Wednesday Watch

Earnings of Note
Company/Estimate
ACN/.37
AA/.47
DNA/.19
ISCB/.32
STAR/.24
SCHN/1.25
YHOO/.08

Splits
INFY 2-for-1

Economic Data
None of note.

Recommendations
Goldman Sachs reiterated Outperform on PFE, VZ and Underperform on TFX.

Late-Night News
Asian indices are mostly lower on weakness in U.S. technology shares. Symbian Ltd. may Wednesday say most of its owners have agreed to increase their stakes in the company, blocking an attempt by Nokia to increase its stake to more than 50%, the Financial Times said. Volkswagen AG is offering "zero percent loans" to U.S. customers, the Financial Times said. China's economy may grow at least 10% in the first half of this year, Wen Wei Po reported. Virgin Blue Holdings, Australia's second-largest carrier, is considering adding flights to the U.S., competing on some of the most profitable routes of larger rival Qantas Airways, Bloomberg reported. Police in Jordan arrested the brother-in-law of al-Zarqawi, a Jordanian linked to al-Qaeda and accused of organizing terrorist attacks in Iraq, Agence France-Presse reported. Pakistan's President Musharraf said his country will rid itself completely of al-Qaeda terrorists, Agence France-Presse reported. American International Group and Morgan Stanley are among six bidders seeking to buy three Tokyo buildings worth $1.1 billion, in what may be the largest single property purchase by a foreign investor since Japan's bubble economy burst in 1990, Bloomberg said.

Late-Night Trading
Asian Indices are -.75% to +.25% on average.
S&P 500 indicated +.09%.
NASDAQ 100 indicated +.17%.

BOTTOM LINE: I expect U.S. stocks to open modestly higher in the morning as several short-term indicators are reaching oversold levels. The Portfolio is 50% net long heading into tomorrow.

Tuesday Close

S&P 500 1,116.19 -.82%
NASDAQ 1,963.43 -2.15%

Leading Sectors
Energy +.45%
Iron/Steel +.37%
Foods +.10%

Lagging Sectors
Disk Drives -4.20%
Software -5.05%
Computer Boxmakers -5.23%

Other
Crude Oil 39.53 -.30%
Natural Gas 6.40 -.30%
Gold 393.00 unch.
Base Metals 110.71 +.70%
U.S. Dollar 88.21 -.02%
10-Yr. T-note Yield 4.48% +.48%
VIX 16.25 +7.76%
Put/Call 1.08 +33.33%
NYSE Arms 2.17 -25.43%

After-hours Movers
APPB +4.21% after reiterating 2Q and 04 forecast.
ASCL -21.54% after cutting 2Q and 3Q forecast.
JDAS -19.83% after lowering 2Q forecast.

Recommendations
TheStreet.com says that general public short-selling is at an all-time high which bodes well for the second half of the year as this group of investors has a bad track record.

After-hours News
U.S. stocks finished lower today on rising oil prices, political worries and earnings disappointments in the technology sector. After the close, Starwood Hotels said it will open its first "W" hotel in Europe, the Financial Times reported. Drinking milk and taking calcium supplements daily may help prevent colon cancer, according to a study in tomorrow's Journal of the National Cancer Institute. The U.S. Commerce Department imposed duties of as much as 113% on imported shrimp from China and up to 93% on those from Vietnam, in a preliminary decision on a complaint by U.S. harvesters and processors, Bloomberg reported.

BOTTOM LINE: The Portfolio finished lower today on weakness in my technology long positions. I did not trade in the afternoon, thus leaving the Portfolio with 50% net long market exposure. Today was disappointing for the bulls, as the NASDAQ fell back below its 200-day moving average and through the 2000 level. Once again, the overcapacity generated during the technology bubble of the late 90's is disrupting technology stock fundamentals. Too many technology companies are still competing for the same business, thus any slight decline in demand results in outsized earnings shortfalls. I now expect the major U.S. indices to explore the lower end of their trading ranges at some point during the next month on concerns over the tech sector and anti-business political rhetoric.

Mid-day Update

S&P 500 1,115.72 -.86%
NASDAQ 1,965.28 -2.06%

Leading Sectors
Iron/Steel +.98%
Energy +.36%
Foods unch.

