Monday Watch

Weekend Headlines
Bloomberg:
- Taiwan President Chen Shui-bian joined as many as 1 million people in a mass rally in Taipei to protest against a Chinese law that authorizes attacking the island if it declares independence.
- NY-based Blackstone Group LP, manager of the world's biggest buyout fund, is leading an investor group in a $14.9 billion bid to acquire Italian mobile telephone company Wind SpA.
- Wal-Mart Stores said March sales at stores open at least a year are rising within its forecast as shoppers bought more food.
- Investors in US Treasury securities are their most bullish in seven weeks, reflecting optimism that the highest 10-year note yields since June offer adequate compensation for inflation.
- As the US dollar heads for the biggest quarterly advance against the euro since 2001, traders are more bullish on the US currency than they have been in 17 months, according to a Bloomberg survey.
- Crude oil futures in NY are falling, extending a 3.3% decline last week, after Qatar's energy minister said OPEC's customers weren't asking for more oil, reducing concern about global shortages.
- Boeing said it may raise its forecast for 2006 deliveries because of higher-than-expected demand from Chinese and Indian airlines.
- The US dollar may gain against the yen this year, snapping a three-year drop, as rising interest rates and a strong US economy increase the appeal of US assets, said Makoto Utsumi, a former top currency official at Japan's Ministry of Finance.
- McDonald's, Borders Group and 50 other companies have lopped more than $1.5 billion off their reported pretax earnings since federal regulators urged them in November to review how they account for leases of stores and other rental properties.

Wall Street Journal:
- Boeing plans to sell a new version of it 702 commercial satellite to help return the division to profitability this year.
- A group of 26 former Democrat and Republican national-security officials will send a letter tomorrow to US President Bush asking the federal government to spend as much as $1 billion in the next five years on cutting fossil fuel dependence.

NY Times:
- AIG is close to a decision to remove Maurice "Hank" Greenberg as chairman as his appearance before prosecutors investigating reinsurance transactions nears.
- A growing number of families of critically ill patients are fighting to keep their loved ones alive through advances in medical technology, even when doctors believe it is time to let the patients die.
- Digital set-top boxes that allow viewers to pause and replay live tv and skip commercials also give advertisers new ways to customize ads according to viewing habits.
- Dayton, Ohio, which has established 40 charter schools and is planning nine more, has become a subject of interest to educators as the system competes with public schools for students and money.
- Investigators on three continents are examining units of billionaire investor Warren Buffett's Berkshire Hathaway for possible financial manipulation.

Washington Post:
- The Bush administration is contacting Syrian opposition groups and assessing political trends there amid concern their nation's military withdrawal from Lebanon may destabilize the Damascus regime.

Chicago Tribune:
- Ten drugmakers, including GlaxoSmithKline, Pfizer and Novartis AG, plan to begin an advertising campaign to promote a drug card for US residents without health insurance.

Crain's Chicago Business:
- Chicago's Pritzker family is in talks to acquire the remaining 50% of the top-grossing casino in Illinois from its partner, Mandalay Resort Group.

Seattle Times:
- Microsoft is bolstering alliances in Washington as part of a long-term strategy to repair damage from its federal antitrust case and gain a voice in new media regulations.

Time Magazine:
- US Customs and Border Protection officials said they are planning to increase resources this week to target illegal immigration from Mexico to Arizona.

Daily Telegraph:
- General Motors may scrap some brands, such as Pontiac and Buick, as it tries to reverse a decline in sales.

Sunday Times:
- Elan Corp.'s directors are considering splitting off the company's San-Francisco-based biotechnology unit from its drugs delivery business.
- Ford Motor is preparing to put $934 million of new investment into its Jaguar brand.

Independent on Sunday:
- A group within the UK Labour government is preparing a plan for constructing up to 10 new nuclear reactors in Britain.

Bild am Sonntag:
- The European Union's foreign-policy chief said China's policies toward Taiwan are raising "concern" among EU member states, even if the bloc is still seeking to scrap a weapons ban against China.

Weekend Recommendations
Bulls and Bears:
- Had guests that were positive on XOM, USU, COHR, DCX, UPS, SFD, mixed on C, MSFT, BUD, FHN, KOMG, KO, MVL and negative on AAPL, TOL, GE, FDX.

Cavuto on Business:
- Had guests that were positive on GM and mixed on EMC, TSO, ASO, WM.

Forbes on Fox:
- Had guests that were positive on VLO, SPI, WYE, mixed on PKZ, LUV and negative on SHOP.

