Economic Week in Review

ECRI Weekly Leading Index 133.70 +.60%

The Conference Board's Consumer Confidence Index came in at 87.3 vs. expectations of 92.5 and a reading of 96.8 the prior month. This was the largest monthly drop since before the Iraq war began. At the same time, spending at U.S. retail stores in the week ended last Sat. rose 5.6% from a year earlier, according to the Instinet Research Redbook weekly sales report.

Durable Goods Orders fell 1.8% in January vs. expectations of a 1.4% gain and 1.6% growth the prior month. Excluding Transportation, which fell because of a significant decline in aircraft orders, the index rose 2.0% vs. expectations of a 1.8% rise and 1.7% growth last month. Orders for communications equipment rose 73.3%, the most since Jan. 1997. A measure for the demand for business equipment rose for the eighth time in nine months, the best performance since 1994. The inventory-to-sales ratio held at a record low of 1.4 months. "Replenishing inventories will make for a sizeable contribution to growth in the first quarter," said Bill Sharp, an economist at JP Morgan. Deutshe Bank's chief fixed-income economist said, "A meaningful pick-up in hiring cannot be far away with capital spending growing at an annualized 15-20 percent rate this quarter."

The U.S. economy expanded at a 4.1% annual rate in the 4th quarter, faster than the initial estimate, because businesses increased spending to rebuild inventories and buy equipment and software, the Commerce Department said. Therefore, last year's second half GDP growth rate of 6.1% was the strongest six months since the first half of 1984. The personal consumption expenditures price index, a measure of inflation tied to spending, which is watched closely by Greenspan, gained at a very low .7% annual pace.

The Chicago Purchasing Manager's Index declined to 63.6 in Feb. vs. expectations of 63.5 and a reading of 65.9 last month. The index has now held above 60 for 4 straight months, a stretch not seen since 1994-95. The employment component of the index rose to 54.8 this month, its highest reading since 1998. The Univ. of Michigan Consumer Confidence Index fell to 94.4 in Feb. vs. expectations of 94.0 and a reading of 103.8 last month.

During the course of the week, several comments came from Fed officials. Fed Governor Bies said that recent data suggest job growth may "pick up, perhaps substantially, over the course of this year." Greenspan said consumer debt burdens aren't a threat to the U.S. economic expansion because interest costs have fallen and financial obligations as a ratio to income aren't rising. Greenspan did say renters may be having more credit problems because they can't take advantage of rising property values to increase their wealth and sometimes have large student loans. Greenspan also said that "the U.S. economy appears to have made the transition from a period of sub-par growth to one of more vigorous expansion." He urged Congress to cut spending in order to retain tax cuts that stimulate the economy. Finally, Greenspan said "any tax increase large enough to reduce the deficit would pose significant risks to economic growth."

BOTTOM LINE: The very strong retail spending reports released last week lead me to believe that the consumer is quite confident about their financial situation. It is likely that politics and the mainstream media's focus on the current job situation led to the lower consumer confidence readings. The economy is doing very well right now and is poised to post the best year of growth in over 2 decades. Very strong consumer spending and the recent pick-up in corporate spending, with little inflation, strenthen this view. Employment is always a lagging economic indicator and to focus on this one data point is like looking in the rear-view mirror of an automobile while driving. I would be very worried if 4-6 months from now significant job creation hadn't materialized. All signs point to the contrary as of now.

Weekly Scoreboard*

Indices
S&P 500 1,144.94 +.07%
Dow 10,583.92 -.33%
NASDAQ 2,029.82 -.40%
Russell 2000 585.56 +.98%
Wilshire 5000 11,172.88 +.26%
Volatility(VIX) 14.55 -10.35%
AAII Bullish % 41.58 -26.34%
US Dollar 87.31 +.24%
CRB 272.90 +3.57%

Futures Spot Prices
Gold 396.80 -.43%
Crude Oil 36.16 +5.73%
Natural Gas 5.42 +4.45%
Base Metals 113.05 +.92%
10-year US Treasury Yield 3.97% -3.05%
Average 30-year Mortgage Rate 5.58% unch.

