Mid-day Update

S&P 500 1,143.66 +.16%
NASDAQ 2,062.51 +.26%

Leading Sectors
HMO's +4.09%
Nanotechnology +2.78%
Gaming +2.20%

Lagging Sectors
Oil Service -.53%
I-Banks -.80%
Homebuilders -2.64%

Other
Crude Oil 34.23 -.47%
Natural Gas 5.86 +.83%
Gold 417.00 -1.30%
Base Metals 1112.73 -1.78%
U.S. Dollar 89.30 +.89%
10-Yr. Long-Bond Yield 4.22 +1.85%
VIX 15.54 -.64%
Put/Call .73 +10.61%
NYSE Arms .65 +30.0%

Market Movers
NT -4.45% after saying the SEC issued formal order of investigation related to previous restatement.
CI +13.2% after significantly raising 1Q and 04 estimates.
OHP +10.14% after Wall Street Journal reported that it may be acquired by WC.
CVS +6.67% after announcing solid same-store-sales for March and the acquisition of 1,260 Eckerd drugstores from J.C. Penney, making it the number 1 drugstore operator in the U.S.
CCRD -20.2% after lowering 1Q and 2Q estimates, multiple downgrades.
Homebuilders and Mortgage providers are falling across the board again on interest rate fears.

Economic Data
ISM Non-Manufacturing for March 65.8 vs. expectations of 61.5.

Recommendations
Goldman Sachs reiterated Outperform on EMC, SAP, VLO, UNH and MO. Citi Smith Barney raised estimates and reiterated Buy on DNA ahead of earnings. Citi says their top software picks are MSFT, SEBL and INFA. Citi expects BAC, BK, JPM, NCC, ONE, WFC to post strong quarters and BBT, MTB, PNC, TCB and UPC to miss estimates. KCI and AMTD rated Overweight at JP Morgan. ORCL raised to Sector Outperform at CIBC. SE raised to Buy at Merrill. CAM raised to Buy at Jefferies. KMX and TKLC raised to Strong Buy at Raymond James. TheStreet.com has a negative article on QCOM, saying tech firms ranging from INTC to CSCO are bankrolling rivals to its CDMA wireless standard. Cramer, of TheStreet.com, says oil will fall more than investors expect, giving a big boost to the economy and stock market. He also says the longer the Fed waits to raise rates the less he likes stocks.

Mid-day News
U.S. stocks are mostly higher mid-day on positive earnings news and a very strong ISM Non-manufacturing report. JetBlue was ranked the best U.S. airline in quality last year, with the second-best on-time performance and the second-lowest number of complaints, the AP said. Pakistan offered to host nuclear disarmament talks with India, Agence France-Presse reported. Philip Morris International offered to pay about $1B over 12 years to settle European Union charges it aids cigarette smuggling that cost governments billions of euros in lost tax revenue. The ISM Non-manufacturing Index, a gauge of U.S. service industries which make up the largest share of the U.S. economy, jumped in March to an all-time record as orders and employment climbed. Tax refunds and mortgage refinancing have helped lift consumer demand, reported Bloomberg. The survey's index of prices paid rose to 65.7 from 57.3 in February.

BOTTOM LINE: The Portfolio is having a good day today as a few of my tech longs are up substantially and my shorts are down. I have not traded and the Portfolio's market exposure is still 100% net long. The markets are quietly consolidating after their recent run-up. I would view any advance today as a big positive, considering the violence in Iraq over the weekend and a continued rise in interest rates. I may take some profits later in the day as I have a few positions that are up substantially over the last 10 days.

Monday Watch

Earnings Announcements
Company/Estimates
MTZ/.13
MBT/5.19

Splits
TACT 3-for-2

Economic Data
ISM Non-Manufacturing is estimated at 61.5 for March vs. 60.8 for February.

Weekend Recommendations
Forbes on Fox had guests that were positive on ADP and mixed on HD, WMT. Bulls and Bears had guests that were positive on GE, WMT and EWH, mixed on TWX, TOL, UOPX, XOM, CHV and negative on CSCO and MCD. Cashin' In had guests that were positive on MICC and mixed on LUV, MRK. Louis Rukeyser's Wall Street had guests that were positive on GE, MCK, AMGN, HPQ, MSFT, TXN, CKFR, IFIN, TECH, CSCO, XOM and negative on IR, SUNW, SEPR, PCS and BIIB. Byte and Switch has positive article on storage vendors. Barron's has positive columns on the LCD market, AIG(target $93), NTRT and negative columns on the U.S. dollar and REV. Goldman Sachs reiterated Outperform on BSX and CFC. GS raised estimates on broadlines retailers, favorites are TIF, FD and WMT. GS says that recent crude oil inventory builds points to increased likelihood of a continuation of the recent correction in crude oil and related equities.

