Mid-day Update

S&P 500 1,136.11 +.10%
NASDAQ 1,9990.84 +.21%

Leading Sectors
Nanotechnology +2.90%
Utilities +1.02%
Semis +.91%

Lagging Sectors
Oil Service -.68%
Telecom -.78%
HMO's -1.17%

Other
Crude Oil 37.80 -3.08%
Natural Gas 6.33 -3.07%
Gold 394.20 -.38%
Base Metals 109.83 +.46%
U.S. Dollar 89.28 +.22%
10-Yr. T-note Yield 4.68% -.55%
VIX 15.03 +.27%
Put/Call .68 -17.07%
NYSE Arms 1.02 +27.50%

Market Movers
BFD +26.0% after announcing its acquisition by Banknorth for $195 million.
NVEC +30.9% after saying the U.S. Patent and Trademark Office issued the company a patent for an innovation type of MRAM.
OXM +18.78% after saying it agreed to buy Ben Sherman Ltd. for $146 million in cash.
TASR +17.58% after increasing it annual revenue growth forecast from 100% to 150% for 04.
SOTR +13.62% after agreeing to be acquired by Wachovia for $14.3 billion.
CPG +11.7% after agreeing to be acquired by Simon Property Group for $3.5 billion in cash and stock.
BBBB +10.7% on continuing strength after IPO.
IMDC +6.55% after settling a patent lawsuit with Ethicon Endo-Surgery for $17.3 million.
EASI +5.28% after saying it is in full-scale production of its armored cab design for the U.S. Army's Family of Medium Tactical Vehicles.
MIL +5.27% after positive Barron's mention.
LABS -8.58% after saying it plans to sell $90 million in convertible debt.
CYBX -4.67% on profit-taking.
ASKJ -5.1% on insider selling.
SOHU -7.33% on crackdown by Chinese government on online content and YHOO entering Chinese search market.

Economic Data
None of note.

Recommendations
Goldman Sachs reiterated Outperform on SLR, PAYX, KO, PEP, STZ and ATYT. Goldman reiterated Underperform on PBG and RKY. Citi SmithBarney said to Buy MOT, target $25. Citi says their recent Semi Purchasing Manager survey was better than expectations and has positive implications for LLTC, MXIM, INTC, AMD and NSM. Citi reiterated Sell on MU, target $12. ARXX raised to Buy at Deutsche Bank, target $16.

Mid-day News
U.S. stocks are quietly higher today as investors continue to fear making big bets ahead of several market-moving events over the next couple of weeks. Iran seized three British navy vessels that reportedly entered the country's territorial waters, Agence France-Presse said. U.S. officials have been spending about $2.5 billion in Iraqi oil revenue on programs such as police cars and uniforms, as well as repairing schools, the NY Times reported. Abiomed, the maker of the experimental artificial heart, expects to become profitable by March 31 and to have annual revenue of $500 million by 2011, the Boston Globe reported. The leaders of the largest labor unions in the U.S. are considering reducing the number of unions to 15 from 65 to better focus their organizing and bargaining efforts, the LA Times reported. The AFL-CIO is undertaking its earliest and largest "get-out-the-vote" campaign ever for Democratic presidential contender John Kerry, the Washington Post reported. Geely Group this year plans to become the first Chinese automaker to sell cars in the U.S., Automotive News reported. Wal-Mart said June's sales are rising around the low end of its recent forecast, Bloomberg reported. Motorola expects to raise as much as $2.73 billion in an IPO of its Freescale Semiconductor unit, Bloomberg said. A privately funded and constructed spaceship was launched today from California's Mojave Desert on a mission to become the first non-governmental craft to leave the Earth's atmosphere, Bloomberg reported. The U.S. SEC is moving ahead with plans to bring hedge funds under greater government oversight over the opposition of most of the $800 billion industry, Bloomberg reported. Crude oil futures are falling as Iraq resumed partial exports through one of two pipelines shut after an attack early last week, Bloomberg said.

BOTTOM LINE: The Portfolio is having a very good day today as my security and telecom equipment longs are rising and short Chinese ADRs are falling. I added a few new technology longs this morning, bringing the Portfolio to 100% net long market exposure. The fundamentals are improving today on an acceleration in merger activity, falling energy prices and declining interest rates. I expect U.S. stocks to rise modestly into the close on short-covering.

Monday Watch

Earnings of Note
Company/Estimate
PDG/.00
WAG/.32
APOG/.08
WWE/.19

Splits
CACH 3-for-2
PG 2-for-1
WGR 2-for-1

Economic Data
None of note.

