Monday Close

S&P 500 1,087.12 -1.05%
NASDAQ 1,896.07 -1.14%

Leading Sectors
Semiconductors +.41%
I-Banks -.50%
Papers -.51%

Lagging Sectors
Airlines -3.01%
Oil Service -3.05%
Nanotechnology -6.14%

Other
Crude Oil 38.95 +.05%
Natural Gas 6.18 -.06%
Gold 378.00 -.18%
Base Metals 99.59 -3.56%
U.S. Dollar 91.75 +.21%
10-Yr. Long-Bond Yield 4.79% +.31%
VIX 19.77 +9.05%
Put/Call 1.25 +25.00%
NYSE Arms .67 +3.08%

After-hours Movers
LTON +37.5% after substantially beating 1Q estimates and raising 2Q guidance.
PSUN +3.32% after beating 1Q estimates and raising 04 forecast.
MCIA +3.42% after announcing another 7,500 job cuts.

Recommendations
Goldman Sachs reiterated Underperform on PSS and RKY.

After-hours News
U.S. stocks finished lower Monday, sending the Dow below 10,000 for the first time this year, on continued fears of rising interest rates and slowing Chinese economic growth. After the close, Merrill Lynch said it gained approval to invest in China's stock markets, the first foreign bank to be licensed this year, the Financial Times reported. U.S. auto safety regulators Wednesday will release proposed rules that may reduce by as much as 11% the 9,000 deaths annually from side-impact crashes, Bloomberg reported. Electronic Data Systems said it may cut its dividend or issue stock to raise more than $1B to avoid a cut in its credit rating to below investment grade, Bloomberg reported. Chiquita Brands said the U.S. is investigating payments the company's Colombian subsidiary made to groups identified as foreign terrorists, Bloomberg reported. IBM, McDonald's, GE and other large U.S. employers said they may use their buying power to extend health insurance to workers who lack coverage, Bloomberg reported.

BOTTOM LINE: The Portfolio fell slightly today as I increased market exposure into the afternoon weakness by adding several new long positions. The Portfolio is now 50% net long. Semiconductors significantly outperformed again today in another sign that tech is stabilizing. I believe that the major U.S. indices are very close to at least a short-term bottom and possibly an intermediate-term one. I will look to increase market exposure into any extreme weakness tomorrow in anticipation of this expected rally. One of the new longs I added into afternoon weakness was SWIR. I am keeping a $21 stop-loss on this position.

Mid-day Update

S&P 500 1,083.68 -1.37%
NASDAQ 1,889.18 -1.50%

Leading Sectors
Semis -.02%
Retail -.76%
Tobacco -.82%

Lagging Sectors
Gaming -2.70%
Iron/Steel -5.14%
Nanotechnology -5.68%

Other
Crude Oil 39.15 -1.95%
Natural Gas 6.23 -1.02%
Gold 376.30 -.71%
Base Metals 100.45 -2.73%
U.S. Dollar 91.80 +.74%
10-Yr. Long-Bond Yield 4.78% +.27%
VIX 19.99 +10.26%
Put/Call 1.33 +33.0%
NYSE Arms .80 +23.08%

Market Movers
ADSK -4.7% after announcing acquisition of Unreal Pictures and Citi SmithBarney downgrade to Hold.
BRK/A -3.0% after disappointing 1Q earnings.
C -3.3% after saying it will set aside $4.95B in 2Q to cover legal costs.
NAV -6.0% after JP Morgan downgrade to Neutral.
OSTK -13.0% after announcing 1.73M secondary offering.
STFC -14.0% after Gregory Shepard dropped his bid to buy 8M shares and instead will sell 1M to Carl Icahn for $13.
STI -6.9% after announcing the acquisition of NCF for $6.98B.
Chinese ADRs down across the board on continued worries over economic growth.

Economic Data
None of note.

Recommendations
Goldman Sachs reiterated Outperform on SPG, FDC, CSCO, KO, PEP, STZ and CLI. QSFT raised to Buy at Citi SmithBarney, $16 target. CEY raised to Buy at Citi, target $44. POWI cut to Sell at Bank of America, target $22. STI cut to Underweight at Prudential. LEA raised to Overweight at Prudential, target $70.

Mid-day News
U.S. stocks are falling mid-day on fears over rising U.S. interest rates and slowing Chinese economic growth. Kuwait is backing Saudi Arabia's call for more OPEC production, Dow Jones reported. Some cable executives have pledged not to carry former Vice President Al Gore's new 24-hour network, as they were angered by his attempts at price controls, the LA Times reported. U.K. Defense Secretary Hoon said there are strong signs that Iraqi abuse photographs the Daily Mirror published may be fake, Bloomberg reported. Delta Air said it may be forced to seek Chapter 11 bankruptcy protection unless the company is able to reduce costs, stem losses and raise capital, Bloomberg reported.

BOTTOM LINE: The Portfolio is up slightly today as my retail shorts are down more than my healthcare longs. U.S. stocks appear to have entered the "shake-out" phase, which should result in a more meaningful intermediate-term bottom. I am currently in the process of rotating out of a few of my more defensive longs and into some of the leading basic material, industrial and tech companies. I will likely increase market exposure into any further extreme weakness this afternoon or tomorrow.

Monday Watch

Earnings of Note
Company/Estimate
AH/.38
CVC/-.37
CHTR/-.32
FOSL/.20
PSUN/.16
SBL/.08

Splits
None of Note.

Economic Data
None of Note.

Weekend Recommendations
Goldman Sachs reiterated Outperform on EBAY, PXD, BAC, GDT, BSX and DTV. Barron's has positive columns on MCIA and WMB.

Weekend News
Oil & Gas Journal has an interesting article, saying that technology will increase oil reserves 3x-4x current estimates. Americans have conflicting emotions about the photographs of abuse at the Abu Ghraib prison in Iraq, with many disgusted at the images yet protective of U.S. troops, the NY Times reported. President Bush plans to intensify a worldwide effort to gain support for Israeli Prime Minister Sharon's plan to withdraw from the Gaza Strip and retain some West Bank settlements, the NY Times reported. U.S. companies that sell products overseas say opposition to the war in Iraq and any anti-Americanism hasn't led to a loss in sales, the NY Times reported. BMW, the world's second-largest maker of luxury cars, may expand its Spartanburg, South Carolina, plant to build a third model there, the head of production said. A blast in the Russian republic of Chechnya killed President Kadyrov, Russian President Putin said. U.S. state governments are reporting the strongest tax revenue and the most positive outlook for budgets since the stock market began to crash in early 2000, the Washington Post reported. Iran won't oppose any move by OPEC to raise production when the group meets in Beirut next month, Reuters said. IBM said it has developed client middleware that will help companies avoid using Microsoft's operating system, the Financial Times said. SunTrust Banks agreed to buy National Commerce Financial for $6.98 billion in cash and stock, Bloomberg reported. Asian stocks are falling tonight by the most in 2 ½ years on concerns over rising interest rates in the U.S. and slowing Chinese economic growth.

Late-Night Trading
Asian indices are sharply lower, -6.00% to -1.00% on average.
S&P 500 indicated -.48%.
NASDAQ indicated -1.0%.

BOTTOM LINE: The Portfolio is 25% net short heading into the week. I expect U.S. stocks to put in a short-term bottom on Monday or Tuesday as strong economic reports, stabilizing interest rates and good corporate earnings lead investors to bargain hunt. It is possible, looking at the carnage in Asian indices tonight, that U.S. stocks may be in the process of forming an intermediate-term bottom rather than short-term. If this is the case, I would expect to see less investor complacency and an extreme surge in volume on a broadly negative day. I will likely begin to add selective long positions into any extreme weakness tomorrow in anticipation of a short-term rally.

Chart of the Week

Amex Computer Networking Index(2 Years)



Bottom Line: The Networking Index is down 28.55% since its recent high on January 20, 2004. It is currently at the most oversold technical level since its bottom on October 8, 2002. The index should outperform this week as I expect Cisco Systems(CSCO) to report a good quarter and give an optimistic forecast.

Weekly Outlook

There are a number of economic reports scheduled for release this week as well as a few significant corporate earnings reports. Scheduled economic reports include the Import Price Index, Trade Balance, Monthly Budget Statement, Producer Price Index, Retail Sales, Initial Jobless Claims, Continuing Claims, Consumer Price Index, Business Inventories, Industrial Production, Capacity Utilization and the preliminary reading of the Univ. of Mich. Consumer Confidence Index for May. The Producer Price Index, Retail Sales, Initial Jobless Claims, Consumer Price Index and Consumer Confidence all have market-moving potential.

Wal-Mart(WMT), Target(TGT), Cisco(CSCO), Dell(DELL), May Department Stores(MAY), Federated Department Stores(FD), Kohl's(KSS), Cablevision(CVC), Disney(DIS), Computer Associates(CA), Analog Devices(ADI), Elan Corp.(ELN), Panera Bread(PNRA) and Tiffany(TIF) are some of the more important companies that release quarterly earnings this week. There are also a few other events that have market-moving potential. The Fed's Snow speaks at the Chicago Fed Conference on the Banking Industry, the Fed's Santomero speaks on the current economic outlook, the 2004 Electronic Expo and the Intel, Texas Instruments, Yahoo! and Qualcomm Analyst Meetings could all impact trading this week.

BOTTOM LINE: It is good to see investor complacency falling from very high levels as evidenced by the decline in the AAII Bullish % and the rising VIX and Put/Call readings. As well, Friday's sell-off had a "washed-out" feel to it as breadth was horrific, many tech stocks rose and volume was average. I expect to see an oversold rally begin on either Mon. or Tues. of this week as many stocks have come down too far too fast. Strong earnings, strong economic reports and stabilizing interest rates should provide the positive catalysts for the rally. I expect networking, semiconductor, basic material and industrial stocks to outperform this week, while restaurants, retailers and pharmaceuticals may underperform.

Market Week in Review

S&P 500 1,098.70 -.78% for the week.

U.S. stocks fell modestly last week as broad-based weakness in commodity and interest rate-sensitive shares outweighed relative strength in technology stocks. Rising energy prices and fears that the Fed is falling behind the curve with respect to inflation dominated trading throughout the week. Commodity-related stocks took another beating on comments by Alan Greenspan that a slowing Chinese economy would further pressure commodity prices. As well, a Bank of America downgrade of the oil service sector sent energy-related stocks reeling even as the price of crude hits its highest level since the Gulf War. The selling in the later part of the week seemed to climax on Friday as 3,185 stocks fell and 261 advanced on the NYSE. This 12-to-1 negative ratio was the broadest since Oct. 27, 1997. On this day, the S&P 500 ended an 11% slide and proceeded to rally almost 37% over the next 9 months.

There were also a number of positive developments throughout the week. Tyco, the world's largest marker of security systems, said second-quarter profit rose more than 600%. The company also raised its third-quarter and 04 forecasts. Royal Bank of Scotland agreed to buy Charter One Financial for $10.5 billion, sending the shares 22% higher, and said it will continue to hunt for U.S. acquisition targets. The Semiconductor Industry Association said it will soon hike industry growth forecasts to 20% for 04 and DRAMeXchange.com said prices for memory chips are rising for the first time in over a month. This resulted in a 3.05% gain for the SOX on the week, in a significant show of relative strength. This is important as this group had fallen 21.4% from its recent highs and led the entire market lower. Finally, block trades on the NASDAQ rose 24.3% from the prior week, implying that large institutions or "smart money" is moving back into technology shares.

