Weekly Outlook

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

Mon. - Personal Income, Personal Spending, PCE Deflator, New Home Sales, Chicago Purchasing Manager
Tues. – Construction Spending, ISM Manufacturing/Prices Paid, Total Vehicle Sales
Thur. - Non-farm Productivity, Unit Labor Costs, Initial Jobless Claims, ISM Non-Manufacturing
Fri. - Unemployment Rate, Average Hourly Earnings, Change in Non-farm Payrolls, Average Weekly Hours, Univ. of Mich. Consumer Confidence, Factory Orders

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

Mon. -HJ Heinz(HNZ), Tiffany & Co.(TIF), Univision Communications(UVN)
Tues. - Marsh & McLennan(MMC), Pacific Sunwear(PSUN)
Wed. - American Eagle Outfitters(AEOS), Michaels Stores(MIK), Autozone(AZO), Chico's FAS(CHS), Costco Wholesale(COST), Hovnanian Enterprises(HOV), Liz Claiborne(LIZ), Petsmart(PETM)
Thur. - Neiman-Marcus Group(NMG/A), Saks Inc.(SKS)
Fri. - Mandalay Resort Group(MBG)

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

Mon. - CIBC Israeli Tech Conference, Bear Stearns Media Conference, Merrill Lynch Global Automotive Conference
Tue. - Banc of America Energy & Utilities Forum, Bear Stearns Media Conference, Prudential Semi/Equip. Conference, Fed's Lacker speaks, Fed's Moscow speaks, Fed's Santomero speaks, Wells Fargo HealthCare Conference
Wed. - CSFB Semi/Equip. Conference, Fed's Greenspan testifies before House Budget Committee
Thur. - CSFB Semi/Equip. Conference, CIBC Gaming/Lodging/Leisure/Travel Forum
Fri. - CSFB Semi/Equipment Conference, Fed's Moscow speaks

Bottom Line: I expect US stocks to finish the week modestly higher as strong earnings/economic reports and rebounding technology shares offset slightly higher long-term interest rates. The conferences this week and technical improvement should further spur interest in semiconductor/equipment shares. As well, I expect Retailers to outperform on robust earnings reports, stabilizing energy prices and a strong employment report. Homebuilders may take a breather as long-term rates rise. Moreover, the US dollar should gain modestly this week as rates increase, sentiment improves and US economic growth continues to outshine other industrialized nations. My short-term trading indicators are still giving mixed signals and the Portfolio is 100% net long heading into the week.

Economic Week in Review

ECRI Weekly Leading Index 133.90 -.30%

Consumer Confidence for February fell to 104.0 versus estimates of 103.0 and an upwardly revised reading of 105.1 in January. However, Americans were the most optimistic about their current conditions than at any time since September 2001 and the fewest number in almost three years described jobs as hard to get, Bloomberg said. Consumers were less optimistic going forward. "Perhaps all the discussion in the media concerning potential shortfalls in Social Security has made individuals apprehensive about the future," said Michael Moran, chief economist at Daiwa Securities. US consumers spent at the fastest pace in more than four years during the last six months of 2004. Retail sales excluding autos rose twice as much in January as they did a month earlier, evidence shoppers are keeping their wallets open, Bloomberg reported. "Sales trends have improved in 2005, and I believe sales momentum will accelerate as the year progresses," Wal-Mart CEO Scott said.

The Consumer Price Index for January rose .1% versus estimates of a .2% increase and no change in December. The CPI Ex Food & Energy rose .2% versus estimates of a .2% increase and a .2% rise in December. "The inflation numbers today were quite tranquil," former Fed Governor Gramley, now an economic adviser at Stanford Washington Research Group, said in an interview. "We're in great shape," he said. Companies keep offering discounts to lure customers amid competition, excess capacity and rising costs, Bloomberg said. Consumer prices rose 3.0% the past 12 months, right at the historical long-term average. Fed Chairman Greenspan last week told lawmakers "the economy seems to have entered 2005 expanding at a reasonably good pace, with inflation and inflation expectations well anchored." John Shin, an economist at Lehman Brothers said, "One thing we haven't seen is wage pressure, so we're more sanguine about inflation." Finally, David Resler, chief economist at Nomura Securities said, "There is very little reason for the Fed to do anything different than they've been doing: raise rates a little at a time until they get to a neutral rate."