Weekend Recommendations
Forbes on Fox had guests that were positive on APC, FCX, MMC, AH, DHB and IDNX. Bulls and Bears had guests that were positive on LYG, OXY, HPQ, NMG/A, TARO and mixed on ATYT and STX. Cashin' In had guests that were positive on SU, UPL,NOC and mixed on DEO. Louis Rukeyser's Wall Street had guests that were positive on CVX, CNF, FMC, MET, MSFT, TYC, MRK, AES and EP. Wall St. Week w/Fortune had guests that were positive on FRX, AGN, ELN, HCR, BEV and KIND. Barron's had a positive column on MIL. Barron's mid-year roundtable is positive on stocks for the second half of the year. Goldman Sachs reiterated Outperform on EBAY and raised 2Q estimates. Goldman said FLEX is oversold and to buy for a trade. Goldman reiterated Outperform on ATYT ahead of earnings report. ElectronicNews has a positive article on the semiconductor industry.

Weekend News
China will cut Internet access to unlicensed Internet cafes and strengthen its control over online chat rooms as part of a crackdown on "unhealthy" material on the Web, Xinhua reported. Baghdad's raw sewage began receiving treatment late last month for the first time in as many as 15 years, though officials made no fanfare about it for fear of the treatment plant being bombed, the NY Times reported. Telephone, cable and satellite prices will decline as they compete more with each other and fail to meet their growth goals, Barron's reported. Former President Bill Clinton, in a memoir to be released Tuesday, said his biggest disappointment while in office was his failure to bring Osama bin Laden to justice, Newsweek reported. Clinton lost his temper for several minutes during an interview that is scheduled to run Tuesday with the BBC's David Dimbleby when he was repeatedly questioned about his affair with Monica Lewinsky, the Sunday Telegraph reported. Las Vegas Sands, which operates the Venetian Casino Resort in Nevada, may have a market value of at least $4 billion after an IPO, Barron's reported. Al-Qaeda confirmed the death of the terrorist group's leader in Saudi Arabia, Agence France-Presse reported. Oil supplies resumed to Iraq's southern port of Basra after repairs were completed to a pipeline sabotaged by insurgents last week, the AP said. Exxon Mobil won a contract worth up to $1 billion to boost output from the Upper Zakum offshore oil field by a third over two years, Gulf News reported. Time Warner, whose profit has risen since Parsons became CEO in May 02, still faces U.S. federal accounting probes that began about two years ago, the NY Times reported. Pakistan and Saudi Arabia helped set the stage for the Sept. 11 attacks by cutting deals with Afghanistan's Taliban and Osama bin Laden that allowed the network to flourish, the LA Times reported. U.S. Justice Dept. prosecutors plan to ask a grand jury to return a fraud indictment against Enron's former Chairman Ken Lay, the Houston Chronicle reported. GE will offer financing products direct to consumers under the brand GE Money, the Financial Times reported. Chicago Sun-Times circulation officials set up fake sales accounts and told distributors to throw out newspapers to boost circulation numbers, the Wall Street Journal reported. The American Journal of Psychiatry published a positive study about Forest Lab's Celexa without acknowledging a negative one known to exist, the Wall Street Journal said. U.S. Treasury Secretary Snow said private sector forecasts that the U.S. economy will continue to generate 200,000 to 300,000 jobs a month this year are "reasonable," Bloomberg reported. Copper prices will probably rise for the second week in London and NY as U.S. demand for metal grows and inventories shrink, according to a Bloomberg survey. The South Korean government said it will stick to its plans to deploy 3,000 more troops in Iraq this summer, rejecting an ultimatum from Muslim militants who are threatening to behead a South Korean hostage unless the nation's soldiers are withdrawn, Bloomberg said.

Late-Night Trading
Asian indices are mixed, -.25% to +1.50% on average.
S&P 500 indicated +.27%.
NASDAQ 100 indicated +.51%.

BOTTOM LINE: I expect U.S. stocks to open higher tomorrow as strength in Japan and declining oil prices boost investor sentiment. One of the new longs I added Friday afternoon was PD and I am using a $70 stop-loss on this position. The Portfolio is 75% net long heading into the week.

Chart of the Week

Japan's Nikkei-225 Stock Average
Last 12 months


Bottom Line: Japan's Nikkei-225 appears to be breaking out tonight after a 3-week consolidation. The Index will likely break through its recent highs of 12,195 set in April. The Nikkei has returned 27.4% over the last 12 months versus the S&P 500's gain of 16.0%.

Weekly Outlook

There are several important economic reports and a few significant corporate earnings reports scheduled for release this week. Economic reports this week include Durable Goods Orders, Initial Jobless Claims, New Home Sales, Help Wanted Index, Final 1Q GDP, Final Univ. of Mich. Consumer Confidence and Existing Home Sales. Durable Goods Orders and Home Sales both have market-moving potential.

