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Monday Watch

Weekend Headlines
Bloomberg:
- Global semiconductor sales will this year rise more than earlier forecast because of better-than-expected computer demand and inventory management, market researcher Gartner Inc. said.
- Wal-Mart Stores said May sales at US stores open at least one year are rising within its forecast range as shoppers spent more on food.
- OPEC nations may link their most profitable oil-field developments to less attractive refining ventures to spur international companies to invest in new refineries, the group's president said.
- President Bush said the US delivered a "series of devastating blows" to terrorists in the Middle East in recent weeks, highlighting several high-profile captures and a week-long offensive against insurgents near the Syrian border.
- Senator McCain said a meeting tomorrow among a dozen Republican and Democratic senators will be their last chance to head off a partisan showdown over President Bush's judicial nominees.
- The US dollar is poised for its longest winning streak against the euro since 2000 as some investors say the US currency's three-year bear market has ended, a Bloomberg News survey showed.
- Gold may fall for a fourth straight week in NY, the longest decline in a year, as a rally in the US dollar reduces the allure of precious metals, a Bloomberg survey showed.
- China's textile makers, who spent $14.3 billion last year on factories and materials, say local demand will buffer any slowdown in orders from Wal-Mart and Carrefour SA because of a looming trade war with the US and Europe.
- Chinese stocks are falling, paced by textile companies, after the government said it will raise export tariffs on products such as shirts and pants to ease trade tensions with the US and European Union.
- China's relations with Japan are at their lowest ebb in three decades and both governments must "strive" to improve ties between Asia's two largest economies, China's Vice Premier Wu Yi said.

Wall Street Journal:
- European and Japanese cellphone revenue is slowing or falling, making for bigger challenges for companies such as Britain's Vodfone, Sweden's TeliaSonera, and Japan's NTT DoCoMo.

New York Times:
- Merck CEO Clark plans to revitalize research and development at the company after it lost its position as the largest drugmaker.
- The popularity of sport-utility vehicles in the US is beginning to wane amid higher gas prices, and passenger cars are beginning to win back sales for the first time in 14 years.
- Maurice "Hank" Greenberg, the ousted head of American International Group, will likely continue to influence control over about $16 billion of the insurer's stock.
- Harvard University is starting to allow donors to invest with the university's endowment, a decision that's attracted attention in academic and investing circles.
- The UN is allowing its peacekeepers to be more aggressive in their operations by returning fire and searching for weapons because of failed missions in Rwanda, Bosnia and Somalia.

Washington Post:
- Democrats in the US House of Representatives are risking support from high-tech companies to oppose the Dominican Republic-Central America Free Trade Agreement.
- Sunni Muslims ended their two-year boycott of politics in post-Saddam Iraq yesterday with leaders agreeing to help draft a constitution and participate in elections.
- Jurors in criminal cases increasingly are refusing to convict suspects in the absence of the kind of forensic data that they see used on popular television crime shows.
- The US military plans to reduce the number of bases it holds in Iraq by 96% by moving its forces into four large airbases and turning the rest over to Iraqi troops.

Crains's New York Business:
- Washington Mutual, Bank of America, Citigroup and other banks are opening so many new branches in NY City, they may saturate the market.

LA Times:
- Shares of US retailers such as Pacific Sunwear of California and Abercrombie & Fitch fell Friday after Prudential analyst Stacy Pak downgraded them on concern that a glut of denim fashions may be developing.
- Murders in the Mexican border city of Tijuana jumped by 77% during the first four months of this year, fueled in part by fighting between drug cartels.

Business Insurance Magazine:
- Commercial health-insurance premiums probably will increase 7.5% to 9.5% this year, less than in previous years, as companies price their offerings at or near medical costs.

Financial Times:
- Time Warner has "failed" to integrate its America Online acquisition and to get full benefit from its joint bid for Adelphia Communications, citing John Malone, the US cable-tv investor.
- China overtook Italy as the world's fourth-most popular destination for tourists.
- UK company directors bought more stock in their own companies in the past month than since July, with technology shares among the most popular and retail the least.
- Mattel is investigating claims that children as young as 13 are employed at a Mexican factory that makes dolls clothes for the company.
- Two-thirds of international institutional investors say markets have scarcely considered, if at all, the possibility of a "No" vote in the French national referendum on the European Union constitution on May 29, citing Barclays Capital.

