Monday Watch

Weekend Headlines
Bloomberg:
- US stocks are at the lowest prices relative to earnings and dividends in eight years, based on the S&P 500, and the comparison may help sustain their rebound from the lows of 2005.
- Wal-Mart Stores said May sales at US stores open at least a year are rising within its forecast.
- The US warned N. Korea that a nuclear-weapons test would be considered a "provocative act," after reports suggested the North may be ready to conduct its first detonation.
- Another aide to terrorist Abu Musab al-Zarqawi responsible for many recent suicide bombings in Iraq was captured by Iraqi security forces.

New York Times:
- Genentech's Susan Desmond-Hellmann, a cancer doctor who runs the company's drug development unit, deserves credit for a string of recent clinical trial successes, citing analysts.
- US companies including Boeing, Cisco Systems, Motorola and GM, which have considerable sales in China, would likely benefit from a revaluation of the Chinese yuan.
- Iraq's new government plans to name Sunni Arabs to the Cabinet post of minister of defense and minister of industry, which are six of the nominations set to be presented for approval tomorrow.
- Pfizer, Eli Lilly and four other drugmakers are among the biggest beneficiaries of a temporary break allowing them to bring home overseas profit at a lower tax rate.
- Verizon Communications, Time Warner Cable and other telephone and cable television providers are aiming to cut into Vonage Holdings' lead in Internet-based phone services by developing their own online services.

Washington Post:
- Senate Democratic Leader Harry Reid of Nevada called President Bush a "loser" while speaking to high school students in his home state.
- The shift of government work to outside contractors by the Bush administration has created a boom for companies that specialize in working with federal agencies.
- A remote New Mexico town is one of several locations being used in a multi billion-dollar government initiative that simulates terrorist attacks to train emergency personnel.

Rocky Mountain News:
- EchoStar Communications was ordered by a Denver jury to pay $8 million to a blind man, who was refused a customer-service job at the company.

LA Times:
- A lack of honeybees and cold, wet weather is causing a shortage of almonds, which are leading to higher prices.
- California Governor Arnold Schwarzenegger has about $2 billion more to close a gap in the state's budget because improvements in the state's economy have lead to higher tax revenue.

Dow Jones Neswires:
- OPEC won't consider another production increase because of an over-supply of oil.

Financial Times:
- Liberty Media, a US cable tv company that doubled its stake in Rupert Murdoch's News Corp. last year to almost 19%, is close to striking an agreement that will remove the threat it poses to Murdoch's control of his company.
- US lawmakers have called on President Bush to encourage China and Japan to revalue their currencies to ease pressure on US carmakers.
- The board at GM meets on Monday as the company faces pressure to restructure its North American operations and questions over what to do about its dividend.
- GE Chairman Jeff Immelt may today announce plans for the company to invest in and produce technology to reduce the environmental impact of industrial development.

Finanz & Wirtschaft:
- Alcon Inc., the world's largest eye-care company, aims to lift sales by 8% to 10% annually, CEO Cary Raymont said

International Herald Tribune:
- The Wall Street Journal, published by Dow Jones & Co., may change its European and Asian newspapers to a tabloid format from the current broadsheet in a bid to stem losses by its international editions.

Clarin:
- Argentina's government is considering plans that would spark an increase in investments by the country's energy companies

Financial Mail:
- Home Depot may acquire Kingfisher Plc, the UK's third-largest home-improvement retailer, after executives from both companies met to discuss terms.

Economic Times:
- Wal-Mart Stores is holding preliminary talks with companies in India to start its retail business in the country.

Weekend Recommendations
Bulls and Bears:
- Had guests that were positive on AXP, CMP, DELL, MSO and mixed on URBN, GS, SINA, HEW.

Forbes on Fox:
- Had guests that were positive on JRC, SEB, LBTYA, VRSN and mixed on DPH, JJZ.

Cashin' In:
- Had guests that were positive on VE, LUK, CVS, CEDC, PFE, mixed on WEN and negative on SIRI, PKZ.

Cavuto on Business:
- Had guests that were positive on COST, UPS, SBTV and mixed on WWY.

Forbes:
- Had a positive column on cell phone entertainment.

Barron's:
- Had positive comments on ETN.
- Had negative comments on IBM.

Goldman Sachs:
- Reiterated Outperform on DIS, BSX and NFP.

Night Trading
Asian indices are -1.0% to +.50% on average.
S&P 500 indicated +.10%.
NASDAQ 100 indicated +.03%.