Bottom Line: I believe fears of inflation, slowing earnings growth and a hard-landing by the Chinese economy are exaggerated. Most commodity prices are currently falling and the U.S. economy in not nearly as dependent on low oil prices as it once was. Crude Oil accounts for less than 5% of inflation. Almost 70% of inflation is derived from rising Unit Labor Costs, which are currently subdued. Furthermore, the U.S. dollar appears to be breaking up through its downtrend line that has held since February 02, which should further pressure commodity prices. Earnings acceleration has always peaked during the first few quarters of a recovery from recessions. Earnings are currently accelerating at the fastest pace on record. It is inevitable that growth will soon decelerate from these unsustainable levels. However, I find no empirical evidence of any correlation between decelerating earnings growth from very high levels and a significant decline in stock prices. Finally, investors seem to think that China has all of a sudden imploded, which is currently not the case. Any company that sells to China or benefits from Chinese economic strength has been ravaged over the last several weeks. I would recommend investors with a long-term horizon that are looking for a bit of international exposure begin to accumulate a basket of these shares at current levels. In my opinion, China is still in the early stages of a multi-year surge in economic growth that will yield huge benefits to companies that operate in the region.

Economic Week in Review

ECRI Weekly Leading Index 136.00 +.59%

Construction Spending rose 1.5% in March versus expectations of a .5% gain and a .1% drop in February. Moreover, total U.S. construction spending is rising at a record annual pace of $944.1 billion, as work increases on highways and other public works as well as private homes and office buildings. "We've been seeing an improving economy for the last year and a half and I think we're going to see improved occupancy in both apartments and offices," said Sam Zell, chairman of Equity Residential and Equity Office Properties, the largest office and apartment landlord in the U.S. Finally, Wienerberger AG, the world's biggest brick-maker, said it is spending $50 million in the U.S. to enlarge capacity at plants in Rome, Georgia; Brickhaven, North Carolina; Louisville, Kentucky, Bloomberg reported.

The ISM Manufacturing Index for April held near a two-decade high coming in at 62.4 versus expectations of 62.7 and 62.5 in March. Production increased and more factories added workers than at any time since 1987. "The combination of lean inventories, strong demand and a weak dollar is clearly leading to an underlying pick-up in factory activity," said David Greenlaw, chief U.S. fixed income economist at Morgan Stanley. The ISM Prices Paid Index rose to 88.0 in April, the highest since 1979, versus expectations of 85.0 and a reading of 86.0 in March. Finally, the Backlog of Orders Index rose to an all-time high.

Factory Orders for March rose 4.3% versus expectations of a 2.4% rise and .3% in February. This was the largest year-over-year increase since the stock market bubble burst in 2000, as the strongest economic growth since 1984 prompted companies to buy more machines, electronics and petroleum. Manufacturers had a record-low 1.23 months worth of inventories at the current sales pace in March. "With inventories low and firms finding it hard to gain traction to both meet demand and bring stocks to a more comfortable level, we can expect increased hiring and accelerated production," said Drew Matus, an economist at Lehman Brothers.

Federal Reserve policy makers voted unanimously to keep the benchmark U.S. interest rate at a 45-year low of 1%. "At this juncture, with inflation low and resources use slack, the committee believes that policy accommodation can be removed at a pace that is likely to be measured," members of the rate-setting Open Market Committee said in a statement following their meeting in Washington, Bloomberg reported.

The U.S. budget deficit may narrow to $370 billion this year, 29% lower than White House estimates, as a vigorous economy boosts tax revenues, economists at Citigroup said in a weekly report. "This sharp upturn in tax receipts has sweeping positive implications for the Treasury's financial position," the report said. State tax receipts are also rising as the U.S. economy expands. The National Conference of State Legislatures said last week that 32 states predict they will have surpluses this year. States had posted a record $78.4 billion in deficits last year.

The ISM Non-manufacturing(Services) Index rose to an all-time record of 68.4 in April versus expectations of 65.0 and a reading of 65.8 in March. "The economy is getting even better as business spending and hiring are driving things," said Robert Mellman, an economist at J.P. Morgan. Services account for 85% of the $11.3 trillion U.S. economy. The survey's employment index rose to the highest level since 2000, as well. Economic conditions "are extremely strong, really everywhere," Jeff Immelt, CEO of General Electric said. "We're seeing volume up in the U.S. and Europe in every one of our businesses."

Non-farm Productivity for the 1st quarter rose 3.5%, meeting expectations, versus 2.5% in the 4th quarter. Unit Labor Costs for the 1st quarter rose .5% versus expectations of 0.0% and 0.0% in the 4th quarter. "It's really labor that is the most important input and stable labor costs suggest little inflation and more willingness on the Fed's part to move very slowly" in raising rates, said Tim Rogers, Chief Economist at Briefing.com.

The Unemployment Rate in April fell to 5.6% versus expectations of 5.7% and a 5.7% rate in March. Change in Non-farm Payrolls was a positive 288,000 in April versus a 170,000 estimate and 337,000 jobs created in March. Change in Manufacturing Payrolls in April was a positive 21,000 versus a 5,000 estimate and 9,000 jobs created in March. The revised March figures showed that manufactures increased hiring for the first time in 42 months. Total job gains in the last two months were the most since early 2000, Bloomberg reported. Since the job market turned around in September, the economy has added 1.1 million jobs. "After March, it looked like payrolls were finally getting into synch with everything else. Now they've really caught up with what everything else was telling us, and that is the economy is growing at a really strong rate," said Robert McGee, chief economist at U.S. Trust. The economy is now projected to grow 4.6% this year, the most since 1984, Bloomberg reported.

Bottom Line: The main economic data points released last week were almost universally above-expectations and continued to paint a very strong picture of the current state of the U.S. economy. However, as each report during the week seemed stronger than the previous, investors began to sell bonds and send interest rates higher. The 10-yr T-note is now yielding 4.77%, the highest since July 2002. The long-term downtrend line in interest rates, dating back to 1987, is around 5.7%. I highly doubt the downtrend will be broken at this point, but a move near this level is possible, barring any significant negative jolt to world economic growth. Retail sales came in a bit below expectations last week, but this may be explained by extraordinarily good weather and a rush by consumers to spend their time buying homes and lock in relatively low rates before any further increases. Almost every commodity is currently falling in price with the exception of energy. This is troubling considering this is a seasonally weak time of the year for energy demand. Crude oil is now at its highest level since the Gulf War in 1990. However, the U.S economy is much less dependent on low energy prices than in the past. The International Energy Agency, in a recent report, estimates high energy prices are shaving only about .3% off of current U.S. economic growth.

Home sales should remain relatively robust as job growth accelerates, offsetting higher interest rates. The ISM and Factory Orders reports both point to an accelerated rate of hiring and production in the coming months. I am not sure of the extent to which a falling budget deficit will lower interest rates, but it is a very positive development nonetheless. Unit labor costs, the largest component of inflation, rose for the first time in a year, but remain at relatively subdued levels. The two blow-out jobs reports I anticipated have occurred, thus the Fed could move interest rates higher at any time from their current 45-year low emergency levels. Barring an intra-meeting move, the June 29-30 meeting will likely result in the first Fed rate hike. The Fed will probably raise rates by 50 basis points at this time. Overall, last week's data were very positive as the "jobless recovery" myth perpetuated by the mainstream media is no longer debatable. Historically, mild inflation has been good for stocks as companies regain pricing power, profits soar and hiring accelerates. The main worry I have at this point is that the media's obsession with negativity is hurting investor psychology, thus potentially creating a self-fulfilling prophecy of slower economic growth.

Weekly Scoreboard

Indices
S&P 500 1,098.70 -.78%
Dow 10,117.34 -1.06%
NASDAQ 1,917.96 -.11%
Russell 2000 548.56 -2.01%
Wilshire 5000 10,793.66 -3.20%
Volatility(VIX) 18.13 +5.47%
AAII Bullish % 38.98 -22.04%
US Dollar 91.13 +.69%
CRB 273.53 +.36%

Futures Spot Prices
Gold 379.10 -2.29%
Crude Oil 39.93 +7.05%
Natural Gas 6.29 +7.32%
Base Metals 103.27 -.88%
10-year US Treasury Yield 4.77% +5.76%
Average 30-year Mortgage Rate 6.12% +1.83%

Leading Sectors
Semis +3.05%
Drugs +1.67%
Software +1.54%

Lagging Sectors
Oil Service -4.94%
Airlines -5.26%
Homebuilders -6.36%

*% Gain or loss for the week

Mid-day Update

***There will not be a mid-day update today due to a scheduling conflict. However, the Weekly Scoreboard, Economic Week in Review, Market Week in Review and Weekly Outlook will be released tonight and this weekend at their regularly scheduled times.

Friday Watch

Earnings of Note
Company/Estimate
BBOX/.70
CHINA/.04
TBUS/.02
CDCY/.03
MSO/-.19
PCTY/-.14

Splits
None of Note.

Economic Data
Unemployment Rate for April estimated at 5.7% versus 5.7% in March.
Change in Non-farm Payrolls for April estimated at 170K versus 308K in March.
Change in Manufacturing Payrolls for April estimated at 5K versus 0K in March.
Average Hourly Earnings for April estimated +.2% versus +.1% in March.
Average Weekly Hours for April estimated at 33.8 versus 33.7 in March.
Wholesale Inventories for March estimated +.5% versus +1.3% in February.

Recommendations
Goldman Sachs reiterated Outperform on DVN and RSE. GS reiterated Underperform on VICL. Jim Cramer, of TheStreet.com, thinks there is a good chance stocks will rise tomorrow no matter what the employment numbers are. VISX is expected to rise as demand for corrective eye surgery grows, Business Week reported. CGFW may be an acquisition target of a larger company seeking to expand in online security, Business Week reported.

Late-Night News
Asian indices are mixed on a rebound in Taiwan and slight weakness elsewhere. GE's NBC network told the NFL that it would be interested in broadcasting Sunday and Monday night games, Business Week reported. The UN tightened security around Secretary-General Kofi Annan after reports that a statement attributed to al-Qaeda's Osama bin Laden offered a reward to anyone who kills top U.S. and UN officials, Bloomberg reported. Major League Baseball dropped plans to adorn the bases in 15 ballparks with the logo for an upcoming Spider-Man movie one day after announcing the promotion, the Wall Street Journal reported. Hong Kong Dragon Air plans to spend as much as $300 million to buy five Boeing 747-400 aircraft as it aims to enter the U.S. cargo market by the end of 2006, the South China Morning Post reported. Ukrainian security officers arrested three men and seized almost 375 pounds of cesium-137, a potential ingredient in a radioactive "dirty bomb," the AP said. The U.S. Congressional Budget Office said the federal budget deficit for 04 will be smaller-than-expected because a vigorous economy is generating tax revenues $30-$40 billion above expectations. The FBI arrested an Oregon lawyer after Madrid authorities said they found evidence that linked him to material associated with the March commuter train bombing, Newsweek reported.

