Chart of the Week

Bottom Line: The VIX, one measure of investor anxiety, is still showing high levels of complacency. I expect this index to approach 25 within the next 2 months as terrorism worries and negative political rhetoric send investor pessimism higher. From a contrarian's standpoint, this is necessary for the strong rally I expect in the fourth quarter.

Weekly Outlook

There are a number of important economic reports and some significant corporate earnings reports scheduled for release this week. Economic reports this week include Construction Spending, ISM Manufacturing/Prices Paid, Personal Income, Personal Spending, PCE Deflator, Vehicle Sales, ISM Non-manufacturing, Factory Orders, Initial Jobless Claims, Unemployment Rate, Average Hourly Earnings, Change in Non-farm Payrolls, Average Weekly Hours and Consumer Credit. ISM Manufacturing/Non-manufacturing, ISM Prices Paid and Change in Non-farm Payrolls all have market-moving potential.

Proctor & Gamble(PG), Priceline.com(PCLN), Emerson Electric(EMR), Quest Communications(Q), Tyco(TYC), IAC/InterActiveCorp.(IACI), Clorox Co.(CLX), CVS Corp.(CVS), Abercrombie and Fitch(ANF), CIGNA Corp.(CI), Goodyear Tire(GT), XM Satellite Radio(XMSR) are some of the more important companies that release quarterly earnings this week. There is also another event that has market-moving potential. The RBC Technology Conference could also impact trading this week.

Bottom Line: I expect U.S. stocks to finish the week mixed as positive news on the economic front is offset by terrorism fears. It is likely that the major U.S. indices will put in a short-term top this week as worries over terrorism come to the fore once again ahead of the Olympics. It is my contention that levels of investor anxiety will spike up within the next 2 months as most stocks weaken, setting the stage for a very good fourth quarter for U.S. equities. I continue to believe that the selling in much the technology sector is overdone and these stocks will lead the vigorous rally I envision for the year's final quarter.

Market Week in Review

S&P 500 1,101.72 +1.43%

Click here for the Weekly Wrap by Briefing.com.

Bottom Line: Last week was definitely a win for the Bulls. Crude oil reached a 21-year high and reports confirmed a slowing of economic growth in the second quarter, yet U.S. stocks advanced. Telecom and software, having recently experienced significant declines, saw some of the best performances for the week. It was also a positive that the CRB Index continued to drop, which bodes well for future readings of inflation. Finally, the AAII % Bulls fell again, which is a contrary indicator and a good development. On the negative side, the Put/Call, Arms and VIX all fell, showing there is still too much investor complacency to sustain a meaningful advance. I currently do not believe high oil prices are a major problem for the U.S. economy, however above $50/bbl. economic weakness will accelerate. I continue to anticipate a decline in prices before they reach this level. Inflation is still set to rise below its 41-year average of 3.0% for all of 2004.

Economic Week in Review

ECRI Weekly Leading Index 131.10 -.08%

Existing Home Sales for June rose to 6.95M versus estimates of 6.65M and an upwardly revised 6.81M in May. The median selling price rose 9.6% year-over-year to a record $191,800. "When you combine the fact that more people are working and we have low mortgage rates, you get a healthy housing market," said Tom Kunz, CEO of Century 21. The U.S. economy so far this year has had the strongest six months of job growth since the stock market bubble burst and the economy began to plunge into recession in 2000, Bloomberg reported. Moreover, the average rate on a 30-year fixed mortgage is still only about a percentage point above an all-time low. The supply of homes available for sale, another gauge of housing demand, dropped to 4.1 months' worth in June, the lowest since December 2001, Bloomberg said. Finally, mortgage purchase applications suggest sales will remain robust. June purchase applications were 12% higher on average than in 2003, the Mortgage Bankers Association said.

