Tuesday Watch

Weekend News
Emerging market bond prices rose to a record last week in comparison with US government debt as investors, struggling with low interest rates, diversify into higher-yielding securities, the Financial Times reported. Bonuses of as much as $15,000 tax-free being offered by the US National Guard to lure guardsmen are reservists to re-enlist are working, and some have signed on for six more years, the NY Times reported. "Podcasts," which use a recently developed technology that enables people to make broadcasts on their computers, are becoming more popular as computer users download them to portable players, the NY Times said. Identity theft at ChoicePoint, which collects data on driving, property records and other transactions, may involve as many as 500,000 victims, an AP report said. Doctors advocate more caution using painkiller drugs, including cardiac screening, in the wake of a FDA panel's decision against banning their sale, the NY Times reported. Japanese companies including Mitsubishi, Itochu, and Nippon Steel, are advising Iraq on developing its gas reserves and upgrading oil-export terminals, the Middle East Economic Digest reported. Abercrombie & Fitch may open its first store in Europe in 2006, the Telegraph reported. More investors are buying farmland, spending as much as $500,000 a field in the US Midwest, as people from cities look for secure investments to round out their portfolios, the LA Times reported. McDonald's Corp. has added fresh fruit and more vegetables to its menu in recent years, changing the produce industry as it seeks to deflect criticism about the nutritional value of its food, the NY Times reported. Some US companies, faced with high health-care benefit cots, are using cash and other incentives to make employees more conscious of their lifestyles, the Washington Post said. Denver International Airport and the businesses around it are expected to contribute almost $85 billion to Denver's economy by 2025, up from $15.3 billion now, the Denver Post reported. India may sell stakes in 44 state-run companies and begin the sale process after the budget, the Economic Times reported. Axa SA, Europe's second-biggest insurer, boosted its stake to 5.6% in Teva Pharmaceutical Industries, the world's biggest maker of generic drugs, Haaretz reported. A US federal advisory group will recommend soon that new-born babies should be checked fro 29 rare medical conditions, the NY Times reported. The US gave the Iraqi central bank approval to open a deposit account at the Federal Reserve Bank of New York to earn income on reserves of about $5 billion, Arabian Business magazine reported. Video game makers are turning away from movie-based games because of high marketing costs, the NY Times said. Taser International, which makes stun guns, has hired hundreds of police officers to help sell the devices to law enforcement agencies nationwide, the San Francisco Chronicle reported. Sirius Satellite Radio's agreement to acquire Howard Stern's radio show is the subject of a SEC insider-trading investigation, the NY Post reported. Toyota Motor plans to add two assembly factories in North America by 2010 as it attempts to increase sales in the world's richest auto market and challenge GM, the Wall Street Journal reported. US banks will acquire rivals, creating larger companies and smaller local banks will continue to thrive at the same time, the Financial Times reported. Iraq's largest political slate will select its candidate for prime minister tomorrow in a secret ballot, choosing between Ahmad Chalabi, former favorite of the US administration, and Ibrahim al-Jaafari, the interim vice-president, the AP reported. US regulators will allow fund managers to continue to receive independent stock research through "soft dollar" commissions paid by their clients, the Financial Times reported, citing an interview with SEC Chairman Donaldson. "I think you will see us moving in the direction of a tighter definition of what is allowable to be paid for via soft dollar," Donaldson said. Qwest Communications plans to make another bid for MCI as early as this week, the Wall Street Journal said. An increasing number of US companies are halting IPOs in order to consider acquisition offers from potential suitors, the Wall Street Journal reported. In an attempt to lift sales, Hasbro introduced the $30 I-DOG, a palm-sized electronic toy that wiggles after being plugged into portable music players, Bloomberg reported. Israeli Prime Minister Sharon signed orders to begin evacuating all 21 Israeli settlements in the Gaza Strip, and another four in the West Bank, after his cabinet approved the measures hours earlier, Bloomberg said. China criticized a joint statement by the US and Japan declaring the peaceful resolution of China's dispute with Taiwan as a strategic objective, Bloomberg reported. China's producer prices rose last month at the slowest pace in nine months as government lending curbs helped rein in industrial expansion, Bloomberg reported. China agreed to let selected commercial banks set up fund management companies, aiming to boost capital markets and prepare lenders for competition, Bloomberg reported. Israel released 500 Palestinian prisoners as part of acts of goodwill with the Palestinian Authority to try to make progress in the peace process, Haaretz reported. Novartis AG, Europe's fourth-largest drugmaker, agreed to buy German generic drugmaker Hexal AG and most of its US affiliate Eon Labs for $7.4 billion in cash to create the world's largest generic drugs company, Bloomberg reported. Macquarie Bank, Australia's biggest publicly traded investment bank, raised its 2005 price forecasts for aluminum, nickel, zinc and copper, saying global demand could outstrip supply by more than it expected, Bloomberg said. European Central Bank council member Wellink said inflation is under control, suggesting he sees no need to raise interest rates in coming months as the economy recovers from a fourth-quarter slowdown, Bloomberg reported. Toronto-Dominion Bank, Canada's No.2 bank, plans to buy at least one US lender this year and open more TD Waterhouse discount-brokerage offices using its new stake in Banknorth Group, Bloomberg said. China's consumer prices rose in January at their slowest pace in more than a year as harvests improved, helping stem gains in food costs, Bloomberg reported. Australia will send about more troops to Iraq to help with rebuilding the nation, Bloomberg said. Winn-Dixie Stores, which operates about 920 supermarkets in the southern US, filed for Chapter 11 bankruptcy protection, Bloomberg reported. President Bush and French President Chirac called for Syria to pull its troops out of Lebanon, Bloomberg said.