Weekend News
GlaxoSmithKline(GSK) and Pfizer(PFE) are preparing bids of about $1.85B for Roche Holding's consumer health-care business, the Sunday Telegraph reported. Spanish police evacuated a building in the Madrid suburb of Lehanes after bombs were found, radio Cadena Ser reported. Red Bull and other energy drinks have surpassed bottled water as the fastest growing segment of the beverage industry, the NY Times reported. Microsoft's settlement with Sun Micro could help it overturn the European Commission's ruling, the Financial Times reported. Asian stocks are rising on optimism that the strongest U.S. jobs report since the stock market bubble burst will benefit exporters, reported Bloomberg.

Late-Night Trading
Asian indices are +.25% to +2.00% on average.
S&P 500 indicated +.03%.
NASDAQ indicated -.03%.

BOTTOM LINE: The Portfolio is 100% net long heading into the week. U.S. stocks may rise in the morning on strength in Asia and what should be a strong ISM Non-manufacturing report. However, I think the major indices will consolidate this week, providing opportunities on both the long and short sides. I will continue to short homebuilders and oil service stocks on any short-term strength and will add technology stocks, specifically semis/equipment, on any weakness. I am keeping a close eye on software stocks as well. They will benefit disproportionately from an significant increase in employment.

Weekly Outlook

The coming week is relatively light on market-moving economic reports. However, there are a few important earnings announcements scheduled for release. Scheduled economic reports include ISM Non-Manufacturing, Import Price Index, Initial Jobless Claims and Wholesales Inventories. The ISM Non-Manufacturing is the most import release this week. It is estimated at 61.5 for March vs. 60.8 in February.

Alcoa(AA), Genentech(DNA), Research In Motion(RIMM), Yahoo!(YHOO), General Electric(GE), Abbott Labs(ABT) and Rite Aid(RAD) are some of the more important companies that release quarterly earnings this week. The FedEx(FDX) Investors and Lenders meeting, the Dell(DELL) Analyst meeting and the Brocade(BRCD) Annual Stockholders meeting are all scheduled this week, as well. Finally, the Dow re-shuffling occurs on Thursday.

BOTTOM LINE: Anxieties over violence in Iraq, higher interest rates and the market's short-term overbought technical position will likely lead to a consolidation for U.S. stocks during this holiday-shortened week. However, positive news on the earnings front and lower energy prices should keep any pullback in check.

Chart of the Week

ISM Manufacturing



BOTTOM LINE: The ISM Manufacturing Index is at its highest level since 1983. Much like the improvement in Japan, its improvement is dismissed as just another blip up on the way down. I believe this analysis is incorrect. In my opinion, manufacturing is in the very early stages of a multi-year upturn.

Market Week in Review

S&P 500 1,141.81 +3.05% for the week.

U.S. equity markets rose all week on better-than-expected earnings reports, multiple corporate takeovers, falling energy prices and strong manufacturing and employment reports. Best Buy(BBY), Circuit City(CC), Allegheny Technologies(ATI), Schnitzer Steel(SCHN), Autodesk(ADSK), WalMart(WMT) and PepsiCo(PEP) all made positive statements regarding the strength of their businesses. Hollywood Entertainment(HLYW), Tularik(TLRK), Millennium Chemicals(MCH) and Arch Wireless(AWIN) all announced their acquisition this week, continuing a very strong trend since the beginning of the year.

Crude Oil fell 3.4% for the week as traders took profits on OPEC's 4% production cut. As well, speculation the Bush administration would implement measures to cut U.S. demand pressured crude prices. This resulted in outperformance by the Airline sector(+8.6%) and underperformance by the Oil service sector(+.59%) for the week.

The very strong ISM Manufacturing report and Friday's blow-out jobs report were the main catalysts for U.S. stocks throughout the week. However, these great reports sent bond prices lower for the week, resulting in a rise in the 10-yr. T-note yield to 4.14%. This led to outperformance by the technology sector and underformance by the financials and homebuilders for the week.

Another market-moving announcement came Thursday when Dow Jones reported its first changes to the Dow average since 1999. Eastman Kodak(EK), International Paper(IP) and AT&T(T) will be removed this Thursday in favor of American International Group(AIG), Verizon Communications(VZ) and Pfizer(PFE).

