Economic Week in Review

ECRI Weekly Leading Index 134.10 -.07%

Concerns that inflation will soon accelerate are "premature," meaning the U.S. central bank can afford to wait before boosting interest rates, said Michael Moskow, president of the Federal Reserve Bank of Chicago. However, he also reiterated that the Fed can't maintain its rate stance "indefinitely." Moskow also said that the increase in raw materials costs was being offset by deflationary forces. Finally, he said that he isn't seeing signs that high energy prices are impacting consumers, business output or business production.

U.S. Durable Goods Orders rose 2.5% in February vs. expectations of +1.5% and -2.7% in January. Orders for computers, motor vehicles and aircraft led the way. Unfilled orders for business equipment, which gauges the ability of manufacturing to keep pace with demand, increased .7% in February, the biggest rise since October. Excluding transportation equipment, Durable Goods Orders declined .3% vs. expectations of a 1.5% rise and a .6% gain in January.

New Home Sales were 1163K in February vs. expectations of 1100K and 1099K in January. Purchases rose 12% in the Northeast, the fastest since January 1997. "The very high level of activity really ensures that consumer spending remains golden through the first half of this year," said Ken Mayland, chief economist of Clear View Economics.

The final GDP reading for the 4th quarter was 4.1%. This increase followed a gain of 8.2% in the 3rd quarter, resulting in the fastest six-month growth in almost 20 years. Corporate profits rose for a third consecutive quarter and were up 31% from the same quarter in 02, resulting in rapidly falling valuations for U.S. equities. Economists are now projecting the economy to growth 4.6% for all of 2004, the fastest economic growth since 1984.

The final Univ. of Mich. Consumer Confidence reading for March came in at 95.8 vs. a previous reading of 94.1 and expectations of 93.7. Income-tax rebates are up 5% on average from last year which may be buoying consumers until companies step up the pace of hiring, Bloomberg reported.

Macroeconomic Advisors, a private economic forecaster the Fed pays close attention to, says that for the rest of this year and 2005, the U.S. should see the heady combination of strong economic growth, payroll job gains of 200,000 a month, additional increases in corporate profits, significant gains in stock prices, only moderate rising interest rates and continued very low inflation.

BOTTOM LINE: The Fed, through multiple statements, made it clear last week that they do not see a significant pick-up in inflation, notwithstanding rising energy and base material prices. However, they also made it clear that they are going to raise rates at the first sign of sustainable job growth. I believe it will take two consecutive "above-expectations" jobs reports to prompt the Fed to raise rates. In my opinion, this will occur within the next 4-6 months at most. Ethan Harris, chief U.S. economist at Lehman Brothers said, "There's a legitimate concern that the general hue of news coverage on the economy has been very negative lately, and there's a risk of self-fulfilling expectations here." I agree with this statement and find it amazing that the Univ. of Mich. Consumer Confidence reading increased in the last two weeks. This is a significant development in my opinion. The U.S. consumer saw multiple terror attacks, the NASDAQ correcting almost 12%, record-high gas prices, very negative political campaigning and "slower-than-expected" job growth, yet consumer's confidence rose. Maybe the U.S. consumer is finally seeing through the mainstream media's intense focus on negativity and is realizing their net worth is at all-time highs, U.S. economic growth is at 20-year highs, the housing market is the best in U.S. history, corporate profits are near all-time highs, job creation is inevitable, there has not been a terror attack on U.S. soil since 9/11, inflation is near all-time lows, interest rates are near 46-year lows, unemployment is relatively low and falling, entrepreneurship is climbing, more parents are able to afford to send their children to college/graduate school and our standard of living is the highest in the world and climbing.

Weekly Scoreboard*

Indices
S&P 500 1,108.06 -.15%
Dow 10,212.97 +.26%
NASDAQ 1,960.02 +1.00%
Russell 2000 572.92 +.38%
Wilshire 5000 10,840.18 -.12%
Volatility(VIX) 17.33 -9.50%
AAII Bullish % 31.48 -18.45%
US Dollar 88.89 +.84%
CRB 278.75 -.09%

Futures Spot Prices
Gold 423.20 +2.30%
Crude Oil 35.73 -5.10%
Natural Gas 5.4 -3.42%
Base Metals 112.11 -.85%
10-year US Treasury Yield 3.84% +1.59%
Average 30-year Mortgage Rate 5.40% +.37%

Leading Sectors
Airlines +4.23%
Semis +3.43%
Gaming +3.39%

Lagging Sectors
Broadcasting -2.77%
Energy -3.09%
Oil Service -4.49%

*% Gain or loss for the week

Friday Close

S&P 500 1,108.06 -.10%
NASDAQ 1,960.02 -.36%

Leading Sectors
Airlines +2.42%
Iron/Steel +1.96%
I-Banks +1.37%

Lagging Sectors
Restaurants -1.09%
Wireless -1.19%
Semis -1.25%

Other
Crude Oil 35.73 +.62%
Natural Gas 5.39 +1.11%
Gold 422.20 +1.27%
Base Metals 112.11 +1.52%
U.S. Dollar 88.89 -.01%
10-Yr. Long-Bond Yield 3.83% +2.47%
VIX 17.33 -3.08%
Put/Call .77 +11.59%
NYSE Arms .88 +100.0%

After-hours Movers
RIMM +4.7% after saying it will receive a payment for an undisclosed amount from Good Technology to settle a series of lawsuits between companies.
OSUR +6.6% on a continued rise after winning U.S. approval to sell the first kit for rapid detection of the virus that causes AIDS in saliva.