Weekend Recommendations
-Bulls and Bears: Had guests that were positive on LSS, NMG/A, NOK, MAR, LEXR, BMY, SGP, mixed on DV, MSFT and negative on MSO, EK, LLY, GNSS.
-Forbes on Fox: Had guests that were positive on COST, EMN and mixed on CMCSA, CHTR, VZ, SBC.
-Cashin' In: Had guests that were positive on BCS, ELP, PBR and mixed on ERICY, TSRA, ANPI, IMCL.
-Cavuto on Business: Had guests that were positive on TYC, ABB, FD, RHI and mixed on FNM.
-Barron's: Had positive comments on CRYP, NTLRF, WPTE and HET. Had negative comments on AIG.
-Goldman Sachs: Reiterated Outperform on MDT, MMM, DDR, BC and CEN. Reiterated Underperform on HC and CVC.

Night Trading
Asian Indices are mostly lower, -.75% to unch. on average.
S&P 500 indicated -.09%.
NASDAQ 100 indicated -.13%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Before the Bell Video(bottom right)
Asian Indices
European Indices
Top 20 Business Stories
In Play
Bond Ticker
Analyst Actions
Macro Calls
CNBC Guest Schedule

Earnings of Note
Company/Estimate
AG/.46
ARW/.50
ADSK/.28
CHK/.36
CVH/.96
CTRP/.25
DPZ/.39
EASI/.73
FD/2.54
HD/.47
NTES/.43
NBL/1.48
NOVL/.02
ZEUS/1.15
OMC/1.25

Splits
- None of note.

Economic Data
- Consumer Confidence for February is estimated to fall to 103.0 versus a reading of 103.4 in January.

BOTTOM LINE: I expect US stocks to open modestly lower in the morning on worries over higher energy prices and slowing global growth. The Shanghai A-Share Index is continuing its recent outperformance, rising about 1.5% tonight, breaking clearly above its 50-day moving-average. I may look to acquire shares in a Chinese ADR over the next few days. The Portfolio is 75% net long heading into the week.

