Mid-day Update

S&P 500 1,098.26 -.01%
NASDAQ 1,841.82 +.21%

Leading Sectors
Fashion +2.30%
Semis +1.51%
Wireless +.90%

Lagging Sectors
Broadcasting -1.51%
Commodity -1.53%
Iron/Steel -1.95%

Other
Crude Oil 46.60 -.30%
Natural Gas 5.37 -3.19%
Gold 412.70 -.67%
Base Metals 108.91 -1.66%
U.S. Dollar 88.78 +.75%
10-Yr. T-note Yield 4.27% +.92%
VIX 16.02 +.06%
Put/Call .76 -20.83%
NYSE Arms .82 +24.24%

Market Movers
GOOG +3.7% on continuing strong demand for its IPO.
ARTI +15.4% after ARMHY agreed to buy it for about $913 million. ARMHY -18.15%.
MOND +12.3% after it said it would eliminate its class B shares as part of a reincorporation, approving a $30 million stock repurchase plan and Prudential upgrade to Overweight.
FILE +8.4% after KeyBanc upgrade to Buy.
EYET +4.58% on optimism over an upcoming FDA review of Macugen, the company's experimental drug intended to treat an eye disease that is one of the leading causes of blindness.
SCST -26.4% after cutting 3Q outlook.

Economic Data
None of note.

Recommendations
Goldman Sachs reiterated Outperform on A, JTX, WMT and PG. Goldman reiterated Underperform on HRB, TSG and BA. Citi SmithBarney reiterated Buy on UNM, target $20. Citi reiterated Buy on DPZ, target $18. RHI cut to Reduce at UBS, target $21. Bear Stearns raised Hospital stocks to Overweight. PBG cut to Underweight at Prudential, target $25. MOND raised to Overweight at Prudential, target $44. DPZ raised to Outperform at CSFB, target $17. BLS cut to Underperform at Raymond James. SBC raised to Outperform at Raymond James, target $28. MDCC raised to Outperform at Thomas Weisel.

Mid-day News
U.S. stocks are mixed mid-day as interest rates rise, oil stabilizes and earnings reports are mixed. Boeing and IPass are combining services to allow corporate travelers on long-distance flights to connect to the Internet, Reuters said. Comcast plans to offer a digital video recorder service beginning today that will enable viewers to record their shows without a videocassette recorder, the Star-Ledger reported. Sharp Corp. said it has created a microwave oven that can melt some of the fat and oil from steak, chicken, fish and other foods, Reuters reported. Infineon Technologies AG, Europe's second-largest chipmaker, plans to expand in the U.S. by bolstering its business for memory chips there, Die Welt reported. Norway's $140 billion Petroleum Fund hired Fidelity Investments, T. Rowe Price Group, Alliance Capital Management and three other companies to oversee stocks after investments stagnated in the second quarter, Bloomberg reported. Wal-Mart cut its August forecast for sales due to weaker-than-expected back-to-school demand, Bloomberg said. OAO Yukos Oil, Russia's biggest oil exporter, cut its 2004 production target to 1.72 million barrels a day of crude because payments on the company's tax bill forced it to spend less on drilling and maintaining wells, Bloomberg reported. FedEx raised its earnings estimates for a second time this fiscal year because of rising international and ground business, Bloomberg reported. RCN, a provider of cable tv, phone and Internet service, filed a plan to exit bankruptcy that will exchange $1.2 billion in unsecured debt for all of the equity in the company by the end of the year, Bloomberg said. Oil futures fell modestly after Iraq boosted shipments to tankers to normal rates for the first time in two weeks, Bloomberg reported. Merrill Lynch and UBS are among the Wall Street firms which together are losing some of the wealthiest Americans as clients, a group that pays as much as $28 billion in fees for financial advice every year, Bloomberg said.

BOTTOM LINE: The Portfolio is substantially higher mid-day as my homebuilding, internet, alternative energy and telecom equipment longs are rising and my Chinese ADR and steel shorts are falling. I have not traded and the Portfolio is still 125% net long. The market is maintaining its constructive tone today as many market leading stocks are higher. It is also positive to see Natural Gas making another intermediate-term low today and commodity-related stocks continue to weaken, which bodes well for future inflation readings. However, rising interest rates and a rebound in oil off its morning lows will likely result in more mixed trading into the close.

