Chart of the Week

CRB Index 6-month Chart



Bottom Line: The CRB Index, a measure of commodity prices, broke its 6-month uptrend last week. Commodity prices have been the main source of investor concern regarding inflation. Higher U.S. interest rates, the Chinese government's attempts to slow its scorching economy and a rising U.S. dollar should continue to pressure commodity prices in the short-term.

Market Week in Review

S&P 500 1,140.60 +.53% for the week.

U.S. stocks finished higher on the week led by technology shares as numerous quarterly reports exceeded investor expectations. General Motors(GM), Motorola(MOT), Ford(F), Qualcomm(QCOM), Juniper(JNPR), eBay(EBAY), American International Group(AIG), United Parcel Service(UPS), Caterpillar(CAT), American Express(AXP), Microsoft(MSFT), Broadcom(BRCM), 3M(MMM), Altria(MO), Eli Lilly(LLY), Wells Fargo(WFC), Coca-Cola(KO), Amgen(AMGN), Cummins(CMI), Honeywell(HON) and Corning(GLW) are some of the major U.S. companies that reported stellar results. Bloomberg reported that with more than half of the S&P 500 having reported quarterly results, 78% have exceeded expectations and only 11% have missed estimates. The average earnings increase so far is 26% versus estimates of 13% when the period began, Thomson Financial reported. Doug Cote, who helps manage $40 billion at ING Investment Management, said, "Earnings will continue to surprise on the upside and that will trump inflation scares every time."

Last week was characterized by a tug-of-war between strong corporate/economic reports and rising interest rates. The Wireless and Software sectors, led by Motorola and Microsoft respectively, were the stand-outs for the week. Interest rates rose again last week on the strongest Durable Goods report since the early 80's, great corporate earnings reports and continued inflation worries. Commodity-related sectors continued their recent downtrends as the U.S. dollar rose and China talked of slowing its scorching economy. The CRB Index, a measure of commodity prices, broke down through its six-month uptrend line last week.

BOTTOM LINE: I believe the major U.S. indices are preparing for an assault on their recent highs. I would like to see the NASDAQ break 2,060 on good volume to confirm last week's move. I can't emphasize enough how important Microsoft's report is to the overall market. This company has been a drag on the performance of the major indices during this entire bull-run. I think its performance will only improve throughout the year as corporate hiring and spending accelerate. The fall in the CRB Index is a very positive development as well. Commodity prices have been the main source of investor concerns over inflation. The S&P 500 current P/E of 22.1 is below where it was in 1992 and 1987 before major bull moves. However, most pundits and analysts harp on excessive valuations. The P/E on 04 estimates is 18 and falling as numerous companies are significantly beating expectations. While I do not view the market as cheap, I hardly find its valuation excessive given corporate profits are at all-time highs, American's net worth is at all-time highs, inflation and interest rates are relatively low, U.S. and world economic growth is the strongest since the early 80's, job growth is accelerating and productivity is near record levels. U.S. stocks deserve a premium multiple based on these characteristics.

Economic Week in Review

ECRI Weekly Leading Index 134.60 +.30%

The Index of Leading Economic Indicators rose .3% in March, meeting expectations and up from an unchanged reading last month. This was the largest year-over-year gain since 1984 and shows the U.S. economy is gaining momentum. Companies taking longer to fill orders on increasing demand, falling jobless claims, rising building permits and tax refunds putting more money in the hands of consumers, all contributed to the rise, Bloomberg reported. Taxpayers received $142.5 billion in refunds through April 2, compared with $131.4 billion at the same time last year. Finally, the increase suggests that economists may need to reconsider their projections of 4.3% growth for the second quarter.

The Producer Price Index for March rose .5% versus expectations of a .4% rise and a .1% increase in February. The PPI Ex Food and Energy rose .2% versus expectations of a .1% increase and a .1% gain the prior month. Exceptional economic growth in the U.S. and China is increasing demand for commodities, thus leading to price increases. "These are not alarming increases, but they are higher than they have been in a few years," said Christopher Low, chief economist at FTN Financial.

