Mid-day Update

S&P 500 1,100.93 -.07%
NASDAQ 1,876.10 -.60%

Leading Sectors
Tobacco +1.06%
Defense +.85%
Homebuilders +.57%

Lagging Sectors
Disk Drives -1.55%
Biotech -1.74%
Airlines -2.42%

Other
Crude Oil 43.52 -.64%
Natural Gas 5.82 -4.70%
Gold 394.00 +.10%
Base Metals 111.49 -.57%
U.S. Dollar 89.75 -.24%
10-Yr. T-note Yield 4.46% -.40%
VIX 16.06 +4.83%
Put/Call .78 +21.87%
NYSE Arms 1.11 -15.27%

Market Movers
COCO -43.2% after lowering 4Q, 04 and 05 forecasts. Education stocks down across the board on the news.
COX +20.5% after James Cox Kennedy, whose family controls Cox, offered $7.9 billion to take the fourth-largest U.S. cable-tv operator private.
NTMD +27.0% after Deutsche Bank initiated coverage with a Buy rating, citing the "blockbuster potential" for the company's heart drug for African-Americans.
QCOM +3.4% after Bank of America upgrade to Buy.
RIGL +37.4% after saying its first experimental drug, dubbed R112, showed promise in alleviating the symptoms of hay fever in its first large test.
PG +3.2% after beating 4Q estimates and giving positive 05 outlook.
SNPS -16.4% after lowering 3Q forecast.
INVN -13.2% as looming investigations by the Dept. of Justice and SEC may delay GE's $900 million acquisition of the company.

Economic Data
Construction Spending for June fell .3% versus estimates of unch. and up .1% in June.
ISM Manufacturing for July was 62.0 versus estimates of 62.0 and 61.1 in June.
ISM Prices Paid for July was 77.0 versus estimates of 79.0 and 81.0 in June.

Recommendations
NFX raised to Overweight at JP Morgan. ARDI cut to Underweight at JP Morgan. PPP cut to Underweight at JP Morgan. QCOM raised to Buy at Bank of America, target $90. NTMD rated new Buy at Deutsche Bank, target $38. CBG rated Outperform at CSFB, target $26. COCO cut to Underweight at JP Morgan. Goldman Sachs reiterated Outperform on CBL, WMT, FD, NOI, RSE, PG, STA, MMP, FDC, CRE, EBAY, CAL and COH. Goldman reiterated Underperform on DTE and FHCC. Goldman rated JTX Outperform. Goldman upgraded SANM to Outperform. Goldman reiterated Cautious view on REITs. NT raised to Buy at Citi SmithBarney, target $5. Citi reiterated Buy on TXT, target $70. FCX reiterated Buy on FCX, target $50. Citi reiterated Buy on PEG, target $45. Citi reiterated Buy on CI, target $75.

Mid-day News
U.S. stocks are modestly lower mid-day on fears over domestic terrorism. An overseas Web gambling industry has sprung up in recent years that the U.S. wants to curb because betting via the phone or Internet is illegal in the U.S., the Wall Street Journal reported. Absolut vodka has begun sponsoring social-networking text messages on entertainment locations, in a bid to boost its brand, the Wall Street Journal reported. The shares of OAO Yukos Oil, Russia's largest oil exporter, jumped as much as 20% as government officials said the company may get more than the two months allowed by law to pay a $3.4 billion tax bill, Bloomberg said. DirectTV agreed to buy Pegasus Satellite TV's broadcast satellite business for about $938 million, Bloomberg said. Fifth Third Bancorp, the 11th largest U.S. bank, said it agreed to buy First National Bankshares of Florida for $1.58 billion in stock to help it expand into five new markets in Florida, Bloomberg said. Companies in the S&P 500 have reported a 31% rise in profits for the 2nd quarter so far, above the 21% expected increase and the best performance in at least 6 years, Bloomberg reported. The Institute of Supply Management's factory index for last month rose to 62.0, near the 20-year high reading of 63.6 set in January, Bloomberg reported. President Bush said he supports two key recommendations of the commission that studied the Sept. 11 attacks: creating the post of national intelligence director and an office to coordinate all U.S. efforts to combat terrorism, Bloomberg said. According to Tradesports.com, President Bush's chances of re-election have risen 4 percentage points since the Democratic Convention to 53.3%.

BOTTOM LINE: The Portfolio is lower today as most of my longs are declining. I have not traded and the Portfolio is still 125% net long. While the major indices are lower, the mildly negative reaction to the weekend's terror news is a positive for the Bulls. As well, oil is falling despite the news and violence in Iraq over the weekend. I expect U.S. stocks to rise modestly into the close.