Cashin' In:
- Had guests that were positive on SNE and mixed on WMT, PG.

Business Week:
- Had a positive columns on ADSK and YHOO.

Barron's:
- Had positive comments on GM's mini-bonds, COP, CNX, KWK, COG, TIF, ALSK and negative comments on X.

Goldman Sachs:
- Reiterated Outperform on NSM, CAN, YHOO, BSX, GOOG, EBAY, CL and MCHP.
- Reiterated Cautious view of Slot Manufacturers.
- Sees multiple catalysts for Gaming stocks in April, favorites are STN, WYNN and LVS.

Night Trading
Asian indices are mixed, -1.0% to +.75% on average.
S&P 500 indicated +.22%.
NASDAQ 100 indicated +.24%.

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
BKST/1.60
WAG/.48
IPXL/.14

Splits
QSII 2-for-1

Economic Data
None of note

BOTTOM LINE: Asian Indices are mixed tonight as gains in exporting stocks are offsetting losses in commodity-related shares in the region. China's Shanghai A-Share Index is falling again and is at cycle lows, down 28.9% in the last 12 months and 42.9% from its all-time high set in June 2001. I expect US stocks to open modestly higher in the morning on a bounce from last week's declines, a gain in the US dollar and lower energy prices. The Portfolio is Market Neutral heading into the week.

Weekly Outlook

There are a number of important economic reports and a few significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. - None of note
Tues. - Consumer Confidence
Wed. - Final 4Q GDP, Final 4Q Personal Consumption, Final 4Q GDP Price Deflator
Thur. - Personal Income, Personal Spending, PCE Deflator, Initial Jobless Claims, Help Wanted Index, Chicago Purchasing Manager, Factory Orders
Fri. - Unemployment Rate, Average Hourly Earnings, Change in Non-farm Payrolls, Average Weekly Hours, Univ. of Mich. Consumer Confidence, Construction Spending, ISM Manufacturing, Total Vehicle Sales

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

Mon. - Micron Technology(MU), Walgreen Co.(WAG)
Tues. - Apollo Group(APOL)
Wed. - Accenture Ltd(ACN), Best Buy(BBY), Carmax Inc.(KMX), Circuit City Stores(CC), Ruby Tuesday(RI)
Thur. - American Tower(AMT), Bed Bath & Beyond(BBBY), Freddie Mac(FRE), Red Hat Inc.(RHAT), Toys R Us(TOY)
Fri. - Pier 1 Imports(PIR)

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

Mon. - None of note
Tue. - Smith Barney Healthcare Conference, Banc of America Media/Telecom/Entertainment Conference, Prudential Metals & Mining Conference
Wed. - Lehman Brothers' Global Healthcare Conference, Banc of America Media/Telecom/Entertainment Conference, MSFT Analyst Meeting
Thur. - Lehman Brothers' Global Healthcare Conference
Fri. - Lehman Brothers' Global Healthcare Conference

BOTTOM LINE: I expect US stocks to begin the week modestly lower and then rally on an oversold technical bounce, bargain hunting, short covering, stabilizing long-term interest rates and quarter-end window-dressing. Consumer Confidence readings will likely come in below expectations due to the recent extreme negativity perpetuated in the media, high-profile acts of violence around the country, Terri Schiavo's Case, the Social Security debate, higher gas prices and lower stock prices. As well, other economic data may fail to meet elevated expectations. This, combined with a stronger US dollar, should lead to a stabilizing of long-term interest rates this week. I continue to expect the second half of the year to be much better for US stocks than the first half as inflation decelerates, commodities prices fall, long-term interest rates decline, low valuations tempt investors, growth remains healthy, the US dollar stabilizes, employment continues to improve, merger activity continues and corporate spending accelerates. My trading indicators are still bearish and the Portfolio is market neutral heading into the week.

Economic Week in Review

ECRI Weekly Leading Index 135.20 -.44%

The Producer Price Index for February rose .4% versus estimates of a .3% increase and a .3% gain in January. The PPI Ex Food & Energy for February rose .1% versus estimates of a .1% gain and a .8% increase in January. Core prices were up 2.8% from February of last year, the biggest 12-month gain since November 1995. Not all the gains at the earlier stages of production have been passed on to consumers, suggesting manufacturers are relying on productivity to offset higher costs for energy and other raw materials, Bloomberg said. The price of gasoline increased 5.2% last month, the most since October of 2004. US central bankers "are setting us up for the possibility that they may need to accelerate if they think that the pace of inflation in picking up," said Edger Peters, chief investment officer at PanAgora Asset management. "There isn't any hard evidence that is happening, but there is anecdotal evidence," Peters said. Prices of raw materials, used at the earliest stage of the production process, actually fell 1.6% in February, Bloomberg reported. Cliff Waldman, an economist at Manufacturers Alliance, said "It's important to remember that labor costs hold the lion's share of total American business costs, and the data as a whole and labor costs going forward are fairly benign."