BOTTOM LINE: This was a very good week for the bulls. The NASDAQ broke its recent downtrend on Friday with a gap-up move on good volume and breadth. I think tech stocks will outperform this quarter, led by semiconductors. The SOX fell 18.4% from its recent highs over the last couple of months, while fundamentals continued to improve. I suspect this semi cycle will last longer than is currently expected, thus making the recent decline a significant buying opportunity. Oil Service stocks have corrected about 10% from their recent highs. This group may see a little more deterioration in the short-run as crude moves towards $30/bbl., however long-term investors should begin adding to favorite longs now as current weakness in energy prices is only temporary in nature. Homebuilders are up 92.6% over the last 12 months. This stunning performance, combined with Fed rate-hike fears, will lead to more profit-taking in the short-run. I expect this group to fall over 15% from its recent highs. Companies that build for the low-end market should see their stocks decline the most.

Economic Week in Review

ECRI Weekly Leading Index 134.10 (no update this week)

The Chicago Purchasing Manager Index for March fell to 57.6 vs. 63.6 the prior month and expectations of 61.0. "The upsurge in manufacturing activity that has occurred over the last several months is continuing, but at a slower pace," said Kevin Logan, a senior economist at Dresdner Kleinwort Wasserstein.

The Producer Price Index for February rose .1% vs. .3% the prior month and expectations of .3%. The PPI Ex Food & Energy for February rose .1% vs. .3% the prior month and expectations of .1%. "People will probably express some relief at the small gain in producer prices after the increase in January, but the bigger story is in the early stages of production," said Stephen Stanley, chief economist at RBS Greenwich Capital.

The ISM Manufacturing Index for March rose to 62.5 vs. 61.4 the prior month and expectations of 59.5. The ISM Prices Paid Index for March rose to 86.0 vs. 81.5 the prior month and estimates of 82.0. The ISM Manufacturing Index and its employment component were both near two-decade highs. Companies produced more cars, electronics and business equipment as they attempted to restock depleted shelves. "The breadth of the expansion as well as its speed is breathtaking. No need for fancy over-thinking. Plain and simple, this report tells us that the manufacturing sector is smoking," said Stephen Stanley.

The world economy, led by Asia and the U.S., is projected to grow 4.75% this year, the strongest performance in a generation, according to a semiannual forecast from the Institute for International Economics. "It is clear we are in boom right now -- a U.S. boom, a world boom," C. Fred Bergsten, director of the research group, told an audience at its Washington headquarters.

The Change in Non-farm Payrolls for March was 308,000 vs. 46,000 the prior month and expectations of 120,000. Manufacturing Payrolls were unchanged for March vs. a loss of 4,000 the prior month and expectations of a 5,000 gain. The Unemployment Rate for March was 5.7% vs. 5.6% the prior month and expectations of 5.6%. The 308,000 jobs added was the largest gain since the stock market bubble burst in early 2000. Strength was apparent across the board. Alan Binder, former Fed vice chairman said, "Once job creation is firmly established at a solid pace, the Fed is going to start raising rates."

BOTTOM LINE: The key takeaway for the week is that the U.S. economy is in great shape and getting better. The one missing component of this recovery was job creation. Historically, significant job creation occurs 6-9 months after the first real burst in economic growth coming out of a recession. This happened in the 3rd quarter of last year and right on schedule the U.S. economy has its first exceptional jobs report. I now believe the Fed will raise rates at the June 29-30 meeting as I expect another really good jobs report in the next 2 months and hints of inflation are cropping up in the early stages of production. The market is currently expecting the Fed to make its first move at the August 10 meeting.

The fact that the economy added the most jobs since early 2000 and is growing at the fastest rate since the early 80's is even more impressive considering the environment at the time of the stock market bubble. Many companies employing hundreds of thousands of people were created on pure hype. Inexperienced and corrupt management teams, with faulty business models, used "creative" accounting to boost their stock prices to sell more shares to the public. This gave them the capital to hire more people to rapidly increase sales at the expense of profits, giving the appearance of growth. In the current environment, companies with good business models, selling real products, using relatively little "creative" accounting are the most profitable in history. It took awhile to burn off the excess capacity generated by the greatest economic bubble in U.S. history. This is why the recovery appeared to be in slow-motion. However, beginning with the 8.2% growth of the 3rd quarter of 03, the fastest since the early 80's, and now with the best job creation since the stock market bubble in 2000, the U.S. economy is in a full-fledged boom.