Durable Goods Orders for January fell .9% versus estimates of no change and an upwardly revised 1.4% gain in December. Durables Ex Transportation for January rose .8% versus estimates of a .3% increase and an upwardly revised 2.8% gain in December. The .8% rise in orders excluding transportation equipment prompted economists at Morgan Stanley and JP Morgan to boost first-quarter economic growth forecasts, Bloomberg reported. Except for transportation, "strength predominated" in today's report, said Stephen Stanley, chief economist at RBS Greenwich Capital. Concern that business spending would slow after tax incentives expired at the end of 2004 "can now be officially put to bed," Stanley said. Orders for electrical equipment, appliances and components rose 13% last month, the largest jump ever, Bloomberg reported. As well, orders for non-defense capital goods excluding aircraft, a sign of business investment, increased 2.9% and are up 20% from January 2004. "Almost everything we have got for January so far is coming in at the high side of expectations," said Robert Mellman, an economist at JP Morgan. Economist Bill Mulvihill at Griffin, Kubik, Stephens & Thompson in Chicago said US GDP growth may be about 4.5% during this quarter, Bloomberg reported.

Initial Jobless Claims for last week rose to 312K versus estimates of 309K and 303K the prior week. Continuing Claims fell to 2650K versus estimates of 2693K and 2712K prior. The four-week moving-average of claims, a less volatile measure, fell to 309K, the lowest since the week of Nov. 4, 2000, Bloomberg reported. "The low level of initial claims and the drop in continuing claims point to a pickup in hiring in February," said Wesley Beal, chief US economist at IDEAglobal. The economy probably added 225,000 jobs in February, the most in four months, according to the median forecast in a recent Bloomberg survey. "There are lots of jobs out there, but employers can't find the qualified employees they need," said Gina Martin, an economist at Wachovia Corp. "There is a disconnect between the education of the people that are unemployed and the skills that employers are looking for," Martin said.

The Help Wanted Index for January rose to 41, the highest level in almost 2 years, versus estimates of 38 and a reading of 38 in December. "There is now clear evidence that the labor market has shifted up a gear over the past couple of months," said Ian Shepherdson, chief US economist at High Frequency Economics. "Both jobless claims and the help wanted index improved materially in February," said Jay Feldman, an economist at CSFB. "We are revising up our payroll forecast to 275,000 from an earlier forecast of 190,000." Finally, Conference Board economist Ken Goldstein said, "If new jobs continue to open up, consumer expectations could turn even more positive this spring."

Preliminary 4Q GDP rose 3.8% versus estimates of a 3.7% increase and a prior estimate of a 3.1% gain. The Preliminary 4Q GDP Price Deflator rose 2.1% versus estimates of a 2.0% increase and a prior estimate of a 2.0% gain. Preliminary 4Q Personal Consumption rose 4.2% versus estimates of a 4.6% increase and a prior estimate of a 4.6% gain. The better-than-expected GDP number was a result of a smaller trade deficit and increased business spending on equipment and software, Bloomberg reported. "Capital expenditures are developing a head of steam," said former Fed Governor Gramley. "First-quarter GDP is going to be well above 4%, maybe 4.5%," he said. Ted Wieseman, an economist at Morgan Stanley said, "There is good reason to believe that not only capital spending but hiring is picking up, and that is going to be a key driver for the economy." "The strength of the recovery in the face of a 25% run-up in oil prices is a testament to the recovery's resilience," said Robert DiClemente, chief US economist at Citigroup. Spending on equipment and software grew at an 18% annual rate in the fourth quarter, following a 17.5% increase in the prior quarter. The back-to-back gains are the strongest since the six months that ended in September 1997, Bloomberg reported. Finally, the core personal consumption expenditures price index, Greenpan's favorite measure of inflation, rose 1.6% during the fourth quarter, within the Fed's preferred range of 1-2%, Bloomberg said.

