Economic Week in Review

ECRI Weekly Leading Index 134.40 -.15%

The Empire State Factory Index, a gauge of manufacturing in New York state, fell to 25.3 this month from a record high reading of 42.1 in February. This failed to meet expectations of 38.0. Anthony Chan, chief economist at Banc One said, "...we are likely to see the manufacturing sector continue to take 2 steps forward followed by a singe step back."

U.S. Industrial Production rose .7% in February versus expectations of a .4% rise. February's strong number followed a .8% rise in January, resulting in the largest 2-month gain since October-November 1999 during the final blow-off stage of the bubble. Strong demand, a lower dollar and the need to replenish inventories all suggest industrial production will remain strong.

U.S. employers plan to boost hiring during the second quarter, at the fastest pace in over 3 years, because demand for products and services is beyond the capacity of their current workforce, according to the latest Manpower Inc. survey.

U.S. housing starts fell to 1855K in February versus 1903K in January and expectations of 1930K. The 5th wettest February on record contributed to a 1.6% drop in the South, where about half of all new homes are built. Toll Brothers, the largest U.S. builder of high-end homes, said backlogs of houses ordered and awaiting construction totaled 5,094 homes at the end of January, larger than their entire delivery for last year.

The Federal Reserve policy makers reiterated they will be "patient" in holding down borrowing costs to help boost job growth, voting to leave the benchmark U.S. interest rate at a 45-year low of 1%. In their economic outlook, the Fed maintained their view that the risk of deflation equals that of inflation.

The Consumer Price Index rose .3% in February, meeting expectations, and lower than January's .5% rise. Core prices were 1.2% higher in the 12 months ended in February, the smallest rise since 1966. U.S. producer prices rose .6% in January versus expectations of a .4% rise and a .2% increase in December. This increase was mainly attributed to higher costs for gasoline and heating oil. Core prices were up .9% in the 12 months ended in January.

The Leading Indicators Index was unchanged in February versus expectations of a .1% rise and a .4% rise in January. The index is still 3.3% higher than the previous peak reached in May of 2002.

The Fed Bank of Philadelphia's general economic index registered a reading of 24.4 in March versus expectations of 29.0 and a reading of 31.4 in February. In a special question by the Philly Fed, 73.2% of the participants said they've had job openings in the last 3 months and 89.2% said problems filling those positions were due to a lack of "qualified applicants." Almost 77% said they anticipate job openings in the next 6 months.

BOTTOM LINE: Overall, the reports were mixed. Industrial production is still at very high levels. The fall in the Philly Fed and Empire State manufacturing reports was likely a result of exceptionally high readings the prior month, indicating just a pause. There are the initial signs of a pick-up in inflation, however the current readings are not high enough to be of concern. Based on the Fed's statements, I continue to believe that a rate hike will not occur until a couple of really strong monthly employment reports are released. Last week's reports also suggest that companies are having trouble meeting demand with their current labor force, implying a pick-up in hiring will occur very soon.

Weekly Scoreboard*

Indices
S&P 500 1,109.78 -.96%
Dow 10,186.60 -.52%
NASDAQ 1,940.47 -2.23%
Russell 2000 570.74 -2.08%
Wilshire 5000 10,852.98 -1.05%
Volatility(VIX) 19.15 +4.65%
AAII Bullish % 38.30 -6.51%
US Dollar 88.13 +.56%
CRB 279.70 +3.02%

Futures Spot Prices
Gold 412.70 +4.32%
Crude Oil 38.08 +5.14%
Natural Gas 5.58 +.04%
Base Metals 113.07 +4.13%
10-year US Treasury Yield 3.78% unch.
Average 30-year Mortgage Rate 5.38% -.55%

Leading Sectors
Iron/Steel +3.80%
Commodity +1.76%
Oil Service +1.26%

Lagging Sectors
Networking -4.42%
Semis -4.48%
Airlines -7.92%

*% Gain or loss for the week

Friday Close

S&P 500 1,109.78 -1.12%
NASDAQ 1,940.47 -1.12%

Leading Sectors
Iron/Steel +3.97%
Broadcasting +.15%
Computer Service +.01%

Lagging Sectors
Disk Drive -1.97%
Oil Service -2.29%
Semis -3.60%

Other
Crude Oil 38.08 +.40%
Natural Gas 5.58 -.87%
Gold 412.70 +.34%
Base Metals 113.07 +.31%
U.S. Dollar 88.13 +.56%
10-Yr. Long-Bond Yield 3.77% +.45%
VIX 19.15 +3.35%
Put/Call .80 1.02 +24.39%
NYSE Arms 2.03 +93.33%

After-hours Movers
None of note.

