Sunday, June 27, 2004

Weekly Outlook

There are a number of important economic reports and a few significant corporate earnings reports scheduled for release this week. Economic reports this week include Personal Income, Personal Spending, Consumer Confidence, Chicago Purchasing Manager, Initial Jobless Claims, Construction Spending, ISM Manufacturing, Vehicle Sales, Unemployment Rate, Average Hourly Earnings, Change in Non-farm/Manufacturing Payrolls, Average Weekly Hours and Factory Orders. Consumer Confidence, Chicago Purchasing Manager, ISM Manufacturing, Change in Non-farm Payrolls all have market-moving potential.

McKormick(MKC), Research in Motion(RIMM), Sonic(SONC), Emmis Communications(EMMS), Monsanto(MON), Constellation Brands(STZ), Biomet(BMET), ConAgra(CAG) and General Mills(GIS) are some of the more important companies that release quarterly earnings this week. There are also a couple of other events that have market-moving potential. The FMOC Policy Announcement, end of the quarter repositioning, handover of power to the Iraqi government and the NYSSA Homeland Security Industry Conference will also impact trading this week.

Bottom Line: I expect U.S. stocks to rise this week, possibly by a substantial margin, led by technology shares. The handover of power to the Iraqis, the Fed keeping the word "measured" in its policy statement with respect to the pace of rate-hikes, falling energy prices, the recent decline in interest rates and positive economic reports should provide the catalysts for a good week for U.S. stocks. The AAII % Bulls increased by a substantial amount last week which would normally be a negative. However, I believe that while investors may feel more bullish, they are waiting for the uncertainty surrounding events of the coming week to lift before they actually buy in a significant way.

Here are some of the reasons for my current bullish stance on U.S. stocks:

1)Recently, NASDAQ short interest hit an all-time high and NYSE short interest approached an all-time high, which should result in a significant amount of short-covering in the very near future as fundamentals continue to improve.
2)Interest rates have declined by almost 30 basis points in the last few weeks. The 10-yr T-note is yielding 4.64%, over 40% lower than in 1994.
3)Gas prices have fallen 13% from their recent highs.
4)Inflation for 2004 is set to rise less than the 40-year average of 3.0%.
5)Valuations for most U.S. stocks(S&P 500 04 P/E=17.3, down 66% from peak) are very reasonable given the strong economic backdrop and relatively low interest rate picture.
6)Corporate profits and growth are near all-time highs.
7)Corporate balance sheets are much cleaner and healthier.
8)Executive corruption is down.
9)U.S. and world economic growth are on pace to reach 20-year highs this year.
10)Japan(the world's second largest economy) is contributing meaningfully to world growth for the first time in almost 15 years.
11)China's growth is slowing, but still exceptional.
12)The big picture in Iraq is improving. The cost of the
War in Iraq is set to come in at only 1% of U.S. GDP versus 12% for the Vietnam War, 15% for the Korean War and 130% for WWII.
13)There have been no major terror acts on U.S. soil since 9/11.
14)U.S. home ownership is at all-time highs.
15)American's are the wealthiest in U.S. history. Moreover, 1 out of every 125 are now millionaires, even excluding home equity.
16)Job opportunities and wages are improving substantially. 1.2 million jobs have been created in the last 6 months.
17)The Unemployment rate is lower than the average rate over any 10-year period during the last 40 years.
18)The Budget Deficit will come in significantly below estimates for 2004 as substantial economic growth increases incomes and profits, resulting in increased government tax receipts.
19)Consumer sentiment is improving with job gains and income growth.
20)U.S. manufacturing, which has been in a depression for many years, is rebounding at one of the fastest paces on record.
21)Corporate spending on services and equipment is on the rise for the first time in several years.
22)Consumers are continuing to spend at a very healthy rate.
23)The massive overcapacity, in many sectors, generated during the Internet bubble is almost burned off.
24)Current U.S economic growth is the result of real companies with real business models generating real profits. During the Internet bubble, companies with poor management teams, flawed business models, corrupt accounting and no profits were artificially inflating economic growth.
25)Stock market internals are rapidly improving.

Finally, my short-term trading indicators are giving buy signals and the Portfolio is 150% net long heading into the week.

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