Weekly Outlook

There are a few important economic reports and some significant corporate earnings reports scheduled for release this week. Economic reports for the week include:

Tues. - Consumer Confidence
Wed. - Consumer Price Index, FOMC Meeting Minutes
Thur. - Durable Goods Orders, Initial Jobless Claims
Fri. - Preliminary 4Q GDP, Preliminary 4Q Personal Consumption, Preliminary 4Q Price Deflator, Existing Home Sales

Some of the more noteworthy companies that release quarterly earnings this week are:

Tues. - Autodesk(ADSK), Federated Department Stores(FD), Home Depot(HD) Novell(NOVL), Omnicom(OMC)
Wed. - Cablevision Systems(CVC), Lowe's(LOW), MCI Inc.(MCIP), Toll Brothers(TOL)
Thur. - Gap Inc.(GPS), H&R Block(HRB), HJ Heinz(HNZ), Kohl's(KSS), McAfee Inc.(MFE), Newmont Mining(NEM), Staples Inc.(SPLS), Clear Channel(CCU)
Fri. - None of note

Other events that have market-moving potential this week include:

Tues. - Morgan Stanley Basic Materials Conference
Wed. - Goldman Sachs Technology Symposium, Morgan Stanley Basic Materials Conference, Fed's Guynn speaks on Economic Outlook
Thur. - Goldman Sachs Technology Symposium, Morgan Stanley Basic Materials Conference, Fed's Poole speaks at Culver-Stockton College
Fri. - Goldman Sachs Agricultural Forum, Goldman Sachs Technology Symposium

Bottom Line: I expect US stocks to finish the week mixed as strong earnings and economic reports are offset by continuing worries over higher interest rates and energy prices. Crude oil is very close to breaking up through its downtrend line that has been in place since October of last year. However, I expect resistance at the $49-$50/bbl. level to hold. It would be a psychological negative for US equities if crude were to close above $50/bbl. The fact that long-term interest rates rose significantly last week and the Homebuilding Index posted gains bodes well for the group. I expect this sector to continue to outperform and make all-time highs over the coming months. I also expect long-term rates to head a bit higher in the near-term before turning lower again over the intermediate-term. My short-term trading indicators are still giving mixed signals and the Portfolio is 75% net long heading into the week.

Economic Week in Review

ECRI Weekly Leading Index 134.30 unch.

The Empire Manufacturing Index for February fell to 19.19 versus estimates of 20.0 and a reading of 20.08 in January. The gauge held close to its six-month average, suggesting factories are producing just enough to meet demand and keep inventories in line with purchases, Bloomberg said. "As long as consumers continue to spend, the wheels of the US economy are going to turn and that will allow manufacturing to expand," said Glenn Haberbush, an economist at Mizuho Securities. The survey's hiring index for the next six months rose to 26.1 from 22.9, Bloomberg reported. However, the unfilled orders component of the index fell to negative 12.2 from 5.57. "Anything that suggests factories are slowing doesn't gibe with what we're seeing," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi. Finally, the measure of prices manufacturers paid for materials fell to 48.8 from 50.4, while the index of prices received dropped to 13.2 from 27.7.

Advance Retail Sales for January fell .3% versus estimates of a .4% decline and a 1.1% increase in December. Retail Sales Less Autos for January rose .6% versus estimates of a .4% increase and a .3% rise in December. The .6% increase, led by department stores and apparel retailers, was the biggest since October. Job and income gains are fueling consumer spending, Bloomberg said. Retailers including Target, Nordstrom and American Eagle Outfitters reported stronger-than-expected demand in January. Retail sales account for almost half of all consumer spending, which in turn accounts for about two-thirds of the US economy, Bloomberg said. Consumer spending this year is estimated to rise a strong 3.5%, according to the median estimate of 68 economists surveyed by Bloomberg from January 31-February 7. "We have now seen enough positive signs in the economy to have some confidence that it is on course for sustained growth," said Janet Yellen, president of the Fed Bank of San Francisco.