Leading Sectors
Homebuilders +7.11%
Restaurants +3.50%
Iron/Steel +3.26%

Lagging Sectors
Semis -1.48%
Software -1.55%
Defense -1.70%

*% Gain or loss for the week

Friday Close

S&P 500 1,144.94 unch.
NASDAQ 2,029.82 -.14%

Leading Sectors
Homebuilders +2.75%
Iron/Steel +2.03%
Fashion +1.22%

Lagging Sectors
Airlines -.66%
Hospitals -.72%
Semis -1.49%

Other
Crude Oil 36.16 +1.83%
Natural Gas 5.42 +.46%
Gold 396.80 +.33%
Base Metals 113.05 +.13%
U.S. Dollar 87.31 -.40%
10-Yr. Long-Bond Yield 3.97% -1.57%
VIX 14.55 -1.89%
Put/Call .72 +14.29%
NYSE Arms 1.33 +51.14%

After-hours Movers
None of Notes

Recommendations
Janney Montgomery cut ILXO to Hold from Buy. Goldman Sachs recommends buying the Yen vs. the Euro. GS also recommending to go long Puts on June WTI crude with a 29.00/bbl. strike. Goldman expects crude to reach $26.00/bbl. by June. GS is revising their average summer NYMEX natural gas price forecast up by $.75/mmBtu to $5.25/mmBtu.

After-hours News
U.S. stocks were mixed today, as semis led tech lower with most other sectors showing strength. The yield on the U.S. 10-yr. Treasury note fell today as the revised GDP deflator showed little inflation. As well, Fed Governor Bernanke told reporters yesterday the Fed will be "patient and watch the data to see how things continue" on inflation. The U.S. Congressional Budget Office says that President Bush's budget request to Congress would cut the deficit in half by 2007. Deutsche Bank's 40-story tower next to the World Trade Center site will be sold to New York state for $90M and demolished to make more room for redevelopment at Ground Zero.

BOTTOM LINE: The Portfolio finished the day about even. I covered a few cyclical shorts and sold some technology longs near the close to reposition the Portfolio, while maintaining 75% net long market exposure. Bonds are on the verge of breaking out technically. This is very strange considering the continued strength in commodities prices and all of the recent talk of inflation worries. The rotation out of tech and into consumer cyclicals seems to have a little further to go. With interest rates dropping and tax stimulus coming, investors are betting the valuations in retail and homebuilding are too low relative to tech. I expect tech to regain its leadership role in the 2nd quarter.

Mid-day Update

S&P 500 1,147.89 +.26%
NASDAQ 2,030.70 -.07%

Leading Sectors
Homebuilders +2.37%
Iron/Steel +2.11%
HMO's +1.28%

Lagging Sectors
Hospitals -.25%
Airlines -.68%
Semis -1.50%

Other
Crude Oil 36.10 +1.66%
Natural Gas 5.46 +1.28%
Gold 396.80 +.33%
Base Metals 113.05 +.13%
U.S. Dollar 87.39 -.32%
10-Yr. Long-Bond Yield 3.98% -1.28%
VIX 14.36 -3.17%
Put/Call .84 +33.33%
NYSE Arms 1.10 +25%

Market Movers
SPW -19.8% on 4Q estimate miss, weak outlook and multiple downgrades.
DNA +5.2% on U.S. approval to sell its Avastin colon-cancer drug.
ILXO +16.7% on takeover by Genzyme, GENZ -5.4%.
MRVL +5.1% on strong 4Q, raised 1Q guidance and 2-for-1 split announcement.
RDY -13.0% after the Indian drugmaker was barred by a U.S. appeals court from selling a version of Pfizer's hypertension drug Norvasc.
PDE -13.1% after weak 4Q and downgrade by Merrill.
ADSK +9.3% after significantly beating 4Q estimates and raising 1Q guidance significantly, multiple upgrades.

Economic Data
Revised GDP was 4.1% vs. expectations of 3.8%.
Revised Personal Consumption was 2.7% vs. expectations of 2.6%.
Revised GDP Price Deflator was 1.2% vs. expectations of 1.1%.
Univ. of Mich. Consumer Confidence for Feb. was 94.4, ahead of the 94.0 estimate.
Chicago Purchasing Manager Index for Feb. was 63.6 vs. 63.5 estimates.

Recommendations
Goldman positive on MRVL, raising estimates and reiterating outperform. GS reiterates Outperform on SNDK after Analyst Day. Citi Smith Barney positive on BRCM and MRVL.

Mid-day News
U.S. stocks are mixed this afternoon, as technology shares' weakness is offset by broad strength in the rest of the market. The Supreme Court will discuss whether to take a case by the Department of Justice questioning the legality of certain Class II slot machines, with a decision expected to be published on Monday, March 1. If the S.C. decides to take the case, it may potentially take away one of the slot makers growth opportunities, according to Goldman Sachs. Autodesk(ADSK) CEO said on CNBC that customer demand is very strong. Iraq plans to boost crude-oil exports to pre-war levels of 2.2 million barrels a day by late March or early April. The U.S. dollar will continue to weaken through year-end according to traders and strategists surveyed by Bloomberg. The Chicago Purchasing Manager's Index held close to its highest level in almost 10 years. As well, a measure of employment showed more companies are adding jobs in the area. The judge in the Martha Stewart trial dismissed a securities fraud charge, the most serious offense in the indictment.

