Monday Close

S&P 500 1,084.10 -1.06%
NASDAQ 1,876.64 -1.45%

Leading Sectors
Oil Service +.40%
Energy -.22%
Drugs -.26%

Lagging Sectors
Iron/Steel -2.46%
Networking -2.83%
Nanotechnology -3.37%

Other
Crude Oil 41.53 -.05%
Natural Gas 6.42 unch.
Gold 379.80 +.05%
Base Metals 99.92 -2.06%
U.S. Dollar 90.95 -.77%
10-Yr. Long-Bond Yield 4.69% -1.66%
VIX 19.96 +8.07%
Put/Call 1.22 +27.08%
NYSE Arms .99 +85.42%

After-hours Movers
MLNM +16.52% after saying its Velcade medicine helped people with a blood cancer called multiple myeloma live longer.
CSC +5.16% after beating 4Q estimates, raising 1Q and 04 guidance.
ENDP -11.09% after saying it had decided to launch it oxycodone extended-release tablets after an appellate court decision.

Recommendations
Goldman reiterated Outperform on CLX, SRE, KMI, EQT, ATG, PFE, GS reiterated Underperform on SGP and BMY. Jim Cramer, of TheStreet.com, said long-term investors should look at buying CMLS.

After-hours News
U.S. stocks finished lower Monday as violence in Iraq and concerns over slowing Asian economies continued to worry investors. After the close, the UK government said it may send another 3,000 troops to Iraq before coalition forces hand over power to Iraq's interim government on June 30, the London-based Times said. U.S. government bonds rallied after a report showed international investors increased their holdings of the securities by a record $61.5 billion in March, Bloomberg reported. Agilent Technologies, the world's largest maker of scientific test gear, reported that sales rose 25% to the highest level since 2001 and above analysts' estimates, Bloomberg reported. SBC Communications tomorrow will receive notice that 100,000 employees represented by the Communications Workers of America may go on strike. The Pentagon said it suspended payment of $159.5M to Halliburton for meals served at 64 Army dining facilities in Iraq because the documentation submitted by the company is incomplete, Bloomberg said.

BOTTOM LINE: The Portfolio fell today as my tech and basic material longs dropped. Some of my long positions hit stop-loss points in the afternoon. The Portfolio is 75% net long after exiting these positions. The rally I expected in the afternoon materialized, but failed. However, the 1-1.5% losses for the major U.S. indices today came on light volume and could have been much worse considering the news. As well, bonds rallied strongly, the ARMS, Put/Call, VIX all spiked and oil stabilized. I continue to expect a decent rally beginning at any time.

Mid-day Update

S&P 500 1,084.61 -1.01%
NASDAQ 1,876.35 -1.47%

Leading Sectors
Oil Service +.57%
Energy -.14%
Drugs -.19%

Lagging Sectors
Iron/Steel -2.20%
Networking -2.56%
Nanotechnology -2.65%

Other
Crude Oil 41.15 -.58%
Natural Gas 6.42 +.30%
Gold 380.10 +.80%
Base Metals 99.92 -2.06%
U.S. Dollar 90.81 -.93%
10-Yr. Long-Bond Yield 4.70% -1.29%
VIX 19.88 +7.63%
Put/Call .73 -23.96%
NYSE Arms 2.48 +75.69%

Market Movers
NEB +31.2% after saying Deluxe Corp. would acquire it for $586.8M.
FFHH +21.24% after saying it will be acquired by MidCountry Financial for $83.4M.
SJH +7.82% after saying it is in merger discussions with OMI Corp.
KMRT +6.48% after substantially beating 1Q estimates by selling assets.
ESMC -12.15% after reporting 3Q that disappointed some.

Economic Data
Empire Manufacturing for May came in at 30.21 versus expectations of 34.0 and 34.03 in April.

