Chart of the Week

Bottom Line: A significant decline in jobs growth began in early 2000 as the stock market bubble burst and the economy began to slow dramatically. Job losses hit their worst levels after the September 11th terrorist attacks. As well, it took awhile for the U.S. economy to burn off the excess capacity generated by the financial recklessness of the later part of the 90's. Tax cuts, low interest rates and increased government spending stimulated demand enough to burn off this massive excess capacity in a relatively short period of time. The U.S. economy has now reached a point were it can sustain itself without excessive stimulus. Corporate profits are soaring, allowing companies to hire more people and to spend more on equipment that will make them even more productive. As corporate spending accelerates, the need for more workers is increasing and incomes are growing. More jobs and higher incomes are more than offsetting an increase in interest rates and energy prices, thus allowing consumer demand to remain at very high levels.

Weekly Outlook

There are a few important economic reports and several significant corporate earnings reports scheduled for release this week. Economic reports this week include Consumer Credit, Wholesale Inventories, Import Price Index, Initial Jobless Claims, Monthly Budget Statement, Trade Balance, Producer Price Index and preliminary Univ. of Mich. Consumer Confidence. The Producer Price Index and Consumer Confidence reading both have market-moving potential.

Take-Two Interactive(TWO), Tommy Hilfiger(TOM), H&R Block(HRB), Martek Biosciences(MATK), Omnivision Technology(OVTI) and National Semiconductor(NSM) 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 CIBC Communications and Technology Food Chain Conference, Goldman Sachs Healthcare Conference, Deutsche Bank Media Conference, EEII Convention and Expo, the Fed's Kohn speaking to the National Economist Club, Pacific Growth Equities Life Sciences Conference, the Fed's Guynn speaking in Atlanta and Greenspan's testimony to an international monetary conference could all impact trading this week.

Bottom Line: I expect U.S. stocks to rise modestly this week on a continuation of the fall in energy prices and positive news from multiple conferences. As well, the relatively high Put/Call and ARMS readings and another fall in the AAII % Bulls last week also bodes well for stocks. However, any rise will likely be muted by resurfacing inflation fears and rising interest rates as I expect Producer Prices and Consumer Confidence to exceed expectations at the end of the week. My short-term trading indicators are still giving buy signals and the Portfolio is 125% net long heading into the week.

Market Week in Review

S&P 500 1,122.50 +.11%

U.S. stocks finished mixed last week as falling energy prices and rising interest rates led many investors to remain on the sidelines. Market volatility increased, investor complacency decreased and volume was light. The holiday-shortened week began with investor anxiety over terrorist attacks in Saudi Arabia sending oil prices higher and stocks lower. As well, Merrill Lynch made negative comments on Intel ahead of its mid-quarter update which weighed on technology shares early on. As OPEC began to make significant comments with respect to their determination to see lower oil prices, stocks began to rally. However, investor jitters resurfaced quickly ahead of Intel's update, President Bush's trip to Europe and the May jobs report. Finally, stocks finished the week on a modestly strong note as Intel strengthened its revenue guidance range and the U.S. jobs report exceeded expectations.

There were a few other positive developments during the week. Auto sales exceeded expectations as dealers said they were seeing no ill-effects from higher gas prices and interest rates. Same-store-sales for retailers were especially strong in May. Wal-Mart and J.C. Penney gained after the retailers said sales rose more-than-expected. Mandalay Resort Group announced earnings that significantly beat expectations. Finally, Comverse Technology reported earnings that exceeded forecasts and it raised forward guidance.

Bottom Line: Overall, last week was characterized by a cautiously positive tone. The fact that U.S. stocks rose in the face of a terrorist attack in Saudi Arabia and rising oil prices at the beginning of the week is very positive. As well, it is obvious that the American consumer is financially healthy and willing to spend as their record-high wealth levels, increasing incomes and better job opportunities more than offset higher interest rates and energy prices. However, volume was light throughout the week as an imminent interest rate hike by the Fed and the expectation of increased terrorist activity into Iraq's handover on June 30 continued to weigh on investors' minds. It was definitely disappointing that falling energy prices, an unexpectedly positive mid-quarter update by Intel and a very strong jobs report could not generate more enthusiasm.

Economic Week in Review

ECRI Weekly Leading Index 134.10 +.30%

Construction Spending for April rose 1.3% to a record annual pace of $970 billion versus estimates of a .4% rise and an upwardly revised 2.4% increase in March. Builders completed homes at the highest rate since 1979 in April, the agency said last month. Government and company spending on construction may pick up the slack should home building slow later this year amid higher mortgage costs, Bloomberg reported. "We're still riding the wave of the super-strong housing starts numbers," said Ken Mayland, chief economist of Clear View Economics. "We can't expect these sorts of increases to persist in the second half, but the baton is being handed off as nonresidential is starting to perform better."