U.S. Federal Reserve Chairman Alan Greenspan said most U.S. banks are well positioned to adjust their balance sheets to higher interest rates. "Many banks indicate that they now either are interest rate neutral or are positioned to benefit from rising rates," Greenspan said. Bank asset quality is improving as U.S. banks charged off .75% of total loans as non-performing assets in the final quarter of 03, the lowest rate since the stock market bubble burst in 2000, Bloomberg reported. Alan Greenspan also said, "The threat of deflation is no longer an issue for the U.S. and companies appear to have a greater ability to raise prices." Greenspan dismissed rising commodity prices as an inflation threat, saying that they're a small part of total costs for companies. Moreover, Greenspan said, "Inflation pressures are reasonably contained as labor productivity helps hold down prices because firms can produce more goods in an hour." Labor costs, which account for 70% of inflation, are still declining. Non-farm unit labor costs fell .4% in the 4th quarter after a 5.6% decline in the prior three months, Bloomberg reported. Greenspan proceeded to say, "The U.S. economy is in a vigorous expansion that has not produced broad-based inflation pressures." "A rapid pace of growth is leading companies to add to payrolls, and once signs of accelerating inflation appear, the central bank will raise interest rates," Greenspan told the Joint Economic Committee of Congress.

Initial Jobless Claims fell to 353K last week versus expectations of 340K and 362K the prior week. Continuing Claims rose to 3019K versus expectations of 2988K and 2967K the prior week. "Job creation is still going at a healthy clip, but not at a rate that's appreciably stronger than what we say in the first quarter," said Richard DeKaser, chief economist at National City. DeKaser expects 170,000 jobs were added in April, a month after the biggest gain in almost 4 years, Bloomberg reported.

Durable Good Orders for March rose 3.4% versus expectations of a .7% rise and a 3.8% rise in February. "The manufacturing sector is on fire," said Anthony Chan, chief economist at Banc One Investment Advisors. The jump in orders makes it more likely companies will boost work hours and hiring, Lehman Brothers economist Drew Matus said. The report also suggests business investment exceeded 10% for a third straight quarter, said Steven Wieting, an economist at Citigroup Global Markets. Kenneth Goldstein, chief economist of the Conference Board, said "We're seeing the beginning of a turnaround for the national labor market with the volume of help-wanted ads rising after 3 years of declines." Gannett Co., the biggest U.S. newspaper publisher, said last week its help-wanted ads soared 23% in March. Help-wanted ads are a tremendous indicator because companies don't advertise for employees unless they intend to hire in the next month or two. The fact that it's gotten a lot better in February and March suggests that the pace of economic activity is really improving, Bloomberg reported.

BOTTOM LINE: There are several key takeaways for the week. I now believe that the U.S. economy grew nearly 6% in the first quarter versus economist's estimates of 4.6% growth. I also think second quarter economic growth will be stronger than current expectations of 4.3%. While inflation is not currently a problem, the Fed is preparing the markets for a rate hike in the near future. Unit labor costs, which are 70% of inflation, remain subdued. As well, a stronger dollar and slowing Chinese economy are already contributing to lower commodity prices. The Fed Funds rate, however, is at emergency levels and these levels are unwarranted in the current economic environment. I continue to expect the first rate hike to occur at the June 29-30 meeting, while market expectations are for a raise at the August 10 meeting. Finally, while job creation will temporarily slow from last month's strong pace, the large increase in help-wanted ads and exceptionally strong durable goods report bodes well for another large jobs number in the near future.