The FOMC raised the Fed Funds rate 25 basis points to 2.75%, the seventh increase in a row. The accompanying policy statement said that while the FOMC still expects "measured" rate increases, inflation pressures have picked up, Bloomberg reported. The statement's forward-looking third paragraph said inflation is "expected to be contained," a change from "is expected to be relatively low," the phrase used in February. Fed officials said they've seen little evidence that higher prices are working through to wage demands, one of the situations that might add to inflation. "Longer-term inflation expectations remain well contained," the FOMC's statement also said. The Fed's two-edged message – that while inflation risks are rising, it needn't yet step up the pace of rate hikes – may reflect disagreements among policy makers that will be clarified in coming weeks, economists and former Fed officials said. "I expect to see the 'measured' statement to go at the next meeting," said John Roberts, a managing director and head of government bond trading at Barclays Capital, Bloomberg reported.

The Consumer Price Index for February rose .4% versus estimates of a .3% increase and a .1% rise in January. The CPI Ex Food & Energy for February rose .3% versus estimates of a .2% gain and a .2% increase in January. Higher prices for gasoline, airfares and lodging contributed to February's gain, Bloomberg said. Year-over-year prices including food and energy rose 3%, right at the long-term average, Bloomberg reported. Energy prices, which account for about a 14th of the index, rose 2% in February after falling in the prior two months, Bloomberg said. The increase in the core index last month was probably exaggerated by a surge in the cost of hotel and motel rooms related to the Super Bowl, said Joseph LaVorgna, chief US fixed-income economist at Deutsche Bank Securities. Lodging costs rose 1.1% after a .7% decline in January, Bloomberg said.

Existing Home Sales for February fell to 6.79M versus estimates of 6.70M and 6.82M in January. An improving job market will give buyers the income needed to keep sales strong as the Fed raises rates, economists said. "We are still in a very, very strong market," said Daryl Jesperson, CEO of Re/Max International. "A stable employment picture, historically low interest rates and an economy that is doing well are all promoting activity," Jesperson said. The median price of an existing home rose 1.1% to $191,000 last month and was up 11% compared with February of last year. Sales were strongest in the Northeast, increasing 4.6%, Bloomberg reported. When the Fed first started raising rates in June of 2004, the average 30-year mortgage rate was 6.29% versus a current average of 6.01%, Bloomberg said.

Durable Goods Orders for February rose .3% versus estimates of a .9% gain and a 1.1% decline in January. Durables Ex Transportation for February fell .2% versus estimates of a .3% increase and an upwardly revised .9% increase in January. Orders are still up from a year earlier as companies continue to invest in equipment, software and inventories amid expectations that the economic expansion will continue, Bloomberg said. The drop in February's orders excluding transportation may be a belated response to the end of tax incentives designed to spur orders in 2004, economists said. "We were due for a pause," said Stephen Stanley, chief economist at RBS Greenwich Capital. "These figures are certainly not a cause for concern," Stanley said. Even with the declines in February, orders for non-defense capital goods excluding aircraft, an indication of future business investment, were up 16% in the first two months of 2005 compared with a year earlier, Bloomberg reported.

Initial Jobless Claims for last week rose to 324K versus estimates of 315K and 321K the prior week. Continuing Claims rose to 2673K versus estimates of 2650K and 2642K prior. The less-volatile four-week moving average was 321,750, down 5.4% from a year ago, Bloomberg reported. "Companies are generally becoming more confident despite the increase in energy costs and interest rates," said Lynn Reaser, chief economist at Banc of America Capital Management. "Sales and orders remain strong and companies are even experiencing some increases in pricing power. All of this is leading to increased hiring and a general easing in layoffs," Reaser said.