Lagging Sectors
Semis -4.12%
Software -4.81%
Computer Boxmakers -5.20%

Other
Crude Oil 39.55 +3.0%
Natural Gas 6.43 +4.51%
Gold 392.60 -1.56%
Base Metals 110.71 +.70%
U.S. Dollar 88.14 -.10%
10-Yr. T-note Yield 4.47% +.43%
VIX 16.58 +10.08%
Put/Call 1.17 +44.44%
NYSE Arms 2.35 -19.34%

Market Movers
VRTS -36.0% after cutting 2Q estimates and JP Morgan downgrade to Neutral.
BRCM -8.83% on CNXT shortfall.
NNI +14.2% on CSFB upgrade to Outperform, target $26.
KVHI -19.0% after lowering 2Q estimates.
ESPD -10.45% on continued fall after announcing disappointing 2Q.
UNFI -10.0% after lowering 05 forecast.

Economic Data
ISM Non-Manufacturing for June came in at 59.9 versus expectations of 63.0 and 65.2 in May.

Recommendations
Goldman Sachs reiterated Outperform on VOD, KO, IACI, YHOO, EBAY, NFP, BSX, INTC, AMD, AMX, SAP, FS and IGT. Goldman reiterated Underperform on UNM. Citi SmithBarney reiterated Buy on IGT, target $50. Citi reiterated Buy on INFA, target $10.50. BOBJ cut to Underweight at JP Morgan. KTO raised to Overweight and JP Morgan. GENZ raised to Outperform at CSFB, target $58. NNI raised to Outperform at CSFB, target $26. GNW rated Buy at UBS. STLD raised to Overweight at Morgan Stanley, target $40. VRC raised to Overweight at Morgan Stanley, target $29. GT raised to Overweight at JP Morgan. VRNT cut to Reduce at UBS, target $31.50. IFS rated Overweight at Lehman, target $17.

Mid-day News
U.S. stocks are lower mid-day on earnings shortfalls, political worries and higher energy prices. Senator Kerry has chosen North Carolina Senator John Edwards as his vice-presidential running mate, NBC News reported. Tradesports.com is showing the chances of President Bush being re-elected falling 3 points to 54%. As well, Bush's chances of winning Edward's home state of North Carolina are falling 14 points to 62%. Iraqi oil exports, cut by half since Saturday because of damage to a pipeline in the south of the country, will return to normal tomorrow after repairs are completed, Al Arabiya tv news reported. General Motors may produce a hybrid gas-electric sport utility vehicle in China to compete with Japanese rivals, the Detroit News reported. Jeff Schwartz, CEO of Autobytel, told CNBC that a recent round of consumer surveys show sales of sports-utility vehicles have dropped 20-30% while smaller, fuel-efficient vehicles, particularly hybrids, are up 20-30%, Bloomberg reported.

BOTTOM LINE: The Portfolio is lower today on weakness in my technology longs. I took profits in a number of long positions and added a few new shorts this morning, bringing the Portfolio's market exposure to 50% net long. One of my new shorts is SWIR and I am using a $38.25 stop-loss on the position. The market is falling today on concerns over technology sector earnings, future anti-business political rhetoric and rising oil prices. While it does appear that the fundamentals in the tech sector have deteriorated a bit recently, I continue to expect a pick-up later this quarter. Anti-business political rhetoric will likely accelerate as the party conventions approach. Finally, I expect oil to begin to decline before week's end. Overall, it now appears the recent trading range will continue to hold until later in the year.

Monday Watch

Earnings of Note
Company/Estimate
AYI/.44

Splits
None of note.

Economic Data
ISM Non-Manufacturing for June estimated at 63.0 versus 65.2 in May.

Weekend Recommendations
Forbes on Fox had guests that were positive on F, KKD, HAIN, WEN, WFMI and mixed on PLMO. Bulls and Bears had guests that were positive on SNP, IMOS and mixed on IPMT, SLR, DLX and ELX. Cashin' In had guests that were positive on BA, mixed on RIMM and negative on ADSK, WGO. Louis Rukeyser's Wall Street had guests that were positive on CD, SDS, EOP, SPG, MDT, CMCSA, URS, AXK and PRV. Wall St. Week w/Fortune had guests that were positive on TLT, BAC, NOK and APCC. Barron's had positive comments on BA. Goldman Sachs reiterated Outperform on WAG, SYMC, MERQ, BSX and Underperform on INFA.

