional news regarding the intern scandal surfaced. The NYPD has been preparing for possible nuclear, biological or chemical weapons attacks, the NY Times reported. Wal-Mart said February sales at U.S. stores are rising at the high end of its forecast, as shoppers purchased more coats, food and Valentine's items last week. U.K. warns major terror attacks may be imminent in Saudi Arabia. North Fork Bancorp confirmed rumors that it would buy GreenPoint Financial for $6.3B.

Weekend Recommendations
Guests on "Forbes on Fox" made positive comments on APC,COP,CAM,POG and NWL. On "Cashin N", ATVI, MX, TELK, NGG and VE were talked up. ATVI, NTOP, GNSS, LUV, and TXN were recommended on "Bulls and Bears". Barron's had positive comments on LORLF, DIS, JNS, HZO, CLE, FITE, ANN and CHS. It had negative analysis on CMCSK, FD, MAY, DDS, SKS and the technology sector.

Late-Night Trading
Asian indices are up on average .75% to 1.25%.
S&P 500 indicated +.24%.
NASDAQ indicated +.47%.

BOTTOM LINE: With my short-term indicators on "sell", I have positioned the Portfolio conservatively at 40% net long. It looks like the markets may try and rebound on the open from the end-of-week selling. I will closely watch the strength of this rebound and my short-term indicators. I am very bullish intermediate-term, but I don't want to fight the tape.

Monday, February 16, 2004

Weekly Outlook

U.S. stocks should extend recent gains this week, as the release of a number of key economic indicators should confirm brisk growth with little inflation. As well, recent merger activity should continue and a number of leading U.S. companies are set to release earnings. Reports over the weekend say North Fork is nearing an agreement to acquire GreenPoint Financial for about $6.2B in a union of two similarly sized New York regional banks. Shares of AT&T Wireless and Disney gained in Europe on Mon., as investors speculated there will be takeover battles for the 3rd-largest U.S. mobile phone provider and the No. 2 U.S. media company. Agilent(A), Applied Materials(AMAT), Hewlett-Packard(HPQ), Intuit(INTU), Nextel(NXTL), Nordstrom(JWN), Wal-Mart(WMT) and Target(TGT) report this week. Options expiration should add to volatility towards the end of the week.

BOTTOM LINE: The short-term technical indicators I follow turned negative last week, thus my Portfolio's relatively low(40% net long) level of market exposure. I believe we are still consolidating from the markets extraordinary strength over the last 12 months before we make new highs. While I am cautious short-term, I am getting more and more positive on the markets potential performance for the year. Valuations are LOW for the general market on expected 04 earnings relative to interest rates. With an expected P/E of 18.8 and interest rates at 46-year lows, the S&P 500 should continue a meaningful advance. Fed Fund futures are now showing market expectations that the Fed will remain on hold until Oct. I can't emphasize enough how positive the recent acceleration in merger and acquisition activity is for the market. Venture capital, for the first time in several years, is accelerating its flow into many promising U.S. start-ups. Investors have poured $31B into equity mutual funds just this year, according to recent data. The media harps on the decline in the dollar and large budget/trade deficits scaring away foreign investors, yet recent data suggest otherwise. Foreigners' appetite for U.S. stocks and bonds remains voracious. In November, foreign purchases of U.S. stocks and bonds jumped 217% to 87.6 billion, after a 560% jump in October according to The A quiet IPO/secondary market, major Merger/acquisition activity and increasing inflows into U.S. equity funds all paint a very bright supply/demand picture for the market. Economic data points released this week should confirm accelerated spending by corporate America. Finally, with asset values increasing, debt service burdens decreasing, interest rates/inflation low, large increases in income tax refunds and income/job growth steadily accelerating, the consumer should continue to contribute meaningfully to economic growth. Strong housing and retail markets will provide a significant boost to 1st Q GDP, propelling it above 5% for the quarter. Overall, despite the negativity conveyed by most of the mainstream media, 04 is shaping up to be another very good year.

Sunday, February 15, 2004

Market Week in Review

The S&P 500 advanced for an 11th week in 12 on Greenspan's testimony to Congress, takeover announcements and interest rates near 46-year lows. Greenspan told lawmakers Wednesday the U.S. economy may grow as much as 5% this year, the strongest pace since 1984, without sparking inflation. As a result, he said the Fed can be "patient" with respect to raising rates. Comcast's hostile bid for Disney and Juniper's acquisition of NetScreen generated excitement for further takeover announcements. Consolidation, in the form of increased mergers and acquisitions, is generally very positive for the overall market.