BOTTOM LINE: The Portfolio is about even on the day. I haven't made any trades yet. Market exposure equals 75% net long. I will likely sell a few of my tech positions and rotate into a more consumer cyclicals, keeping market exposure at 75% net long.

Friday Watch

Earnings Announcements
Company/Estimate
TTWO/.70
IART/.30

Splits
None of note

Economic Data
4Q revised GDP estimated at 3.8% from 4.0% actual.
4Q revised Personal Consumption estimated at 2.6% vs. 2.6% actual.
4Q revised GDP Price Deflator estimated at 1.1% vs. 1.0% actual.
University of Michigan Consumer Confidence for Feb. estimated at 94.0 vs. 93.1 prior month.
Chicago Purchasing Manager's Index for Feb. estimated at 63.5 vs. 65.9 last month.

Late-Night News
Japanese Industrial Production rose 3.4% in January vs. expectations of 2.5%. Pimco purchased about $3B of U.S. Treasury inflation-linked securities at the government's January auction, anticipating a return of inflation. Disney may be interested in buying InterActiveCorp(IACI) to discourage Comcast, Business Week reported. George Soros raised his stake in Valentis(VLTS) to 20%, Business Week said. Disney said that more than 30% of its shareholders may not back Chairman and CEO Eisner at next week's meeting, the WSJ reported. China's growing demand for cars is causing global rubber prices to surge. Michelin and Bridgestone said they will raise prices to compensate. Investors are becoming increasingly concerned about junk bonds, Citi Smith Barney said.

Late-Night Trading
Asian markets are mostly up, ranging from +.50% to +2.0%.
S&P 500 indicated +.22%.
NASDAQ indicated +.30%.

BOTTOM LINE: The strength in Japan, Korea and Hong Kong tonight bodes well for tech stocks tomorrow. It is likely that Consumer Confidence will fall below expectations again and I will closely watch the market's reaction to this news. The Chicago Purchasing Manager's report should meet or beat expectations. The Portfolio remains 75% net long and I will likely make some trades tomorrow on the long side.

Thursday Close

S&P 500 1,144.91 +.11%
NASDAQ 2,032.57 +.47%

Leading Sectors
Homebuilders +3.55%
Networking +1.46%
Gaming +1.38%

Lagging Sectors
Drugs -.17%
Papers -.34%
Defense -.65%

Other
Crude Oil 35.37 -.39%
Natural Gas 5.41 +.26%
Gold 395.90 +.10%
Base Metals 112.90 +.13%
U.S. Dollar 87.66 +.47%
10-Yr. Long-Bond Yield 4.03% +.67%
VIX 14.83 -.67%
Put/Call .63 -17.11%
NYSE Arms .88 +12.82%

After-hours Movers
ADSK +12.6% after significantly beating 4Q estimates and raising guidance substantially.
MCDTA +7.0% after beating 4Q and reiterating 1Q guidance.
CHINA +2.9% after strong 4Q.
ILXO +17.45% on $1B takeover offer by Genzyme. GENZ -4.3%.
MRVL +4.9% on strong 4Q and 2-for-1 split announcement.

Recommendations
Goldman Sachs reiterates Attractive rating on AMR and raises estimates as strengthening demand offsets higher oil prices.

After-hours News
U.S. markets finished mostly higher today, as strength in homebuilding and technology shares offset weakness in the defense sector. After the close, Business Objects(BOBJ) pulled out of 2 investor conferences next week, leading traders to speculate a secondary is coming. The U.S. may limit exports of scrap steel to ensure that the raw material used to make steel bars and other products is in sufficient supply to meet domestic demand, citing the Korean Trade Promotion Agency. Four Season may offer to buy Savoy Group, the owner of London's Claridge's hotel, for as much as $1.5 billion, the London-based Times said. Genentech said it won U.S. approval for its Avastin drug, the first caner drug that chokes off a tumor's blood supply. The U.S. Justice Department will seek to block Oracle's $9.4B hostile bid for Peoplesoft. "A more meaningful pick-up in hiring cannot be far away, as capital spending is now growing at a 15-20% rate in the current quarter," said Deutshe Bank's Joseph LaVorgna. As well, Fed Governor Susan Bies, in a speech to the NY Forecasters Club, said "job growth may pick-up perhaps substantially over the course of the year."

BOTTOM LINE: The Durable Goods report makes me more confident in my 5%+ GDP prediction for 1Q. I am seeing comments by CEO's that lead me to believe that they FINALLY believe in the strength of the recovery. Their confidence, combined with recent data points showing a stretched labor force and some supply shortages, lends more credence to recent Fed talk of a pick-up in job creation soon. I didn't make any change today, thus leaving the Portfolio with 75% net long market exposure.