Late-Night Trading
Asian Indices -.50% to +1.50%.
S&P 500 indicated +.11%.
NASDAQ indicated +.14%.

BOTTOM LINE: I expect Non-farm Payrolls to rise above expectations of 170K and interest rates to rise further, pressuring stocks in the morning. However, I am not overly confident in this prediction, thus my market neutral position in the Portfolio. I will likely add long positions into any extreme weakness in stocks on the open as a result of falling bonds. If I am wrong in my assumptions and job growth falls below expectations or bonds rally, I would expect stocks to rally as well. Investors will incorrectly assume the Fed will wait longer than is currently expected to hike rates. I still expect the Fed to make their first move at the June 29-30 meeting irregardless of tomorrow's report. The Fed Funds rate is currently at emergency levels which are unwarranted in today's strong economic environment. Any stock rally, as a result of falling interest rates, will likely last a few days as the major indices are at oversold technical levels. Thus, I would likely increase market exposure under this scenario.

Thursday Close

S&P 500 1,113.99 -.67%
NASDAQ 1,937.74 -1.00%

Leading Sectors
Broadcasting +.70%
Utilities +.22%
Foods +.13%

Lagging Sectors
Retail -2.35%
Nanotechnology -2.69%
Airlines -3.28%

Other
Crude Oil 39.42 +.13%
Natural Gas 6.22 +.10%
Gold 388.00 -.10%
Base Metals 105.68 +.46%
U.S. Dollar 89.89 +.64%
10-Yr. Long-Bond Yield 4.60% +.41%
VIX 17.05 +8.12%
Put/Call 1.26 +48.24%
NYSE Arms .95 +23.38%

After-hours Movers
FARO +11.41% after beating 1Q estimates and reaffirming 04 forecast.
NPSP +5.40% after beating 1Q estimates.
CAMD -3.97% after beating 1Q estimates, but disappointing guidance.

Recommendations
WERN raised to Buy at UBS, target $24. Goldman Sachs reiterated Underperform on VRSN. GS reiterated Outperform on ARG, CMX and CLX.

After-hours News
U.S. stocks finished lower Thursday as better-than-expected reports on jobs and wages fueled inflation fears ahead of tomorrow's important employment numbers. After the close, the AP reported that a Web site statement attributed to Osama bin Laden offered a reward of $125,00 in gold bullion to anyone who kills the top U.S. civilian official in Iraq, Paul Bremer, "or the American chief commander or his deputy in Iraq." Univision, the largest U.S. Spanish-language tv and radio broadcaster, said first-quarter profit more than doubled to $31.6 million, Bloomberg reported. Fannie Mae improperly accounted for some manufactured housing and aircraft lease securities, and must further write down the value of the securities, Bloomberg reported. Emerging-market bonds had their biggest decline in almost 2 years on worries over rising world interest rates, JP Morgan said. The U.S. Senate confirmed John Negroponte as the first U.S. ambassador to Iraq since the 1991 Gulf War, Bloomberg reported.

BOTTOM LINE: The Portfolio rose today as my tech and retail shorts fell and my healthcare and energy longs were mixed. I added to one of my retail shorts in the afternoon and initiated a new long position in MSFT. I am keeping a close below $26 stop-loss on this position. These new trades leave the Portfolio at a market neutral(shorts-longs=0) position. U.S. stocks could rally on a weaker-than-expected jobs report tomorrow or an unexpected bond rally. However, I expect Non-farm payrolls to come in above expectations of 170K and interest rates to move higher. This will likely pressure stocks on the open. I continue to feel there is too much investor complacency for a meaningful bottom in this recent correction. However, a counter-trend trading rally could occur at anytime from current oversold levels.

Mid-day Update

S&P 500 1,109.87 -1.04%
NASDAQ 1,929.85 -1.40%

Leading Sectors
Foods -.03%
Drugs -.31%
Utilities -.38%

Lagging Sectors
Retail -2.70%
Disk Drives -2.70%
Airlines -3.42%

Other
Crude Oil 39.42 -.38%
Natural Gas 6.25 -1.03%
Gold 387.40 -1.60%
Base Metals 105.68 +.46%
U.S. Dollar 89.85 +.58%
10-Yr. Long-Bond Yield 4.59% +.32%
VIX 17.34 +9.96%
Put/Call 1.31 +54.12%
NYSE Arms 1.29 +67.53%

Market Movers
KG -16.6% after substantially missing 1Q estimates and withdrawing 04 forecast.
GMST -23.81% after missing 1Q estimates and lowering 04 forecast.
MGPI +28.47% after strong 3Q estimates and raising 04 forecast.
ASYT +22.16% after substantially beating 4Q estimates and raising 1Q forecast.
HANS +13.67% after beating 1Q estimates.
THQI +9.9% after beating 4Q estimates and raising 1Q/04 forecast.
IPMT +5.96% after beating 1Q estimates and raising 04 forecast.
WMS +6.42% on strong 3Q results, raised to Buy at Roth Capital, $35 target.
HB -17.03% after substantially missing 2Q estimate and lowering 3Q/04 forecast.
PPCO -17.85% after saying it will begin a new study on a painkilling drug as the FDA said its prior results were favorably biased.
CHS -7.11% on profit-taking after announcing above-expectations 16% same-store-sales.
MIK -7.0% after missing April same-store-sales estimate and lowering 1Q guidance.

Economic Data
Preliminary 1Q Non-farm Productivity +3.5%, meeting estimates, versus 2.5% in 4Q.
Preliminary 1Q Unit Labor Costs +.5% versus 0.0% expectations and -.4% in 4Q.
Initial Jobless Claims for last week 315K versus 335K expectations and 340K prior week.
Continuing Claims 2935K versus expectations of 2971K and 3004K prior week.

Recommendations
Goldman Sachs upgraded NOI to Outperform. GS reiterated Attractive view on oil service stocks, saying they prefer equipment/service stocks over drillers. GS reiterated Underperform on AMCC, LVLT and T. GS reiterated Outperform on TRW, CMX, HD, AET, GE, IGT, AGI and BSX. Citi Smith Barney upgraded HIG to Buy, target $81. Citi said to Sell ADBE and Buy VRTS, target $33. Citi reiterated Buy on MCD, target $33. Citi reiterated Buy on PMI, raised target to $55. Citi also said 2 restaurants well-positioned to battle rising costs are SBUX and WEN. JWN raised to Buy at UBS, target $44. VSH raised to Buy, target $24. ADTN raised to Buy at Legg Mason, target $32. MU raised to Outperform at CSFB, target $19. NOC raised to Buy at Bank of America, target $115. COLM rated Outperform at CSFB, target $67. DDR raised to Overweight at Morgan Stanley, target $35. EXPD raised to Outperform at Bear Stearns.

Mid-day News
U.S. stocks are falling mid-day as better-than-expected reports on jobs and wages fueled concerns that inflation is accelerating. Goldman Sachs said key takeaways from its Electrical Products Group Conference are that companies are seeing strong organic growth, higher capital spending, a pick-up in price increases and improved balance sheets which can help fund stock repurchases or acquisitions. Goldman says the bottom line is that the industrial recovery is accelerating. AOL unveiled a new video game site yesterday to try to win over more customers to its high-speed broadband Internet service, Reuters reported. Adidas plans to introduce a $250 running-shoe line, the Wall Street Journal reported. XM Satellite Radio Chairman Parsons told CNBC he expects to have 2M subscribers by the end of the second quarter and that subscribers will exceed 2.8M in 04. The legal voting age in California could drop to 14, after the Senate Elections Committee voted 3-2 to pass legislation that would lower the state's age, the San Francisco Chronicle reported. News Corp., owner of the FOX network, said its fiscal 3Q profit increased by 69% on higher ad sales from its "American Idol" show and Fox News Channel. The Madrid terrorist bombings which killed 191 people three days before national elections, influenced the voting decisions of 28.5% of Spaniards, according to a Center for Sociological Research Poll. A slowdown in China's economy will push global commodities prices lower, helping restrain inflation, said Alan Greenspan. Sales at U.S. retailers including Wal-Mart, Nordstrom and JC Penney increased less than expected in April, causing retail shares to fall, Bloomberg reported. Unit Labor costs rose last quarter for the first time in a year, which may herald faster growth in wages and fuel concern about inflation, Bloomberg reported. The number of Americans filing applications for unemployment benefits fell to the lowest since the stock market bubble burst in 2000 and productivity trailed economic growth for a second quarter, suggesting companies will increase hiring, Bloomberg reported.

BOTTOM LINE: The Portfolio is up today as my healthcare and energy longs are down less than my retail and technology shorts. I have not traded today and the Portfolio is still positioned market neutral(shorts-longs=0). While it is good to see investor complacency is starting to fall as evidenced by the soaring ARMS, Put/Call readings and falling AAII Bullish %, their current levels are still not sufficient to form a meaningful bottom in this correction. The recent slew of better-than-expected economic reports points to a better-than-expected jobs' report tomorrow, which would likely send interest rates higher and stocks lower. However, a below-expectations report could provide the catalyst for a short-term oversold trading rally. The key will be the bond markets reaction to this report.

Thursday Watch

Earnings of Note
Company/Estimate
ATVI/.00
ATK/.87
BE/.04
CPN/-.11
CMX/.31
DISH/.15
TOL/.87
UVN/.08
XMSR/-.79

Splits
BEBE 3-for-2
EXC 2-for-1

Economic Data
Preliminary Non-farm Productivity for 1Q estimated +3.5% versus 2.6% in 4Q.
Preliminary Unit Labor Costs for 1Q estimated unch. versus -.4% in 4Q.
Initial Jobless Claims for last week estimated at 335K versus 338K prior week.
Continuing Claims estimated at 2971K versus 3013K prior.
FOMC minutes.

Recommendations
Goldman Sachs reiterated Outperform on RRI, IGT, CLX, CCI and PPH. GS reiterated Underperform on BPL and PPS.

Late-Night News
Asian indices are mixed as strength in Hong Kong and Taiwan is being offset by weakness in Korea and Japan. China's central bank probably won't raise interest rates immediately after the weeklong Labor Day holiday, which ends tomorrow, Ming Pao Daily reported. Three wildfires in Southern California that have burned more than 22,000 acres and destroyed at least 14 homes are nearly contained as cooler weather helps firefighters, AP reported. China's government has closed more than 8,600 unlicensed Internet cafes since February because they violated rules covering the admission of juveniles, Xinhua News reported. Fannie Mae is seeking the support of the SEC in defending its accounting policies, the Wall Street Journal reported. New York Attorney General Spitzer is preparing to file a lawsuit against Richard Grasso seeking repayment of some of the $139.5M in pay the former NYSE chairman received, the Washington Post reported.

Late-Night Trading
Asian Indices -2.50% to +2.0%.
S&P 500 indicated -.03%.
NASDAQ indicated +.07%.

BOTTOM LINE: I expect U.S. stocks to remain weaker to neutral tomorrow ahead of Friday's employment report. An unexpected rise in Unit Labor Costs or fall in initial jobless claims will likely send interest rates higher, thus pressuring stocks. The Portfolio is positioned market neutral heading into trading tomorrow.