Recommendations
Goldman Sachs reiterated Outperform on PAYX. GS reiterates Outperform on X. GS reiterates Outperform on CSCO on recent pullback saying 3 recent data points suggest business is tracking at or above estimates and they see upside later in the year as the IT buying cycle continues to strengthen.

After-hours News
U.S. stocks fell today as morning weakness in Semis spread to the rest of the market by later afternoon. Terrorism fears ahead of the weekend also contributed to the drop. Metal and mining stocks advanced after Nucor Corp.(NUE), the largest U.S. maker of steel using recycled metal, boosted its profit forecast as it passed on to customers the higher cost of scrap, which has soared in the past year on demand from China. Profit for Nucor's fiscal first quarter will be .80-1.00 a share, higher than its previous forecast of .40-.60 cents.

BOTTOM LINE: The Portfolio was up today, notwithstanding its 100% net long exposure, as a few of my longs were up substantially and my shorts declined. I rotated out of some tech on the afternoon breakdown in the Morgan Stanley High-tech Index and into a few new cyclical longs, leaving the Portfolio 100% net long. I am anticipating at least a short-term bounce early next week barring any major weekend terror acts.

Mid-day Update

S&P 500 1,118.93 -.31%
NASDAQ 1,962.52 unch.

Leading Sectors
Iron/Steel +4.39%
Software +.83%
Papers +.60%

Lagging Sectors
Networking -.89%
Airlines -1.12%
Semis -1.35%

Other
Crude Oil 38.00 +.18%
Natural Gas 5.61 -.37%
Gold 410.10 -.29%
Base Metals 113.07 +.31%
U.S. Dollar 88.28 +.73%
10-Yr. Long-Bond Yield 3.78% +.70%
VIX 18.50 -.16%
Put/Call .95 +15.85%
NYSE Arms 1.30 +23.81%

Market Movers
ADBE +9.6% after significantly beating 1Q estimates and raising 2Q guidance.
STTX +18.9% after boosting 2Q forecast substantially.
CACS +11.6% after Cingular selected it for wireless backhaul solutions.
QCBC +17% after takeover by BPOP.
NUE +6.89% after boosting 1Q guidance substantially.
PSRC -16.4% after meeting 3Q estimates and lowering 4Q guidance.
ACVI -17% after lowering 1Q guidance.

Economic Data
None of note.

Recommendations
ADBE raised to Buy at Citi Smith Barney, target $47. Citi saying to buy MOT on weakness ahead of next week's CTIA Conference. VRTS raised to Buy 2 at UBS, target $35. SFD raised to Outperform at CSFB, target $32. SAP raised to Sector Outperform at CIBC, target $45. BAC, FBF raised to Outperform at Bear Stearns. HBAN, ASO cut to Sell at Merrill. PGR raised to Overweight at Lehman, target $105. ROK raised to Overweight at Lehman, target $38. MGA raised to Overweight at J.P. Morgan. SOHU raised to Overweight at Pacific Growth. Cramer of TheStreet.com thinks BDK could pre-announce to the upside. Morgan Stanley says semi demand will stay strong in 04 and recommends overweighting the sector following the recent 20-25% pullback. Goldman Sachs reiterates Outperform on AMGN. GS sees improved newspaper stock performance in 04 led by surging help-wanted ad sales, favorites are TRB and GCI. GS says PFE is favorite pharma stock and does not believe drug re-importation will occur this year.

Mid-day News
Stocks are mixed mid-day on stength in commodity-related stocks and weakness in semis. Merrill Lynch increased its forecast for mobile-phone shipment this year to 20 percent from a previous 16 percent due to growing markets in China, India and Russia. Demand for semis was the highest in 3 years in February, reported TheStreet.com. Saddam Hussein took $10.1 billion, $3.5 billion more than previously estimated, in smuggled oil revenue from the UN Oil for Food Program, the Washington Post reported. San Francisco home prices surged 14% in February to record highs, the San Francisco Chronicle reported. Oracle expects to soon agree to sell its financial-management software to 100 customers in Asia, Dow Jones reported. Cramer says on CNBC that high oil prices affect 10% of S&P positively and 20% negatively. Pakistani forces continue to battle as many as 400 fighters along the Afghan border who appear to be protecting a "high-value" target. Adobe’s CFO said that he is excited about economic growth and that they are hiring worldwide.