Sunday Telegraph:
- European Union leaders are preparing a plan to salvage the bloc's planned constitution should the French reject it narrowly in a referendum next week. Under the "Plan B," all 25 EU members will release an emergency joint statement that will say voting must continue. The UK would proceed with it referendum next spring and the French would then vote again after the constitution is approved by all other EU states. Should the French reject the treaty by a wide margin, the constitution would be doomed, as France was one of the EU's founding members, and leaders wouldn't attempt to revive it.

China Daily:
- Profit at China's steelmakers may drop by $568 million this year because of government efforts to slow exports of the metal.
- China dispatched 3 million doses of avian influenza vaccine to the northwestern province of Qinghai after confirming deaths of migratory birds there resulted from the virus.

Weekend Recommendations
Bulls and Bears:
- Had guests that were positive on TOL, CECO, MOT, FCS, GS, MER, TS, NCC and mixed on DIS.

Forbes on Fox:
- Had guests that were positive on DHI and mixed on OMM.

Cashin' In:
- Had guests that were positive on PEP, mixed on AMAT, HPQ, UHAL, HAS, K, NUE and negative on WMT.

Cavuto on Business:
- Had guests that were positive on WPO, VIA, WFT and negative on NYT.

Forbes:
- Had a positive article on AMCR and BCO.

Barron's:
- Had positive comments on AVID, MOT, SFA, SNE, PCAR, JAS, BWNG, DRRX, ILA, DYN, MYG and MSFT.
- Had negative comments on USU.

Goldman Sachs:
- Reiterated Outperform on IBM, DKS, AAP and ODP.

Night Trading
Asian indices are -1.0% to +.50% on average.
S&P 500 indicated -.04%.
NASDAQ 100 indicated -.10%.

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Earnings of Note
Company/Estimate
CPB/.33
DY/.25

Splits
ECA 2-for-1

Economic Releases
None of note

BOTTOM LINE: Asian Indices are mixed as strength in Japan and Australia is being offset by weakness in China and Taiwan. I expect US stocks to open modestly higher on a decline in energy prices and short-covering ahead of economic reports and Fed speeches. The Portfolio is 100% net long heading into the week.

Weekly Outlook

There are some 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. - Existing Home Sales, Minutes of May 3 FOMC Meeting
Wed. - Durable Goods Orders, New Home Sales
Thur. - Preliminary 1Q GDP, Preliminary 1Q Consumption, Initial Jobless Claims, Help Wanted Index
Fri. - Personal Income, Personal Spending, PCE Deflator, Univ. of Mich. Consumer Confidence

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

Mon. - Campbell Soup(CPB)
Tues. - Computer Sciences(CSC), GameStop(GME), Medtronic(MDT), Network Appliance(NTAP), Williams-Sonoma(WSM)
Wed. - Autozone(AZO), Dollar Tree(DLTR)
Thur. - Chico's FAS(CHS), Computer Assoc.(CA), Costco(COST), Dollar General(DG), HJ Heinz(HJZ), Toll Brothers(TOL)
Fri. - None of note

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

Mon. - UBS Specialty Pharma Conference, Fed's Santomero speaks
Tue. - Oppenheimer Wireless Conference, UBS Software & IT Conference, UBS Global Oil and Gas Conference, UBS Global Pharma Conference, Fed's Moskow speaks
Wed. - Goldman Sachs Internet Conference, Needham Biotech Conference, UBS Software and IT Conference, UBS Global Oil and Gas Conference, Fed's Bernanke speaks, Fed's Guynn speaks
Thur. - Banc of America Aerospace & Defense Conference, UBS Global Oil & Gas Conference, Goldman Sachs Internet Conference, Needham Biotech Conference, Fed's Guynn speaks, Fed's Moskow speaks
Fri. - Fed's Ferguson speaks, Fed's Yellen speakes

BOTTOM LINE: I expect US stocks to finish the week modestly higher on short-covering, bargain-hunting, more optimism and better-than-expected economic reports. Better-than-expected Durable Goods Orders, Better-than-expected Consumer Confidence and an upward revision to 1Q GDP should boost sentiment regarding the economy this week. As I have stated previously, I expect the Fed to continue making relatively hawkish statements until closer to the June meeting. However, I will closely monitor comments for hints of the coming policy shift I expect. My trading indicators are giving bullish signals and the Portfolio is 100% net long heading into the week.

