Mid-day Update

S&P 500 1,080.04 -.57%
NASDAQ 1,831.54 -.93%

Leading Sectors
Telecom +1.31%
Insurance +.46%
Computer Services -.12%

Lagging Sectors
Internet -1.99%
Biotech -2.68%
Hospitals -3.20%

Other
Crude Oil 41.40 -.74%
Natural Gas 5.97 -2.59%
Gold 389.80 -.18%
Base Metals 109.14 +.89%
U.S. Dollar 89.02 -.27%
10-Yr. T-note Yield 4.47% +1.01%
VIX 17.63 +6.85%
Put/Call .73 -6.41%
NYSE Arms 1.36 -21.84%

Market Movers
ANDW -26.2% after beating 2Q estimates and lowering 3Q/4Q guidance.
CHKP -13.65% after slightly missing 2Q estimates and lowering 3Q forecast.
MYL -15.5% after agreeing to buy KG for $4 billion in stock to expand into heart treatments and add sales force to call on cardiologists. KG +25.2%.
IMCL -15.0% after Citi downgrade to Neutral, price target cut to $72.
OCR -31.0% after missing 2Q estimates and lowering 04 guidance.
BSX +4.88% after 2Q estimates mostly met expectations after stent recall.
AGYS +18.88% after beating 1Q estimates and raising 05 forecast.
MANT +11.1% after saying it received a four-year contract to provide the federal government with security clearance background investigations.
CTSH +11.8% after beating 2Q estimates and raising 3Q and 04 forecast.
CRS +7.2% after JP Morgan upgrade to Overweight.
BEC -8.4% after missing 2Q estimates and lowering 3Q forecast.
TASR -9.9% on news that CBS News will run a negative story on the company.

Economic Data
Existing Home Sales for June were 6.95M versus estimates of 6.65M and 6.81M in May.

Recommendations
CRS raised to Overweight at JP Morgan. IGT raised to Sector Outperform at CIBC, target $38. HCR raised to Buy at Legg Mason, target $38. UHS raised to Buy at Oppenheimer, target $52. NTLI raised to Overweight at JP Morgan. Goldman Sachs reiterated Outperform on AMT, VZ, XRX, SRE, NEM, PDG, ENH, BSX, AMLN, FS, IGT, GCI, HOT, PG, SLB and ITT. Goldman reiterated Underperform on CYT, SGP, PGL, CR and DJ. Citi SmithBarney reiterated Buy on HAL, target $37. Citi reiterated Sell on MYG, target $15. Citi reiterated Buy on WY, target $72. Citi reiterated Buy on ITT, target $92. Citi reiterated Buy on SSCC, target $23. Citi reiterated Buy on UTX, target $109. Citi thinks banks will outperform in second half, favorite is BAC. Citi said with semi-equipment shipment delays finally beginning, the final phase of the correction in those stocks has begun, Buy on weakness, favorite is LRCX. Citi reiterated Buy on ATH, target $90. Citi reiterated Buy on WLP, target $111.70.

Mid-day News
U.S. stocks are falling mid-day, led lower by healthcare-related companies, on concerns over negative political rhetoric, earnings shortfalls and rising interest rates. Iraqi Defense minister Hazima al-Shalan said Iran has sent spies into Iraq, infiltrated the country's new government and taken positions along Iraq's border, the Washington Post reported. Sun Micro plans to debut two computer system lines with microprocessors from Advanced Micro, the Wall Street Journal reported. Sprint will likely announce today it is offering local telephone service to business customers in 35 markets, the Wall Street Journal said. Shares of AO Yukos Oil, Russia's largest oil exporter, fell after Interfax reported a major shareholder was placed on a wanted list by a Moscow court on murder-related charges. An Alzheimer's drug called donepezil might slow the onset of the disease in high-risk patients by six months, the LA Times reported. Roche Holding and Chiron are competing for the lead in the market for tests that can screen donated blood for the West Nile virus, the LA Times reported. Career Education, which is being probed by the U.S. SEC, is also being investigated by federal law-enforcement officials, the Financial Times reported. Nokia may have its credit rating reduced by S&P on concern the company will continue to lose market share to competitors, Bloomberg reported. HCA, the biggest U.S. hospital chain, said second-quarter profit rose 47% as lower malpractice expenses compensated for an increase in unpaid bills, Bloomberg reported. Google plans to sell 24.6 million shares in its IPO for between $108-$135/share and the symbol will be GOOG, Bloomberg said. U.S. sales of previously owned houses rose more than expected in June to a record annual pace of 6.95 million, the National Assoc. of Realtors said. U.S. Treasuries fell in New York after home sales unexpectedly rose and speculation increased that other economic reports this week will add to evidence growth is accelerating, Bloomberg reported. Medicare proposed rules for its 2006 program to help the elderly pay for prescription drugs, including how the agency will work with pharmacy-benefit managers such as Express Scripts to get discounts on drugs, Bloomberg reported.