ISM Manufacturing for May came in at 62.8 versus estimates of 61.5 and a reading of 62.4 in April. ISM Prices Paid for May came in at 86.0 versus an estimate of 89.3 and a reading of 88.0 in April. The report showed that more factories were hiring than at any time in 31 years, Bloomberg reported. The index reached 63.6 earlier this year, the highest since December 1983 and has been greater than 60 for seven months in a row. Manufacturers are hiring workers and buying new equipment to boost production as sales improve. "Production should remain strong for many months and probably into 2005. I am very optimistic about manufacturing," said Richard DeKaser, chief economist at National City Corp.

The final 1Q Non-farm Productivity reading showed an increase of 3.8% versus estimates of a 3.7% rise and a prior estimate of 3.5%. The final 1Q Unit Labor Costs reading showed an increase of .8% versus estimates of a .4% rise and a prior forecast of .5%. Gains in productivity, aided by higher spending on equipment and software, may help companies hold down costs and prices as they try to keep up with orders and add to payrolls, Bloomberg reported. "We're now seeing a pickup in business investment spending, and that should help firms boost productivity even more," said Michael Moran, chief economist at Daiwa Securities.

Factory Orders for April fell 1.7% versus estimates of a 1.4% decline and an upwardly revised 5.0% increase in March. "April was essentially a month where orders took a breather," Stephen Stanley, chief economist for RBS Greenwich Capital said. As well, Factory Orders were up almost 11% compared to a year earlier.

ISM Non-manufacturing for May came in at 65.2 versus estimates of 66.0 and a reading of 68.4 in April. This gauge of activity at U.S. service companies, which make up the largest share of the economy, reached the fourth highest level on record as businesses increased hiring, Bloomberg said. The employment component of the survey reached its second highest level on record. Stronger employment and rising incomes are keeping households in a buying mood, which should help underpin economic growth for the rest of the year, economists said. "Since the beginning of the year, there has been a dramatic acceleration in the economy," said William Zollars, CEO of Yellow Roadway Corp., the biggest U.S. trucking company.

The Change in Non-farm Payrolls for May was 248,000 versus estimates of 225,000 and an upwardly revised gain of 346,000 in April. The Change in Manufacturing Payrolls for May was 32,000 versus estimates of 20,000 and an upwardly revised 29,000 in April. The Unemployment Rate for May held at 5.6%, meeting estimates and the same as April's rate. The gain in manufacturing employment was the largest in six years and the economy has now recouped all the jobs lost in the aftermath of 9/11 and the recession, Bloomberg reported. Moreover, employment has increased by 1.2 million so far this year, the best five months of job growth since the stock market bubble burst and the economy began to deteriorate in early 2000. "People wouldn't be hiring like this if they didn't have a high level of confidence," said Edward McKelvey, chief U.S. economist at Goldman Sachs.

Bottom Line: There are several key takeaways for the week. First, construction is on fire. Homebuilding will likely slow from its current torrid pace to a more sustainable level of good growth. Non-residential construction is now starting to accelerate as companies flush with record-high cash hoards are expanding operations. The secular downturn in manufacturing that began over a decade ago appears to be over. Factories are now hiring and expanding at very healthy levels. This should bring good economic growth to areas of the U.S. that missed out on the technology-led prosperity of the 90's. The recent pickup in business investment for technology products should result in continued high levels of productivity, allowing companies to shield their customers from significant price increases. Lastly, American's net worth is at all-time highs, incomes are rising and hiring is accelerating, more than offsetting the increase in energy prices and interest rates, resulting in strong demand for many goods and serives. Thus, the service sector, which accounts for 85% of the U.S. economy is very strong and getting stronger.

