Monday Watch

Earnings of Note
Company/Estimate
URS/.50
SMSC/.13
ZQK/.46

Splits
None of note.

Economic Data
Trade Balance for April estimated at -$45.0 billion versus -$46.0 billion in March.
Advance Retail Sales for May estimated +1.2% versus -.5% in April.
Retail Sales Less Autos for May estimated +.6% versus -.1% in April.

Weekend Recommendations
Forbes on Fox had guests that were positive on AMD, AGIX, BSX, JNJ and mixed on AZN, AAPL. Bulls and Bears had guests that were positive on NVS, ABT, SHPGY, LLY, SVM, VZ and mixed on PIR, FCS, BRL, CMCSA. Cashin' In had guests that were positive on PKZ, VIP, NVO, TKC, SIRI and mixed on SEPR, AMZN, RYAAY. Louis Rukeyser's Wall Street had guests that were positive on ACDO, CVD, MNT, CHN, JNJ, ABT, TGT and AGN. Wall St. Week w/Fortune had guests that were positive on FON, LU, NT, TXN, AFL, LNC, MET, PRU, TMK, UL, NEM and negative on CXW. Barron's had a positive column on banking stocks. Goldman Sachs reiterated Outperform on MDT, PFGC and EMC. Goldman expects JBL and SLR reports this week to support view that enterprise hardware and communications are improving. Goldman thinks VRTSE can trade higher in near-term on a number of catalysts.

Weekend News
Moqtada al-Sadr called on his supporters to end aggression against opponents and the U.S.-led coalition in Iraq, NY Times said. Disney President Rober Iger said he would like to succeed Chief Executive Michael Eisner, who has held the role for 19 years, the London-based Times reported. ChevronTexaco's annual oil and gas production fell by about 15% during the past six years while its reported reserves rose 14%, contributing to concerns that the oil industry can't keep pace with demand, the NY Times said. A non-partisan congressional office has concluded that Social Security's shortfall during the next 75 years will be 33% less than originally thought, Bloomberg reported. Fifty of the U.S.'s largest employers have formed a purchasing group to win greater discounts from drugmakers, rather than acquiring medications through pharmacy benefit managers, the NY Times reported. China's central bank is poised to raise interest rates and is waiting for the appropriate time, the Economic Observer reported. Police in the UAE arrested an Indian citizen who offered to sell nuclear secrets to Arab embassies, al-Hayat reported. More companies are granting their executives restricted stock grants, that aren't tied to performance, instead of stock options, the NY Times reported. Government agencies have stepped up efforts to detect radioactive materials in the New York and New Jersey area, the Star-Ledger reported. The number of U.S. companies filing for bankruptcy may fall to a six-year low this year, boosted by increased pricing power and profitability, the Financial Times said. The terror group Hamas said it will continue attacks against Israel even after the nation withdraws from settlements in the Gaza Strip, Haaretz reported. 12 people were killed and thirteen others wounded in an attack on an Iraqi police patrol in the capital, Agence France-Presse reported. Copper prices may rise this week as inventories fall and global demand is forecast to exceed production, Bloomberg reported. Nokia may have to lower its sales forecast for this quarter after price reductions and new models failed to stem a drop in market share, Bloomberg reported. Crude oil futures are falling in New York after a general strike ended in Nigeria without disrupting oil exports, Bloomberg said.

Late-Night Trading
Asian indices are mostly lower, -2.0% to unch. on average.
S&P 500 indicated -.51%.
NASDAQ 100 indicated -.61%.

BOTTOM LINE: I expect U.S. stocks to open lower tomorrow on Middle East violence, rising interest rates and weakness in Asia. I will likely add a few new shorts on any unexpected strength on the open. The Portfolio is market neutral heading into tomorrow.