Recommendations
TheStreet.com has a positive article on gold stocks, guests' favorites are PDG, EGO, CBJ, RIC and GSS.

After-hours News
U.S. stocks finished slightly lower on late-day profit-taking before the weekend, sending the S&P 500 to its third straight weekly loss. U.S. Treasury Notes had their biggest decline in two months after measures of personal income and consumer confidence were better-than-expected.

BOTTOM LINE: The Portfolio had a good day today as several longs rose substantially, offsetting minor losses in my short positions. The late-day sell-off led by semis was to be expected as many stocks had risen 8-12% in a very short period of time. I didn't trade today and the Portfolio is still 125% net long.

Mid-day Update

S&P 500 1,112.37 +.29%
NASDAQ 1,970.44 +.17%

Leading Sectors
Airlines +2.95%
I-Banks +1.46%
Oil Service +1.42%

Lagging Sectors
Restaurants -.45%
Hospitals -.50%
Wireless -.70%

Other
Crude Oil 35.33 -.51%
Natural Gas 5.35 +.07%
Gold 420.80 +.91%
Base Metals 112.11 +1.52%
U.S. Dollar 89.00 +.11%
10-Yr. Long-Bond Yield 3.81% +1.97%
VIX 16.85 -5.76%
Put/Call .77 +11.59%
NYSE Arms .65 +45.45%

Market Movers
GE +3.2% on addition to Focus 1 list by Merrill Lynch.
SWBD +26.9% on $160M acquisition by INSP.
SINT +26.8% after announcing a contract renewal with the U.S. government for as much as $800M.
INSP +14.2% after saying acquisition of SWBD will add $10-14M revenues in 2H.
RECN +14.5% after upgrade to Outperform at JMP Securities.
ATRS +11.1% after Pacific Crest raised it to Strong Buy.
CAH +4.2% after Goldman upgrade to Outperform.
MYOG -39.2% after saying its experimental Enoximone drug failed to meet the main goal of an advanced study. Multiple downgrades.

Economic Data
Personal Income for February +.4% vs. +.3% expectations.
Personal Spending for February +.2% vs. +.4% expectations.
Univ. of Mich. Consumer Confidence final reading for March 95.8 vs. estimates of 93.7.

Recommendations
CAH and MCK upgraded to Outperform at Goldman Sachs. GS reiterates bullish view on newspaper stocks, favorites are GCI and TRB. GS reiterated Outperform on KRB, SPLS, YHOO and AMT. Citi Smith Barney upgraded BBY to Buy, $62 target. Citi reiterated Buy on LPX and EEFT. Citi would Buy SEBL ahead of quarterly report on recent weakness. Citi made positive comments on UTSI and MOT after CTIA conference. Citi would Buy VZ and BLS at current levels. HLT and TV raised to Overweight at Morgan Stanley. MSPD rated Outperform at Thomas Weisel. GE added to Focus 1 list at Merrill Lynch. DRL rated Buy at Merrill. DUK rated Sector Outperform at CIBC. ET, NITE and AMTD raised to Strong Buy at Raymond James. NWL raised to Overweight at JP Morgan. TheStreet.com had a guest that was positive on ADI and TXN. TSC also has a positive column on UTX.

Mid-day News
U.S. stocks are modestly higher mid-day on continued strength in airlines and an upgrade of GE by Merrill Lynch. Russian President Putin said it was unacceptable that terrorists believed their bombings in Madrid defeated Spain's ruling party, and he urged the international community to unite, Interfax reported. Twaiwan's parliament failed to agree on a recount in the disputed presidential election and riot police clashed with protesters trying to block final certification of President Chen Shui-bian's victory. Continental Air raised fares for the second time in a month to help cover rising fuel costs, Bloomberg reported. A stretch of I-95 near Bridgeport, Connecticut may be closed for as long as 2 weeks because of structural damage caused by an oil tanker truck that collided with a car and caught fire last night. El Paso Corp. said it has been notified that the SEC is conducting a formal investigation of the 41% reduction in the company's oil and gas reserves, Bloomberg reported. U.S. personal spending rose .2% in February and consumer confidence unexpectedly climbed this month, suggesting the economy is maintaining strength, Bloomberg reported.