Walgreen(WAG), Goldman Sachs(GS), Morgan Stanley(MWD), FedEx(FDX), Goodyear Tire(GT), Bed, Bath & Beyond(BBBY), Omnivision Technologies(OVTI), Apollo Group(APOL), Paychex(PAYX), Micron Technology(MU), Nike(NKE) and RiteAid(RAD) are some of the more important companies that release quarterly earnings this week. There are also a couple of other events that have market-moving potential. The Bank of America Auto Conference and a speech by the Fed's Santomero could also impact trading this week.

Bottom Line: I expect U.S. stocks to trade neutral-to-higher this week on short-covering and strong corporate earnings reports. It is good to see the AAII % Bulls fell substantially last week following the spike the preceding week. While I think U.S. stocks will move quietly higher this week, I am not ruling out an outsized move in either direction ahead of many market-moving events the following week. My short-term trading indicators are still giving mixed signals and the Portfolio is 75% net long heading into the week.

Market Week in Review

S&P 500 1,135.02 -.13%

U.S. stocks finished mixed last week on a slight pick-up in volume as violence in the Middle East offset strong economic reports and falling interest rates. Commodity-related stocks showed relative strength and technology shares lagged throughout the week. Stocks fell on Monday as interest rates rose ahead of key inflation reports. However, bonds rallied sharply on the release of these reports as they showed core inflation remained subdued and expectations for future inflation diminished. A much higher-than-expected reading on consumer confidence and positive comments from Alan Greenspan with respect to inflation also buoyed stocks mid-week. The week ended on a mixed note as rising oil prices and fears over a technology sector slowdown pressured shares on Thursday. However, by Friday investors once again focused on falling interest rates as U.S. stocks ended the week on a positive note.

There were several notable movers last week. Microsoft(MSFT) rose 5.9% on speculation over a massive share buyback and improving fundamentals. General Electric(GE) rose 3.6% on strong economic reports and falling interest rates. Cyberonics(CYBX) rose 101.5% after the FDA recommended approval of the company's brain-stimulation device for severe depression and speculation of a Boston Scientific takeover. Red Hat(RHAT) fell 21.7% after the company reported disappointing 1Q sales and lowered its 2Q forecast. Jabil Circuit(JBL) fell 12.7% after reducing its 04 forecast. Yellow Roadway(YELL) gained 2.3% after raising 2Q estimates on broad-based economic strength. Nucor(NUE) rose 6.7% after boosting its 2Q forecast. Solectron gained 10.6% after beating 3Q estimates and raising 4Q guidance. Finally, Symantec(SYMC) fell 9.5% over concerns of increasing future competition from Microsoft.

Bottom Line: Overall, last week was mildly positive for the bulls. Fundamentals continued to improve and interest rates seem to have stabilized. It is also very positive that market bell-weathers General Electric and Microsoft are acting much better. However, the anxiety in the tech sector in the face of improving business conditions is somewhat concerning. This skepticism is positive for the longer-term health of the sector. I continue to believe tech stocks will outperform in the second half as valuations continue to fall and corporate tech spending accelerates. Oil appears to be headed lower in the intermediate-term as last week's attacks could not move prices up significantly. The outperformance by commodity-related stocks last week tells me that investors are not as concerned about inflation as in recent weeks. This counterintuitive logic is based on the belief that the Fed will not raise rates excessively, thus killing the economic recovery, resulting in a crash in commodity prices. Volume continues to remain light ahead of the Iraqi handover of power, end of the quarter repositioning, Russell rebalancing and Fed rate hike. More pundits and analysts are anticipating an upward move in U.S. stocks at the first of July, which means it is likely a move will begin imminently or later than I currently anticipate. I continue to believe long-term investors should use any excessive weakness over the next few weeks to accumulate shares in favorite stocks.

Economic Week in Review

ECRI Weekly Leading Index 132.70 +.45%

Advance Retail Sales for May rose 1.2% versus expectations of a 1.2% rise and a .6% decline in April. Retail Sales Less Autos for May rose .7% versus estimates of a .6% rise and a .1% fall in April. Rising incomes and more jobs are boosting sales at retailers such as J.C. Penney, Neiman Marcus and Wal-Mart, Bloomberg reported. "The sales figures look very strong," said Steven Wieting, a senior economist at Citigroup Global Markets.

Gary Stern, president of the Federal Reserve Bank of Minneapolis, said he sees no threat of rising inflation and the central bank is ready to adjust the pace at which it raises rates should that expectation prove wrong. New York City's economy grew at a blistering 7% annual rate in the first quarter of 04, outpacing the rest of the U.S. for the first time since the heights of the stock market bubble, Bloomberg reported. "The two main factors behind the increase were jobs and incomes," City Comptroller Thompson said. Finally, 32% of U.S. employers plan to add workers in the third quarter, the most since before the economy began to plunge into recession in 2000, according to a survey released by Manpower Inc.