Recommendations
NE raised to Overweight at JP Morgan. CNO rated Buy at Deutsche Bank, target $22. IBPI rated Buy at Deutsche Bank, target $18. MBG rated Outperform at CSFB, target $62. MERX cut to Underperform at CSFB, target $12. BJS raised to Strong Buy at Raymond James, target $55. Goldman Sachs reiterated Outperform on CAH and GILD. GS reiterated Outperform on IBM, target $106. Goldman said tech stocks now more attractively valued relative to market than in March 03, favorites are MSFT, CSCO and DELL. GS said Consumer Discretionary stocks are most overvalued. GS thinks HPQ report will be positive for SANM on commercial PC strength. GS raised AMD to Outperform. GS reiterated Outperform on MRVL ahead of quarter. Citi SmithBarney upgraded CTSH to Buy, target $56. Citi said results of its affluent investor survey indicate that 80% of affluent investors plan to allocate new money to stocks over the next year, reiterated Buy on MER and MWD. Citi reiterated bullish stance on security software stocks, favorite is RSAS. Citi reiterated Buy on FNM, target $86. Citi reiterated Buy on BJ, target $30. Citi reiterated Sell on EK, target $23. Goldman reiterated Outperform on ACS, STZ and KRB.

Mid-day News
U.S. stocks are lower mid-day on violence in Iraq and concerns over slowing growth in Asia. Shares of Lucent are dropping after the Wall Street Journal reported the SEC will file civil fraud charges against the company. Paul Allen may buy more cable assets to expand Charter Communications, the LA Times reported. Iraqi Council members want to supervise an investigation into the UN oil-for-food scandal and asked accounting firm KPMG to gather evidence of kickbacks and bribes paid under the program, the New York Times reported. Vonage will announce today that it will cut the price for unlimited Internet calling by 14%, the Wall Street Journal reported. The Arab Resistance Movement claimed responsibility today for killing Izzedine Salim, president of the Iraqi Governing Council, the AP reported. Fluor, the largest U.S. engineering and construction company, wants a long-term presence in Iraq, Reuters reported. Tennessee Governor Bredesen signed a law last week that makes that state the nation's first to give incentives to businesses that don't send data-entry and call-center jobs overseas, AP reported. An older shell containing Sarin nerve gas was discovered and partly detonated in Iraq today, Bloomberg reported. Saddam Hussein's regime declared all its Sarin nerve gas rounds destroyed before the 1991 Gulf War, Bloomberg said.

BOTTOM LINE: The Portfolio is down today as my tech and basic materials longs are falling. I added a new short and long, leaving the Portfolio 100% net long. I took a long position in YZC this morning. I am using a $34.75 stop-loss on the position. Volume in the major averages is light today, interest rates are falling, the ARMs and VIX are spiking and the selling is much less than I expected, considering recent news. This is a very good for the Bulls and I still believe last Wednesday marked at least a short-term bottom for most U.S. stocks. I expect a rally to materialize at some point this afternoon.

Monday Watch

Earnings of Note
Company/Estimate
A/.24
CSC/1.00
LOW/.54
LTD/.13
TOY/-.01

Splits
SYK 2-for-1 split

Economic Data
Empire Manufacturing for May estimated at 34.50 versus 36.05 in April.

Weekend Recommendations
Forbes on Fox had guests that were positive on TSG, mixed on ADM, CNX and negative on Dell. Bulls and Bears had guests that were mixed on TM, RTP, AGI, WWCA, YHOO, SBL, GE, MEE, NCC and negative on MHR. Cashin' In had guests that were positive on KROL, CVX, CCU, mixed on CME and negative on MSO. Louis Rukeyser's Wall Street had guests that were positive on INTC, JNJ, AMGN, RDN, KSS, COF, XRX, AIG, TGT, PEP, PFE and BAC. Wall St. Week w/Fortune had guests that were positive on ESV, NOI, MIK, BLI, ESRX, CMX, TEVA, BRL, MYL and ELAB. Barron's had a positive column on CMX, MHS, MDRX and a negative column on FNM.