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

Earnings of Note
Company/Estimate
AL/.56
ADBL/.00
CELL/.21
PCLN/.20
SSI/.09
TSO/.55

Splits
GNTX 2-for-1

Economic Releases
10:00 EST
- Wholesale Inventories for March are estimated to rise .7% versus a .6% gain in February.

BOTTOM LINE: Asian Indices are mixed as strength in India and Australia is being offset by weakness in China and Korea. I expect US stocks to open mixed as higher energy prices offset more economic optimism. The Portfolio is 100% 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. - Wholesale Inventories
Tues. - None of note
Wed. - Trade Balance, Monthly Budget Statement
Thur. - Advance Retail Sales, Initial Jobless Claims
Fri. - Import Price Index, Business Inventories, Univ. of Mich. Consumer Confidence

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

Mon. - Tesoro Corp>(TSO)
Tues. - Cisco Systems(CSCO), El Paso Corp.(EP)
Wed. - Federated Dept. Store(FD), May Dept. Stores(MAY), Walt Disney(DIS)
Thur. - Dell Inc.(DELL), Kohl's Corp.(KSS), Target Corp.(TGT), Wal-Mart Stores(WMT), Analog Devices(ADI), American Eagles Outfitters(AEOS)
Fri. - Liberty Media(LBTYA), Tiffany & Co.(TIF)

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

Mon. - UBS Global Financial Services Conference, Prudential Software Summit
Tue. - Prudential Software Summit, Merrill Lynch Global Industries Conference, Bear Stearns Intl. Healthcare Conference, Merrill Lynch Metals and Mining Conference, UBS Global Financial Services Conference, CIBC Communications and Tech Conference, Fed's Fisher speaks, Fed's Hoenig speaks
Wed. - Goldman Consumer Symposium, Lehman Brothers Financial Services Conference, Piper Jaffray Tech Conference, UBS Leveraged Finance Conference, CIBC Communications and Tech Conference, UBS Global Financial Services Conference, Prudential Software Summit, Merrill Lynch Global Industries Conference, TXN Analyst Meeting, Fed's Bies speaks, Fed's Poole speaks
Thur. - Piper Jaffray Tech Conference, UBS Leveraged Finance Conference, Bear Stearns Global Transportation Conference, Lehman Brothers Financial Services Conference
Fri. - American Society of Clinical Oncology Meeting begins, Piper Jaffray Tech Conference

BOTTOM LINE: I expect US stocks to finish the week modestly higher on short-covering, good earnings reports and bargain-hunting. The recent rally will likely continue near-term as a result of the relatively high levels of skepticism regarding its validity. However, a more significant advance will not occur until it is perceived that the Fed will slow the pace of rate hikes and oil falls meaningfully below $50/bbl. I continue to believe US growth is slowing to around 2.5% temporarily, notwithstanding the strong employment report on Friday. However, I am monitoring recent data carefully for signs that growth is stronger than I currently perceive. Slower growth and decelerating measures of inflation should allow the Fed to slow the pace of rate hikes after the June 29-30 meeting. As I stated in the prior post, I continue to believe oil has seen its cycle highs and will begin an accelerated downward move during the second half of the year, thus helping boost GDP growth back to more healthy levels. My trading indicators are giving neutral signals and the Portfolio is 100% net long heading into the week.

Economic Week in Review

ECRI Weekly Leading Index 134.40 -.22%

Construction Spending for March rose .5% versus estimates of a .3% increase and a .5% gain in February. The rise in construction spending to a record $1.052 trillion annual rate was driven by increased work on new homes, factories and commercial buildings. Construction spending has risen every month since January of last year, the best performance on record. Moreover, for the first quarter, construction is up a very strong 9.3%(YoY), Bloomberg reported. "We still have tight inventories which tell builders to keep on building," said Ellen Beeson, an economist at Bank of Tokyo-Mitsubishi.

ISM Manufacturing for April fell to 53.3 versus estimates of 55.0 and a reading of 55.2 in March. ISM Prices Paid for April fell to 71.0 versus estimates of 71.2 and a reading of 73.0 in March. The production index component of the ISM, a measure of the work being performed, actually rose to 56.7 versus estimates of 56.5, Bloomberg reported. As well, the new export orders component of the index rose to 57.2 from 55.4. This report shows companies started paring inventories in April after slowing demand in the first quarter caused the fastest increase in stockpiles in about five years, Bloomberg said. "The trend is definitely toward a slower pace of growth," said Norbert Ore, chairman of the institute's manufacturing committee.