Economic Week in Review

ECRI Weekly Leading Index 133.10 -.89%

Empire Manufacturing for May fell to -11.1 versus estimates of 11.7 and a reading of 2.0 in April. This is the first contraction since 2003. "The survey is much weaker than we expected, and it supports our view that the soft patch is not over," said Ian Shepherdson, chief economist at High Frequency Economics. Stephen Stanley, chief economist at RBS Greenwich Capital, took the report in stride. "With ample signs of a revival of economic activity in recent weeks, these numbers do not worry me much," Stanley said. The six-months index for orders actually rose to 45.3 from 34.3, Bloomberg reported. As well, the gauge of prices manufacturers paid for materials fell to 42 from 43.1. Finally, the index of hiring expectations over the next six months rose to 22.1 this month from 21.5 in April, Bloomberg reported.

Net Foreign Security Purchases for March fell to $45.7B versus estimates of $70.0B and $84.1B in February. The details may show less potential harm to the dollar than suggested by the total, Bloomberg said. Sean Callow, a currency strategist at IDEAGlobal, noted that demand by private investors for US Treasuries rose by a net $42.9 billion, an increase of 35%. "This resilience in private sector demand for US Treasuries is way above what is needed to finance the current-account deficit," Callow said.

The NAHB Housing Market Index for May rose to 70 versus estimates of 69 and a reading of 67 in April. The gauge of US homebuilder optimism rebounded in May as mortgage rates near record lows and increased job creation fueled housing demand, Bloomberg reported. "With unsold inventories in good shape, housing starts should be solid in coming months," said David Seiders, the association's chief economist. All three components of the index rose. The group's gauge of buyer traffic increased to 53 from 50. The current sales measure rose to 76 from 73, and sales expectations for the next six months increased to 77 from 76, Bloomberg reported.

The Producer Price Index for April rose .6% versus estimates of a .4% increase and a .7% gain in March. The PPI Ex Food & Energy for April rose .3% versus estimates of a .2% increase and a .1% gain in March. US wholesale prices rose more than forecast in April, led by higher costs for gasoline, cigarettes and new vehicles, Bloomberg reported. The data showed raw materials prices are starting to slow, Bloomberg said. "My sense of it is that commodity price pressures have substantially disappeared," said William Poole, president of the St. Louis Federal Reserve. "I'm not relaxed about inflation, but I don't think there's reason for deep concern or worry," he said.

Housing Starts for April rose to 2038K versus estimates of 2000K and 1836K in March. Building Permits for April rose to 2129K versus estimates of 2043K and 2021K in March. US housing starts rebounded more than expected in April as mortgage rates near historic lows and rising job growth spurred home sales, Bloomberg said. Last month's figures are consistent with forecasts that this year may be the best for construction since 1978, and a jump in building permits to almost a 22-year high supports that outlook, Bloomberg said. "We can count on housing to be an engine of growth for the first half and possibly the second half," said Nariman Behravesh, chief economist at Global Insight. Housing units authorized but not started rose to a 19-year high of 224,100 in April, up 22% from a year earlier, Bloomberg reported.

Industrial Production for April fell .2% versus estimates of a .2% increase and a .1% gain in March. Capacity Utilization for April fell to 79.2% versus estimates of 79.5% and 79.4% in March. Excluding autos, manufacturing production rose, and with retail sales accelerating and energy prices retreating, the slowdown isn't likely to last much longer, economists said. "Manufacturing has been weighed down in the last couple of months by the auto sector as Detroit goes through an inventory correction," said Joshua Shapiro, chief economist at Maria Fiorini Ramirez. GM plans to cut output 10% this quarter compared with the same period last year and Ford is reducing it 4.8%, the No. 1 and No. 2 US automakers have said, Bloomberg reported. Outside of autos, manufacturing production picked up, rising .4% after an unchanged reading the prior month, Bloomberg said. Factories expect to invest 9.8% more in new capital equipment this year, up from a 1.6% increase projected in December, according to the results of a survey issued last week by the Institute for Supply Management.

The Consumer Price Index for April rose .5% versus estimates of a .4% increase and a .6% gain in March. The CPI Ex Food & Energy for April was unchanged versus estimates of a .2% increase and a .4% gain in March. Core prices failed to rise for the first time since November 2003. Prices for hotel stays, new autos and clothing actually fell. Energy prices rose 4.5% in April, the largest monthly gain since March 2003, yet the CPI still decelerated from the prior month. "Pipeline price pressures are becoming less intense," said Bruce Kasman, head of economic research at JP Morgan Chase. "This should help temper retail goods inflation." "We have reached the peak of the upward surprises on inflation," said Ellen Beeson, an economist at Bank of Tokyo-Mitsubishi.