Monday Watch

Earnings of Note
Company/Estimate
PERY/-.30
TOY/-.03
WWE/.06

Splits
HTLD 3-for-2

Economic Data
None of note.

Weekend Recommendations
Cashin' In had guests that were positive on SYMC, ASA, POSS, EK, CHK, UBL and mixed on MCD. Wall Street Week w/Fortune had guests that were positive on AEOS, AAPL, CVX, SII, UTH, PLMO and XMSR. Barron's had positive comments on BSX, GET, MYL and MNST. Goldman Sachs reiterated Outperform on STZ, KO, EBAY, ENH, NKE and Underperform on PBG, EK and GAS.

Weekend News
The price of a barrel of oil will fall to around $30 within "a few months," Cinco Dias reported, citing comments from World Bank chief economist Francois Bourguignon. General Motors may hire Wolfgang Bernhard, who had helped DaimlerChrysler AG by cutting costs and creating new products, the Detroit Free Press reported. Among major Japanese companies, 96% expect the country's economy to expand, signaling optimism has increased the most since the early 1990's, the Sankei newspaper reported. Pakistan's security forces arrested nearly a dozen al-Qaeda-linked terror suspects plotting attacks on key sites, including the country's parliament and the U.S. Embassy in the capital of Islamabad, Agence France-Presse reported. U.S. newspapers are considering cutting some of their comic strips in order to reduce costs, yet risk alienating long-term readers, the NY Times said. Iran will delay the planned start-up of its first nuclear reactor until 2006, a year later than previously scheduled, Agence France-Presse reported. Morgan Stanley has invested $35 million in two Israeli venture capital funds in the last few months for the first time since 2001, Haaretz reported. The U.S. government is taking steps to help farmers and ranchers protect the nation's food supply from possible attacks by terrorists, the LA Times reported. China is making higher quality goods than competitors in Eastern Europe, though the perception is that Chinese products are inferior, the Financial Times reported. Cia. Vale do Rio Doce, Rio Tinto Plc and BHP Billiton plan to spend a combined $5.3 billion over the next four years to increase the output of iron ore, the main commodity used to make steel, by over 50%, the Financial Times said. Sony and Time Warner are nearing final negotiations for separate bids for MGM, valuing the company's debt and equity as much as $4.8 billion, the Financial Times reported. Southwest Air wants to boost revenue by overhauling its schedule in October, the Wall Street Journal reported. Pfizer Inc. faces the possibility of a 25% decline in revenue as at least four of its best-selling drugs lose patent protection in the next three years, the Wall Street Journal reported. The U.S. Department of Justice has started a criminal investigation of the medical-supply industry to determine whether hospitals are overcharging Medicare and other government health programs, the NY Times reported. U.S. warplanes and helicopters attacked followers of al-Sadr in the Iraqi city of Najaf, as negotiations to end the standoff continued, the AP reported.

Late-Night Trading
Asian indices are mixed, -.50% to +.75% on average.
S&P 500 indicated +.02%.
NASDAQ 100 indicated +.07%.

BOTTOM LINE: I expect U.S. stocks to open modestly higher in the morning after another weekend with no major terrorism and stabilizing oil prices. Volume will likely be light again this week as many on Wall Street vacation. The Portfolio is 125% net long heading into the week.

Chart of the Week

S&P 500 Price Momentum Oscillator



Bottom Line: The S&P 500 Price Momentum Oscillator generated a Buy signal last week. This is one of many technical indicators that point to the possibility that the major U.S. indices have entered an intermediate-term rally phase.

Weekly Outlook

There are a few important economic reports and some significant corporate earnings reports scheduled for release this week. Economic reports this week include Existing Home Sales, Durable Goods Orders, New Home Sales, Initial Jobless Claims, Preliminary 2Q GDP, Preliminary 2Q Personal Consumption, Preliminary 2Q Price Deflator, and the Final Univ. of Mich. Consumer Confidence reading for August. Home Sales, Durable Goods and the Preliminary 2Q GDP all have market-moving potential.