Factory Orders for March rose .1% versus estimates of a 1.2% decline and a downwardly revised .5% decrease in February. This report also showed orders for capital goods excluding aircraft, a gauge of future business investment rose 10.4% from the first quarter of 2004, Bloomberg said. "Underlying demand for some manufacturing products is still reasonably firm," said Adam Chester, chief economist at HBOS Treasury Services. The figures are consistent with an economy "reaching a more mature rate of expansion," Chester said.

The FOMC raised its benchmark rate 25 basis points to 3.0% versus estimates of a hike to 3.0% and 2.75% at the prior meeting. As well, the Fed restated a plan to carry out further increases at a "measured" pace to head off faster inflation. "Recent data suggest the solid pace of spending growth has slowed somewhat, partly in response to the earlier increase in energy prices," the Fed said. "The Fed isn't particularly worried that the slowdown is a serious one," said former Fed Governor Lyle Gramley, now an economic adviser at the Stanford Washington Research Group. The Fed jarred financial markets shortly before 4pm EST when it announced it had mistakenly left a sentence about inflation expectations being "well-contained" out of the statement earlier in the afternoon, Bloomberg reported.

Total Vehicle Sales for April rose to 17.5M versus estimates of 16.8M and 16.8M in March. Domestic Vehicle Sales for April rose to 13.9M versus estimates of 13.3M and 13.5M in March. Toyota Motor and Nissan Motor said US sales of cars and trucks soared more than 25% last month, while sales at GM and Ford declined. Asian companies now have a record 37.5% share of US auto sales, Bloomberg said. US consumers are shunning the less fuel-efficient sport-utility vehicles and trucks that make up the bulk of sales at GM and Ford, Bloomberg said. GM now has a 25.4% share of the US market so far in 2005, an 80-year low.

ISM Non-Manufacturing for April fell to 61.7 versus estimates of 61.0 and a reading of 63.1 in March. "Close to 60 should be viewed as exceptionally strong," said James O'Sullivan, a senior economist at UBS Securities. The ISM Non-Manufacturing is holding just under the 62.4 average for all of last year. This is an exceptionally strong level, considering services account for 85% of the US economy, Bloomberg reported. This index is also still near the all-time high that was set last year in April at 66.9. However, components within the index show a continuation of the recent deceleration is likely. Measures for new orders, order backlogs, inventories and employment were modestly weaker. Once again, another measure of inflation showed deceleration. The prices paid component of this index fell to 61.9 from 65.6 the prior month, Bloomberg reported.

Preliminary 1Q Non-farm Productivity rose 2.6% versus estimates of a 1.8% gain and a 2.1% increase in 4Q. Preliminary 1Q Unit Labor Costs rose 2.2% versus estimates of a 2.0% gain and a 1.7% increase in 4Q. "We've moved into a new era where productivity is permanently at a higher level," said Ellen Beeson.

The Unemployment Rate for April was 5.2% versus estimates of 5.2% and 5.2% in March. Average Hourly Earnings for April rose .3% versus estimates of a .2% increase and a .3% gain in March. The Change in Non-farm Payrolls for April rose to 274K versus estimates of 174K and an upwardly revised 146K in March. The Change in Manufacturing Payrolls for April fell 6K versus estimates of a decrease of 5K and a 7K decline in March. The strong payroll report was further bolstered by an upward revision of 93,000 more jobs created in February and March than previously thought, Bloomberg reproted. Stand-out sectors included an increase in retail employment of 24,000 in April after a decline of 2,100 in March. As well, construction jobs rose by 47,000 after an increase of 29,000 the prior month. "It is a surprisingly strong report, it's across the board, and it's good news for the economy," said William Ford, former president of the Atlanta Fed. The average weekly paycheck and the total number of hours worked per week rose by the most in eight years, Bloomberg reported.

Consumer Credit for March fell to $5.5B versus estimates of $6.4B and $5.8B in February. Borrowing by US consumers grew in March at the slowest pace in four months, as retail sales cooled and limited purchases by credit card, Bloomberg reported. More home-equity loans amid record housing prices may have helped restrain use of credit cards, economists said.