Weekly Outlook

There are a number of important economic reports and several significant corporate earnings reports scheduled for release this week. Economic reports this week include Trade Balance, Advance Retail Sales, PPI, CPI, Business Inventories, Empire Manufacturing, Preliminary U. of Mich. Consumer Confidence, Housing Market Index, Housing Starts, Industrial Production, Capacity Utilization, Initial Jobless Claims, Leading Indicators, Philadelphia Fed. and Current Account Balance. PPI, CPI, Consumer Confidence, Initial Jobless Claims, Leading Indicators and Philly Fed all have market-moving potential.

Oracle(ORCL), Lehman Brothers(LEH), Circuit City(CC), Bear Stearns(BSC), Best Buy(BBY), KB Home(KBH), Adobe Systems(ADBE), Solectron(SLR), Carnival Corp.(CCL) and Red Hat(RHAT) 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 Thomas Weisel Growth Forum, Bear Stearns Tech Conference and NYSSA Semi Conference could all impact trading this week.

Bottom Line: I expect U.S. stocks to trade weaker-to-neutral this week on a moderate rise in interest rates and energy prices. Numerous economic reports will likely point to continued strong economic growth and higher-than-expected inflation which will send interest rates higher and pressure stocks in the short-term. The spike in the AAII % Bulls, lower Put/Call and ARMS readings and a falling VIX last week also point to a tougher week for U.S. stocks. Finally, the market's technically overbought short-term condition and psychological factors will also weigh on shares this week. My short-term trading indicators are giving mixed signals and the Portfolio is market neutral(longs-shorts=0) heading into the week.

Chart of the Week

CBOE Index Put/Call Ratio (simple 5-day moving-average)
(>1.70 Bullish, <1.00 Bearish)
Close: 1.35


Bottom Line: Put/Call, ARMS, VIX and AAII % Bulls readings are all pointing to a weaker-to-neutral environment for U.S. stocks in the short-term. The market has technical and psychological hurdles in the short-term as well.

Market Week in Review

S&P 500 1,136.47 +1.02%

U.S. stocks finished mostly higher last week on very light volume as the death of President Reagan dominated thoughts and headlines. The shortened trading week began on a strong note as investors bid shares higher on optimism over job growth, a large merger announcement and lower energy prices. As the week progressed, strong economic and corporate earnings reports began to pressure bonds. Moreover, Alan Greenspan's comments suggesting that interest rates could rise faster than current expectations also sent rates higher, thus pressuring stocks on Wednesday. Finally, U.S. stocks ended the week on a positive note, led by commodity-related shares, as energy prices stabilized and a government report showed a higher-than-expected inflation reading.

Merger activity provided a lift to U.S. shares throughout the week. MGM Mirage(MGG), the third-largest U.S casino company, offered to purchase Mandalay Resort Group(MBG) in a transaction valued at $7.65 billion including the assumption of $2.8 billion in debt. May Department Stores(MAY) announced it had entered into a definitive agreement to acquire the Marshall Field's department store group and nine Mervyn's store locations in the Twin Cities area from Target(TGT) for $3.24 billion in cash. This transaction sent Dillards(DDS) stock higher as investors deduced its shares were undervalued. Finally, favorable earnings news from FedEx(FDX) and National Semiconductor(NSM) had positive implications for the overall economy. On the disappointing side, Tommy Hilfiger(TOM) and Omnivision Technologies(OVTI) both reported below-expectations quarterly reports.

Bottom Line: Once again, last week was characterized by a cautiously positive tone. The postponement of the PPI and the ceremonies for President Reagan likely made for a more positive week for U.S. stocks than would have otherwise been the case. Energy prices and interest rates appear to have bottomed in the short-run, which pressured high-beta stocks, interest rate-sensitive shares and airlines on Wednesday and Thursday. Friday's action was a positive for the Bulls, but on very light volume I tend to believe it was just a very short-term respite from the selling that began on Wednesday. Merger activity is almost always a positive for stocks and it definitely boosted shares in select sectors last week. The fact that an energy-dependant bell-weather cyclical company such as FedEx is raising guidance says volumes about how strong current economic growth really is. Finally, news from the semiconductor industry continues to exceed even optimistic projections and investors continue to sell the news in anticipation of an abrupt end to the current cycle.