Weekend News
Pfizer is not considering a merger, but is actively looking for partnerships with biotech companies, La Gaceta de los Negocios reported, citing Pfizer's Chairman. Japan's air cargo exports rose 10% to an all-time high in the year ending March 31, Nikkei English news reported. Blue Nile, the Internet jewelry retailer that plans to hold its IPO on Wednesday, has gained loyal clients by selling diamonds at below-market prices and by letting buyers customize, Barron's reported. IBM and Cisco plan a tie-up to offer Internet protocol phone services, the Nihon Keizai reported. Electronic Arts and Activision are considering buying smaller rival Eidos Plc for $569M, the Observer reported. BT Group, the UK's largest phone company is losing more than 150,000 customers each month, the Sunday Times reported. Mattel's new restaurant on Fifth Avenue in New York is capitalizing on the growing popularity of its American Girl brand, the NY Times reported. Saudi Arabia is seeking to rent a fleet of oil tankers to boost production and delivery as oil prices surge, The Business newspaper reported. Employers in the West expect to increase their number of college-graduate hires this year by 8.3%, the Seattle Times reported. Jordan's King Abdullah II said he is urging Arab leaders to fight religious extremism and terrorism against civilians and that Arab countries must develop a blueprint for reform, Newsweek reported. SAP AG Chief Executive Officer Kagermann said he expects sales from software licenses to grow by 10% this year, helped by rising demand in the U.S. as companies are showing an increasing readiness to spend more, the Welt newspaper reported. Chinatrust Financial may take over some medium or small U.S. banks, the Economic Daily News reported. Japanese Finance Minister Tanigaki said the Chinese have a good grasp of their current economic situation and will successfully engineer a soft-landing, Bloomberg reported. As well, China's government is confident it can cool its economy without causing an abrupt slowdown, Finance Minister Jin Renqing said. Merck, Bristol-Myers Squibb and Gilead Sciences plan to develop a combination of three HIV drugs, the companies said. The U.S. government is enacting a quick approval process for AIDS treatments intended for use in developing countries under the Emergency Plan for AIDS Relief, Bloomberg reported. Dell is boosting sales to government and corporate customers in China, helping it catch the country's biggest supplier Lenovo Group, according to researcher IDC. China told Taiwan President Shuibian three days before his inauguration that he must accept Chinese sovereignty or "face destruction by playing with fire," Bloomberg reported.

Late-Night Trading
Asian indices are sharply lower, -4.75% to -1.50% on average.
S&P 500 indicated -.72%.
NASDAQ indicated -1.00%.

BOTTOM LINE: The Portfolio is 100% net long heading into the week. U.S. stocks will likely open sharply lower on significant declines in Japan, Taiwan, Korea and India. India's biggest stock market is currently halted for the second time today, plunging 15.6% on concerns that the nation is headed for political instability and a slowdown in it economic program as Communist parties backing a new government will block sales of profitable state-run companies. I expect U.S. stocks to reach their daily lows before noon. Stocks should rally later in the day as bonds rally and investors speculate the Fed can be more patient with respect to raising interest rates due to slowing growth in Asia.

Weekly Outlook

There are only a few important economic and corporate earnings reports scheduled for release this week. Scheduled economic reports include Empire Manufacturing, Housing Starts, Building Permits, Initial Jobless Claims, Continuing Claims, Leading Indicators and Philadelphia Fed. The Leading Indicators and Philadelphia Fed. report both have market-moving potential.

Lowe's(LOW), Barnes & Noble(BKS), Home Depot(HD), Deere(DE), Saks Fifth Avenue(SKS), Staples(SPLS), Applied Materials(AMAT), Hewlett Packard(HPQ), Marvell Technology(MRVL) and Nordstrom(JWN) are some of the more important companies that release quarterly earnings this week. There are also a few other events that have market-moving potential. The GigaWorld IT Forum, Semi Book-to-Bill, Piper Jaffray Tech Conference, Wireless Enterprise Symposium, Goldman Global Chemical Conference, Bank of America Investors Conference and Prudential Software Summit could all impact trading this week.

