Monday Watch

Weekend Headlines
Bloomberg:
- Protestors in Beijing overran police barricades and hurled bottles at the Japanese Embassy in a day of demonstrations against Japan's glossing over of wartime atrocities in the nation's textbooks and other grievances.
- Wal-Mart Stores said April sales at US stores open at least a year are rising within its forecast range as shoppers buy more food.
- Wal-Mart Stores will offer a line of premium bath and bedding items in more than 1,000 stores to lure affluent shoppers.
- Verizon Communications will pay investor Carlos Slim $1.1 billion for his 13% stake in MCI Inc. to fend off a competing bid for MCI by Qwest Communications.
- US corporate bond sales last week totaled $4.5 billion, about one-third of the average this year, as companies avoided borrowing from investors who demanded extra yield to compensate against falling bond prices.

NY Times:
- US consumers worried about how they will cope with chronic pain and said they still want to use banned painkillers made by Pfizer and Merck in spite of the warnings.
- China has increased its trade surplus with the rest of the world, which may increase international calls for China to loosen its currency's peg to the US dollar and allow the yuan to appreciate.
- Billionaire investor Warren Buffett is "fearful" that his involvement in an insurance investigation will sully his reputation.
- The US Defense Department may reduce the number of troops in Iraq by as much as 26% by early next year because of decreasing insurgent attacks and the rising number of trained Iraqi soldiers.

LA Times:
- Marine Terminals, a holding company owned by some of the world's largest shipping businesses, is leading a coalition to build a $1 billion port in Mexico to tap into California's trade business.
- San Diego County is drawing most of the venture capital being spent on technology startups in Southern California.

Edaily:
- The Bank of Korea won't diversify its foreign exchange reserves, a move that would cause the won to rise further against the US dollar.

San Jose Mercury News:
- Users of Microsoft's Windows operating system may be the target of a scam luring them to a phony security update that installs a virus on personal computers.

San Francisco Chronicle:
- Spending on online advertising rose 24% to a record $2.7 billion in the fourth quarter as more marketers turned to the Internet to reach out to customers.

Boston Globe:
- China's efforts to improve its air force and navy will soon allow it to block US forces from defending Taiwan.

Financial Times:
- Official aid to poor nations rose 4.6% in 2004 to $78.6 billion, boosted by donations to Iraq and Afghanistan.
- Coca-Cola, McDonald's Corp. and MasterCard are in talks about possible sponsorship deals with soccer's ruling body FIFA.

AFP:
- OPEC halted talks on boosting its oil-output quota by 500,000 barrels of oil a day because crude prices have dropped.
- China's Prime Minister Wen Jiabao yesterday said he wants to "properly settle" a decades-old border dispute with India and take ties between the two countries to a "new high."

al-Hayat:
- A price of $40 to $50 a barrel for the crude pumped by OPEC is "reasonable and fair," Qatar's oil minister said.

Sunday Times:
- Boeing Co. plans to build a new version of its 747 aircraft that would be able to fly further and carry more passengers than the original plane.

Economic Daily News:
- Taiwan's central bank has kept 50% to 60% of foreign-currency reserves in US dollars.

Commercial Times:
- Microsoft is exploring possible ties with Quanta Computer and other Taiwan companies in the manufacture of advanced automotive electronics.

Xinhua News Agency:
- China's crude steel output rose 23.7% in the first-quarter from a year earlier to 77.7 million metric tons.

Weekend Recommendations
Bulls and Bears:
- Had guests that were positive on ZMH, SU, AIG, BRK/B, mixed on IGT, GM, CY, COP, ADSK, TM and negative on YHOO, OVTI, F.

Forbes on Fox:
- Had guests that were positive on APC, AZR and mixed on BRY, ORI.

Cashin' In:
- Had guests that were positive on DUK, TSRA, NXTP and PVH.

Barron's:
- Had positive comments on DTV, DRI, DII and CC.

Goldman Sachs:
- Reiterated Outperform on COF, AMGN, DNA, GILD, FMD, SYK and KRB.
- Reiterated Underperform on EW.