Initial Jobless Claims for last week fell to 321K versus estimates of 330K and 341K the prior week. Continuing Claims rose to 2601K versus estimates of 2583K and 2596K prior. New claims have averaged about 325,000 in the first four months of the year, down from 350,000 a year ago. The four-week moving-average of claims increased to 329,750 from 324,250 the prior week. The four-week moving-average of continuing claims dropped to 2.58M, a four-year low. The insured unemployment rate, which tends to move with the US unemployment rate, held at a four-year low of 2.0%. "There are no reasons to be concerned about the labor market," said Tim Rogers, chief economist at Briefing.com.

Leading Indicators for April fell .2% versus estimates of a .2% decline and a .6% fall in March. The Leading Economic Indicators Index fell for a fourth straight month in April as high gas prices weighed on consumer sentiment. March’s number was revised down to a .6% decline, the largest decrease since September 20001. "There have been a number of signs of a loss of momentum," said Roger Kubarych, a senior economist at HVB America.

Philadelphia Fed. for May fell to 7.3 versus estimates of 17.3 and a reading of 25.3 in April. This was the biggest monthly drop since January 2001. Factory demand is moderating as growth in business spending eases and companies sell from inventories that piled up during the first three months of 2005, Bloomberg said. "There's no longer the need to rebuild inventories, and demand overall is growing at a more moderated pace. "The weakness in the auto sector is also feeding through to other manufacturers," said David Sloan, senior economist at 4Cast Inc.

BOTTOM LINE: Overall, last week's economic data were slightly negative. Manufacturing activity has slowed significantly from vigorous levels to below-average rates. This is mainly a result of the 1Q build in inventories. Companies, especially autos, are now decreasing production to work off these stockpiles. As well, some commodity-related industries are beginning to decrease production as prices fall. I expect factory production to accelerate during the third quarter as inventories fall and demand strengthens. Increasing demand for US Treasuries by the private sector is a positive and I continue to believe fears of foreign central bank "diversification" are way overblown, especially with the recent US dollar strength. The housing market remains very strong despite the attempts by many to paint a negative picture. I do not believe there is a nationwide bubble in housing. However, price gains will moderate substantially over the next few years. This has already begun. The median existing home price is only up about 2.0% since June of last year. Inflation, which is rising around average rates right now, is set to decelerate through year-end. I expect many bears to begin switching their arguments to deflation from inflation during this period. The labor market will likely show some weakness over the coming months due to slowing manufacturing activity. However, I expect a rebound back to modest levels shortly thereafter. I continue to believe US GDP growth is slowing temporarily to around 2.5% this quarter. Low interest rates, an end to the inventory correction, falling commodity prices, a booming housing market, improving consumer sentiment, rising stock prices, improving trade/budget deficits and a firmer US dollar should propel growth back to average levels during the third quarter. Finally, the ECRI Weekly Leading Index fell .89% to 134.40 and is still forecasting slowing, but healthy levels of economic activity.

Market Week in Review

S&P 500 1,189.28 +3.05%*



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was positive. The advance/decline rose, every sector gained and volume was average on the week. Small-caps, Cyclicals and Tech shares outperformed as investors began anticipating a slowing in the Fed's pace of rate hikes. Measures of investor anxiety were lower on the week. The AAII % Bulls is still at relatively low levels, but is no longer registering extreme investor pessimism. Mortgage rates are now only 50 basis points away from all-time lows set in June 2003. The downward move in energy prices continued and the contango in the futures market still exists. I believe this situation, slowing demand, excess supply and a firmer US dollar, will result in a much larger decline in oil prices than most expect. An accelerated decline will likely occur when the contango begins to reverse itself. The Fed has likely been targeting the CRB Index, which has been the main source of inflation fears. The recent breakdown in the CRB is unambiguously positive for future inflation readings. Low long-term interest rates and falling gold prices correspond with this view. Fed comments will likely remain relatively hawkish until closer to the June meeting, thus keeping downward pressure on commodity prices. I continue to believe the Fed will hike rates at the June meeting and remove the "measured" language, paving the way for a pause in their rate of hikes. It appears as though the recent rally has legs. All my intermediate-term trading indicators are bullish for the first time since September of last year. As I have been saying for several months, lower inflation, low interest rates, modest growth, reasonable valuations, lower energy prices and a relatively healthy labor market should help to propel stocks further in the second half of the year.

*5-day % Change