BOTTOM LINE: While U.S. stocks may begin the week lower on weakness in Asia, I expect shares to rise as the week progresses. The market's oversold state, strong earnings reports, investor conferences and stabilizing interest rates should provide the catalysts for a continuation of the rally that began last Wednesday. There are many positive aspects to the US market and economy that are currently being ignored as investor psychology has been damaged by the constant barrage of negative reporting in the mainstream press. Job growth is accelerating substantially, American's net worth is at all-time highs, home ownership is at all-time highs, consumer spending is very strong, corporate spending is accelerating, corporate profits are at all-time highs, corporate cash levels are at all-time highs, interest rates and inflation are relatively low, the 04 P/E on the S&P 500 is 17.04 and falling(the lowest in 7 years and down 41% from its highs reached during the bubble), the US dollar has stabilized, US and world economic growth will be the best in two decades this year, the budget deficit is shrinking, manufacturing is improving rapidly, exports to China are exploding, the Japanese economy is finally showing real growth and Europe is improving. These many positives are forgotten as the vast majority of headlines focus on something bad about Iraq or inflation. This intense focus on negativity could result in a self-fulfilling prophecy of slower economic growth as investors lose confidence, stocks drop, consumers lose confidence and consumer/corporate spending slows. At this time, I do not anticipate such a scenario.

Chart of the Week

Initial Jobless Claims



Bottom Line: Initial jobless claims, which began to rise substantially in 2000 as the stock market bubble burst and the economy tanked, peaked shortly after the 9/11 terroist attacks. The 4-week moving average fell again last week, bringing it to its best levels in over 3 years.

Market Week in Review

S&P 500 1,095.70 -.27%

U.S. stocks fell modestly last week as more negative images from Iraq and rising oil prices dominated headlines, drowning out strong economic and corporate reports. Cisco, Dell, Disney and Qualcomm gave positive assessments of the current and future states of their businesses and all four stocks declined. Around the clock reporting on the torture at the Abu Ghraib prison in Iraq and the recent video of an American being beheaded weighed heavily on investors' psyche throughout the week. The higher-than-expected Producer Price Index report also weighed on shares as traders continue to view rising inflation as a big negative for stocks.

There were also a number of positive developments throughout the week. Major U.S. companies Cisco, Dell, Disney and Qualcomm all reported double-digit earnings and revenue growth. Cisco reported an earnings gain of 23% and sales gain of 22%, both above expectations. Cisco also raised their forecast for next quarter. Cisco's CFO said corporate spending is the best since the tech sector imploded several years ago and that they plan to hire 1,000 people in the near future. The major U.S. indices appeared to make at least a short-term bottom on Wednesday. As the S&P 500 touched its 200-day moving-average, the ARMS index spiked and Barton Biggs made positive comments on CNBC, investors began to buy in a big way. Many stocks finished higher on good volume Wednesday, recovering from significant declines earlier in the day. Moreover, the 10-year T-note rallied significantly on Friday as it appeared to make at least a short-term bottom as well. Finally, the AAII % Bulls dropped significantly last week in a sign that investor complacency continues to fall.

Bottom Line: U.S. stocks appear to have made at least a short-term bottom last week and likely an intermediate-term one. However, I am concerned that good earnings reports continue to be met with selling. Cisco is a very large company that is reporting 20%+ growth. The US dollar is only down 2.2% from year-ago levels and has risen 7.8% from its recent lows. Thus, the argument by the bears that currency is artificially boosting growth does not have merit. Furthermore, corporate IT spending, which is highly correlated to job growth, should continue to accelerate throughout the year. The VOIP market, a growing driver of Cisco revenues, will continue to accelerate as well. At around 28 times 04 estimates CSCO is not cheap, however I would argue that one of the premier tech companies in the world growing 20% deserves a premium multiple. While I do not currently have a position in Cisco, the stock which is down 26.4% from its recent highs should be considered by long-term investors.

I continue to believe that investors are overreacting to inflation and China. Oil accounts for less than 5% of inflation and would have to trade at $78/bbl. to equal the inflation-adjusted prices of the early 80's. Moreover, OPEC will likely increase production soon as it is in their interest not to damage world economic growth. Basic materials prices continue to fall as traders anticipate slowing demand from China. Furthermore, consumer prices are expected to rise 2.2% this year, well below the 3.0% average of the last 84 years. Finally, modest inflation has almost always been good for stocks as companies regain pricing power, profits soar and hiring accelerates. Numerous statements by Chinese officials indicate they want to slow growth from unsustainable levels, which is beneficial to world growth in the long-run. At this point, I do not believe that China is in danger of an economic collapse, which is what many stock prices of companies operating in China suggest.