The Consumer Price Index for May rose .6% versus expectations of a .5% rise and a .2% rise in April. The CPI Ex Food & Energy rose .2% versus expectations of a .2% rise and a .3% rise in April. Prices minus food and energy(core) were 1.7% higher than a year earlier, compared with a 1.8% rise in the 12 months ended in April. Last year, the core index rose 1.1%, the smallest yearly gain in 44 years as global competition and excess capacity kept companies from boosting prices.

The Preliminary University of Michigan Consumer Confidence reading for June was 95.2 versus expectations of 90.8 and a reading of 90.2 in May. Confidence rebounded amid increased hiring, higher wages, falling gasoline prices and improvement in Iraq, the survey showed.

Housing Starts for May were 1967K versus expectations of 1950K and an upwardly revised 1981K in April. Building Permits for May were 2077K versus estimates of 1970K and 2006K in April. U.S. homebuilders began work on more houses than expected in May and building permits rose to the highest level in more than 30 years, suggesting that rising rates have yet to curb demand, Bloomberg reported. Year-to-date, the rate of housing starts has averaged 2.12 million, on pace to surpass last year's total of 1.85 million, the most in 25 years. "A better performing economy -- jobs, income growth -- that trumps to a certain extent rising rates," said Ken Mayland, chief economist for Clear View Economics. U.S. employers added 248,000 workers in May and have created 1.2 million jobs just since the beginning of the year, Bloomberg reported.

Industrial Production for May rose 1.1% versus estimates of a .8% rise and a .8% rise in April. This was the largest gain in six years, as utilities generated more power and companies made more business equipment. Manufacturers are "doing a little more of the heavy lifting in the economy," said Jonathan Basile, an economist at CSFB. "Businesses are investing more and hiring more, and that is a good sign for the sustainability of the expansion."

The Producer Price Index for May rose .8% versus estimates of a .6% rise and a .7% rise in April. PPI Ex Food & Energy rose .3% in May versus estimates of a .2% rise and a .2% rise in April. "We're starting to see a lot of pipeline pressures building in prices, but the key question is whether companies can pass these on to consumers," said Stephen Stanley, chief economist at RBS Greenwich Capital.

Initial Jobless Claims for last week came in at 336K versus estimates of 340K and 351K the prior week. Continuing Claims were 2895K versus a downwardly revised 2864K prior. "We're in the early stages of a long expansion," said Douglas Lee, president of Economics From Washington. "We're in the middle of a red hot labor market," said Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi.

Leading Indicators for June rose .5% versus estimates of a .4% rise and an increase of .1% in May. Production workers put in longer weeks and delivery times slowed as companies tried to replenish inventories stripped by rising demand. "The data reflect a robust economic environment this spring and point to more of the same this summer," Ken Goldstein, an economist at the Conference Board said.

The Philadelphia Fed. Index rose to 28.9 in June versus estimates of 25.3 and a reading of 23.8 in May. "The data remain consistent with a robust factory sector," said Michael Englund, chief economist at Action Economics. "Manufacturing continues to run on all cylinders." 52% of the Philly region's factories said they were operating at 80% of capacity or higher compared with 29% six months ago, Bloomberg reported. The prices paid index component of the report fell to 51.9 from 59.6, Bloomberg said. "We see a very robust recovery across all the segments we serve," said William Zollars, CEO of Yellow Roadway, the biggest U.S. trucking company. The U.S. economy is still projected to expand 4.6% this year, the most since 1984, according to the median estimate of a Bloomberg survey.

Bottom Line: Retail sales continue to exceed estimates as more Americans are gaining employment and receiving higher wages which more than offsets higher interest rates and gasoline prices. Multiple Fed members reiterated their belief that inflation is not a problem and that they stand ready to increase the pace of rate hikes if this view changes. Both the CPI and PPI exceeded expectations last week, yet the yield on the 10-year T-note fell 9 basis points. Thus, signaling an intermediate-term change in investor perceptions regarding future inflation. This is a very positive and unexpected development. I believe consumer confidence bottomed last month and will take out its recent highs of 103.80 in the near future. Iraq is improving and gasoline prices are falling. These were the two main sources of consumer angst. A recent survey showing that 57% of all Americans thought the U.S. economy had lost jobs over the last 6 months, when in fact it has gained 1.4 million, also bodes well for future confidence readings. A combination of the media's under-reporting of anything positive and Americans tuning out most forms of media likely led to this staggering number. However, as the election gets closer I believe most Americans will look much more closely at what is going on in the economy and they will see a very positive picture, thus increasing consumer confidence. Housing continues to defy the skeptics and will set another record this year, however a mild slowdown will likely occur in the next few months. Manufacturing continues to improve at a very rapid rate as capacity utilization climbs. Factories are hiring more and workers are working longer hours to meet rising demand. As of now, most costs are not being passed on to the consumer due to exceptional levels of productivity and profitability. Overall, a very positive week for the U.S. economy as exceptional growth continued and inflationary expectations diminished.