Market Week in Review

S&P 500 1,095.70 -.27%

U.S. stocks fell modestly last week as more negative images from Iraq and rising oil prices dominated headlines, drowning out strong economic and corporate reports. Cisco, Dell, Disney and Qualcomm gave positive assessments of the current and future states of their businesses and all four stocks declined. Around the clock reporting on the torture at the Abu Ghraib prison in Iraq and the recent video of an American being beheaded weighed heavily on investors' psyche throughout the week. The higher-than-expected Producer Price Index report also weighed on shares as traders continue to view rising inflation as a big negative for stocks.

There were also a number of positive developments throughout the week. Major U.S. companies Cisco, Dell, Disney and Qualcomm all reported double-digit earnings and revenue growth. Cisco reported an earnings gain of 23% and sales gain of 22%, both above expectations. Cisco also raised their forecast for next quarter. Cisco's CFO said corporate spending is the best since the tech sector imploded several years ago and that they plan to hire 1,000 people in the near future. The major U.S. indices appeared to make at least a short-term bottom on Wednesday. As the S&P 500 touched its 200-day moving-average, the ARMS index spiked and Barton Biggs made positive comments on CNBC, investors began to buy in a big way. Many stocks finished higher on good volume Wednesday, recovering from significant declines earlier in the day. Moreover, the 10-year T-note rallied significantly on Friday as it appeared to make at least a short-term bottom as well. Finally, the AAII % Bulls dropped significantly last week in a sign that investor complacency continues to fall.

Bottom Line: U.S. stocks appear to have made at least a short-term bottom last week and likely an intermediate-term one. However, I am concerned that good earnings reports continue to be met with selling. Cisco is a very large company that is reporting 20%+ growth. The US dollar is only down 2.2% from year-ago levels and has risen 7.8% from its recent lows. Thus, the argument by the bears that currency is artificially boosting growth does not have merit. Furthermore, corporate IT spending, which is highly correlated to job growth, should continue to accelerate throughout the year. The VOIP market, a growing driver of Cisco revenues, will continue to accelerate as well. At around 28 times 04 estimates CSCO is not cheap, however I would argue that one of the premier tech companies in the world growing 20% deserves a premium multiple. While I do not currently have a position in Cisco, the stock which is down 26.4% from its recent highs should be considered by long-term investors.

I continue to believe that investors are overreacting to inflation and China. Oil accounts for less than 5% of inflation and would have to trade at $78/bbl. to equal the inflation-adjusted prices of the early 80's. Moreover, OPEC will likely increase production soon as it is in their interest not to damage world economic growth. Basic materials prices continue to fall as traders anticipate slowing demand from China. Furthermore, consumer prices are expected to rise 2.2% this year, well below the 3.0% average of the last 84 years. Finally, modest inflation has almost always been good for stocks as companies regain pricing power, profits soar and hiring accelerates. Numerous statements by Chinese officials indicate they want to slow growth from unsustainable levels, which is beneficial to world growth in the long-run. At this point, I do not believe that China is in danger of an economic collapse, which is what many stock prices of companies operating in China suggest.