Toys "R" Us(TOY), H.J. Heinz(HNZ), Toll Brothers(TOL), H&R Block(HRB), OmniVision Tech(OVTI), SeaChange Intl.(SEAC), Williams-Sonoma(WSM), ADC Telecom(ADCT), The Sports Authority(TSA), Dollar General(DG) are some of the more important companies that release quarterly earnings this week. There are also several other events that have market-moving potential. The Fed's Guynn speaking to paper and pulp executives, Alan Greenspan's speech at the Kansas City Fed Symposium, the Raymond James Mid-west Mini-conference and the Novellus(NVLS) Mid-quarter update could also impact trading this week.

Bottom Line: I expect U.S. stocks to finish the week modestly higher as oil prices fall further, more than offsetting terrorism fears ahead of the Republican Convention. Technology shares, continuing to rebound from oversold levels, and homebuilders should lead the way. I would like to see volume accelerate on any further advance and measures of investor anxiety increase. My short-term trading indicators are still giving Buy signals and the Portfolio is 125% net long heading into the week.

Market Week in Review

S&P 500 1,098.35 +3.15%

Click here for the Weekly Wrap by Briefing.com.

Bottom Line: Last week's market action was very positive, considering the violence in Iraq, rising oil prices, continuing terrorism fears and mixed economic reports. The advance/decline line was very constructive and most sectors turned in very good performances for the week. The Dow's 2.9% gain was its best weekly performance in 16 months. The big picture in Iraq continues to improve, notwithstanding the recent violence. Trading action Friday seemed to indicate that oil prices put in at the very least a short-term top. Each day and each event that passes without a serious terror act gives the market more confidence in our abilities to preemptively thwart acts of terrorism. This should also result in an erosion of the terror premium in oil over the next few months. Several economic and retail earnings reports last week disproved the bearish assumption that the U.S. consumer was retrenching in any significant way. Finally, it was positive to see the AAII % Bulls drop on the week in the face of such a strong rally. The key takeaway for the week is that market psychology seems to have shifted for the better. However, the lack of substantial volume and severely oversold technical condition of most stocks makes it harder to predict an end to the recent weakness. It is likely that one last correction will occur in September before the significant rally I envision begins in earnest during the fourth quarter. It is very possible that the lows for the year are in place and the weakness in September will not take the major indices to new lows for the year. Longer-term investors should use any extreme weakness in the coming weeks to add to favorite long positions.

Economic Week in Review

ECRI Weekly Leading Index 131.70 +.23%

The Empire Manufacturing Index fell to 12.57 in August versus estimates of 32.3 and a reading of 35.75 in July. Readings above zero indicate expansion. Thirty-four percent of the state's manufacturers, down from 46% in July, reported an increase in new orders, pushing the measure of new orders to the lowest in almost a year, Bloomberg said. "We've seen a little bit of a lull this month," said David Freund, vice president of operations at Selflock Screw Products in East Syracuse, New York. Selflock believes business will accelerate again after the Republican convention in September, Bloomberg reported.

International investors stepped up purchases of U.S. securities in June amid faster U.S. economic growth than in Europe and Japan, Bloomberg reported. "The purchases may alleviate concern about the attractiveness of U.S. assets after a government report Friday showed the U.S. trade deficit widened," said Stephen Jen, head of currency research at Morgan Stanley in London. "Some investors are too fixated on the U.S. deficit," said Jen, who used to work at the International Monetary Fund and Federal Reserve. "If you look at the demand for dollar assets and U.S. Treasuries, it's hard to say people have a lot of fears about financing the U.S. deficit."

The NAHB Housing Market Index rose to 71 in August versus expectations of 67 and a reading of 67 in July. A reading above 50 means that builders view market conditions as more positive than negative. The index has exceeded 60 for 15 months in a row, Bloomberg said. "With the ongoing favorable financing climate and solid house-price performance, we have good reason to expect continue strength in the housing market in the months ahead," said Bobby Rayburn, the NAHB President. A gauge of buyer traffic in the builders' survey rose to 57, the highest since May 1999. NAHB is forecasting housing starts of 1.9 million in 2004, the most since 1978, and record single-family starts of 1.56 million, Bloomberg said. Finally, the National Association of Realtors increased its estimate for home sales last week for the eighth time this year, saying low mortgage rates and an improving economy will spur the housing market to records for both existing home sales and new home sales, Bloomberg reported.