Night Trading
Asian indices are -.75% to -.25% on average.
S&P 500 indicated -.04%.
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
CC/.59
DNA/.25

Splits
BER 3-for-2

Economic Releases
None of note

BOTTOM LINE: Asian Indices are lower on weakness in technology shares in the region. I expect US stocks to open modestly lower in the morning on weakness in Asia and continuing worries over slowing global growth. The Portfolio is 25% 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:

Mon. - None of note
Tues. - Trade Balance, Minutes of March 22 FOMC Meeting, Monthly Budget Statement
Wed. - Advance Retail Sales
Thur. - Initial Jobless Claims, Business Inventories
Fri. - Empire Manufacturing, Import Price Index, Net Foreign Security Purchases, Industrial Production, Preliminary April Univ. of Mich. Consumer Confidence

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

Mon. - Circuit City(CC), Genentech(DNA), Abbott Labs(ABT)
Tues. - Ameritrade Holdings(AMTD)
Wed. - Advanced Micro Devices(AMD), Apple Computer(AAPL), Harley-Davidson(HDI), Lam Research(LRCX), Linear Techonogy(LLTC), Commerce Bancorp(CBH)
Thur. - JB Hunt Transportation(JBHT), PepsiCo(PEP), UnitedHealth Group(UNH), Sun Microsystems(SUNW), Southwest Airlines(LUV)
Fri. - Citigroup(C), General Electric(GE), Wachovia(WB), Mattel Inc.(MAT)

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

Mon. - Fed's Guynn speaks on Business Ethics
Tue. - Fed's Santomero speaks on Economy
Wed. - None of note
Thur. - Fed's Bernanke speaks on Current Account Gap
Fri. - None of note

BOTTOM LINE: I expect US stocks to finish the week modestly lower on continuing worries over slower economic growth and inflation. While I think US growth is slowing and may even temporarily fall below 3%, growth should accelerate to healthy levels later in the year. As well, the coming weeks will likely result in peak inflation fears for the year. I continue to expect the second half to be much better for US stocks than the first half as inflation decelerates, commodities prices fall, long-term interest rates remain low, 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 25% net long heading into the week.

Economic Week in Review

ECRI Weekly Leading Index 134.70 -.15%

Initial Jobless Claims for last week fell to 334K versus estimates of 330K and 353K the prior week. Continuing Claims rose to 2688K versus estimates of 2625K and 2598K prior. "The continuing claims number actually looks good, suggesting slow to moderate improvement in the unemployment rate," said Scott Anderson, an economist at Wells Fargo. The insured unemployment rate held at 2.1%, where it has been since mid-January, Bloomberg reported. The US unemployment rate fell in March to 5.2% from 5.4%. Monthly job growth has averaged 159,000 for the first three months of this year versus an average of 183,000 in 2004. The economy needs to create about 100,000 jobs a month to keep the unemployment rate from rising, according to most economists, Bloomberg reported. The percentage of teenagers in the workforce or looking for work has steadily fallen over the past two decades to the lowest on record, according to recent statistics. Teens are studying more, are taking heavier course loads and are involved in more extracurricular activities than ever before, USA Today reported. The percentage of teens who are enrolled in school has jumped 10 percentage points over the last two decades to 81%, the most recent Labor Dept. data show.

Wholesales Inventories for February rose .6% versus estimates of a .7% increase and a 1.0% gain in January. Sales fell for the first time in 21 months, Bloomberg said. The ratio of purchases to inventories rose to 1.18 months, the highest since January of 2004 though still close to last April's record low, Bloomberg reported. "I know this is the first sales decline in a while, but it doesn't look like anything worrisome, especially since we know retail sales were decent," said Stuart Hoffman, chief economist at PNC Financial. Some economists said rising corporate confidence about the economy encouraged the buildup of stockpiles. Oil inventories started the month at 294.4 million barrels of crude and finished at 301.6 million barrels, according to Ron Planting, an economist with American Petroleum Institute. He also said oil inventories were 6% above the five-year average of 287 million barrels, Bloomberg reported.

Consumer Credit for February fell to $5.6B versus estimates of $7.5B and $11.6B in January. "Consumers have grown slightly more cautious about the outlook the last few months so it is no surprise that they did not make as many purchases with credit cards in February," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi. Economists surveyed by Bloomberg forecast that consumer spending in the first quarter of the year rose 3.1%, after rising 4.2% at an annual rate in the fourth quarter and 3.8% for all of 2004. Sales at stores open at least a year rose 4.7% in February, and then rose 4.1% in March, the International Council of Shopping Centers said. Most of the credit slowdown is on the car-credit side, a reflection of car sales and of the incentives available for car sales," said Kevin Harris, chief economist at Informa Global Markets US. The economy is projected to grow at a 4.0% annual rate in the first quarter, after growing at a 3.8% pace the previous three months, according to the median estimate of economists surveyed by Bloomberg.