BOTTOM LINE: The Portfolio is having a good day as a few of my longs are up substantially. I expect the recent weakness in the last hour will not persist throughout the day. I haven't executed any trades today, however I may add a few longs on any significant weakness. Goldman Sachs is estimating S&P 500 operating EPS to grow 10% in 04 and 8% in 05, down from 29% in 03. I view this as a positive for the market as companies should exceed these low expectations by a wide margin. The Portfolio is 100% net long.

Friday Watch

Earnings Announcements
Company/Estimate
None of note.

Splits
None of note.

Economic Data
None of note.

Recommendations
Goldman Sachs reiterates Outperform on AGI, MSFT, PAYX, BIIB, UTX and SLR. GS reiterates that IGT is top pick among slot manufactures. GS reiterates Underperform on BMY. Business Week's "Inside Wall Street" column is positive on EP. It also says MEDI could be takeover target.

Late-Night News
Asian stocks are mixed on strength in Korea's Kospi and weakness in Japan's Nikkei. Microsoft is cutting the price on the Xbox to $149. There is still no word on the success of the Pakistani offensive along the Afghan border where bin Laden's top aide is said to be surrounded. U.S. Secretary of State Colin Powell arrived in Baghdad on the eve of the one-year anniversary of the U.S. invasion of Iraq, AFP reported.

Late-Night Trading
Asian Indices -.50% to +1.0%.
S&P 500 indicated +.30%.
NASDAQ indicated +.42%.

BOTTOM LINE: Option expiration and a stellar report from Adobe after the close of trading today could prove to be the catalysts for a good day tomorrow. Option expiration will likely add to volatility as well. The Portfolio is 100% net long. I will likely add tech exposure on a break above 482 on the Morgan Stanley High-tech Index. A break below 473 on the MSH and I will likely exit some tech longs.

Thursday Close

S&P 500 1,122.32 -.13%
NASDAQ 1,962.44 -.72%

Leading Sectors
Oil Service +.86%
Energy +.81%
Insurance +.57%

Lagging Sectors
Semis -1.32%
Restaurants -1.79%
Airlines -2.35%

Other
Crude Oil 37.80 -.34%
Natural Gas 5.59 -.71%
Gold 411.90 +.15%
Base Metals 112.72 +.56%
U.S. Dollar 87.64 -1.15%
10-Yr. Long-Bond Yield 3.75% +1.06%
VIX 18.53 +2.32%
Put/Call .82 +2.50%
NYSE Arms 1.05 +57.62%

After-hours Movers
ADBE +7.2% after significantly beating 1Q estimates and boosting 2Q estimates.
PSRC -11.0% after meeting 3Q estimates and lowering 4Q guidance.

Recommendations
TIBX price target raised to $12 at Lazard Freres. KBH price target raised to $90 at Friedman Billings. ABN Amro says the U.S. dollar will strengthen against the euro in the next 12 months as investment flows into the U.S. improve. Goldman reiterates Outperform on MDT, $54 target. Merrill Lynch named PXD Focus 1 stock.

After-hours News
U.S. stocks finished slightly lower after a strong afternoon rally on rumors that a "high value" al-Qaeda target was cornered on the Pakistani/Afghan border. After the close, United Airlines' parent UAL said it plans to postpone completion of its bankruptcy reorganization until later this summer, Bloomberg reported. UN Secretary-General Annan said he will send a political team to Iraq as early as next week to help form a transitional government by June 30.

BOTTOM LINE: The Portfolio was down today mainly from weakness in my technology long positions. However, I kept the positions in tact as the mornings lows held and the afternoon rally was strong. It wasn't surprising that rumors surfaced that an al-Qaeda leader was cornered, but the market's very positive reaction to those rumors was surprising. It seems as though the market is developing the type of underlying strength needed to form a bottom. I would expect a positive day tomorrow on better performance from tech as Adobe reported a very good quarter and guidance after the close. The Portfolio is 100% net long.