One-Family Home Re-sales for January fell to 5.94M versus estimates of 6.7M and a downwardly revised 5.97M in December. Sales were strongest in the South, rising 3.5% for the month. The median price of a previously owned home fell to $189,000 last month from $191,000 in December, Bloomberg said. However, the median price was up 10.5% from January 2004. "We do have characteristics of bubbles in certain areas, but not, as best as I can judge, nationwide," Greenspan said during Congressional testimony Feb. 17. "I don't expect that we will run into anything resembling a collapsing bubble," he said. Moreover, the supply of homes available for sale, another gauge of housing demand, declined to a record-low 3.7 months' worth in January, Bloomberg reported. The 30-year fixed mortgage rate in January averaged 5.66%, near its 40-year low reached in June of 2003 and down from 5.81% in December, Bloomberg said. "We're seeing a lot of first-time home-buyers on the market," said Scott Jones, a loan officer at Weichert Realtors in Oakton, Virginia.

Bottom Line: Overall, last week's economic data were positive. Consumer Confidence is definitely being dampened by the negative political rhetoric surrounding Social Security and talk of nuclear proliferation, even as consumer spending remains strong. However, as time passes the effects of this should subside. In the near-term, I expect confidence to rise modestly as increasing gas prices mostly offset better job prospects, low long-term interest rates and improvements in Iraq. The modest rises in the CPI and the Core PCE show that inflation is well in check. Companies are finding other ways to absorb rising costs, as evidenced by their very strong profit growth, without passing these increases on to the consumer. As well, the overcapacity generated during the 90's and global competition still makes it incredibly hard for companies in many sectors to raise prices. The airline, telecom, auto, technology and retail sectors are some of the main areas still facing immense pressure to keep prices low. Rising home values do not have the same negative effect on consumer psyche as increases in goods and services due to the fact that homes are an investment. I am still keeping a close eye on unit labor costs, which comprise two-thirds of inflation, as the job market appears to be accelerating. Any substantial increases in labor costs for a sustained period would prompt the Fed to accelerate their pace of rate hikes. I currently do not anticipate this to be a problem. The fact that Durable Goods Orders are as strong as they are so far this year is remarkable considering the many forms of stimulus that hit the US economy during the fourth quarter of 2004. I had expected that 4Q/04 growth stole from 1Q/05 growth, but this does not appear to be the case. This bodes very well for another strong year for the US economy. I now expect US GDP growth of a healthy 3.5% for the year. While the housing market in some areas of the country is exhibiting bubble-type characteristics, many other areas are not. Considering this winter has been one of the wettest on record, the housing market remains quite robust. I continue to expect a slowing from record levels to more sustainable healthy levels. Finally, the ECRI Weekly Leading Index fell .30% for the week, staying near its highest level since May of 2004.

Market Week in Review

S&P 500 1,211.37 +.88%

Click here for the Weekly Wrap by Briefing.com.

Bottom Line: Overall, last week's market performance was positive. The advance/decline line was stronger, most sectors rose and volume was decent. The CRB Index rose to an all-time high, resulting in substantial outperformance by most commodity-related stocks. Moreover, better-than-expected economic reports spurred cyclical shares to gains for the week. However, consumer stocks underperformed as energy prices approached highs set in October of last year. Technology was mixed on the week. The semiconductor index rose 3.24% and closed above its 200-day moving-average, while the internet sector underperformed substantially, falling 2.25%. Measures of investor anxiety were mostly lower on the week, but the AAII % Bulls fell to 31.82%, a relatively low level. Worries over South Korea's one sentence statement about their diversifying out of US assets are overdone, in my opinion. It is highly unlikely that South Korea would risk damaging their relationship with the US given current circumstances. Just 10 days ago a report showed the strongest 2 month accumulation of US assets by international investors in 2 years. Finally, it was a big psychological positive for the Bulls that the significant rise in crude oil, heating oil and natural gas didn't result in any follow-through declines from Tuesday's sharp sell-off. As well, the fact that strong economic reports and worries over the US dollar didn't result in higher long-term interest rates is also a boost to psychology.

Weekly Scoreboard*

Indices
S&P 500 1,211.37 +.88%
Dow 10,841.60 +.81%
NASDAQ 2,065.40 +.20%
Russell 2000 637.53 +1.01%
DJ Wilshire 5000 11,933.02 +.88%
S&P Equity Long/Short Index 1,023.04 -.68%
S&P Barra Growth 582.70 +.98%
S&P Barra Value 624.26 +.79%
Morgan Stanley Consumer 587.54 -.09%
Morgan Stanley Cyclical 776.62 +1.65%
Morgan Stanley Technology 473.35 +.87%
Transports 3,715.17 +3.08%
Utilities 356.06 -.04%
Put/Call .83 -1.19%
NYSE Arms .81 -35.20%
Volatility(VIX) 11.49 -2.38%
ISE Sentiment 145.00 +2.11%
AAII % Bulls 31.82 -12.49%
US Dollar 82.66 -.98%
CRB 300.23 +3.53%