New Home Sales for February rose 9.4%, the most in more than 4 years, to 1226K versus estimates of 1150K and 1121K in January. Increasing job prospects and pent-up demand due to exceptionally wet weather in prior months spurred gains. The median sales price increased to $230,700 from a 10-month low of $210,400, Bloomberg reported. "This is clearly a boom period," said Tim Rogers, chief economist at Briefing.com. "I don't expect any serious declines until mortgage rates get into the mid-sixes," Rogers said. Measured against sales, the supply of homes actually decreased to 4.4 months in February from 4.6 months in January, Bloomberg reported. Sales were strongest in the northeast, rising 20.3%, Bloomberg said.

BOTTOM LINE: Overall, last week's economic data were mixed. Measures of inflation were only moderately higher last week, which is a positive considering the steep rise in commodity prices so far this year. I continue to expect inflation readings to begin to decelerate again during the second half of the year. Consumer prices for 2005 will likely rise around the 3.0% average of the last 40 years and below the 3.3% increase in 2004. The Fed may remove the word "measured" to describe the pace of future rate hikes from their next policy statement to allow more freedom. However, with the US dollar strengthening, foreign purchases of US assets remaining strong, the CRB Index turning lower, inflation only near average rates, global economic growth slowing and significant problems at a few major US companies, it is highly unlikely the Fed will actually raise rates 50 basis points at any meeting in the foreseeable future. While home sales may have benefited modestly from the perception that long-term rates are headed higher, the strong results were mainly a result of pent-up demand and improving employment prospects in most parts of the country. Durable Goods Orders are likely slowing to more sustainable healthy rates. The labor market continues to improve at a modest stable pace which is a big positive for the consumer and the stock market. As long as unit labor costs remain in check, inflation should stay well under control. Finally, the ECRI Weekly Leading Index fell .44% to 135.20.

In my opinion, the current environment is very similar to the period before last year's election, when almost every economic report was spun in a negative light by the media, politicians and bears. There are likely a number of reasons for this. Reality remains much more positive than current perception. However, if the extreme negativity persists, perception could begin to affect reality in a negative way, thus creating a self-fulfilling prophecy. Billionaire hedge fund investor and political activist George Soros described this type of reaction in his Theory of Reflexivity back in 1994.

Market Week in Review

S&P 500 1,172.42 -1.58%

Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was negative. Good news was ignored and any bad news punished US shares quickly. Rising interest rates and worries over the problems at General Motors, AIG, Citigroup and Fannie Mae continued to weigh heavily on investor psyche. Lower commodity prices, merger activity and a strengthening US dollar had little positive impact on trading. The Nasdaq is now trading right below the psychologically important 2000 level at its 200-day moving-average. Value stocks, specifically Cyclicals, bore the brunt of the selling, while defensive Consumer shares outperformed through week’s end. The advance/decline line fell on the week, volume was light and most sectors declined. Finally, measures of investor anxiety were mixed, which is a negative considering recent losses. However, the sharp decline in the AAII % Bulls is a big positive and bodes well for a meaningful bottom in the near future.

Weekly Scoreboard*

Indices
S&P 500 1,172.42 -1.58%
DJIA 10,442.87 -1.73%
NASDAQ 1,991.06 -1.26%
Russell 2000 615.27 -1.63%
DJ Wilshire 5000 11,558.65 -1.53%
S&P Equity Long/Short Index 1,027.75 -.63%
S&P Barra Growth 565.90 -1.02%
S&P Barra Value 601.15 -2.13%
Morgan Stanley Consumer 573.92 -.44%
Morgan Stanley Cyclical 749.81 -2.42%
Morgan Stanley Technology 453.40 -1.88%
Transports 3,744.67 -.87%
Utilities 353.97 -1.64%
Put/Call .64 -42.34%
NYSE Arms 1.10 +17.02%
Volatility(VIX) 13.42 +.98%
ISE Sentiment 173.00 +24.46%
AAII % Bulls 23.23 -28.46%
US Dollar 84.16 +2.90%
CRB 306.88 -4.44%

Futures Spot Prices
Crude Oil 54.84 -3.70%
Unleaded Gasoline 159.92 +2.64%
Natural Gas 7.06 -2.19%
Heating Oil 154.84 -2.43%
Gold 425.00 -3.17%
Base Metals 127.52 -1.91%
Copper 145.60 -3.19%
10-year US Treasury Yield 4.59% +1.86%
Average 30-year Mortgage Rate 6.01% +1.01%

Leading Sectors
Airlines +2.44%
Computer Services +2.43%
Hospitals +1.53%

Lagging Sectors
Commodity -3.79%
I-Banks -3.98%
Insurance -4.52%

*5-day % Change