Net Foreign Security Purchases for December fell to $61.3B versus estimates of $58.5B and an upwardly revised $89.3B in November. International investors accumulated US assets in December as their appetite for US corporate bonds and government securities remained strong. Taking November and December data together, "this is the best two-month performance since early 2003 and is associated with improving sentiment towards the US economy," said Steven Englander, a currency strategist at Barclays Capital. Treasury Secretary Snow told the US Congress last week that the budget gap will narrow and that the trade imbalance reflects the desire of foreigners to invest in US assets as well as weak economic growth abroad, Bloomberg reported.

Business Inventories for December rose .2% versus estimates of a .2% increase and a 1.1% gain in November. The .2% rise was outpaced by a 1% increase in sales that kept supplies at record lows. "You have an economy that has learned to control inventories in the business cycle," said John Silvia, chief economist at Wachovia Corp. The elevated pace of consumer and corporate spending may lead to increased orders at factories as they rebuild inventories, Bloomberg said.

The NAHB Housing Market Index for February fell to 68 versus estimates of 69 and a reading of 70 in January. US homebuilder optimism declined for a second month in February as wet weather discouraged buyers and delayed projects, Bloomberg said. "When you get that kind of weather, people don't go shopping for homes and you have more inventory to sell," said Kevin Harris, chief economist at Informa Global Markets. Rainfall last month averaged .43 inches more than the 1895-2005 average, according to the National Climatic Data Center. Moreover, states in the Southwest region experienced the third wettest January on record. Job growth and a shortage of land will help spur sales and limit the restraining effects of higher mortgage rates this year, Bloomberg said. "Builders are still expressing very positive views of the conditions in the housing market," said David Wilson, president of the NAHB.

Housing Starts for January rose to 2159K versus estimates of 1925K and an upwardly revised 2063K in December. Building Permits for January rose to 2105K versus estimates of 2000K and an upwardly revised 2069K in December. US housing starts unexpectedly rose to a 21-year high in January, paced by record construction of single-family homes, Bloomberg reported. Payroll growth and mortgage rates averaging less than 6% are fueling demand after the best year for home sales ever in 2004, Bloomberg said. "There's no reason to believe housing cannot have another record year," said Richard Yamarone, chief economist at Argus Research. "People have been saying the sky is falling for many years now, and housing continues to be solid and steady," said Ara Hovnanian, CEO of Hovnanian Enterprises. "I don't think we're going to exceed 2004, nor do I see a big fall-off this year," he said. The South saw the strongest gains as construction soared 19%, Bloomberg said. However, starts fell 24% in the Northeast. "We've got the best of both worlds right now," said Donald Tomnitz, chief executive of DR Horton. "There are jobs being created, incomes are up, unemployment is down and mortgage rates have dropped." Finally, the average rate on a 30-year fixed mortgage fell to 5.71% in January from 5.75% in December. Rates remain within a percentage point of their all-time low of 5.21% in June of 2003.

Industrial Production for January was unchanged versus estimates of a .3% increase and a .7% gain in December. Capacity Utilization for January was 79.0% versus estimates of 79.3% and 79.1% in December. Production at US factories, mines and utilities was unchanged last month, held back by a decline in energy demand, Bloomberg reported. January was warmer and wetter than average, contributing to a 3% decline in utility production. "Excluding autos, manufacturing is actually looking very healthy in January," said Chris Low, chief economist at FTN Financial. US automakers Ford and GM have said they're cutting back on production in the first quarter to reduce inventories as sales in January fell, Bloomberg said. Capacity Utilization rose 2.3 percentage points last year, the biggest increase since a 2.7-point gain in 1994.

The Import Price Index for January rose .9% versus estimates of a .6% increase and a 1.4% decline in December. Prices of goods imported into the US increased in January for the first time in three months, led by higher costs for oil, Bloomberg said. Excluding petroleum, the measure of the costs of goods and raw materials from abroad increased .2 percent after a .4 percent rise the previous month, Bloomberg reported. As well, prices for imported autos and parts fell .1%, the first decline since September 2003 and food prices dropped .2% after a .8% increase the prior month, Bloomberg said. In testimony before Congress, Greenspan forecast the core personal consumption expenditures price index, his favorite inflation gauge, would rise between 1.5% and 1.75% this year, Bloomberg reported.