In other positive developments, Imclone's Erbitux received FDA approval for the treatment of colon cancer. PC motherboard shipments in Jan. rose much more than expected according to Smith Barney. The FCC ruled a computer-to-computer calling service isn't subject to traditional telephone rules, signaling it will take a hands-off approach to other internet-phone services as it begins a regulatory review of the VOIP industry. Commodity-related sectors exhibited tremendous strength throughout the week on price increases resulting from voracious Chinese demand and a significant improvement in U.S. growth.

While the S&P 500 rose modestly for the week, the NASDAQ fell .5%. This divergence and weakening breadth readings are a little worrisome and merit attention. OPEC's decision to cut production in April and stick to quotas resulted in a significant increase in energy prices. While Dell met expectations, it was more conservative than most investors expected on its conference call. I believe they are managing expectations to enable them to report a very good upside surprise next quarter. Lastly, Bank of America lowered expectations for Intel's 1st quarter sales and profits. I am not sure what to make of this, as it contradicts the Smith Barney motherboard report. Investors took profits across the board in technology the last two days of the week.

BOTTOM LINE: It appears as though last week's market action was a continuation of the recent consolidation that began a month ago. It wasn't a bad week, but with the exception of commodity-related sectors, not good either. It seems as though more consolidation needs to occur before a meaningful thrust through recent highs.

Economic Week in Review

ECRI Weekly Leading Index 131.7-.68%

Sales at U.S. retailers excluding auto dealers increased .9% in January, the biggest rise in 5 months, as consumers used their Christmas gift cards, taking advantage of post-holiday discounts. As well, cold weather across much of the nation led to increased sales of sweaters and coats. There does not appear to be a retail slow-down so far in February. The same bad weather that helped retailers hurt auto dealers. Including autos, sales fell .3% in January, the first drop since Sept. of 03. However, economists are expecting auto sales to snap back sharply in February with better weather conditions.

The number of Americans filing first-time jobless claims unexpectedly rose by 6,000 last week. Bad weather may have resulted in temporary layoffs at construction related companies, a government spokesman said. It is my opinion that the over-capacity created by the bubble of the late 90's is resulting in an extended time-line for our current recovery. All the expected signs of economic recovery are occurring, but at a leisurely pace. However, this over-capacity is finally being burned off with vigorous U.S. demand in many sectors reported during the last 2 quarters and extending into this quarter. Recently, Cisco Systems and Micron Technology, two of the largest U.S. tech companies, stated that component shortages in their latest quarters are causing them to increase purchases for their inventories from suppliers. Vanguard, one of the largest investment firms in the world, stated this week that a substantial increase in customer interest and activity has resulted in a need to hire a lot of new people quickly.

Furthermore, recent reports showing the ratio of inventories-to-sales at all-time record lows, orders improving for manufacturers more than at any time in 50 years, and a decrease in productivity from 9.2% in the 3rd Q to 2.7% in the 4th Q also point to an increase in hiring very soon. Greenspan went out of his way to point this out several times in his testimony to Congress. Companies have finally squeezed every last ounce of productivity out of their current employees. With GDP growth rising at its fastest past in 20 years, during the last six months, burning off most of the excess capacity produced during the bubble, companies are ready to start hiring again to meet increased demand. Employment has always been a lagging indicator by about 6 months after substantial economic growth. Since substantial growth didn't occur in this recovery until the 3rd Q of 03 and the over-capacity issue is resulting in a push-out of usual recovery characteristics, I believe we are right on schedule for significant job growth within the next 3 months.

The University of Michigan Consumer Confidence Index fell unexpectedly in February to 93.1 from January's near 4-year high reading of 103.8. It is my belief that this decline was a result of several factors. First, I have never seen a greater disconnect between what is really occurring and what the mainstream media are reporting. The media's constant focus and obsession with all things negative could be the result of election year politics or the incorrect assumption that Americans prefer this type of reporting. It is very rare to turn on the nightly news without hearing about how bad the employment situation is, another new terror threat, an attack in Iraq or a new political scandal. I also think an increase in energy prices may have contributed to the decline in sentiment. I am closely following this situation. I am worried that energy prices could cause significant harm to the U.S. economy within the next couple of years. Finally, January's reading of 103.8 was the highest reading since November of 2000. A fall in February from this sharp spike up should have been expected.

BOTTOM LINE: With tax refunds and an improving labor market on the near-tear horizon, it is likely that the consumer will continue to spend. As well, interest rates remain near 46-year lows. These factors, combined with the multi-decade highs in many data points related to increased corporate profitability and spending, leads me to believe that the possibility of a substantial period of U.S. economic prosperity is rising.