Wednesday Close

S&P 500 1,121.53 +.18%
NASDAQ 1,957.26 +.35%

Leading Sectors
Biotech +1.52%
Gaming +1.52%
HMO’s +1.51%

Lagging Sectors
Networking -.69%
Papers -.97%
Oil Service -1.77%

Other
Crude Oil 39.57 unch.
Natural Gas 6.31 unch.
Gold 393.60 -.05%
Base Metals 105.20 -.53%
U.S. Dollar 89.35 +.03%
10-Yr. Long-Bond Yield 4.57% +.23%
VIX 15.77 -4.71%
Put/Call .85 +28.79%
NYSE Arms .77 -2.53%

After-hours Movers
ADRX +7.03% on strong 1Q earnings from royalty payments from its generic version of the Wellbutrin antidepressant.
THQI +10.88% after beating 1Q estimates, lowering 2Q guidance and raising 04 forecast.

Recommendations
Goldman Sachs reiterated Underperform on KZL.

After-hours News
U.S. stocks finished mostly higher Tuesday as strength in biotechnology and gaming shares offset weakness in the energy sector. After the close, the staff of the U.S. FTC said it may urge commissioners to try to block R.J. Reynolds Tobacco's $3B purchase of British American Tobacco's Brown & Williamson unit, Bloomberg reported. Chinese Premier Wen Jiabao said the earlier investment bubbles are pricked, the less damage to the economy, but the government won't slam the brakes on growth, the South China Morning Post reported. Crude oil rose to a 13-year high for a third straight day after an Energy Department report showed that U.S. inventories increased less than expected last week. Lockheed Martin won an order to develop and build a new common missile, a program the company estimates could be worth as much as $5.5B over 20 years, Bloomberg reported. President Bush asked Congress for a $25B reserve to cover further military operations in Iraq. Spending on Iraq now totals about 1% of annual U.S. GDP versus 12% during the Vietnam War, 15% during the Korean War and 130% during WWII, Bloomberg reported.

BOTTOM LINE: The Portfolio rose today as my biotech and healthcare longs rose and my technology and retail shorts fell. I did not trade in the afternoon, leaving the Portfolio with market neutral exposure. Continuing weakness in the tech sector and the relentless rise in crude oil prices are weighing on the market. Breadth/volume readings continue to disappoint and investor complacency is still relatively high. My guess is another spike-up in interest rates or $40+/bbl oil will be the catalyst for another down-leg in the current correction. I will maintain a relatively market neutral stance until I evaluate the bond market's reaction to Friday's employment report.

Mid-day Update

S&P 500 1,121.16 +.14%
NASDAQ 1,958.89 +.43%

Leading Sectors
Airlines +1.72%
Wireless +1.53%
HMO's +1.49%

Lagging Sectors
I-Banks -.34%
Papers -1.05%
Oil Service -2.94%

Other
Crude Oil 39.50 +1.21%
Natural Gas 6.24 -.46%
Gold 392.50 +.18%
Base Metals 105.20 +.18%
U.S. Dollar 89.30 -.57%
10-Yr. Long-Bond Yield 4.55% -.22%
VIX 16.16 -2.36%
Put/Call .94 +42.42%
NYSE Arms .74 -6.33%

Market Movers
WWCA +15.0% after substantially beating 1Q estimates.
LGND -17.2% after missing 1Q estimate and lowering 04 forecast.
CF +22.0% after acquisition by Royal Bank of Scotland for $10.5B.
IPXL +19.33% after substantially beating 1Q estimates.
GIVN + 9.93% on rebound from yesterday's decline after reporting 1Q results.
DIGE +8.2% after saying United Healthcare will reimburse doctors or patients for its DNAwithPap test to detect cervical cancer.
ZIXI -15.5% after missing 1Q estimates and lowering 2Q guidance.
OTEX -9.44% after beating 3Q estimate, widening 4Q guidance and reaffirming 04 forecast.
Oil Service stocks down across the board on Bank of America downgrade.

Economic Data
ISM Non-Manufacturing for April 68.4 versus expectations of 65.0 and 65.8 in March.

Recommendations
Goldman Sachs reiterated Outperform on BBY, TYC and DDR. Citi SmithBarney said to Buy Metal stocks on weakness, favorites are AA, FCX and NEM. Citi also says to Buy selected auto parts and equipment stocks on weakness, BWA, AXL and MGA. Citi reiterated Buy on TYC, target $35. Citi reiterated Buy on AMGN, target $90. Deutsche Bank raised FON to Buy. GLG raised to Buy at UBS, target $20.25. ICOS rated Underperform at Thomas Weisel. BK raised to Overweight at Morgan Stanley. KEY cut to Underweight at Morgan Stanley. BWS raised to Buy at Merrill, target $44. DELL raised to Buy at Bank of America, target $40. MWD raised to Overweight at Prudential, target $63. HNT cut to Underweight at Prudential. CA rated Buy at Bank of America, target $36.

Mid-day News
U.S. stocks are mostly higher mid-day on an all-time record high reading from the ISM Non-manufacturing index and stable interest rates. The average 2003 U.S. vehicle weighs 4,021 pounds, the heaviest since the mid-70's, the New York Times said, citing an Environmental Protection Agency report. An East Texas man was sentenced to 11 years in federal prison for possessing a sodium cyanide bomb capable of killing everyone inside a basketball arena, the LA Times reported. Royal Bank of Scotland CEO Fred Goodwin said he plans more U.S. takeovers as opportunities for growth in the UK diminish. Ford boosted incentives on three sport-utility vehicles and a minivan after sales for the models declined last month. The Institute for Supply Management's index of financial services, construction, retail and other non-manufacturing enterprises that make up the largest share of the economy climbed to 68.4 in April, an all-time record high. The employment component of the index reached its highest reading since the stock market bubble burst in 2000.

BOTTOM LINE: The Portfolio is up today as my healthcare longs are rising and my tech and retail shorts are falling. I added a new biotech long and a new tech short this morning, leaving the Portfolio with market neutral exposure. With investor complacency readings relatively high, a continuing rise in crude oil prices and poor volume/breadth readings, I will likely keep the Portfolio close to market neutral heading into Friday's important employment report.

Wednesday Watch

Earnings of Note
Company/Estimate
CVS/.56
CCI/-.19
THQI/.11
OATS/.07

Splits
None of note.

Economic Data
ISM Non-Manufacturing for April estimated at 65.0 versus 65.8 in March.

Recommendations
Goldman Sachs reiterated Underperform on QGENF. GS reiterated Outperform on NFP, CCU, NOC, DTV, CLX and GTM.

Late-Night News
Asian indices are mostly lower on weakness in Taiwanese semiconductor shares. Microsoft is developing a new tool to filter mass e-mails, known as "spam," that will force companies to pay for the right to send messages to Microsoft clients, the Wall Street Journal reported. Three bombs exploded outside a police station in Athens, Greece before dawn today, damaging the building and its garage and slightly injuring one officer, Reuters reported.

Late-Night Trading
Asian Indices -4.50% to +.25%.
S&P 500 indicated -.16%.
NASDAQ indicated -.32%.

BOTTOM LINE: I expect U.S. stocks to open lower in the morning on weakness in technology shares and terrorism concerns. The Portfolio is market neutral heading into trading tomorrow. I will likely lay out a few new shorts on any unexpected strength on the open.

Tuesday Close

S&P 500 1,119.51 +.18%
NASDAQ 1,950.48 +.61%

Leading Sectors
Networking +3.0%
Iron/Steel +1.99%
Disk Drives +1.78%

Lagging Sectors
Biotech -.83%
HMO's -1.62%
Gaming -3.25%

Other
Crude Oil 38.87 -.28%
Natural Gas 6.21 -.94%
Gold 393.20 +.36%
Base Metals 105.76 +1.51%
U.S. Dollar 89.73 -1.13%
10-Yr. Long-Bond Yield 4.56% +1.37%
VIX 16.55 -.42%
Put/Call .66 -18.52%
NYSE Arms .79 -2.47%

After-hours Movers
WWCA +15.42% after substantially beating 1Q estimates.
PRVD +6.16% after beating 3Q estimates and boosting 04 forecast.
GIVN +5.99% on rebound from today's decline after reporting 1Q results.
ZIXI -12.86% after missing 1Q estimates and lowering 2Q guidance.
ECLG -10.33% after meeting 1Q estimate and lowering 2Q forecast.
SNIC -4.15% after meeting 4Q estimates.

Recommendations
Goldman Sachs reiterated Outperform on MET, ADP, CEN, PAYX, BSX, PFE and KO. GS reiterated Underperform on BMY, RNR and HRB. Bank of America rated Offshore Drillers Underweight.

After-hours News
U.S. stocks rose modestly Tuesday after the Fed reassured investors that any increase in its benchmark interest rate will be "measured," even as policy makers dropped their pledge to be patient in boosting borrowing costs. After the close, Bloomberg reported that cholesterol-lowering drugs, including best-sellers like Pfizer's Lipitor and Merck's Zocor, may reduce death rates after surgery, according to a study in the May 5 Journal of the American Medical Assoc. U.S. auto sales rose .8% in April as Toyota and Nissan benefited from an expanding economy, new models and as fleet customers bought more GM vehicles, Bloomberg reported. Massachusetts Governor Mitt Romney introduced the first statewide advertising campaign aimed at preventing terrorist attacks against buses or trains, Bloomberg said. Best Buy plans to change its sales strategy to target five groups of customers, ranging from suburban mothers to small business owners, amid stiffer competition from Wal-Mart, Bloomberg reported. Royal Bank of Scotland agreed to buy Charter One Financial for $10.5B, Bloomberg reported.

BOTTOM LINE: The Portfolio fell slightly today as my shorts rose a bit more than my longs. I took profits in a couple of shorts in the afternoon, leaving the Portfolio with market neutral(shorts-longs=0) exposure. Today's modest advance came on light volume with mediocre breadth readings. Investor complacency still remains high with energy and interest rates continuing to climb. I expect another down-leg to commence once the current oversold technical bounce runs its course.

Mid-day Update

S&P 500 1,116.14 -.12%
NASDAQ 1,939.78 +.05%

Leading Sectors
Networking +1.78%
Iron/Steel +1.70%
Semis +1.30%

Lagging Sectors
Biotech -1.23%
HMO's -1.60%
Gaming -3.30%

Other
Crude Oil 38.88 +1.75%
Natural Gas 6.28 +.79%
Gold 392.80 +1.37%
Base Metals 105.76 +1.51%
U.S. Dollar 89.96 -.88%
10-Yr. Long-Bond Yield 4.50% +.09%
VIX 17.02 +2.29%
Put/Call .58 -28.40%
NYSE Arms .85 +4.94%

Market Movers
TYC +3.6% after beating 2Q estimate and raising 3Q/04 forecast.
MVSN +25.91% after substantially beating 1Q estimate and raising 2Q/04 guidance.
PSS +19.37% after boosting 1Q estimates significantly.
VISG +20.98% after missing 1Q estimate, but boosting 04 forecast.
KTR +14.15% after announcing it will be acquired by ProLogis for $1.6B.
GPRO +11.12% after significantly beating 1Q estimate and raising 04 forecast.
HNT -8.7% after missing 1Q estimate and lowering 2Q guidance.