Initial Jobless Claims for last week fell to 302K versus estimates of 315K and 304K the prior week. Continuing Claims fell to 2717K versus estimates of 2710K and 2731K prior. The number of Americans filing first-time unemployment claims unexpectedly fell to the lowest in more than four years, supporting Fed Chairman Greenspan's view that the US economy is growing at a "reasonably good pace." Greenspan told Congress the US is benefiting from low inflation and interest rates, even as growth slows from last year's very strong pace, Bloomberg reported. Investors considered that statement a sign that the central bank may continue to raise borrowing costs at a "measured pace," Bloomberg said. "Claims this low indicate demand for new hires is picking up," said Wesley Beal, chief US economist at IDEAglobal. "We may have a big job creation number in our future," he said.

Leading Indicators for January fell .3% versus estimates of a .2% decline and a .3% increase in December. This was the first decline in three months as consumer confidence lagged and stock prices slumped, Bloomberg said. "The decline in January was partly related to weaker manufacturing activity and the drop in consumer confidence," said Elisabeth Denison, a US economist at Dresdner Kleinwort Wasserstein. "I'm looking beyond the weak headline number which probably won't be repeated in February," she said. "Leading indicators has been thrown off in the last year by the fact that the Fed eased so aggressively through the last recession," said Michael Englund, a senior economist at Action Economics. "Declines now are inevitable, but are not reflective of a downturn," he said.

Philadelphia Fed. for February rose to 23.9 versus estimates of 17.0 and a reading of 13.2 in January. "We're really bouncing back from January," said Michael Englund. A gauge of prices paid by manufacturers dropped to 43.5, the lowest since February 2004, from 66.1 in January. As well, the index of prices manufacturers received for their goods declined to 24.6 this month from 24.7 in January, Bloomberg reported. "It still speaks to cost pressures but not nearly what we saw in January," said Michael Trebing, senior economic analyst at the Philadelphia Fed bank.

The Producer Price Index for January rose .3% versus estimates of a .3% increase and a .3% decline in December. PPI Ex Food & Energy for January rose .8% versus estimates of a .2% increase and a .2% gain in December. The increases were led by higher costs for cigarettes, vehicles and business equipment, Bloomberg said. Manufacturers and other producers, struggling with rising costs for energy and other raw materials, are attempting to raise prices to maintain profits, Bloomberg said. "There is an inflation risk, not an inflation problem," said Ken Mayland, chief economist at ClearView Economics. Passenger car prices rose 1.2% in January, the most since March 2003. The industry's incentive spending per vehicle fell to an average $4,143 in January from $4,320 the previous month, Bloomberg reported. However, Ford Motor stepped up incentives last week with 5-year, no-interest loans on Explorer sport-utility vehicles and some F-Series pickups, matching GM after sales of the two largest US automakers spurred the decline, Bloomberg reported. Philip Morris raised prices 10 cents a pack on 22 brands of cigarettes effective January 16, the first list-price increase since April 2002. Cigarette producers have been raising prices and cutting discounts after Congress last year mandated they pay $9.7 billion to buy out tobacco farmers hurt by declining demand, Bloomberg said. Finally, computer prices plunged 6.1% last month, the most since August 2001.

The preliminary Univ. of Mich. Consumer Confidence Index for February fell to 94.2 versus estimates of 95.5 and a reading of 95.5 in January. US consumer sentiment fell for the second straight month in February as the debate over changes to the Social Security system eroded confidence, Bloomberg said. "Consumers are concerned about long-term issues, and there's been a lot of discussion about Social Security," said Reaser, chief economist at Banc of America Capital Management. "Confidence is still at a moderately good level that will support consumer spending," he said. The university's index of current conditions, which reflects Americans perceptions of their financial situation and whether it's a good time to make big purchases, held steady at 110.9, Bloomberg reported.