The Conference Board's Consumer Confidence for July was 106.1, a two-year high, versus estimates of 102.0 and an upwardly revised reading of 102.8 in June. Confidence was boosted by an improving job market that also helped keep home sales at record levels, Bloomberg said. FactCheck.org, an arm of the Annenberg Public Policy Center of the Univ. of Pennsylvania, recently said employment "has increased by 1.3 million jobs this year in categories that on average paid above the median earnings of $541 a week," Bloomberg reported. "U.S. households are continuing to display tremendous confidence in future economic conditions by their willingness to enter into the housing market," said John Ryding, chief U.S. economist at Bear Stearns. The Conference Board also said the percentage of Americans who consider jobs hard to find is now the lowest since 2000.

New Home Sales for June were 1326K versus estimates of 1272K and a downwardly revised 1337K in May. The median selling price increased 11.7% to $209,900 from June of last year. More jobs and higher wages are giving buyers the wherewithal to purchase as interest rates rise, Bloomberg said. The upward turn in interest rates is also dragging "fence-sitters" into the housing market. A total of 1.17 million new homes will probably be sold this year, besting the all-time record sold last year by 7.4%, according to a forecast from the National Association of Home Builders. "One thing that is very difficult to accomplish is to sell a home to an unemployed individual," said Donald Tomnitz, CEO of D.R. Horton. The economy is doing much better, creating jobs, which is the best thing that can happen to our industry he said.

Durable Goods Orders for June rose .7% versus estimates of a 1.5% rise and an upwardly revised decrease of .9% in May. "We went through somewhat of a rough patch in the second quarter and maybe business investment is starting to pick up again," said Bill Natcher, an economist at National City Corp. "Things are still looking good for the second half." Business spending on new equipment and software is likely to grow at an average 16% annual pace in the second half of the year after expanding at an average 10% rate from January to June, according to a forecast by economists at Barclays Capital. Tax cuts approved last year included a greater allowance for depreciating investments in equipment, giving companies incentive to accelerate spending this year before they expire.

Initial Jobless Claims for last week were 345K versus estimates of 340K and 341K the prior week. Continuing Claims were 2960K versus estimates of 2875K and 2786K prior. Claims tend to fall when hiring increases, and weekly claims of about 340,000 corresponds with the monthly creation of roughly 200,000 jobs, according to many economists. The rise in claims is "all due to the temporary auto plant shutdowns," said Joseph LaVorgna, an economist at Deutsche Bank Securities. "The labor market continues to be robust."

The advance Gross Domestic Product reading for 2Q was 3.0% versus estimates of 3.7% and an upwardly revised 4.5% in 1Q. Personal Consumption rose 1.0% versus estimates of a 2.0% rise and an upwardly revised 4.1% increase in 1Q. The GDP Price Deflator for 2Q rose 3.2% versus estimates of a 3.0% gain and a downwardly revised increase of 2.7% in 1Q. The core personal consumption expenditure index, Greenspan's favorite inflation gauge, rose 1.8% at an annual rate in the second quarter after a 2.1% pace in the prior quarter, Bloomberg reported. Nominal GDP rose 6.3% in the second quarter after rising 7.4% in the first quarter, Bloomberg said. "Nominal demand growth remains very robust and this report should in no way discourage the Fed from raising rates a quarter of a point on Aug. 10," said John Ryding of Bear Stearns. Today's report also contained the government's annual revisions for GDP since 1Q of 2001. The revisions show that the monetary and fiscal stimuli implemented during the recession led to the fastest recovery on record, Bloomberg reported. The recession officially ended in November 2001, Bloomberg said.

The Chicago Purchasing Manager Index for July rose to 64.7 versus estimates of 60.0 and a reading of 56.4 in June. After falling in June, the Index surged back near its 16-year high reached in May. Factories are boosting production to reduce building backlogs. The rebound bolsters expectations growth is reaccelerating after slowing in the second quarter, Bloomberg reported. Moreover, the group's index of prices paid for raw materials fell, suggesting inflation is decelerating, Bloomberg said.