Weekend News
Libya started exporting oil to the U.S after the two countries renewed diplomatic ties last week, ending 24 years of estrangement, al-Hayat newspaper said. The number of U.S. travelers taking trips abroad has rebounded from a slump after the Sept. 11, 2001, terrorist attacks, with international traffic on U.S. airlines up 20% this year through May, the LA Times reported. Senator Kerry has tempered his message about the importance of deficit reduction and instead is talking more about his health-care policy, the NY Times reported. Kerry is also trying to win the votes of rural and small-town voters by convincing them that he supports gun ownership, the NY Times said. Pennsylvania lawmakers approved bills that legalize slot machines at horse-racing tracks and use the estimated $1 billion a year in tax revenue to pay for property-tax reductions, the AP reported. China's central bank probably won't raise interest rates in the short-term, the official Xinhua news agency reported. Boeing expects to win a $23 billion order to supply the Air Force with refueling tankers based on its 767 plane in 2005, Handelsblatt reported. Nortel Networks plans to install SAP AG's software companywide to oversee its accounting, Handelsblatt said. Iraq plans to buy 200 megawatts of electricity from Kuwait and link its power grid with other neighboring countries to meet local electricity demand, the Kuwait news agency reported. Kuwait Oil Minister al-Sabah said OPEC would raise its output ceiling as planned next month to push prices in New York down below $35 a barrel, the Kuwait News Agency reported. North Korea and the U.S. made enough progress at last month's six-nation talks for specific accords to be reached on dismantling North Korea's nuclear program, Interfax said. Shanghai General Motors was China's top car seller in June, beating Volkswagen's local venture for the first time, Shanghai Daily reported. A 20-ton cornerstone of Adirondack Mountain granite inscribed with a tribute to the victims of the Sept. 11 attacks was lowered into the pit at New York's World Trade Center site, signaling the start of construction on the 1,776-foot Freedom Tower. Aluminum prices may rise 3.2% in the second half to the highest six-month average in nine years, benefiting producers, a survey of analysts showed. Premier Wen Jiabao's effort to cool China's growth rate to about 7% from last year's 9.1% may trim global growth by half a percentage point in 2005 and Asia's expansion by a full percentage point, said Stephen Roach of Morgan Stanley. Crude oil futures in New York are rising after a pipeline ruptured in Iraq, halving exports, Bloomberg reported.

Late-Night Trading
Asian indices are mostly higher, unch. to +1.0% on average.
S&P 500 indicated +.11%.
NASDAQ 100 indicated +.10%.

BOTTOM LINE: I expect U.S. stocks to open modestly higher tomorrow as there were no significant terrorist attacks over the holiday weekend. Rising oil prices will likely temper gains. The Portfolio is 100% net long heading into the week.

Chart of the Week

Bottom Line: According to AMG Data, Equity funds reported net cash inflows totaling $3.753 billion in the week ended June 30, with $2.25 billion going to the iShares Russell 2000 index fund. This bodes well for continuing outperformance by small-caps. Moreover, the recent downtrend in overall equity fund flows has been broken, as shown in the chart above.

Weekly Outlook

There are a couple of important economic reports and a few significant corporate earnings reports scheduled for release this week. Economic reports this week include ISM Non-manufacturing, Initial Jobless Claims, Consumer Credit and Wholesale Inventories. ISM Non-manufacturing and Initial Jobless Claims both have market-moving potential.

Accenture(ACN), Alcoa(AA), Genentech(DNA), Yahoo!(YHOO), Schnitzer Steel(SCHN), Abbott Labs(ABT), PPG Industries(PPG) and General Electric(GE) 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 Fed's Broaddus speaking on the U.S. economy to tax administrators, the U.S. Oil and Gas Investment Symposium and the Fed's Hoenig speaking on monetary policy could also impact trading this week.

Bottom Line: I expect U.S. stocks to rise this week in a delayed reaction to falling interest rates, declining energy prices, improvements in Iraq, increasing consumer confidence and moderating inflation fears. I am not concerned about a significant slowdown in economic growth. Exceptionally strong home sales and summer travel may be cannibalizing auto and retail sales to an extent. As well, corporate spending should accelerate in the second half of the year as companies flush with cash upgrade operations. Historically, stocks perform the best when economic growth and inflation are moderate rather than high. My short-term trading indicators are giving mixed signals and the Portfolio is 100% net long heading into the week.