BOTTOM LINE: The Portfolio is unchanged today as my longs are falling more than my shorts. I have not traded today and the Portfolio is still 50% net short. It is good to see the VIX continue higher, however the Put/Call and Arms readings are falling. My short-term trading indicators are still giving sell signals. I expect U.S. stocks to fall modestly into the close.

Monday Watch

Earnings of Note
Company/Estimate
AXP/.67
ANDW/.13
BLS/.50
BSX/.45
CTX/1.29
CHKP/.25
CHK/.29
HCA/.65
HUM/.39
IP/.38
PETS/.10
PBI/.61
PVN/.21
PHM/1.43
SWK/.67
SLAB/.38
UNA/.08
VECO/.13

Splits
CWTR 3-for-2

Economic Data
Existing Home Sales for June estimated at 6.66M versus 6.8M in May.

Weekend Recommendations
Forbes on Fox had guests that were positive on SLM and TEVA. Bulls and Bears had guests that were positive on LU, AAPL, MMC, EOG, RTN, F, DCX, TM, ROST and mixed on MSFT. Cashin' In had guests that were positive on JNJ, FLO, PTR, TXN and mixed on MSFT, RHAT. Louis Rukeyser's Wall Street had guests that were positive on UPS, WMT, XMSR, SIRI, JCP and VLO. Wall St. Week w/Fortune had guests that were positive on FO, STZ, PEP, DIS, HDI, GE, SHFL, MGAM, BUD, POOL, MSFT and UTX. Barron's had positive comments on MSFT, DEX, OLN, GTOP, SGR, WG, HGR, MHR, DNR, NR and negative comments on NXTL. Goldman Sachs reiterated Outperform on AGN, DD, AMT, HOT, EBAY, ITT, SLB and Underperform on SIAL, WM, SGP.

Weekend News
North Korea rejected a U.S. proposition to end its nuclear program in exchange for economic aid and improved relations as having "little worthy to be discussed," Agence France-Presse reported. Ford Motor, which accounts for about 80% of all police patrol cars sold in the U.S., may face a challenge from a police version of DaimlerChrysler's Dodge Magnum sports wagon, the LA Times reported. The U.S. Senate gave final approval to a bill that requires states to close loopholes in unemployment insurance laws that allow companies to avoid paying millions of dollars in premiums, the Washington Post reported. A group claiming to be the European arm of al-Qaeda has threatened to attack Australia an Italy with car bombs if their troops aren't withdrawn from Iraq, the Australian Broadcasting Corp. reported. Iraq and Syria agreed to restore diplomatic ties severed in 1982 and control security along their common borders to stop militants from crossing into Iraq, Al-Hayat reported. The campaign of John Edwards will return $44,035 in contributions raised by a LA attorney under scrutiny by California election officials, Newsweek reported. A 312-111 vote last week in the U.S. House favoring the technology industry's position of expensing options shows Silicon Valley's influence in Congress may be reviving, the NY Times said. Consumers fed up with having to pay more costly phone bills have been switching in increasing numbers to phone service over the Internet, the New York Times reported. AT&T will probably be the target of a takeover bid, Newsweek reported. Google may announce the estimated price range for its IPO as early as today, the Financial Times reported. President Bush wants to make decisions within days about enacting some of the recommendations of the commission that investigated the Sept. 11, 2001, terrorist attacks, the Washington Post said. Intel is looking for ways to return some of its $16.7 billion in cash to shareholders, the Financial Times reported. Former President Clinton will play a prominent role in the campaign of Democratic presidential candidate Kerry over the next three months, the Financial Times said. Mylan Labs plans to buy King Pharmaceuticals in a transaction valued at $4 billion, as it seeks to expand its branded-drug business, the Wall Street Journal reported.

Late-Night Trading
Asian indices are mostly lower, -1.0% to -.25% on average.
S&P 500 indicated +.11%.
NASDAQ 100 indicated +.29%.