Futures Spot Prices
Crude Oil 51.49 +6.71%
Unleaded Gasoline 125.45 +1.42%
Natural Gas 6.72 +11.73%
Heating Oil 145.41 +10.75%
Gold 436.10 +1.73%
Base Metals 126.77 -.17%
Copper 148.60 -.60%
10-year US Treasury Yield 4.27% unch.
Average 30-year Mortgage Rate 5.69% +1.25%

Leading Sectors
Energy +7.36%
Iron/Steel +7.35%
Homebuilders +4.00%

Lagging Sectors
Gaming -1.56%
Disk Drives -1.75%
Internet -2.25%

*% Gain or loss for the week

Mid-day Report

Indices
S&P 500 1,207.86 +.64%
Dow 10,801.63 +.49%
NASDAQ 2,057.15 +.27%
Russell 2000 632.93 +.86%
DJ Wilshire 5000 11,890.47 +.64%
S&P Barra Growth 580.66 +.47%
S&P Barra Value 622.58 +.77%
Morgan Stanley Consumer 586.41 -.09%
Morgan Stanley Cyclical 773.33 +.75%
Morgan Stanley Technology 470.68 +.45%
Transports 3,695.86 +.42%
Utilities 355.78 +1.93%
Put/Call .83 -11.70%
NYSE Arms .79 +2.60%
Volatility(VIX) 11.30 -2.33%
ISE Sentiment 132.00 -26.26%
US Dollar 82.72 -.23%
CRB 298.96 +.31%

Futures Spot Prices
Crude Oil 51.40 +.06%
Unleaded Gasoline 125.50 -2.24%
Natural Gas 6.68 +3.50%
Heating Oil 144.70 -1.23%
Gold 436.40 +.14%
Base Metals 126.77 -.40%
Copper 148.50 +.34%
10-year US Treasury Yield 4.25% -.73%

Leading Sectors
Iron/Steel +3.15%
Energy +2.24%
Homebuilders +2.14%

Lagging Sectors
Networking -.25%
Software -.43%
Broadcasting -1.50%

Market Movers
SYNA +13.66% after saying its touch-screen technology is being used in Apple Computer’s new iPod models.
JLG +25.8% after beating 2Q estimates and raising 05 guidance.
BOOM +22.53% on continuing optimism over strong 4Q results.
MANT +12.28% after meeting 4Q estimates and raising 1Q guidance.
APC +7.55% after Business Week reported the company may be valued as high as $117/share in a takeover.
PD +6.11% on optimism over US economic growth and technical breakout.
BCSI -13.25% after meeting 3Q estimates and lowering 4Q guidance.
TKLC -9.7% after meeting 4Q estimates and lowering 1Q guidance.
WON -6.99% after missing 4Q estimates and lowering 05 outlook.

Market Internals
NYSE Unusual Volume
NASDAQ Unusual Volume
NASDAQ 100 Heatmap
DJIA Quick Charts
Chart Toppers
Hot Spots
Option Dragon

Economic Data
- Preliminary 4Q GDP rose 3.8% versus estimates of 3.7% rise and prior expectations of a 3.1% increase.
- Preliminary 4Q GDP Price Deflator rose 2.1% versus estimates of a 2.0% increase and prior expectations of a 2.0% rise.
- Preliminary 4Q Personal Consumption rose 4.2% versus estimates of a 4.6% gain and prior expectations of a 4.6% rise.
- Existing Home Sales for January fell to 5.94M versus estimates of 6.7M and a downwardly revised 5.97M in December.