BOTTOM LINE: Overall, last week's economic data were positive. The record pace of new home sales and rising builder backlogs should spur further gains in construction and construction employment. This should cushion any economic weakness over the coming months. The modest decline in the ISM Manufacturing report was expected after the rise in inventories that was reported in the Preliminary 1Q GDP report. Considering the rise in commodity prices during the first part of the year, the declines in the ISM Manufacturing and Non-Manufacturing prices paid indices is a big positive and corresponds with the drop in the Chicago Purchasing Manager’s prices paid component. The first quarter rise in inventories may limit factory demand over the next few months. The .1% gain in factory orders is more evidence that economic growth is slowing to more sustainable and less inflationary levels. As of now, I continue to believe the Fed will slow their pace of rate hikes after the June meeting, notwithstanding the strong employment report. The strong gain in auto sales was in part due to consumers switching to more fuel efficient vehicles. This trend will likely slow in the second half of the year as gas prices decline. The headline number on the ISM Non-Manufacturing Index was stronger than the underlying components, suggesting a modest weakening in future reports. While Preliminary 1Q unit labor costs, which account for two-thirds of inflation, exceeded estimates slightly, investors focused more on the much better-than-expected productivity number. As long as productivity remains elevated, it is unlikely we will see unit labor costs rise substantially. As a result, hiring will remain modest by historic standards and inflation will remain well in check. While the April jobs report was strong, other indicators point to more moderate hiring in coming months. The sharp gain in construction hiring in April bodes well for an acceleration of new home starts. I continue to believe consumer spending will remain healthy throughout the year as interest rates stay low, stock performance improves, inflation decelerates, job prospects/incomes improve modestly, sentiment rises and gas prices fall. Finally, the ECRI Weekly Leading Index fell .22% to 134.40 and is forecasting slowing, but healthy levels of economic activity.

Market Week in Review

S&P 500 1,171.35 +1.25%*




Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was positive considering the rise in energy prices, increase in interest rates and debt worries at GM/Ford. The S&P 500 has now broken out of the trading range it has been in since mid-April. The advance/decline rose, almost every sector gained and volume was average on the week. Small-cap, Cyclical and Tech shares all outperformed as worries over slowing US growth subsided. Measures of investor anxiety were mixed on the week. However, the AAII % Bulls fell again which is a big positive. The decline in the CRB Index was also a positive, considering the gain in energy prices. In my opinion, the longer oil stays above $50, the greater the chances of a substantial decline in its price during the second half of the year. I continue to believe the contango in the crude futures market, slowing demand, excess supply and a stable US dollar, will result in a much larger decline in oil prices than almost anyone expects. I suspect the decline has already begun and will accelerate within the next 6 weeks. The continuing weakness in Gold is likely more evidence that inflation fears have peaked.

*5-Day % Change

Weekly Scoreboard*

Indices
S&P 500 1,171.35 +1.25%
DJIA 10,345.40 +1.50%
NASDAQ 1,967.35 +2.38%
Russell 2000 596.52 +2.96%
DJ Wilshire 5000 11,535.55 +1.48%
S&P Equity Long/Short Index 1,005.40 +.15%
S&P Barra Growth 565.95 +1.27%
S&P Barra Value 601.02 +1.24%
Morgan Stanley Consumer 580.36 +.89%
Morgan Stanley Cyclical 713.33 +2.28%
Morgan Stanley Technology 448.27 +2.68%
Transports 3,533.66 +3.13%
Utilities 364.88 -1.77%
Bloomberg Crude Oil % Bulls 35.0 +60.4%
Put/Call 1.05 +2.94%
NYSE Arms .95 +10.47%
Volatility(VIX) 14.05 -8.23%
ISE Sentiment 163.0 +20.74%
AAII % Bulls 28.57 -3.97%
US Dollar 84.62 +.27%
CRB 300.46 -1.08%

Futures Spot Prices
Crude Oil 50.96 +3.58%
Unleaded Gasoline 147.60 -.27%
Natural Gas 6.62 +.85%
Heating Oil 143.11 +1.21%
Gold 426.90 -.93%
Base Metals 122.82 -1.72%
Copper 143.65 -1.10%
10-year US Treasury Yield 4.26% +1.43%
Average 30-year Mortgage Rate 5.75% -.52%

Leading Sectors
Steel +7.57%
Oil Tankers +5.23%
Insurance +4.58%

Lagging Sectors
Disk Drives -.11%
Broadcasting -1.08%
Telecom -1.68%

*5-Day % Change