Weekly Scoreboard

Indices
S&P 500 1,140.60 +.53%
Dow 10,472.84 +.20%
NASDAQ 2,049.77 +2.71%
Russell 2000 590.71 +1.26%
Wilshire 5000 11,150.42 +.65%
Volatility(VIX) 14.01 -6.23%
AAII Bullish % 50.0% -21.57%
US Dollar 91.08 +1.30%
CRB 270.12 -2.67%

Futures Spot Prices
Gold 395.70 -1.40%
Crude Oil 36.46 -1.33%
Natural Gas 5.57 -.43%
Base Metals 107.35 -4.94%
10-year US Treasury Yield 4.45% +2.53%
Average 30-year Mortgage Rate 5.94% +.85%

Leading Sectors
Wireless +5.27%
Software +4.44%
Hospitals +4.23%

Lagging Sectors
Energy -1.29%
Drugs -1.34%
Commodity -1.95%

*% Gain or loss for the week

Friday Close

S&P 500 1,140.60 +.06%
NASDAQ 2,049.77 +.83%

Leading Sectors
Iron/Steel +4.13%
Internet +3.90%
Papers +3.88%

Lagging Sectors
Semis +.36%
Fashion -.03%
Disk Drives -.80%

Other
Crude Oil 36.46 -.68%
Natural Gas 5.57 -.92%
Gold 395.70 +.46%
Base Metals 107.35 +.14%
U.S. Dollar 91.08 +.29%
10-Yr. Long-Bond Yield 4.45% +1.67%
VIX 14.01 -4.11%
Put/Call .67 +6.35%
NYSE Arms .80 +9.59%

After-hours Movers
None of note.

Recommendations
Goldman Sachs reiterated Outperform on SAP, IGT, KO, CCE, PEP, SUN, BAX, GDT, PHCC, CSCO and MSFT. GS reiterated Underperform on CYT and POT.

After-hours News
U.S. stocks finished higher Friday as strong corporate earnings and economic reports outweighed rising interest rates. After the close, Bloomberg reported that with more than half of the S&P 500 having reported quarterly results, 78% have exceeded expectations and only 11% have missed estimates. The average earnings increase so far is 26% versus estimates of 13% when the period began, Thomson Financial reported. Fannie Mae recently added Ernst & Young to a list of consultants advising it over its accounting practices, even though the SEC barred the firm from taking on new clients, Dow Jones reported. President Bush cautioned Israeli Prime Minister Sharon against harming Palestinian leader Yasser Arafat after the Israeli leader said he was no longer bound by a promise to spare Arafat from attack, the AP reported. With the U.S. lifting most economic sanctions on Libya in exchange for Qaddafi's agreement to give up weapons of mass destruction, Libyan businesses and government officials are expecting a boom. Africa's biggest holder of known oil reserves can now bring in U.S. companies to modernize its equipment and explore for new deposits. Libya's oil industry is pumping half as much oil as it did 35 years ago when Qaddafi took power. The country holds at least 36 billion barrels of proven oil reserves, worth more than $1 trillion at current prices. Exxon Mobil, ChevronTexaco, ConocoPhillips, Occidental Petroleum and Amerada Hess are all interested in returning to Libya, Bloomberg reported. Chinese President Hu Jintao vowed controls to keep the economy on a steady footing, amid overheating in some industries that has led to shortages of oil, coal, power and choked the transportation system, Bloomberg reported.

Bottom LINE: The Portfolio was unchanged today as more U.S. stocks declined than advanced, notwithstanding the performance of the major indices. I did not trade in the afternoon and the Portfolio is still 125% net long. Taking into account yesterday's large gains and today's interest rate/Iraq fears, I thought the major indices performed pretty well today. I would like to see a follow-through gap up on good volume in the near future to confirm yesterday's move.

Mid-day Update

S&P 500 1,139.02 -.08%
NASDAQ 2,043.26 +.56%

Leading Sectors
Fashion +1.32%
Semis +1.17%
Broadband +.84%

Lagging Sectors
Iron/Steel -1.78%
Tobacco -2.06%
Airlines -2.07%

Other
Crude Oil 36.27 -1.20%
Natural Gas 5.56 -1.12%
Gold 394.80 +.23%
Base Metals 107.35 +.14%
U.S. Dollar 91.13 +.34%
10-Yr. Long-Bond Yield 4.42% +1.07%
VIX 14.10 -3.42%
Put/Call .63 unch.
NYSE Arms .72 -1.37%