Economic Data
Factory Orders for March +4.3% versus expectations of +2.4% and 1.1% in February.

Recommendations
Goldman Sachs reiterated Outperform on IACI, MET, KR, PFGC and BBY. Citi SmithBarney said to Buy IGT on weakness, target $50. Citi also said to Buy CSCO ahead of quarter, target $34. Citi reiterated Buy on RDWR, target $25. Citi reiterated Buy on LPX, target $32. Citi reiterated Buy on SEBL, target $19. EOG raised to Overweight at JP Morgan. EMN raised to Buy at UBS. ISLE raised to Sector Outperform at CIBC. MGG, IGT and AGY cut to Sector Underperform at CIBC. CDN added to Focus List at JP Morgan, target $18.

Mid-day News
U.S. stocks are mixed mid-day on rising energy prices, rebounding technology shares and nervousness ahead of the Fed's rate announcement. Citi SmithBarney now believes this year's budget deficit will total $370B or 3.1% of GDP, much better-than-expected, as vigorous U.S. economic growth is generating higher tax revenues. Guidant, Boston Scientific and Johnson & Johnson generated about $6B in sales of angioplasty products last year as the procedure displaces bypass surgery in repairing blood vessels, the Wall Street Journal reported. The U.S. Transportation Security Administration has designated United Airlines Flight 200 from LA to DC as a "flight of interest", an indication it is a possible terrorist target, the Washington Times reported. Crude oil rose to its highest since the 1990 Gulf War after foreign workers were killed at a chemical plant in Saudi Arabia Saturday, raising concern supplies from the world's biggest oil exported would be disrupted, Bloomberg reported. California regulators may declare the first motor-fuels emergency in 15 years amid concern the rupture of a Kinder Morgan pipeline may cause shortages of gasoline and diesel, Bloomberg reported. Pioneer Natural Resources agreed to buy Evergreen Resources for about $1.7B to tap increasing natural-gas output in the Rockies, Bloomberg reported. Orders placed with U.S. factories rose 10.8% year-over-year, the strongest showing since the stock market bubble burst in 2000, Bloomberg reported. "With inventories low and firms finding it hard to gain traction to both meet demand and bring stocks to a more comfortable level, we can expect increased hiring and accelerated production," said Drew Matus, an economist at Lehman Brothers.

BOTTOM LINE: The Portfolio is unchanged today as my shorts and longs are mixed. I have not traded and the Portfolio is still 25% net short. I am waiting to see the bond market's reaction to the Fed's statement before trading.

Tuesday Watch

Earnings of Note
Company/Estimate
CCU/.14
ECLG/.08
EMR/.68
JILL/.04
KOSP/.28
MBI/1.27
NOC/1.21
TYC/.36
THC/.03

Splits
LACO 2-for-1

Economic Data
Factory Orders in March estimated +2.4% versus +.3% in February.
FOMC rate decision.

Recommendations
Goldman Sachs reiterated Outperform on DVN, AMGN and WMT.

Late-Night News
Asian indices are higher on strength in Hong Kong and Taiwanese semiconductor companies. Motorola may scrap plans to sell shares in Freescale Semiconductor, the company's chip-making unit, Silicon Strategies reported. North Korea said it won't sell nuclear materials to terrorist groups and is seeking friendship with the U.S. because it doesn't want to suffer the fate of Iraq, the Financial Times reported. MetLife, the second-biggest U.S. life insurer, said first-quarter profit rose 44% as stock market gains increased annuities fees and its own income from investments, Bloomberg reported.

Late-Night Trading
Asian Indices +.25% to +2.50%.
S&P 500 indicated +.13%.
NASDAQ indicated +.25%.

BOTTOM LINE: I expect U.S. stocks to open mixed in the morning ahead of the Fed's announcement. It is likely the Fed will change several of its policy statements. The bond market's reaction to these changes will probably dictate the direction of equity trading later in the afternoon. The Portfolio is 25% net short heading into tomorrow.

Monday Close

S&P 500 1,117.56 +.93%
NASDAQ 1,938.72 +.97%

Leading Sectors
Energy +2.55%
Gaming +2.55%
Airlines +2.28%

Lagging Sectors
Disk Drives -.26%
Semis -.59%
Iron/Steel -1.43%

Other
Crude Oil 38.18 -.08%
Natural Gas 6.23 -.02%
Gold 387.80 +.08%
Base Metals 104.19 +.72%
U.S. Dollar 90.77 +.32%
10-Yr. Long-Bond Yield 4.50% -.09%
VIX 16.62 -3.32%
Put/Call .81 -14.74%
NYSE Arms .81 -53.45%

After-hours Movers
MVSN +12.19% after substantially beating 1Q estimate and raising 2Q/04 guidance.
PHRM +5.14% after beating 1Q estimate and raising 04 forecast.
GPRO +4.87% after substantially beating 1Q estimate and raising 04 forecast.
CEPH -4.89% after meeting 1Q estimate and lowering 2Q guidance.
PCLN -3.5% after beating 1Q estimate and announcing acquisition.

Recommendations
Jim Cramer, of TheStreet.com, thinks cyclicals will rally on the Fed rate hike. Goldman Sachs reiterated Outperform on KO, PEP and STZ. GS reiterated Underperform on SGP and FHCC.

After-hours News
U.S. stocks finished higher Monday as strength in energy, gaming and airline stocks offset continued weakness in technology shares. After the close, the Semiconductor Industry Association said it will soon hike its forecast for 04 chip growth to over 20%, TheStreet.com reported. Thomas Siebel will step down as chief executive of Siebel Systems, CNBC reported. UK business optimism and output are at their highest in almost 10 years, the London-based Times said. Global air traffic rose 10% in the first-quarter of 2004 compared with year-earlier figures, beating expectations, the BBC reported. The U.S. government cut its planned borrowing to a net $38 billion from April through June, half the amount it initially forecast, as strong economic growth has resulted in rising tax revenues, Bloomberg reported. The IEA said in a study that higher oil prices are reducing U.S. economic growth by about .3%, Bloomberg reported.

BOTTOM LINE: The Portfolio fell slightly today and I added a few health care service longs in the afternoon, bringing market exposure back to 25% net short. Volume and breadth were weak today. As well, investor complacency remains relatively high. Thus, I believe today's rally was likely an oversold technical bounce and that selling will resurface later in the week.

Mid-day Update

S&P 500 1,115.19 +.71%
NASDAQ 1,935.61 +.81%

Leading Sectors
Gaming +2.53%
Energy +2.32%
Airlines +1.71%

Lagging Sectors
Disk Drives -.41%
Iron/Steel -1.43%
Semis -1.80%

Other
Crude Oil 38.07 +1.85%
Natural Gas 6.15 +5.0%
Gold 387.50 unch.
Base Metals 104.19 +.72%
U.S. Dollar 90.81 +.36%
10-Yr. Long-Bond Yield 4.49% -.31%
VIX 16.92 -1.63%
Put/Call .83 -12.63%
NYSE Arms .82 -52.87%

Market Movers
IACI -4.77% on profit-taking after beating 1Q estimates.
RDWR -29.21% after meeting 1Q estimates and lowering 2Q guidance.
ACCL -29.56% after completing the spin-off of its drug discovery business.
NTE -16.93% after disappointing 1Q results.

Economic Data
Construction Spending for March +1.5% versus expectations of +.5% and -.1% in February.
ISM Manufacturing was 62.4 in April versus 62.7 forecast and 62.5 prior month.
ISM Prices Paid was 88.0 in April versus 85.0 estimate and 86.0 in March.

Recommendations
Goldman Sachs says momentum is gaining in lodging sector, favorite beneficiary is FS. GS reiterated Outperform on AMGN, AGN, DDR, SPG, IACI, DTV, BIIB, MDT, EBAY and AMX. Citi SmithBarney downgraded the Capital Goods and Retailing industry groups and upgraded the Health Care Services and Foods industry groups. Citi removed CAT from focus list and added WMT, MSFT and AW. Citi reiterated Sell on SPW, target $42. Citi reiterated Buy on CI, target $75. UBS raised FS to Buy, target $62.50. UBS raised NCX to Buy, target $30. GTIV raised to Buy at Legg Mason, target $18. DJ raised to Overweight by Prudential, target $55. IPMT rated Buy at Deutsche Bank, target $45. PKG raised to Outperform at CSFB, target $25. ESV and THE raised to Overweight at Moran Stanley. RDK raised to Buy at Merrill Lynch, target $25.

Mid-day News
U.S. stocks are rising this afternoon as strong manufacturing and construction reports lifted optimism corporate profits would continue to beat estimates. The U.S. health care system must adopt electronic medical records technology to boost efficiency and guard against mistakes in the treatment of patients, the NY Times said. A list of about 270 recipients of suspected bribes, from Saddam Hussein's regime under the UN oil-for-food program, is filled with countries and politicians that opposed the Iraq war, the Washington Times reported. Nortel Networks is in default of rules for filing financial statements with "significant" deficiencies, the Ontario Securities Commission said. A computer worm called Sasser is infecting computers worldwide through the Internet and is still spreading, Bloomberg reported. U.S. companies including Caterpillar and Marriott have begun to raise prices, signaling a rise in demand that may spur more corporate investment and hiring, Bloomberg reported. The ISM Manufacturing Index held close to a 20-year high last month as production increased and more factories added workers than at any time since 1987, Bloomberg reported. Frank Quattrone, who managed more IPOs for Internet companies than any banker, was found guilty of obstructing investigations of IPOs by urging bankers to discard records after learning of the probes, Bloomberg reported.

BOTTOM LINE: The Portfolio is down slightly today as my shorts are mixed. I added few new shorts into this morning's strength and one new long, bringing the Portfolio's market exposure to 50% net short. Today's rally is not very strong as volume and breadth readings are weak. As well, investor complacency continues to be a problem. Natural Gas is breaking out today, thus I added a new long position in APA with a 42.25 stop-loss.

Monday Watch

Earnings of Note
Company/Estimate
ACDO/.42
ATN/.21
ASF/.12
ESPD/.18
IACI/.16
NBIX/-.36
PCLN/.08

Splits
None of Note.

Economic Data
Construction Spending for March estimated +.5% versus -.1% in February.
ISM Manufacturing for April estimated at 62.7 versus 62.5 prior month.
ISM Prices Paid for April estimated at 85.0 versus 86.0 in March.
Total Vehicles Sales for April estimated at 17.0M versus 16.7M in March.
Domestic Vehicle Sales for April estimated at 13.5M versus 13.3M prior month.

Weekend Recommendations
Forbes on Fox had guests that were positive on JNJ, WFMI, BBBY, BEAS, COGN, CSR and mixed on HAL and NMG/A. Bulls and Bears had guests that were positive on GE, NFX, MOT, LNCR, PETM, mixed on HAL and negative on DIS. Cashin' In had guests that were positive on MANT, MLNM, FLML, NVEC, CBT and mixed on MRVL. Louis Rukeyser's Wall Street had guests that were positive on COL, WAG, CCU, CLX, DVN, OSI and FNM. Wall St. Week w/Fortune had guests that were positive on BBH, CSCO, SIVB, BAC, GE, MSFT and CCE. Barron's had a positive column on VOD and negative columns on ZLC and TASR.