BOTTOM LINE: The Portfolio is up today as strength in my airline and select technology positions offset rising shorts. I have not traded today and the Portfolio is still 125% net long. I expect the market will either maintain current levels or sell-off a bit later in the day on rising interest rates, weekend terror fears and profit-taking. However, I expect the rally to regain momentum early next week.

Friday Watch

Earnings Announcements
Company/Estimate
DLP/.24
DISH/.09
MEDQ/.20
BREL/.42

Splits
SCHN 3-for-2

Economic Data
Personal Income for February estimated +.3% vs. +.2% in January.
Personal Spending for February estimated +.4% vs. +.4% in January.
Final Univ. of Mich. Consumer Confidence for March estimated at 93.7 vs. 94.1 preliminary.

Recommendations
Oppenheimer raised AVP price target to $94. Goldman Sachs said their meetings earlier this week with tower company and carrier executives at the CTIA wireless conference confirm their bullish thesis for tower stocks. ASFI is undervalued compared to its peers according to Business Week. CPD may be bought by India's Sun Pharmaceutical Industries, reported Business Week.

Late-Night News
Asian stocks are mostly higher with Japan's Nikkei leading the way again. Japanese bonds plunged as the Nikkei surged 1.85% to it highest level since June 2002 after a report showed household spending rose twice as fast as expected. The winner of Taiwan's presidential election recount may find his initiatives to revive the economy and change the island's relationship with China thwarted by questions over his legitimacy, according to executives and analysts.

Late-Night Trading
Asian Indices +.25% to +1.75%.
S&P 500 indicated +.07%.
NASDAQ indicated +.04%.

BOTTOM LINE: The Portfolio is 125% net long and I expect a continuation of today's rally for the next several days. Profit-taking will likely emerge tomorrow at some point, but I do not expect it to be significant. The Portfolio is overweight technology, airlines, gaming and homebuilding. Areas of focus on the short-side are oil-service and retail.

Thursday Close

S&P 500 1,109.19 +1.64%
NASDAQ 1,967.17 +3.02%

Leading Sectors
Airlines +5.11%
Networking +4.46%
Internet +4.14%

Lagging Sectors
Tobacco +.41%
Drugs +.32%
Energy -.26%

Other
Crude Oil 35.52 +.03%
Natural Gas 5.33 -.02%
Gold 416.40 -.12%
Base Metals 110.43 -1.23%
U.S. Dollar 88.95 +.06%
10-Yr. Long-Bond Yield 3.73% unch.
VIX 17.88 -9.74%
Put/Call .69 -22.47%
NYSE Arms .44 -64.52%

After-hours Movers
ET +4.72% after announcing it will replace FleetBoston is S&P 500 Index.
OMNI +5.06% after reporting strong 4Q earnings.
ASKJ +5.57% on no news.
UTEK -4.93% after lowering 1Q forecast and maintaining 04 estimates.
MYOG -30.05% after saying its Enoximone heart-failure drug fails to meet study goal.

Recommendations
Goldman Sachs just released its annual survey of slot floor managers, reinforcing their positive view on the slot manufacturers. It indicates that: 1)there is more room to go in cashless 2)mid-size casinos are providing a second leg to the accelerated replacement cycle 3)significant demand for low and multi-denominational exists and 4)IGT still sets the industry's pace. GS said World pulp data for Feb. reflects a tightening pulp market, prices moving higher, positive for WY, IP, TBC.CA, BOW and ARA. Cramer, of TheStreet.com, likes GS at current levels.

After-hours News
U.S. stocks finished substantially higher on Thursday as falling energy prices, strong economic data and better-than-expected earnings reports propelled the S&P 500 to its largest gain in six months. After the close, the Financial Times reported at least 40 U.S. congressman and senators have criticized the European Union's decision to levy a $609M fine on Microsoft. Executives pay packages will probably fall in coming years as compensation committees respond to accounting changes and upset investors, Business Week reported. U.S. House Leader Delay has been talking with colleagues about the possibility he will have to temporarily leave his post if he's indicted for alleged campaign finance abuses, Roll Call reported. Progressive Corp. tops Business Week's eighth annual rankings of best performing members on the S&P 500 because it never stops trying to find ways to do things cheaper and faster for its customers, Business Week reported. AOL could be worth $10.6B in a sale, Business Week reported. Jamie Olis, a former v.p. of finance at Dynegy, was sentenced to 24 years in prison for his role in a $300M accounting fraud at the company. Hewlett-Packard sued Gateway alleging infringement of six patents.

BOTTOM LINE: The Portfolio had a good day today as my shorts were unchanged and my longs rose substantially. I added a few other beaten-up special situation longs in the afternoon, bringing the Portfolio's market exposure to 125% net long. Terror threats and Micron's disappointing earnings report didn't even slow down the rally today. Thus, with falling oil prices and quarter-end positioning in the near-term, I expect further gains for U.S. equities over the next few days.