BOTTOM LINE: I expect U.S. stocks to open mixed in the morning ahead of a number of important earnings releases, economic reports and the Democratic convention. The Portfolio is 50% net short heading into the week.

Chart of the Week

Bottom Line: Since the first of the month,the Nasdaq is down almost 10%. It is approaching very oversold levels. A tradeable rally ensued the last two times this index reached these levels.

Weekly Outlook

There are a few important economic reports and a number of significant corporate earnings reports scheduled for release this week. Economic reports this week include Existing Home Sales, Consumer Confidence, New Home Sales, Durable Goods Orders, Employment Cost Index, Initial Jobless Claims, GDP, Personal Consumption, GDP Price Deflator, Univ. of Mich. Consumer Confidence and Chicago Purchasing Manager report.  Home Sales, Consumer Confidence readings, GDP and the Chicago Purchasing Manager report all have market-moving potential.  

Andrew Corp.(ANDW), Boston Scientific(BSX), HCA Inc.(HCA), Intl. Paper(IP), American Express(AXP), Automatic Data Processing(ADP), E.I. du Pont(DD), Lockheed Martin(LMT), Nabors Industries(NBR), Phelps Dodge(PD), Verizon Communications(VZ), Veritas Software(VRTS), Boeing(BA), Comcast(CMCSA), Hilton Hotels(HLT), KLA-Tencor Corp.(KLAC), Gillette(G), Time Warner(TWX), BellSouth(BLS), Bristol-Myers Squibb(BMY), Ingram Micro(IM) and Liz Claiborne(LIZ) 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 Hoening's speech on monetary policy, the Government Security Expo and Bank of America's Specialty Pharmaceutical Conference could also impact trading this week.  

Bottom Line:  I expect U.S. stocks to remain under pressure through mid-week, then to rise through week's end, leaving the major U.S. averages modestly higher for the week.  The Morgan Stanley Technology Index is now down 17.8% from its recent high in January.  Barring any domestic terror attacks, the end of the Democratic Convention should prompt at least a relief rally in many oversold stocks.  My short-term trading indicators are still giving sell signals and the Portfolio is 50% net short heading into the week.

Market Week in Review

S&P 500 1,086.20 -1.38%

Click here for the Weekly Wrap by Briefing.com.

Bottom Line:  Overall, last week was not very good for the Bulls.  The NASDAQ advance/decline line continued to deteriorate, technical damage spread, most good news went unrewarded, the Put/Call and Arms readings fell and energy prices rose.  However, there were a few positives last week.  The Financials rose, AAII % Bulls fell, the VIX increased and most commodities declined in price.  As well, according to Thomson, companies boosted earnings by an estimated 24% in the second quarter, above the 19% estimate heading into earnings season.  Moreover, only 11.0% of companies have missed estimates so far.  Thomson also estimates earnings will increase a robust 15.3% in the second half of the year.  The S&P 500's 04 estimated P/E is now 16.51, down 68.0% from its peak.  This very reasonable valuation is also 24.2% lower than in 1992 and 11.5% lower than in 1987, years proceeding major bulls moves.  Considering interest rates are still near historic lows, inflation is below its long-term average, the high level of U.S. economic and military leadership, economic growth near 20-year highs, record-high American net-worth, one could argue that stocks are actually cheap at current levels.

Economic Week in Review

ECRI Weekly Leading Index 131.20 -.23%

Housing Starts for June fell to 1802K versus estimates of 1990K and an upwardly revised 1970K in May.  Building Permits for June fell to 1924K versus estimates of 2000K and an upwardly revised 2097K in May.  The drop in permits was the biggest since 1994, when the Fed last started raising its target interest rate following a recession.  Fed Chairman Greenspan told lawmakers that "housing starts, which have come up at an extraordinary pace in recent years, are very likely to shade lower over the next couple of years.  It's hard to maintain the pace that we're maintaining.  But we do not expect that the fall-off will be abrupt."  Construction, which in 2003 was the strongest in 25 years, may also have been hampered by rainy weather last month.  Rainfall averaged 7.46 inches in the South last month, the wettest June since record-keeping began in 1895.  Moreover, 3.5 inches of rain fell on the entire U.S. last month, the seventh-wettest June on record.  The number of homes authorized but not yet started increased 10% in June to 202,100, the most since April 1987, suggesting builders' backlogs still are widening, Bloomberg reported.      