The Consumer Price Index for July fell .1% versus estimates of a .2% rise and a .3% increase in June. CPI Ex Food & Energy for July rose .1% versus estimates of a .2% gain and a .1% rise in June. The decline in the CPI was the first drop in eight months, as shoppers paid less for gasoline, clothing and transportation, Bloomberg reported. Slowing inflation underscores Federal Reserve policy makers' comments that recent price increases will prove temporary, Bloomberg said. Energy prices, which account for about a 14th of the index fell 1.9% in July, the first decline since November.

Housing Starts for July were 1.98M versus estimates of 1.9M and an upwardly revised 1.83M in June. The 8.3% increase was a result of builders responding to the best two months of home sales on record. Construction permits, a sign of future activity, also increased, Bloomberg reported. The pace has averaged 1.94M units so far in 2004, surpassing last year's 1.85M, the most in 25 years, Bloomberg said. This was a "much stronger than expected report as inventories of new homes are quite lean and housing affordability is still very high," said David Greenlaw, chief U.S. fixed income economist at Moran Stanley. However, August starts in the South may be weaker in the aftermath of Hurricane Charley, which caused at least $11 billion of damage in Florida, Bloomberg said.

Industrial Production for July rose .4% versus estimates of a .5% increase and a .5% fall in June. Capacity Utilization for July was 77.1% versus estimates of 77.5% and 76.9% in June. U.S. industrial production strengthened for the third time in four months, led by business equipment such as computers and semiconductors, Bloomberg said. "This part of the economy is on pretty sound footing," said John Hermann, chief U.S. economist at Cantor Fitzgerald. "It's not a blistering pace, but it's a relatively solid pace that fits in with Greenspan's view that the economy is poised to resume stronger growth."

Initial Jobless Claims for last week fell to 331K versus estimates of 335K and 334K the prior week. Continuing Claims were 2.9M versus estimates of 2.87M and 2.89M prior. Claims are "trending down to the lower part of the range and that's consistent with an underlying labor market that is still sound and stronger that what the payroll numbers suggest," said Michael Gregory, senior economist at BMO Nesbitt Burns.

Leading Indicators for July fell .3% versus estimates of a .1% fall and a .1% decline in June. The index of coincident indicators, a gauge of current economic conditions, rose .1% last month. It tracks payrolls, incomes, sales and production, Bloomberg said. A declining stock market, rising energy prices and a fall in the money supply contributed to the decline in the leading index, Bloomberg reported. "There's a lot of uncertainty right now with the presidential elections and oil prices and kind of the mixed economic numbers," Agilent Technologies DEO Barnholt said. A recent survey by the National Association for Business Economics(NABE) showed that forty percent of CEOs believe terrorism is the biggest near-term threat to the U.S. economy, more than twice the percentage concerned about terror in a March poll, Bloomberg reported.

The Philadelphia Fed's Index for August was 28.5 versus estimates of 30.0 and a reading of 36.1 in July. The index is "more an indication of a pause in rapid growth than anything else," said Michael Trebing, an economist at the Fed bank. "The overall conclusion is we are still seeing growth." The component of the index that measures the outlook for six months from now rose to 52.7, the highest since January, Bloomberg said. The increase in the expectations index is "telling us that any pullback in the Philadelphia area manufacturing sector should be temporary," said Joseph LaVorgna, chief U.S. fixed income economist at Deutsche Bank Securities.

Bottom Line: Overall, last week's economic data were mixed. Measures of manufacturing mostly weakened, but gauges of the future outlook remain relatively strong. Recent surveys say that terrorism worries ahead of the election are weighing heavily on executive purchasing decisions. Strong demand for U.S. securities by foreign investors continues to show that inflation and deficit fears perpetuated by the media and bears are overstated at this point. Many recent economic releases show inflation slowing, including the CPI last week. In my opinion, oil is at an intermediate-term high and will begin falling to the mid-30's within the next few months which bodes well for future inflation readings. As well, slowing demand from China should hold commodity prices in check. The U.S. housing market remains exceptionally strong. The supply of homes in the U.S. is relatively low compared to demand and future gauges of buying activity point to sustainable strength. I continue to believe overall U.S. economic activity will re-accelerate in the fourth quarter. Executive worries over terrorism and anti-business political rhetoric are the two main reasons U.S. growth has recently slowed from the torrid pace seen earlier in the year.