Bottom Line: Overall, last week's economic data were positive. Manufacturing activity appears to be accelerating to stronger levels after a brief respite. Consumer spending was very strong in January, spurred by the redemption of holiday gift cards. I expect spending to slow from last year's exceptional levels, but to remain healthy. Foreign demand for US assets should remain solid as sentiment towards the liberation of Iraq improves, the US dollar remains stable, US growth outpaces other industrialized nations and long-term interest rates stay low. Inventory rebuilding should add to economic growth over the next few months as sales remain brisk. I continue to expect the housing market to remain strong as mortgage rates stay low and the labor market continues to improve. In my opinion, Greenspan's recent use of the word "conundrum" to describe low long-term interest rates was a direct attempt to cool down the housing market. Measures of inflation gave a mixed picture last week. However, I continue to believe consumer inflation will decelerate this year from last year's average levels. The recent improvement in jobless claims bode well for future employment readings. Consumer Confidence should bounce back over the next few months as gasoline prices decline, political rhetoric loses its bite, the labor market continues to improve and long-term interest rates remain low by historical standards. The decline in the Leading Indicators for January doesn’t worry me as the ECRI Weekly Leading Index remained unchanged, staying at its highest level since May of 2004. While I expect US economic growth to hit a "soft patch" again at some point this year, it does not appear imminent.

Market Week in Review

S&P 500 1,201.59 -.31%

Click here for the Weekly Wrap by Briefing.com.

Bottom Line: Overall, last week's market performance was mildly negative. However, losses could have easily been worse given the rise in long-term interest rates and energy prices. These concerns, combined with worsening relations with Iran and modestly hawkish comments from Fed Chairman Greenspan, pressured stocks throughout the week on light volume. Small-cap, financial and technology shares bore the brunt of the selling. The advance/decline line was slightly negative on the week and most sectors declined. Strong earnings reports, solid economic reports and optimism over legal reform likely prevented more substantial losses. As well, commodity-related stocks saw substantial buying interest as the CRB approached its highs of early December 2004. Base metal shares were particularly strong as copper reached an all-time high after a report showed US housing starts reached a 21-year high. Measures of investor anxiety were mixed on the week.

Weekly Scoreboard*

Indices
S&P 500 1,201.59 -.31%
Dow 10,785.22 -.10%
NASDAQ 2,058.62 -.87%
Russell 2000 630.13 -.73%
DJ Wilshire 5000 11,832.07 -.31%
S&P Equity Long/Short Index 1,029.31 +.74%
S&P Barra Growth 578.29 +.13%
S&P Barra Value 618.91 -.74%
Morgan Stanley Consumer 590.20 -.34%
Morgan Stanley Cyclical 767.14 +.19%
Morgan Stanley Technology 467.53 -1.37%
Transports 3,619.97 +.19%
Utilities 352.37 -.14%
Put/Call .84 +1.20%
NYSE Arms .60 unch.
Volatility(VIX) 11.18 -2.19%
ISE Sentiment 142.00 +10.08%
AAII % Bulls 36.36 -16.89%
US Dollar 83.49 -1.29%
CRB 290.66 +1.56%

Futures Spot Prices
Crude Oil 48.50 +3.08%
Unleaded Gasoline 126.34 -1.30%
Natural Gas 5.91 -3.07%
Heating Oil 134.93 +3.39%
Gold 428.90 +1.59%
Base Metals 126.99 +4.14%
Copper 148.10 +4.92%
10-year US Treasury Yield 4.27% +4.43%
Average 30-year Mortgage Rate 5.62% +.90%

Leading Sectors
Iron/Steel +5.20%
Energy +3.98%
Commodity +3.04%

Lagging Sectors
Networking -3.04%
I-Banks -3.24%
Disk Drives -3.66%

*% Gain or loss for the week