Weekend News
Economist.com has a positive article on California's economy, saying it is poised for a rebound. Google is being sued by a unit of rival Yahoo! over the way it sells advertising, the Daily Telegraph reported. UN Secretary-General Kofi Annan said on Sunday any UN official found guilty of corruption in the burgeoning Iraqi oil-for-food scandal would be dismissed and be held liable for legal action, Agence France-Presse reported. Tyco won a $1B contract to build a computerized network of radio transmitters across New York state designed to correct lapses among emergency response agencies, the New York Times reported. China is facing "severe" pressure to meet demand for oil products because of rapid consumption growth and production-capacity constraints, Xinhua News reported. The UK is set to send as many as 4,000 extra soldiers to secure Najaf in the biggest expansion of British forces in Iraq since the beginning of the war, the Sunday Telegraph said. The UK government has bought ani-radiation drugs worth $88.9M to cover half the country's population in the event of a dirty bomb. Chinese Vice Premier Huang Ju urged officials to curb money supply and suspend or halt work on industrial projects that aren't in line with government policy to ensure long-term stable economic growth, China Central TV reported. Wall Street firms are increasing their hiring in NYC as profits rebound, Crain's New York Business reported. Pfizer plans to buy more biotechnology companies to finance new drug discoveries, the Financial Times said. Photographs allegedly showing UK troops abusing a hooded Iraqi prisoner are probably fakes, the London-based Times said. Warren Buffett said he increased his bet against the U.S. dollar, Bloomberg reported. Paul Tudor Jones, founder of the $9.4B hedge fund firm Tudor Investment Corp., is increasing his investments in China, Bloomberg reported.

Late-Night Trading
Asian indices are mostly lower, -1.25% to +.25% on average.
S&P 500 indicated +.04%.
NASDAQ indicated +.36%.

BOTTOM LINE: The Portfolio is 25% net short heading into the week. While the market could rally at any time from its oversold state, I would like to see sentiment indicators such as the Bullish %, VIX, ARMS and Put/Call ratio show less investor complacency. Interest rates will likely rise further during the week in anticipation of Friday's employment report. U.S. stocks should open higher in the morning on some positive developments in Iraq, strong economic data and no significant terrorist acts over the weekend. I will monitor the strength of the open before deciding whether or not to shift market exposure.

Weekly Outlook

There are number of economic reports scheduled for release this week as well as a few significant corporate earnings reports. Scheduled economic reports include ISM Manufacturing/Prices Paid, Vehicle Sales, Factory Orders, ISM Non-Manufacturing, Non-farm Productivity, Unit Labor Costs, Unemployment Rate and Change in Non-farm Payrolls. ISM Manufacturing/Non-Manufacturing, Unit Labor Costs and Change in Non-farm Payrolls have the most market-moving potential.

IAC/Interactive Corp.(IACI), Clear Channel(CCU), Emerson(EMR), Northrop Grumman(NOC), Tyco(TYC), CVS Corp.(CVS), Caremark(CMX), Fox Entertainment(FOX) and XM Satellite Radio(XMSR) are some of the more important companies that release quarterly earnings this week. There are also a few other events that have market-moving potential. The JP Morgan Tech/Telecom Conference, FOMC Policy announcement, Morgan Stanley Healthcare Conference and FOMC minutes release may also impact the market.

BOTTOM LINE: The S&P 500's P/E on 04 estimates is 17.33 and falling, the lowest level since the depths of the Asian/Long-term capital crises in 1998. The S&P 500's current valuation is also lower than in 1992 and 1987, years preceding major bull moves. The economy is growing the fastest since the early 80's, American household net-worth is at all-time highs, American home ownership is at all-time highs, corporate profitability is at all-time highs, interest rates and inflation are relatively low and consumer spending is very strong, yet the stock market is falling. Multiple sectors appear to be breaking down technically. This leads me to conclude investor psychology has changed and the market is in the middle of a P/E multiple contraction phase. Market participants appear to be factoring in the likelihood of another major terrorist attack on U.S. soil. The strong fundamental backdrop for stocks should keep this phase from turning into another bear market. With my short-term trading indicators on sell signals, investor complacency still relatively high and deteriorating technicals in multiple sectors, I expect more weakness in the near-term. I will look to make additional short sales into any bounce from technically oversold levels.

Chart of the Week

NASDAQ Cumulative Advance/Decline Line



Bottom Line: Many technology stocks are approaching technically oversold levels. However, breadth on the tech-heavy NASDAQ continues to deteriorate. Thus, while an oversold bounce could occur at any time, the NASDAQ will likely work its way lower over the next few weeks.

Market Week in Review

S&P 500 1,107.30 -2.92% for the week.

U.S. stocks finished lower last week on fears over rising inflation, escalating violence in the Middle East and China's cooling economy. The NASDAQ had its largest weekly decline in two years as networking, semiconductor and disk drive stocks fell substantially. Nortel Networks, North America's biggest maker of telephone equipment, tumbled 35% after it fired its CEO because of an accounting misstatement that will cut last year's earnings in half. Furthermore, JDS Uniphase, the world's biggest maker of fiber-optic network parts, sank 28% for the biggest decline in the S&P 500. The company said it may lose more money than analysts expected this quarter. Defensive sectors, such as utilities, tobacco and pharmaceuticals all displayed relative strength for the week.

There were a few positive developments last week. Most of the economic and corporate reports were better-than-expected. As well, Genentech and OSI Pharmaceuticals soared after saying their experimental Tarceva medicine extended the lives of lung-cancer patients who no longer responded to other treatments. This is the first time any drug in this class has shown a survival benefit. United Healthcare agreed to purchase Oxford Health Plans for about $56.79/share. Finally, more than 80% of S&P 500 members have reported results and profit at those companies has climbed 27%, with 75% beating expectations. The average positive surprise has been 8%.

Bottom Line: The semiconductor index broke substantially below its 200-day moving average last week, while many other sub-sectors of technology are hovering near this key technical level. Investor psychology has deteriorated a great deal in the last few weeks as the media's obsession with negativity and terrorism over-shadow all positive news. The many exceptional economic and corporate reports have been ignored by investors for the few that have been troublesome. Even as China attempts to slow-down its scorching economy to 7% growth from 10%, investors focus on the damage this will do to companies that sell to China rather than the positive affects this will have on inflation. While inflation has accelerated from its historically low levels, it is not a problem as of yet and does not appear it will become one for the foreseeable future. Historically, stocks perform exceptionally well during periods of slightly rising inflation as companies regain pricing power, boosting profits. I also believe it is very positive for the sustainability of long-term world growth that China is addressing its problems now. This should prevent a collapse in their economy, which is what the China "bubble" bears have been predicting. Technology "bubble" stocks dropped substantially numerous times in the 90's, only to rebound to higher highs, before peaking in 2000. I think companies that sell to China will outperform for many more years before their eventual peak. These stocks are in a bad correction within a long-term secular bull move in my opinion.

Economic Week in Review

ECRI Weekly Leading Index 135.20 +.52%

New Home Sales for March rose to a record 1228K versus expectations of 1173K and 1128K in February. Builders such as Centex and D.R. Horton are confident rising employment will underpin sales, boosting the economy. A measure of the supply of homes for sale fell to the lowest since August. "Lean inventories and mortgage rates that are still low even if they have started edging up in recent weeks, suggests this is still going to be a very strong year for housing," said Ellen Beeson, an economist at Bank of Tokyo-Mitsubishi.

The Conference Board's Consumer Confidence Index rose to 92.9 in April versus expectations of 88.5 and an 88.5 reading in March. "When non-farm payrolls rise by 308,000 in a month, it's going to help consumer confidence," said Delos Smith, a Conference Board Economist.

Existing Home Sales rose to 6.48M in March versus expectations of 6.2M and 6.13M the prior month. The 5.7% increase was the second-fastest pace on record. Re-sales account for 85% of the housing market. U.S. home ownership in the three months through March set a record for the third quarter in a row.

Gross Domestic Product for the first quarter rose 4.2% versus expectations of 5.0% and 4.1% in the fourth quarter. The rise was paced by consumer spending and business investment in office equipment and software. The GDP price deflator, a measure of inflation, rose at a 2.5% annual rate, the most since mid-2001. Unadjusted for inflation, GDP rose at a 6.8% annual rate. "These somewhat higher prices will boost corporate profits, which should permit greater investment and hiring," said Rich Yamarone, chief economist of Argus Research. Higher refund checks because of last year's tax cuts and the Fed's lowest interest rate in four decades helped boost retail sales, while more orders for equipment suggest businesses are gaining confidence that may lead to more hiring, Bloomberg reported.

Personal Income for March rose .4%, meeting expectations, versus a .5% rise in February. This is the strongest three-month pace for income growth since the stock market bubble burst in 2000. Personal Spending for March rose .4% versus expectations of a .7% rise and a .4% rise in February. Spending also benefited from tax refunds and mortgage re-financings.

The University of Michigan Consumer Confidence Index fell to 94.2 in April versus expectations of 94.0 and a final reading of 95.8 in March. Violence in Iraq and record-high gasoline prices likely offset very good economic data, leading to the slight decline, Bloomberg reported.

The Chicago Purchasing Manager report rose to 63.9 in April versus expectations of 61.0 and a reading of 57.6 in March. "Inventories are very lean," Mike England, chief economist at Action Economics said. "Factories are scurrying to rebuild their stocks." The index confirms other reports that showed manufacturing continues to strengthen, Bloomberg reported.

Bottom Line: The housing market continues to exhibit extraordinary strength. While it will likely cool a bit in coming months, an improving labor market should prevent any significant weakness. However, with homebuilding stocks up about 60% over the last 12 months, further weakness in the group should be expected in the near-term within the context of a secular bull move. Consumer confidence readings remain relatively strong considering the daily barrage of negative reporting, high gas prices and recent spurt of violence in the Middle East. Moreover, consumers' exceptionally strong spending patterns over the last few weeks paint an even more robust picture of the true state of the consumer psyche. GDP growth, while not exceptional after inflationary adjustments, was very good once again and will certainly be revised upwards. The U.S. economy has grown 5.5% on average over the last 3 quarters, the best performance since the early 80's. The Chicago Purchasing Manager report is a key gauge of mid-western manufacturing activity. It is also improving at the fastest rate since the early 80's. Overall, the economic data released last week continued to paint a very bright picture of the current state of the U.S. economy. While inflationary pressures have increased, they remain relatively low and should not be a serious problem for the foreseeable future.