Bottom Line: Overall, last week's data were mixed, with signs of improvement. Home sales continue to defy the bears and pundits. There is not a glut of homes as demand continues to outstrip supply. Furthermore, interest rates remain low by historic standards. Home sales should remain strong as job growth continues. As well, American's net worth continues to reach all-time high levels as their homes appreciate in value. Better job opportunities and increasing wealth are leading most Americans to feel more confident about the economy as some consumer confidence readings reach levels not seen since before the stock market crashed and the economy headed towards recession in 2000. Moreover, the big picture in Iraq continues to improve and the media's obsession with negatively has led it to focus on other subjects. Corporate spending should accelerate in the second-half of the year as companies take advantage of tax relief that was passed to alleviate the massive overcapacity of technology equipment produced during the bubble. This relief is scheduled to expire at the end of the year. 2Q GDP came in .7 percentage points below expectations, however 1Q growth was revised higher by .6 percentage points. Recent data continue to suggest that the slowdown seen in the second quarter was temporary. Third quarter growth should exceed 4.0% once again.

Weekly Scoreboard*

Indices
S&P 500 1,101.72 +1.43%
Dow 10,139.71 +1.78%
NASDAQ 1,887.36 +2.07%
Russell 2000 551.29 +2.24%
S&P Equity Long/Short Index 956.51 -.97%
Put/Call .64 -17.95%
NYSE Arms 1.31 -24.71%
Volatility(VIX) 15.32 -7.15%
AAII % Bulls 34.0 -4.79%
US Dollar 89.96 +.77%
CRB 267.78 -.90%

Futures Spot Prices
Gold 393.70 +.13%
Crude Oil 43.80 +5.11%
Unleaded Gasoline 130.49 +2.75%
Natural Gas 6.11 -1.34%
Base Metals 112.13 +3.65%
10-year US Treasury Yield 4.47% +1.13%
Average 30-year Mortgage Rate 6.08% +1.67%

Leading Sectors
Iron/Steel +6.78%
Telecom +4.77%
Software +3.69%

Lagging Sectors
Foods -.64%
HMO's -1.97%
Hospitals -4.33%

*% Gain or loss for the week

Mid-day Update

S&P 500 1,100.92 +.04%
NASDAQ 1,892.74 +.62%

Leading Sectors
Broadcasting +2.21%
Semis +1.80%
Disk Drives +1.59%

Lagging Sectors
Airlines -.93%
Telecom -.99%
HMO's -1.85%

Other
Crude Oil 43.50 +1.71%
Natural Gas 6.15 .49%
Gold 393.30 +.90%
Base Metals 112.13 +1.15%
U.S. Dollar 89.92 -.02%
10-Yr. T-note Yield 4.48% -2.07%
VIX 15.49 -1.21%
Put/Call .60 -6.25%
NYSE Arms 1.51 +64.13%

Market Movers
APCC -13.1% after missing 2Q forecast and giving weaker outlook.
MGAM -25.0% after missing 3Q estimates and lowering 04 forecast.
KLAC +7.5% after meeting 4Q estimates, raising 1Q outlook and WR Hambrecht upgrade to Buy.
GILD +10.5% after beating 2Q estimates substantially.
VSEA +8.8%after meeting 3Q estimates, raising 4Q outlook and Bank of America upgrade to Neutral.
SWIR +8.1% as Piper Jaffray reiterated Outperform after meeting with management.
CYTC +8.5% after beating 2Q estimates and making positive comments.
IRF +7.3% after CEO made positive comments on CNBC.
ACAP +14.2% after substantially beating 2Q estimates and multiple upgrades.
VAS -17.3% on weaker-than-expected 2Q, multiple downgrades and executive resignations.
SYNA -13.6% after meeting 4Q estimates, but lowering 1Q forcast.
PHS -9.3% after beating 2Q estimates, but poor earnings quality.
TGI -9.2% after missing 2Q earnings estimates.