Weekly Scoreboard*

Indices
S&P 500 1,136.47 +1.02%
Dow 10,410.10 +2.10%
NASDAQ 1,999.87 +.55%
Russell 2000 569.12 -.77%
Wilshire 5000 11,046.64 +1.59%
Volatility(VIX) 15.04 -10.37%
AAII % Bulls 55.26 +65.80%
US Dollar 89.97 +1.64%
CRB 269.93 -1.75%

Futures Spot Prices
Gold 386.60 -1.38%
Crude Oil 38.65 +.39%
Natural Gas 6.18 -1.34%
Base Metals 103.57 -2.53%
10-year US Treasury Yield 4.80% +.63%
Average 30-year Mortgage Rate 6.30% +.32%

Leading Sectors
Gaming +4.14%
Telecom +2.72%
Computer Boxmakers +2.68%

Lagging Sectors
Nanotechnology -2.38%
Airlines -3.83%
Biotech -5.52%

*% Gain or loss for the week

Economic Week in Review

ECRI Weekly Leading Index 132.90 -.89%

Consumer Credit for April fell to $3.9 billion versus estimates of $5.9 billion and an upwardly revised $9.3 billion in March. Measured at an annual rate, debt rose 2.3% in April after increasing 5.5% in March. Borrowing may again pick up with gains in payrolls and incomes, which may take some of the place of tax cuts and mortgage refinancing as a spur to the economy, Bloomberg reported. Employment has increased by 1.2 million so far this year and incomes are rising at the fastest rate in several years, Bloomberg said. "U.S. consumer spending continues to be healthy. Car sales went through the roof in May," said chief financial economist at Bank of Tokyo-Mitsubishi. Consumers' "willingness to pay full price at our stores is very strong and creating momentum," Burton Tansky, CEO of Neiman Marcus Group said. Finally, Ford Motor expects no "significant impact" on the company from U.S. interest rate increases this year, CFO Don Leclair said.

The National Association of Realtors said sales of existing single-family homes will rise to a record 6.17 million this year, bolstered by an accelerating economy. The estimate is higher than the forecast for 6 million re-sales that the group provided a month ago. "The higher employment rate has made it possible for more people to obtain loans, even as the cost of financing a home purchase increased as mortgage rates rose," said David Lereah, NAR's chief economist. Lareah said he expects the economy to add about 3 million jobs this year, Bloomberg reported. The median existing home price is forecast to rise 5.4% this year to $179,000, while the median new-home price likely will gain 7.9% to $210,000, Lereah said.

Fed Chairman Greenspan said the U.S. central bank is ready to raise interest rates and would accelerate the pace of increases if inflation picks up. The Fed "is prepared to do what is required to fulfill our obligations to achieve the maintenance of price stability" and ensure maximum sustainable economic growth, Greenspan said. Consumer prices are expected to rise 2.7% this year, the same rate as in 2000, and below the 45-year average rate of 3.0%, according to the median forecast of 45 economists polled by Bloomberg. "The exceptional reluctance to expand payrolls appears to have ended, and businesses are once again hiring vigorously. An increased willingness to borrow, and ample liquid assets, should provide a further lift to capital investment and, with it, economic activity," Greenspan said.

Wholesale Inventories for April fell .1% versus expectations of a .5% gain and a .5% gain in March. That brought supplies at distribution centers, warehouses and terminals to a record low of 1.12 months' worth in April. Lean inventories at wholesalers as well as factories suggest that companies may have to step up production and keep adding workers, Bloomberg reported.

The Import Price Index for May rose 1.6% versus estimates of a .8% gain and a .2% gain in April. Excluding petroleum, the index rose .4%. Imported petroleum prices rose 43.9% in the year ended in May, Bloomberg reported. A drop in oil prices this month "may or may not signal a trend, but is nonetheless welcome," Alan Greenspan said earlier in the week. Oil prices have dropped about 12% since reaching $42.33/bbl. on June 1.