Weekly Scoreboard

Indices
S&P 500 1,107.30 -2.59%
Dow 10,225.57 -1.96%
NASDAQ 1,920.15 -5.89%
Russell 2000 559.80 -4.44%
Wilshire 5000 10,793.66 -2.94%
Volatility(VIX) 17.19 +19.77%
AAII Bullish % 50.0% unch.
US Dollar 90.53 -.57%
CRB 272.54 +1.17%

Futures Spot Prices
Gold 387.50 -2.10%
Crude Oil 37.38 +2.69%
Natural Gas 5.86 +3.66%
Base Metals 104.19 -2.94%
10-year US Treasury Yield 4.51% +1.12%
Average 30-year Mortgage Rate 6.01% +1.18%

Leading Sectors
Utilities +.07%
Tobacco -.09%
Energy -.12%

Lagging Sectors
Disk Drives -8.49%
Nanotechnology -11.03%
Networking -11.82%

*% Gain or loss for the week

Mid-day Update

S&P 500 1,109.74 -.37%
NASDAQ 1,926.11 -1.67%

Leading Sectors
Tobacco +.71%
Energy +.61%
Drugs +.46%

Lagging Sectors
Biotech -3.24%
Internet -3.79%
Networking -4.15%

Other
Crude Oil 37.40 +.24%
Natural Gas 5.86 -1.0%
Gold 387.50 +.10%
Base Metals 104.19 +.72%
U.S. Dollar 90.52 -.06%
10-Yr. Long-Bond Yield 4.50% -.76%
VIX 16.78 +1.39%
Put/Call .68 -28.42%
NYSE Arms 1.55 +17.42%

Market Movers
FDRY -20.2% after missing 1Q estimate and lowering 2Q forecast.
SONO +18.5% after meeting 1Q estimate and raising 04 guidance.
MCK + 9.43% after beating 4Q estimates and raising 04 guidance.
IM -26.24% after missing 1Q estimate and lowering 2Q guidance.
BOBJ -23.2% after missing 1Q estimate and lowering 2Q guidance.
SFNT -19.17% after missing 1Q estimate and lowering 2Q guidance.
CELL -18.4% after missing 1Q estimates.
APCC -18.4% after missing 1Q estimates.

Economic Data
Personal Income for March rose .4%, meeting expectations and down from a .5% rise in February.
Personal Spending for March rose .4% versus a .7% expected rise and .4% rise in February.
Univ. of Mich. Consumer Confidence came in at 94.2 versus expectations of 94.0 and 93.2 prior month.
Chicago Purchasing Manager Report for April came in at 63.9 versus expectations of 61.0 and 57.6 prior month.

Recommendations
Goldman Sachs reiterated Outperform on ROH, NFX, BIIB, MUR, ASN, SRE, AET, AVP, ACS, GCI, TRB, KRI, XOM, PFGC, MCK, DDR, AMIS, STZ, SNDK, KMI and KMR. GS reiterated Underperform on PHS, FHCC and LVLT. Citi SmithBarney upgraded FON to Buy, target $22. Citi strongly reiterated Buy on BG, target $47. MCK raised to Outperform at Bear Stearns.

Mid-day News
U.S. stocks are lower this afternoon on continued weakness in technology shares. Positive earnings surprises for the first quarter are averaging 8% above consensus expectations, leading to almost 300 basis points of upward revisions to 04 estimates. The new 04 earnings growth rate is 16.4% versus 12.7% expectations last month, Bloomberg reported. Russia's RTS Index, the world's second-best performing benchmark in the first quarter, had its sharpest monthly drop in three years amid concern over a slowdown in China and possible bankruptcy at OAO Yukos Oil. The NYSE is applying to delist Gucci(GUC) and suspend its common shares, Dow Jones reported. Donald Trump's Trump Hotels & Casino Resorts, whose auditor in March expressed doubts about its ability to survive, said it may miss a $73.1 million interest payment due Monday, Bloomberg reported.

BOTTOM LINE: The Portfolio is unchanged today as my longs are falling and shorts are mixed. The weakness in technology shares is spilling over into the entire market. I expect this weakness to continue in the short-run as investor complacency is still too high.

Thursday Close

S&P 500 1,113.89 -.76%
NASDAQ 1,958.78 -1.55%

Leading Sectors
Telecom +.14%
Foods +.13%
Insurance +.03%

Lagging Sectors
Disk Drives -2.89%
Oil Service -3.35%
Networking -3.51%

Other
Crude Oil 37.53 +.56%
Natural Gas 5.94 +.27%
Gold 388.80 +.44%
Base Metals 103.45 +.57%
U.S. Dollar 90.44 -.80%
10-Yr. Long-Bond Yield 4.54% +.86%
VIX 16.60 +1.90%
Put/Call .95 +9.20%
NYSE Arms 1.32 -30.53%

After-hours Movers
CALM +17.45% after withdrawing proposed 5M share secondary.
FLML +6.43% after meeting 1Q estimates.
VTIV +5.41% after substantially beating 1Q estimates.
FDRY -26.86% after missing 1Q estimates and lowering 2Q forecast.
APCC -10.26% after missing 1Q estimates.
BOBJ -10.78% after missing 1Q estimate and lowering 2Q guidance.
GNSS -14.92% after meeting 4Q estimate and lowering 1Q forecast.
ITMN -16.71% after making negative comments on future drug prospects.

Recommendations
Goldman Sachs reiterated Underperform on UAL, BVF, AKS and MGM. GS reiterated Outperform on DOW, CMX, DNA and AET.

After-hours News
U.S. stocks finished lower Thursday on a below-expectations GDP report, rising interest rates and concerns over the Chinese economy. After the close, Bloomberg reported that automakers boosted the fuel economy of 2004 model-year vehicles for the second year in a row. Electronic Arts, the largest U.S. video game maker, said fourth-quarter profit surged as sales climbed 29%. Sequoia and Kleiner Perkins Caufield & Byers paid about $25 million combined in 1999 for a stake in Google. The 2 firms now stand to make a return of at least 150-fold from the investment, or about $4 billion, Bloomberg reported.

BOTTOM LINE: The Portfolio rose slightly today as my shorts fell more than my longs. I did not make any afternoon changes and the Portfolio is still 25% net short. One of the new short positions I initiated today is William Lyon Homes(WLS), a small-cap homebuilder. I am keeping a 90.5 stop-loss on this position. I think rising interest rates will continue to pressure this group short/intermediate-term. The tone of the market is still very poor. With my short-term trading indicators still giving sell signals and investor complacency still relatively high, I tend to think we have more to go on the downside before an oversold bounce.

Mid-day Update

S&P 500 1,120.48 -.17%
NASDAQ 1,973.20 -.82%

Leading Sectors
Insurance +.63%
Banks +.46%
Drugs +.42%

Lagging Sectors
Oil Service -2.48%
Homebuilders -2.41%
Semis -2.92%

Other
Crude Oil 37.05 -1.12%
Natural Gas 5.93 -.52%
Gold 387.10 +.36%
Base Metals 103.45 +.57%
U.S. Dollar 90.66 -.55%
10-Yr. Long-Bond Yield 4.55% +1.09%
VIX 16.35 +.37%
Put/Call .86 -1.15%
NYSE Arms 1.02 -46.32%

Market Movers
MACR +18.9% after substantially beating 4Q estimates, raising 1Q guidance and multiple upgrades.
MANT +15.4% after beating 1Q estimates, raising 2Q/04 guidance and multiple upgrades.
TARO -27.4% after disappointing 1Q earnings and multiple downgrades.
VAS -17.1% after missing 1Q estimates and JP Morgan downgrade to Underweight.
INSP -9.9% after disappointing 1Q and 2Q guidance.
ACH -6.2% on continued selling of Chinese commodity stocks.

Economic Data
1Q GDP was 4.2% versus 5.0% estimate and 4.1% last quarter.
1Q Personal Consumption was 3.8% versus 4.2% estimate and 3.2% prior quarter.
1Q GDP Price Deflator was 2.5% versus 2.0% estimate and 1.5% last quarter.
1Q Employment Cost Index was 1.1% versus .9% estimate and .8% prior quarter.
Initial Jobless Claims for last week were 338K versus estimate of 343K and 356K prior week.
Continuing Claims were 3013K versus estimates of 2987K and 3010K prior.
Help Wanted Index for March was 39 versus 41 estimate and 40 in February.

Recommendations
Goldman Sachs reiterated Underperform on TCO, LSI, STA, SYMC and QLGC. GS reiterated Outperform on AL, N, NUE, STLD, AKS, NEM, PDG, MO, AHC, ATG, AET, ACS, EMC and ATI. JP Morgan cut CUB and VAS to Underweight. ASD rated Buy at Bank of America, target $130. DOV rated Buy at Bank of America, target $50. GE rated Buy at Bank America, target $36. HON rated Buy at Bank of America, target $42. TYC rated Buy at Bank of America, target $36. MACR raised to Buy at Merrill, target $26. SPW cut to Sell at Bank of America, target $40. MANT raised to Buy at Legg Mason, target $29. Merrill Lynch cut ACAI to Sell. Jim Cramer, of TheStreet.com, thinks commodity stocks are overdone on the downside.

Mid-day News
U.S. stocks are lower mid-day on a relatively disappointing GDP report, interest rates worries and concerns over the possible slowing of Chinese economic growth. The U.S. government estimates that 41 million Americans have higher-than-normal levels of blood sugar, classifying them as having pre-diabetes and at greater risk of developing the disease, the AP reported. Microsoft is very close to reaching an agreement in its antitrust case with the European Commission, Dow Jones reported. Nokia's market share dropped to 29% in the first quarter, the lowest in at least three years, as competitors such as Siemens shipped more attractive models, Bloomberg reported. Dow Chemical, the largest U.S. chemical marker, said first-quarter profit rose more than 600% on higher prices and greater demand for its products, Bloomberg reported. The U.S. economy expanded at a slower-than-expected 4.2% annual rate in the first quarter, Bloomberg reported. Sinclair Broadcasting ordered its ABC affiliates to preempt "Nightline", saying the show appears to be motivated by an anti-war political agenda. Sinclair which owns 62 U.S. television stations said ABC is disguising political statements as news content, Bloomberg reported. U.S. Treasuries are falling, pushing the yield on the benchmark 10-yr note to a seven-month high, after a surge in measures of inflation tied to the first-quarter GDP report.

BOTTOM LINE: The Portfolio is up slightly today as my shorts are falling more than my longs. I added a few new shorts in the retail and homebuilding sectors in the morning, bringing the Portfolio's market exposure to 25% net short. I was very surprised by the very good, but below-expectations, GDP report and even more surprised by the bond market's reaction. Bond investors are focusing on the higher-than-expected inflation readings in the report rather than the actual report. This does not bode well for the short-term direction of interest rates. While the 4.2% GDP number was below expectations, it likely gives the Fed a little more room to hike rates at a gradual pace. As well, commodity prices continue to fall. Thus, the current higher-than-expected readings on inflation should be temporary and will likely decelerate throughout the remainder of the year. The semiconductor index(SOX) has now clearly breached its 200-day moving-average. This likely means more damage to the overall tech sector and the broader market to an extent. The daily drumbeat of negativity from the mainstream press has turned investor psychology very negative even as the sentiment indicators are not overly bearish. This usually indicates further downside with an eventual spike-up in fear indicators such as the VIX, ARMS and Put/Call ratio signaling a short-to-intermediate term bottom.