Monday Watch

Earnings of Note
Company/Estimate
ASE/.12
AMT/-.16
AVNX/-.18
MVSN/.18
NKTR/-.29
MNT/.34
NTES/.39
PCLN/.31
PG/.48
RJR/1.24

Splits
GTK 2-for-1
VAR 2-for-1

Economic Data
Construction Spending for June estimated unch. versus a .3% rise in May.
ISM Manufacturing for July estimated at 62.0 versus 61.1 in June.
ISM Prices Paid for July estimated at 79.0 versus 81.0 in June.

Weekend Recommendations
Forbes on Fox had guests that were positive on AMGN, DBD and QLGC. Bulls and Bears had guests that were positive on HNZ, ANF, AW, HMC, CRA, mixed on BUD, BA, KO, VZ and negative on IBM, BMY. Cashin' In had guests that were positive on WSM, SBUX, mixed on TEVA, LPNT, XMSR and negative on CSCO. Wall St. Week w/Fortune had guests that were positive on ERES and WM. Barron's had positive comments on BSC, CBH, JJZ and negative comments on MDTL. Goldman Sachs reiterated Outperform on NOI, MET and Underperform on FRNT, UNM, DTE.

Weekend News
Getty Images, the world's largest provider of moving and still images to businesses, has set aside $400 million to expand in Asia and Europe, the London-based Times reported. Bristol-Myers Squibb is close to concluding its legal process with the SEC, the Financial Times reported. The ACLU board is split over a pledge made to U.S. officials that it wouldn't knowingly employ people whose names appear on terrorism watch lists, the New York Times reported. Illinois Governor Blagojevich signed a law that prohibits suits against restaurants from customers that blame them for their obesity, the Chicago Tribune reported. Triarc Cos., which operates Arby's fast-food restaurants, wants to make additional acquisitions in the money-management industry after agreeing to buy a majority stake in an investment company, the New York Times reported. The U.S. federal agency that insures company pensions may face a wave of bankruptcies and defaults on pensions in the airline industry, the New York Times reported. The al-Qaeda terrorist network is planning suicide attacks against corporations based in New York City, ABC News reported. The U.S. has been assigning hundreds of detainees to Iraqi courts for trial to take advantage of a new national criminal court for terrorism suspects, the NY Times said. New Jersey's gain in employment to an all-time high was led by the southern part of the state, particularly by new jobs in Burlington, Camden and Gloucester counties as well as Monmouth and Ocean counties, the Philadelphia Inquirer reported. AT&T may become the target of a takeover by Bellsouth or a foreign telecom company, the Star-Ledger reported. Afghanistan has registered 90% of its estimated 9.8 million eligible voters for presidential elections in October, the BBC said. Police in Newark, NJ, put up metal fences around the Prudential Financial building and blocked off two streets after federal authorities said the building is a terrorist target, the AP reported. The Port Authority of NY and NJ will close the Holland Tunnel to eastbound commercial traffic starting at midnight tonight, CNN said. Unisys may say today that it will offer the Linux operating system, as well as Microsoft's Windows, on its ES 7000 servers, the Wall Street Journal reported. U.S. special forces have been hunting Saudi Arabian terrorists who have re-established secret al-Qaeda training camps in the north eastern quarter of Sudan, the Sunday Telegraph said. Pfizer and Cleveland Clinic researchers may have uncovered a new route to keep the body from making a substance that clogs the brain in Alzheimer's disease, according to a study in the Aug. 1 Nature Medicine. Aluminum Corp. of China may be forced to cut prices as importers of the semi-finished product used to make aluminum metal sell it at a 16% discount, Bloomberg said. Senator Kerry lost ground in his race against President Bush in a CNN/USA Today/Gallup poll after accepting the Democratic presidential nomination, though Kerry gained in a Newsweek survey, Bloomberg reported. Kerry would be the first candidate since 1972 to lose ground after a national convention in a Gallup Poll, USA Today said. Cox Enterprises, which owns 62% of Cox Communications, said it wants to pay $7.9 billion for the shares of the fourth-largest U.S. cable-tv company it doesn't already own, Bloomberg reported. Sun Micro may boost growth by making acquisitions and has looked at buying software maker Novell, the Wall Street Journal reported.

Late-Night Trading
Asian indices are mostly lower, -1.25% to unch. on average.
S&P 500 indicated -.39%.
NASDAQ 100 indicated +-.53%.

BOTTOM LINE: I expect U.S. stocks to open lower in the morning on terrorism fears and higher oil prices. However, the major indices will likely rally off the morning lows on better economic reports. The Portfolio is 125% net long heading into tomorrow.

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.