Fed Chairman Greenspan said a recent slowdown in consumer spending "should prove short-lived" and that the central bank can continue to raise interest rates at a "measured" pace.  "Inflation also seems to have been boosted by transitory factors such as the surge in energy prices," Greenspan told the Senate Banking Committee.  The FOMC, in a related report, predicted the economy will grow as much as 4.75% in 2004 from last year's fourth quarter, down from a 5% estimate in February.  This would still be the fastest U.S. economic growth since the height of the internet bubble in 1999, Bloomberg said.  The FOMC predicted its preferred inflation measure, the core personal consumption expenditures price index, will rise to a range of 1.5% to 2% this year, Bloomberg reported.  "A sustained pick-up in the rate of inflation" is not likely as "businesses are limited in the degree to which they can raise prices because of global competition and slack resources in the economy", Greenspan said.  The FOMC also predicted that the unemployment rate would drop in the fourth quarter, averaging 5.25-5.5%.  Businesses have now added an average of 211,000 new jobs per month over the past six months, Bloomberg said.  "Nothing is frightening them that growth will stall out or that inflation is getting out of hand," said James Paulsen, who oversees about $125 billion as chief investment strategist at Wells Capital Management. 

Initial Jobless Claims fell to 339,000 versus estimates of 345,000 and 350,000 the prior week.  Continuing Claims were 2,797,000 versus estimates of 2,930,000 and 2,964,000 prior.  "Job growth went through a soft patch in June and is picking up again in July," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi.  The Fed Bank of Philadelphia's measure of factory hiring rose to the highest ever this month and the Fed Bank of New York also reported a rise in the number of factories hiring more workers, Bloomberg reported.  "I know a number of people looked at recent data and took it as some indication that there is some significant weakness developing.  If that were the case, I think we would have seen it in a marked pick-up in initial claims for unemployment insurance which, of course, we did not," Greenspan told the Senate Banking Committee.

Leading Indicators for June fell .2% versus estimates of an unchanged reading and a .4% rise in May.  The index fell for the first time in more than a year in June, as a decrease in building permits and hours worked restrained the measure, Bloomberg reported.  Recent reports of gains in the manufacturing sector show any slowdown may be temporary, economists said.  "These data still suggest that, on balance, the economy has shifted to a moderate self-sustaining expansion from a robust stimulus-led one," said Steven Wood, president of Insight Economics.  "Strong economic performance in May gave way to a weaker June.  The index is still about 3.4% higher in the second quarter than in the first," said Ken Goldstein, an economist at the Conference Board.

Bottom Line:  Housing starts were definitely affected by the weather.  As well, the spike in mortgage rates in March likely scared many potential new home buyers into locking-in rates.  This likely resulted in a depletion of some pent-up demand.  However, with mortgage rates falling 46 basis points from recent highs, building will likely stabilize in the near future.  It is obvious from multiple Fed members' comments that they perceive the recent economic weakness as only temporary and that they will continue to raise rates in 25 basis point increments as inflation is not currently a problem.  However, a rise in the Core PCE Price Index of greater than 2% would likely result in an acceleration of the rate of hikes.  Data also suggest that the recent slowdown in job growth was only temporary, as well.  The change in non-farm payrolls for July should meet or exceed the current estimate of 223,000.  The decline in the Leading Indicators Index, while hurt to an extent by bad weather, likely portends a slowdown in GDP growth for this quarter.  I agree with the Fed that current economic weakness is only temporary and that growth will accelerate in the fourth quarter.
  
Overall, the data were mixed and likely point to continued weakness in the short-run.  It is my belief that three main issues are currently slowing economic growth.  First, recent polls suggest that the largest number of small-business owners and executives in recent memory feel that the Democratic ticket will damage the economy.  This perception, combined with President Bush's slide in some polls, is actually resulting in a decrease in business spending in anticipation of a weaker economy.  The still nagging overcapacity generated by the excesses of the late nineties and increased global competition result in earnings shortfalls in some sectors with any slight downtick in demand.  Second, there is the growing perception that a domestic terror act, to disrupt the U.S. election or political conventions, is inevitable.  This is also likely affecting energy prices, confidence and spending by corporate America.  Finally, the extremely wet conditions in much of the country and the spike in home-buying in the first half of the year have dampened consumer spending recently.  I view this as only temporary as I do not believe rates have risen enough or that inflation is a big enough problem to damage consumer spending longer-term.