Thursday Watch

Earnings Announcements
Company/Estimate
APCC/.19
ANDW/.11
CELL/.20
BOBJ/.15
CE/.17
COX/.05
DOW/.43
DUK/.37
ERTS/.21
XOM/.75
FIC/.42
FDRY/.17
FLML/.03
GR/.36
IM/.24
KROL/.30
MCK/.65
MGM/-.08
NTES/.37
PTEN/.26

Splits
None of note.

Economic Data
1Q Gross Domestic Product estimated +5.0% versus 4Q growth of 4.1%.
1Q Personal Consumption estimated +4.2% versus 4Q growth of 3.2%
1Q Employment Cost Index estimated +.9% versus +.8% in 4Q.
Initial Jobless Claims last week estimated at 343K versus 353K prior week.
Continuing Claims estimated 2987K versus 3019K prior week.
Help Wanted Index for March estimated at 41 versus 40 in February.

Recommendations
Goldman Sachs reiterated Outperform on AG, KMT, PPL, WON, DRE, BIIB, STLD, MO, OG, and NUE. GS reiterated Underperform on NFG, EQR, GSIC and HRB.

Late-Night News
Asian indices are down across the board after the Chinese government called on its banks to restrict lending and stopped construction of a $1.3 billion steel plant, as it escalates attempts to slow the economy, Bloomberg reported. China has already raised banks' reserve ratio, restricted lending to the steel, cement and aluminum industries and banned new construction projects to slow the economy and prevent inflation. Still, the second-largest economy in Asia grew at a faster-than-expected 9.7% in the first quarter with investment jumping 53% in the first 2 months, including a 173% increase in money invested in the steel industry, Bloomberg reported.

Late-Night Trading
Asian Indices -3.25% to -.50%.
S&P 500 indicated -.08%.
NASDAQ indicated -.10%.

BOTTOM LINE: I expect U.S. stocks to open lower tomorrow as an exceptionally strong GDP report will likely push interest rates higher. I expect US 1st quarter GDP growth of around 6%, versus economists' expectations of 5%. Commodity-related stocks will probably remain under pressure as investors panic-sell any stock that has benefited from China. It is possible that the major U.S. indices could see a substantial sell-off tomorrow as bonds fall more than I currently anticipate. I will analyze the situation on the open and decide whether to increase or decrease market exposure.

Wednesday Close

S&P 500 1,122.41 -1.38%
NASDAQ 1,989.54 -2.12%

Leading Sectors
Utilities +.18%
Restaurants +.12%
Hospitals -.47%

Lagging Sectors
Homebuilders 3.15%
Nanotechnology -3.24%
Papers -3.58%

Other
Crude Oil 37.26 -.53%
Natural Gas 5.93 -.60%
Gold 384.80 -.29%
Base Metals 102.86 -4.18%
U.S. Dollar 91.17 +.84%
10-Yr. Long-Bond Yield 4.47% +1.94%
VIX 16.29 +8.10%
Put/Call .87 +22.54%
NYSE Arms 1.90 +62.39%

After-hours Movers
MACR +20.21% after beating 4Q estimates and raising 1Q guidance.
PHTN +6.13% after missing 2Q estimates, but raising 3Q guidance.
TWX +4.18% after beating 1Q estimates and raising 04 guidance.
JDSU -7.51% after meeting 3Q estimates and lowering 4Q guidance slightly
SWKS -7.75% on profit-taking after beating 2Q estimates and raising 3Q guidance.

Recommendations
Goldman Sachs reiterated Underperform on AKS, BMY, ACAI and Outperform on SYMC, ATI, FOX. GS says to Buy ROV on weakness. The Street.com has a positive column on PD, saying now is a good long-term entry point.

After-hours News
U.S. stocks finished sharply lower Wednesday on Nortel's ongoing scandal, higher interest rates and concerns about the health of the Chinese economy. After the close, Time Warner's CEO Richard Parsons told CNN that business is stabilizing and that "there's a lot more value there than we're getting credit for." Caterpillar forecast its China sales will grow 35% to $1 billion this year, the China Daily reported. The U.S. House voted to make permanent a tax cut for married couples that expires next year after retooling the legislation to allow more low-income Americans to claim a tax credit for working.

BOTTOM LINE: The Portfolio fell slightly today and I did not make any changes in the afternoon, leaving market exposure at 25% net long. Interest rates rose in anticipation of tomorrow's strong GDP report. Economists are expecting 1st quarter U.S. economic growth of 5.0%. I am expecting a number closer to 6.0%. Commodities continued their fall today on rising U.S. interest rates, a rising U.S. dollar and Chinese economic concerns.

Mid-day Update

S&P 500 1,126.34 -1.03%
NASDAQ 2,001.72 -1.52%

Leading Sectors
Restaurants +.77%
Utilities +.03%
Semis -.15%

Lagging Sectors
Biotech -2.33%
Nanotechnology -2.75%
Papers -2.83%

Other
Crude Oil 37.83 +.80%
Natural Gas 5.86 -.24%
Gold 386.00 -3.31%
Base Metals 102.86 -4.18%
U.S. Dollar 91.15 +.83%
10-Yr. Long-Bond Yield 4.45% +1.71%
VIX 16.15 +7.17%
Put/Call .86 +21.13%
NYSE Arms 1.87 +59.83%

Market Movers
NT -26.0% after saying it fired its CEO, former CFO an controller, all for cause. Also said it would restate three year's worth of financial results covering 2000-2003 and delay 1Q results.
SINA -13.0% on Chinese economic concerns after beating 1Q estimate and raising 2Q guidance.
FLEX -7.0% on NT concerns after beating 1Q estimate and raising 04 forecast.
NET -11.60% after missing 1Q estimates and lowering 2Q forecast substantially.
OSIP -10.0% on profit-taking.
CELG -11.16% after stopping a test of its Revlimid medicine after early results failed to show it helped skin-cancer patients live longer.
FTFC +22.69% after announcing it will be acquired by ASBC for $26.79/share.
ECLP +16.65% after meeting 1Q estimates.
GTRC +12.29% after beating 1Q estimate and raising 2Q forecast.
PLT +17.02% after beating 4Q estimate and raising 1Q forecast.
KSWS -20.14% after beating 1Q estimates and substantially lowering 2Q/04 forecast.
MAGS -20.4% after disappointing 1Q results.
INTL -16.14% after missing 1Q estimates.
COCO -12.0% after beating 3Q estimate and lowering 4Q guidance.

Economic Data
None of note.

Recommendations
Goldman Sachs reiterated Outperform on AGR/A, CBL, NEM, CCE, AMLN, AHC, BSX, AL, STLD, PDG, X, HD, PETC, BHI and WON. GS raised NUE to Outperform. GS reiterated Underperform on F, BMY, HMT, ASH and RKY. Citi SmithBarney downgraded MU from Buy to Sell. Citi said to Buy APCC ahead of quarterly report, target $31. Citi upgraded MHP from Sell to Buy, target $90. Citi reiterated Buy on RCI, raised earning and target to $61. Citi reiterated Buy on BC, target $49. Citi rated AXL Buy, target $48. Citi rated BWA Buy, target $108. Citi rated MGA Buy, target $105. Citi rated SUP Sell, target $30. QLTI cut to Reduce at UBS. CIT raised to Buy at Legg Mason, target $44. ELX raised to Buy, target $20.50. CMCSA raised to Buy at Merrill, target $46. COL raised to Overweight at Morgan Stanley. CSGS raised to Raymond James, target $21. AXCA and Q removed from Focus List at JP Morgan. ETN raised to Outperform at Bear Stearns.

Mid-day News
U.S. stocks are sharply lower mid-day on concerns over the Chinese economy, rising interest rates and the continuing scandal at Nortel. VaxGen said it submitted a plan to the U.S. government to make 75 million doses of an experimental anthrax vaccine for a national stockpile. President Bush has approved measures to enhance the country's defenses against a biological weapons attack, including the creation of a surveillance system to track threats, the NY Times reported. IBM announced today it plans to build new server computers that act more like mainframes, the NY Times reported. Viacom's CBS was sued by Mohamed al-Fayed, the father of the man killed with Princess Diana in a 97 crash, for airing pictures of a dying Diana, Reuters reported. Comcast withdrew its $54.1 billion unsolicited bid for Walt Disney, Bloomberg reported. Boeing boosted its 2004-2005 profit forecasts because of better margins and higher-than-expected commercial-aircraft deliveries next year. Hilton Hotels first-quarter profit rose 400% because of increased business travel, Bloomberg reported. Copper futures fell to a 12-week low as some Chinese banks halted new loans in a government bid to slow the economy, signaling an erosion in demand for metal used in buildings, appliances and automobiles, Bloomberg reported.

BOTTOM LINE: The Portfolio is down slightly today on declines in technology and energy-related long positions. I trimmed a few more longs, leaving the Portfolio with 25% net long market exposure. Interest rates are increasing in anticipation of tomorrow's GDP report. If rates make new near-term lows tomorrow U.S. stocks will likely continue their recent sell-off. However, if rates fall on tomorrow's strong economic report, it may provide the catalyst for another upward thrust. There are two positives I see from today's mostly negative action. In a little over a month the CRB Index has now fallen over 5% as China's government continues to make comments about trying to slow recent torrid growth. Most of the Bear's inflation arguments revolve around rising commodity prices. A rising dollar and decelerating Chinese demand should continue to pressure commodity prices in the near-term. As well, it is positive that semiconductors are mostly unchanged today as the rest of tech is falling. Semis usually lead tech and this may be a sign that tech is trying to find a bottom. I expect stocks to remain under pressure in the afternoon as investors worry about the bond market's reaction to tomorrow's GDP report.

Wednesday Watch

Earnings Announcements
Company/Estimate
AFCI/.08
BMY/.39
CMCSA/.06
EL/.35
FEIC/.08
HAL/.30
HLT/.06
INSP/.16
MGAM/.26
NEM/.34
PD/1.81
QLGC/.36
SOHU/.27
SWKS/.04
SYMC/.34
TWX/.09
ZBRA/.52

Splits
None of note.

Economic Data
None of note.

Recommendations
Goldman Sachs reiterated Outperform on BHI, BSX, MUR, MMP and AFL. GS says to Buy ROH ahead of quarterly report.

Late-Night News
Asian indices are mixed on strength in Hong Kong/Australia and weakness in Taiwan/Korea. The European Central Bank signaled yesterday that the 10 countries which are about to join the European Union may have to wait years before they can adopt the euro, the Wall Street Journal reported. Sony fell as much as 3.3% after the company said it may post a weaker-than-expected 13% rise in net income this year. China's efforts to cool expansion in its steel, cement and other heavy industries are working, a central bank official said, suggesting interest rates may remain where they are unless inflation accelerates, Bloomberg reported.

Late-Night Trading
Asian Indices -1.25% to +.50%.
S&P 500 indicated -.06%.
NASDAQ indicated -.13%.

BOTTOM LINE: I expect U.S. stocks to remain mixed to lower tomorrow ahead of Thursday's 1st Quarter GDP report. My short-term trading indicators are giving conflicting signals and the tone of the market has not been good the last couple of days. The Portfolio is 50% net long heading into trading tomorrow.