Economic Data
Advance 2Q Gross Domestic Product rose 3.0% versus expectations of a 3.7% rise and an upwardly revised 4.5% increase in 1Q.
Advance 2Q Personal Consumption rose 1.0% versus expectations of a 2.0% increase and an upwardly revised 4.1% increase in 1Q.
Advance 2Q GDP Price Deflator rose 3.2% versus estimates of a 3.0% rise and a downwardly revised 2.7% increase in 1Q.
Final Univ. of Mich. Consumer Confidence for July was 96.7 versus estimates of 96.2 and a reading of 96.0 prior.
Chicago Purchasing Manager report for July was 64.7 versus estimates of 60.0 and 56.4 in June.

Recommendations
Goldman Sachs reiterated Outperform on SYMC, DOW, BSX, CMX, AMIS, LIZ and MSFT. Goldman reiterated Underperform on KZL. Citi SmithBarney reiterated Buy on MWD, target $72. Citi reiterated Buy on BHI, target $50. Citi reiterated Buy on ACGL, target $48. Citi reiterated Buy on SPF, target $90. Citi reiterated Buy on BC, target $49. Citi reiterated Buy on BZH, target $174. Citi reiterated Sell on XOM, target $40.50. Citi reiterated Buy on BG, target $50. Citi reiterated Buy on UNH, target $86. DNR cut to Sector Underperform by CIBC. VAS cut to Sector Underperform by CIBC. KSS raised to Overweight at Prudential, target $53. JWN cut to Underweight at Prudential, target $45. GNTX raised to Overweight at Prudential, target $40. ITMN cut to Sell at Legg Mason. XMSR rated Buy at Bank of America, target $32. CVD raised to Outpeform at Bear Stearns, target $51. NILE raised to Buy at Merrill, target $36. HE cut to Sell at Merrill.

Mid-day News
U.S. stocks are mostly higher today on stronger earnings reports, falling interest rates and short covering. Spirit Air, the biggest privately owned U.S. airline, is lowering its prices in a bid to prevent JetBlue Air from grabbing customers when it starts flights from New York's LaGuardia airport to Florida in September, Bloomberg reported. The Sarbanes-Oxley Law, passed two years ago today, has made investors more confident about the accuracy of the financial information they receive from companies, Nasdaq Chief Executive Bob Greifeld wrote in the Wall Street Journal. The U.S. FBI warned police throughout the western U.S. that al-Qaeda terrorists may be planning to strike in California or New Mexico, the LA Times reported. Procter & Gamble may report its biggest quarterly earning gain in two years, on Monday, bolstered by acquisitions and surging sales in developing countries such as China, Bloomberg said. The U.S. economy grew at a 3% annual rate from April through June, less than forecast, Bloomberg reported. The Chicago Purchasing Manager report rebounded sharply in June to 64.7, near May's 16-year high reading of 68.0, Bloomberg reported. Bristol-Myers Squibb, the biggest maker of AIDS drugs, agreed to pay $300 million to settle a class-action lawsuit related to its wholesaler inventory practices, accounting and partnership with ImClone Systems, Bloomberg reported. Crude oil in New York rose to a record for the second time this week on concern that supply from the world's top exporters will be disrupted as fuel consumption surges, Bloomberg said.

BOTTOM LINE: The Portfolio is substantially higher today on strength in my internet, semi-equipment and alternative energy longs. I have not traded today and the Portfolio is still 125% net long. Anti-business political rhetoric and rising energy prices are restraining today's market. While GDP was weaker-than expected, I continue to believe that the slowdown is just a pause that refreshes and economic growth will accelerate in the near future. Signs of this are already appearing as evidenced by today's very strong Chicago Purchasing Manager's report. I expect U.S. stocks to remain mixed into the close as the spiking Arms Index and falling interest rates offset the negatives.