Market Movers
MSFT +6.01% after beating 3Q estimates, raising 05 earnings and lowering 05 sales forecasts.
GLW +16.8% after beating 1Q estimates and raising 2Q guidance.
MCRL +14.1% after beating 1Q estimates and raising 2Q guidance.
MCHP +14.30% after beating 4Q estimates, raising 1Q forecast and announcing 2.5M buyback.
TESS +19.62% on better-than-expected 4Q and raised 05 guidance.
SYNA +20.64% after beating 3Q estimates and raising 4Q guidance.
CLS +16.6% after beating 1Q estimates and raising 2Q forecast.
PKTR +16.56% after beating 1Q estimates.
BWLD +15.38% after beating 1Q estimates, raising 2Q guidance and RBC upgrade to Outperform.
MTLG -19.2% after beating 1Q estimate, but lower 2Q guidance.
ABTL -23.83% after missing 1Q estimates and lowering 04 forecast.
PLCM -13.15% after beating 1Q estimate, but gave disappointing guidance.
STE -12.43% after meeting 4Q estimate, lowering 1Q and 04 guidance.
RSYS -11.11% after meeting 1Q estimate and lowering 2Q guidance.

Economic Data
Durable Goods Orders for March +3.4% versus +.7% estimate and +3.8% prior month.
Durable Goods Oders Less Transportation +3.3% versus +1.4% estimate and +1.1% prior month.

Recommendations
KSS raised to Buy at Deutsche Bank, target $52. PGR and PH cut to Reduce at UBS. AT and WC raised to Overweight at JP Morgan. CLS raised to Sector Outperform at CIBC, target $26. CELG raised to Outperform at Thomas Weisel, target $70.00. NUE cut to Underweight at Prudential. HOT raised to Buy at Merrill, target $46. MCHP raised to Buy at Legg Mason, target $36. GBP rated Underperform at CSFB. ASN rated Outperform at CSFB, target $30. CNX raised to Outperform at Bear Stearns. BRCM rated Outperform by Raymond James, target $50. RYL raised to Strong Buy at Raymond James, target $135. Goldman Sachs reiterated Outperform on MERQ, AA, GLW, BAX, PHCC, GDT, IGT, AMGN, GILD, AXP, TPX, and reiterated Underperform on EW, VRSN and T. Citi Smith Barney said to Buy NCX, target $32. Citi reiterated Buy on UPS, raised estimates, target $80. Citi reiterated Buy on MSFT, raised estimates and target to $34. Citi said AMGN is top biotech pick. Citi reiterated Buy on AXP, target $57. Citi upgraded FISV to Buy, target $46. Citi reiterated Buy on DOX, target $34. Citi reiterated Buy on OHP, $70 target. TheStreet.com has a column saying Chinese ADRs are good for a long trade here.

Mid-day News
U.S. stocks are mixed mid-day as a much better-than-expected Durable Goods Report sent interest rates higher, the U.S. dollar higher and crude oil lower. The U.S. FDA is seeking reports of any problems encountered with Boston Scientific's Taxus stent, the NY Times said. Merrill Lynch ousted Deutsche Bank last quarter as the most accurate forecaster of foreign exchange rates, Bloomberg reported. U.S. Durable Goods Orders rose 3.4% in March, significantly beating estimates, as corporate spending accelerated on machinery, metals and computers. "Spending on software and equipment appears to be increasing quite strongly," Fed Vice Chairman Roger Ferguson said. "Today's report suggests business investment exceeded 10% for a third straight quarter," said Steven Wieting, an economist at Citi Smith Barney said. U.S. Brigadier General Mark Kimmitt today said a U.S. offensive on the city of Fallujah may resume shortly if the heavy weapons of foreign fighters aren't handed over to U.S.-led forces soon, Bloomberg reported.

BOTTOM LINE: The Portfolio is down slightly today, as most stocks are lower and my 125% market exposure is hurting performance. I have not traded as of yet and the Portfolio is still 125% net long. I expect stocks to improve this afternoon as investors anticipate the positive collateral effects from the recent good news by numerous bell-weather companies. Bears are selling on interest rate and Iraq fears, both of which are widely known.