Weekly Scoreboard*

Indices
S&P 500 1,122.50 +.11%
Dow 10,242.82 +.37%
NASDAQ 1,978.62 -.30%
Russell 2000 567.75 -.14%
Wilshire 5000 10,934.60 +.11%
Volatility(VIX) 16.78 +9.82%
AAII % Bulls 33.33 -7.70%
US Dollar 88.54 -.18%
CRB 274.75 -.35%

Futures Spot Prices
Gold 391.70 -1.14%
Crude Oil 38.49 -2.48%
Natural Gas 6.26 -4.41%
Base Metals 106.26 -2.34%
10-year US Treasury Yield 4.77% +2.58%
Average 30-year Mortgage Rate 6.28% -.63%

Leading Sectors
Gaming +3.18%
HMO's +2.13%
Broadcasting +2.09%

Lagging Sectors
Homebuilders -1.89%
Semis -2.39%
Disk Drives -2.60%

*% Gain or loss for the week

Mid-day Update

S&P 500 1,125.57 +.80%
NASDAQ 1,988.91 +1.46%

Leading Sectors
Gaming +3.01%
Semis +2.63%
Airlines +2.35%

Lagging Sectors
Iron/Steel +.06%
Oil Service -.38%
Energy -.69%

Other
Crude Oil 38.58 -1.60%
Natural Gas 6.28 -1.30%
Gold 390.50 +.44%
Base Metals 105.74 -2.20%
U.S. Dollar 88.72 -.26%
10-Yr. T-note Yield 4.73% +.50%
VIX 16.05 -5.75%
Put/Call .83 -26.55%
NYSE Arms .67 -56.77%

Market Movers
SKIL -24.83% after beating 1Q estimates and lowering 05 guidance.
DYAX +21.83% after saying the FDA allowed it to resume clinical trials on a rare genetic disorder.
PETS +10.0% on continued rise after being named Business Week's #1 hot growth company.
KMRT +11.0% after saying Home Depot may buy as many as 24 stores for $365 million.
MBG +8.29% after beating 1Q estimates substantially.
CRDN +6.19% after Roth Capital raised to Buy, target $38.
RDEN -13.5% after meeting 1Q estimates and CL King downgrade.
FBN -8.0% after cutting 2Q forecast.
MYG -7.42% after cutting 2Q/04 forecast and announcing restructuring.

Economic Data
Unemployment Rate for May was 5.6%, meeting estimates and the same as April.
Average Hourly Earnings for May +.3% versus estimates of +.2% and +.3% in April.
Change in Non-farm Payrolls for May was +248,000 versus estimates of +225,000 and an upwardly revised +346,000 in April.
Change in Manufacturing Payrolls for May was +32,000 versus estimates of +20,000 and an upwardly revised +29,000 in April.
Average Weekly Hours for May came in at 33.8 versus an estimate of 33.8 and an upwardly revised 33.8 in April.

Recommendations
WSH rated Buy at UBS, target $43. Goldman Sachs raised SLB to Outperform, target $72. Goldman reiterated Outperform on EMC, target $14-17. Goldman reiterated Outperform on AMD, IR, ADP, CEN, PAYX and INTC. MBG rated Buy at Legg Mason, target $70. FD raised to Outperform at CSFB, target $55. Citi SmithBarney reiterated Buy on INTC, target $33. Citi said tone of analog semi companies on day 2 of semi conference was upbeat, favorites are MXIM and LLTC. Citi reiterated Sell on KFT, target $29.50. Citi reiterated Buy on NMG/A, target $68. Citi reiterated Buy on AV, target $25.

Mid-day News
U.S. stocks are higher mid-day as a government report showing significant U.S. job growth and falling energy prices boost investor optimism. China will start on Sunday a weeklong energy-saving campaign, aiming to avoid a repeat this summer of the power shortages that affected parts of the country last year, Bloomberg reported. GM expects China to become its second-biggest vehicle market this year behind the U.S., Xinhua reported. Amazon.com is targeting a new subscription service to entertainment-industry insiders, hoping to not only sell movies but also help Hollywood make them, the LA Times said. Crude oil prices have plummeted 8.6% from recent highs, heading toward the third straight weekly drop, as rising OPEC production bolsters U.S. inventories and eases concern over summer fuel supplies, Bloomberg reported. U.S. employers added 248,000 workers to payrolls in May, helped by the biggest gain in manufacturing employment in almost six years. The only major category showing job losses was government employment, which declined by 27,000. The economy has now recouped all the jobs lost in the aftermath of 9/11 and the recession, Bloomberg reported. Moreover, American's incomes are now rising at a 5.7% annual rate, the fastest pace since the stock market bubble burst in early 2000, Bloomberg said.

BOTTOM LINE: The Portfolio is having a very good day today as most of my long positions are higher. I added a few internet and semiconductor longs in the morning, bringing the Portfolio's market exposure to 100% net long. One of my new longs is PMCS and I am using a $13.25 stop-loss on the position. I expect U.S. stocks to rise into the close on falling oil prices, great economic news, stabilizing interest rates and positive technology sector comments.