BOTTOM LINE: Overall, last week's economic data were mixed. I continue to expect modest job gains over the coming months. The pace of improvement will allow unemployment to gradually decline without spurring a substantial increase in unit labor costs, which are the main component of inflation. The decline in wholesale sales is more evidence that the economy is slowing modestly. I continue to expect US GDP growth, currently the strongest of all industrialized nations, to slow from around 4.0% this quarter to a more sustainable 3.0% over the next couple of quarters. I also continue to believe that with the US dollar firming, 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. Wal-Mart's lowered estimates are due to higher energy prices finally making a dent in consumer spending. While spending is slowing from very high levels, it is likely to pick back up in the second half of the year as energy prices decline, long-term interest rates remain low and employment prospects continue to improve. The fact that oil inventories are 6% above historical averages is likely a result of companies expecting even higher prices in the future, which has temporarily resulted in an artificial boost in demand. As perceptions change regarding the direction of oil prices, this demand will evaporate and likely cause an even greater decline in the price of crude than would otherwise be the case. Finally, the ECRI Weekly Leading Index declined .15% to 134.70 and is still near cycle highs.

Market Week in Review

S&P 500 1,181.20 +.71%


Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was modestly positive. The advance/decline fell slightly, most sectors rose and volume was light. Small-caps, Cyclicals and Tech shares all underperformed for the week as worries over slowing economic growth continued. While I now believe there is a high probability that oil has seen its highs for the year, the fact that the Bloomberg Crude Oil % Bulls is only 24.0 likely means a retest of the highs is in the offing. Measures of investor anxiety were mostly lower, however the AAII % Bulls came in under 30.0 for the third consecutive week. The last time this happened was February 2003. The S&P 500 proceeded to gain around 40% over the following 12 months. On the positive side, long-term interest rates and the US dollar were stable on the week, Consumer stocks outperformed, commodity prices fell and mortgage rates declined. The ECRI Future Inflation Gauge fell for the second consecutive month in March and is still below levels in Feb. 2003 and March 2000. Moreover, the Weekly Growth Rate of the ECRI Future Inflation Gauge remains in the downtrend it began in Dec. of 2004. I continue to believe the markets' recent poor performance is not a result of worries over inflation. However, investors are concerned that high energy prices, slowing global growth, a substantial increase in corporate lawsuits/investigations, lingering overcapacity from the 90s and a hawkish Fed will result in significantly lower US economic growth. Considering the positives last week, the mediocre nature of this week's rally likely portends another bout of weakness during earnings season.

Weekly Scoreboard*

Indices
S&P 500 1,181.20 +.71%
DJIA 10,461.34 +.55%
NASDAQ 1,999.35 +.73%
Russell 2000 610.75 -.13%
DJ Wilshire 5000 11,636.47 +.58%
S&P Equity Long/Short Index 1,022.55 +.37%
S&P Barra Growth 570.40 +.95%
S&P Barra Value 606.41 +.47%
Morgan Stanley Consumer 584.05 +2.09%
Morgan Stanley Cyclical 742.80 +.14%
Morgan Stanley Technology 453.73 -1.01%
Transports 3,596.70 -2.44%
Utilities 362.01 +.48%
Bloomberg Crude Oil % Bulls 24.0 -14.0%
Put/Call .93 -10.58%
NYSE Arms 1.39 -27.98%
Volatility(VIX) 12.62 -10.43%
ISE Sentiment 163.00 +48.18%
AAII % Bulls 27.74 -2.43%
US Dollar 84.41 unch.
CRB 304.32 -2.42%

Futures Spot Prices
Crude Oil 53.32 -6.98%
Unleaded Gasoline 153.66 -11.13%
Natural Gas 7.24 -6.25%
Heating Oil 149.72 -10.13%
Gold 429.00 +.73%
Base Metals 129.69 -.49%
Copper 150.80 +.97%
10-year US Treasury Yield 4.47 +.47%
Average 30-year Mortgage Rate 5.93% -1.82%

Leading Sectors
Airlines +5.53%
Biotech +3.37%
HMOs +2.61%

Lagging Sectors
Oil Service -2.52%
Energy -2.65%
Steel -2.79%

*5-Day % Change