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.

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