Initial jobless claims rose to 352K last week versus expectations of 335K and 340K the prior week. Continuing Claims came in at 2881K versus expectations of 2972K and 2987K prior. Last week included the Memorial Day holiday, which can present a more difficult time to seasonally adjust the data, Bloomberg said. "Growth in payrolls is robust and the labor market is coming out of the doldrums. I would classify the job market as healthy," said Michael Englund, chief economist at Action Economics. "The next few weeks we're entering the preparation for auto retooling phase and because of that jobless claims will remain on the firm to slightly higher side, obscuring what would otherwise be an overall downward trend," said John Herrmann, chief U.S. economist at Cantor Fitzgerald.

U.S. household net worth rose to a record $45.15 trillion in the first quarter of 2004, Bloomberg reported. Another government report showed the federal budget deficit narrowed to $62.5 billion last month as the strengthening economy boosted tax revenue 12% and federal spending declined 7.5%. "The budget situation is improving -- no question," said John Herrmann, chief U.S. economist at Cantor Fitzgerald. Finally, another report showed that only 1.9% of the jobs lost during the first quarter were a result of outsourcing to other countries. "There is a lot of political sound and fury out there about outsourcing, but at the end of the day it's not a big source of weakness for the labor market," said Jay Bryson, global economist at Wachovia.

Most CEOs of U.S. companies with annual sales of $1 million to $1 billion said they expect to add workers, raise prices and increase profits during the next 12 months, according to a survey by TEC International, Bloomberg reported. 60% of the 1,100 CEOs participating in the quarterly TEC Confidence Index said they planned to add jobs. Moreover, only 6% said they planned to reduce their workforce. The TEC survey provides a glimpse into the thinking of the CEOs who run smaller companies. The organization's 9,000 member companies have a combined workforce of 1.1 million employees and annual sales of $280 billion. The survey also found that 73% of small-company CEOs said they planned to vote for President Bush, down from 74% last quarter. Support for Senator Kerry grew to 21% from 16%, Bloomberg reported.

Japanese consumer spending is driving the fastest growth in the G-7, spurring optimism a rebound in the world's second-largest economy will endure longer than two failed recoveries since 1991 and boost global growth, Bloomberg reported. "Purchasing power is rising and consumers are buying more expensive things now," said Tatsuhiko Izumi, president of Clarion Co., a maker of car navigation systems. Consumers accounted for more than a third of Japan's 6.1% annual growth in the first quarter. Spending by households headed by a salaried worker had a record 9.3% jump in April, Bloomberg said. Confidence among consumers was boosted by a 47% gain in the Nikkei in the year ended March 31, the biggest since 1973. "For almost a dozen years, the Japanese economy has been near zero growth and plagued by deflation. What we see now is strong sustainable growth and price stability," U.S. Treasury Undersecretary John Taylor said.

Bottom Line: Economic data released last week continued to show a very healthy U.S. economy. Consumer borrowing rose less-than-expected, which is a positive considering American's high debt levels. Job growth, rising incomes and record-high household net worth are more than offsetting the negative effects from higher interest rates and gas prices with respect to consumer spending. Multiple Fed members made statements last week that supported my view that they will hike rates by 50 basis points in the very near future. Rates are currently at emergency levels that are not warranted in today's vigorous economic environment. Record-low inventories, notwithstanding the recent surge in economic activity, bodes well for future economic growth and hiring. Inflation, while rising, is not currently a problem and is below its 46-year average. At current levels, inflation is actually a positive as companies regain pricing power, boost profits, increase production and hire more people. Americans' net worth is at all-time high levels, a very positive fact that is barely reported by the mainstream press, and is the main reason that higher energy prices and interest rates are not hurting the economy. Finally, Japan continues to improve and is leading the G-7 in economic growth, which is a big positive for global growth. Japan's recovery appears sustainable this time as consumers are participating for the first time in over a decade.