Recommendations
- Goldman Sachs: Reiterated Outperform on JNPR, MRVL, NEM, AMGN, GILD, IBM, EMC and MERQ. Reiterated Underperform on GPI and HRB. Downgraded MCDTA to Underperform.
- Smith Barney: Said crude-oil prices may fall during the second quarter because of high inventories. Said shares of INTC and CSCO may rally, fueling gains in the S&P 500. Reiterated Sell on CPN, target $3. Reiterated Buy on MRO, target $47. Reiterated Buy on INTU, target $54. Reiterated Sell on TIVO, target $3.50. Reiterated Buy on SPLS, target $37. Reiterated Buy on HD, target $48. Reiterated Buy on WTS, target $335. Reiterated Buy on ASD, target $50. Reiterated Buy on ROP, target $70. Reiterated Buy on CYH, target $39. Reiterated Buy on APCS, target $15. Reiterated Buy on JCP, target $63. Reiterated Buy on BEAS, target $11.50. Reiterated Sell on CEI, target $12.
- Prudential: Raised XOM to Overweight, target $70.
- CSFB: Raised MAS to Outperform, target $37.

Mid-day News
US stocks are modestly higher mid-day on optimism over US economic growth and lower long-term interest rates. The expansion of the liquefied natural gas tanker fleet is causing a shortage of qualified crewmembers, putting safety at risk, TradeWinds reported. Executives from Federated Department Stores, the owners of Macy’s and Bloomingdale’s, will meet May Department Stores board members to agree on a merger, the Wall Street Journal said. The US venture-capital business is seeing the emergence of firms that concentrate on particular regions or industries, rather than investing in a range of business ideas, the Wall Street Journal reported. Onyx Pharmaceuticals licenses a therapy it developed to Shanghai Sunway Biotech, a Chinese biotech company, after stopping work on the virus-aided treatment in 2003, the NY Times reported. US mutual funds are pushing for cuts in the commissions brokers charge for trading stocks, the Wall Street Journal said. Medical-device makers including Advance Neuromodulation Systems are facing greater scrutiny from regulators regarding sales and promotional tactics, the Wall Street Journal reported. The SEC will vote on new rules to open the credit ratings industry to competition, the Washington Post reported. Alcan, the world’s second-largest aluminum producer, may shut its three plants in France if costs for electricity rise further, Liberation reported. Vail Resorts is interested in buying California’s popular Mammoth Mountain Ski Area, valued by analysts at about $300 million, the Rocky Mountain News reported. The French unemployment rate unexpectedly rose to a five-year high of 10% in January and manufacturers in the country became more pessimistic, Bloomberg said. Optimism in the US over the stability of Iraq is growing, while most Americans think their troops will remain in the Middle Eastern country for at least two more years, according to a Pew Research Center Poll. Iran is seeking greater involvement from the US in talks with European countries aimed at limiting its nuclear program, Bloomberg reported. Residents of the northeastern US braced for another blast of winter, as a second storm forecast to hit the region Monday may form a nor’easter and dump snow and rain along the coast, Bloomberg said. Record coal prices will be higher than forecast for at least the next three years, buoyed by surging steel production in China, said Merrill Lynch. Credit Suisse First Boston economists raised their February job forecast as “new cycle low” jobless claims and a surprise improvement in help-wanted advertising suggest hiring is accelerating, Bloomberg reported. The US economy grew at a 3.8% annual rate in the fourth quarter of 2004, faster than earlier estimated, because the trade deficit turned out to be smaller than thought and businesses spent more on equipment and software, Bloomberg reported. MCI will do its “utmost” to complete a combination with Verizon after receiving a revised bid from Qwest, MCI CEO Capellas said. American Airlines, Delta Airlines and America West raised fares as much as $20 on round-trip flights in the US and Canada, matching a fare increase by Northwest, Bloomberg said. The European Union should regulate hedge funds to protect inexperience investors, EU Financial Services Commissioner McCreevy said. US sales of previously owned homes, including condominiums and co-ops for the first time, declined .1% in January, Bloomberg reported.

BOTTOM LINE: The Portfolio is higher mid-day on gains in my homebuilding, semiconductor and alternative energy longs. I added a few new longs this morning, thus bringing the Portfolio to 100% net long market exposure. One of my new longs is GE and I am using a $35 stop-loss on this position. The tone of the market is modestly positive as the advance/decline line is higher, almost ever sector is rising and volume is light. Measures of investor anxiety are mixed. Homebuilders, steel producers and energy-related stocks are once again leading the way. As well, small-caps and interest-rate sensitive sectors are outperforming and most technology-related sectors are underperforming. It is a psychological positive that long-term rates are falling today after a better-than-expected GDP report. I expect US stocks to trade mixed from current levels into the close as rising energy prices offsets optimism over US economic growth and lower long-term interest rates.