Weekly Outlook

There are some important economic reports and a number of significant corporate earnings reports scheduled for release this week. Economic reports include (Tues.)-Empire Manufacturing, NAHB Housing Market Index (Wed.)-Consumer Price Index, Housing Starts, Initial Jobless Claims, Fed's Beige Book (Thur.)-Leading Indicators, Philly Fed. (Fri.)-Univ. of Michigan Consumer Confidence. The CPI, Housing Starts, Leading Indicators, Philly Fed. and Consumer Confidence all have market-moving potential.

Tues.- Bank of America(BAC), Juniper Networks(JNPR), Motorola(MOT), Yahoo!(YHOO), 3M(MMM), IBM(IBM) Wed.- eBay(EBAY), Qualcomm(QCOM), Symantec(SYMC), General Motors(GM), JP Morgan(JPM), Pfizer(PFE) Thur.- Delta Air Lines(DAL), Intl. Game Technologies(IGT), Xilinx(XLNX), Citigroup(C), Fri.- United Technologies(UTX), Charles Schwab(SCH), Fannie Mae(FNM), 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. Tues. - The Fed's Lacker speaking, the Fed's Santomero speaking, the Fed's Stern speaking Wed. – Semi Book-to-Bill, the Fed's Poole speaking, the Fed's Yellen speaking Thur. – the Fed's Bies speaking and the Fed's Stern speaking could also impact trading this week.

Bottom Line: I expect US stocks to finish the week higher on strong earnings/economic reports, a stabilizing US dollar, lower interest rates, short-covering and bargain-hunting. While weakness will likely resurface over the next few weeks, an oversold bounce is likely from current levels. My short-term trading indicators are still giving Sell signals and the Portfolio is 50% net long heading into the week.

Market Week in Review

S&P 500 1,184.52 -.14%

Click here for the Weekly Wrap by Briefing.com.

Bottom Line: The S&P 500 declined for a second straight week, its first back-to-back weekly decline since October. Considering the steep rise in energy prices and some earnings disappointments, last week's minimal declines were a positive. As well, small-caps bounced back from recent losses, the advance/decline line improved and interest rates fell. The homebuilding index hit another all-time high and this sector should continue to outperform as interest rates remain low, housing supply stays relatively low by historic standards and demand remains strong. The oil service index has been in a trading range for almost four months and will likely continue to underperform as crude prices fall further over the next few months. On the negative side, the transportation index has now declined 6.36% from its all-time high on 12/28. This is a concern, but is likely just a correction from recent outsized gains. Finally, most measures of investor anxiety fell on the week and likely remain too low for a durable bottom.

Economic Week in Review

ECRI Weekly Leading Index 130.40 -.91%

Wholesale Inventories for November rose 1.1% versus estimates of a .7% increase and a 1.1% gain in October. Companies have been restocking to ensure enough goods are on hand after consumer spending grew at the fastest pace in almost three years during the third quarter, Bloomberg said. Inventory growth and rising demand are fueling orders, boosting production and helping boost economic growth. "Growth, particularly in consumer spending, has continued to surprise to the upside, so I think we may be back in a situation where inventory growth has been too small," said Stephen Stanley, chief economist at RBS Greenwich Capital. Wholesalers had enough supply on hand to last 1.15 months at the current sales pace. The ratio has held there since May, Bloomberg said.

The Trade Balance for November came in at -$60.3B versus estimates of -$54.0B and -$56.0B in October. The Monthly Budget deficit was -$3.4B versus estimates of $0.0B and -$17.6B in December 2003. The trade deficit unexpectedly grew in November as US demand for oil and consumer goods pushed imports to a record and exports fell as growth in Asia and Europe slowed. The imbalance with China accounted for more than a quarter of the total deficit, Bloomberg said. Tax receipts rose 16.0% in 2004 as tax cuts spurred economic growth, thus increasing corporate and personal incomes, Bloomberg said. The Congressional Budget Office said in its latest annual forecast that the budget deficit would shrink to $348B in 2005, Bloomberg reported. For the first three months of the fiscal year, the US budget deficit fell 8.9% from the prior year.

The Import Price Index for December fell 1.3% versus estimates of a .3% fall and a downwardly revised .2% decline in November. Imports account for about 15% of all goods and services bought in the U.S. The cost of imported petroleum fell 11.5% in December, the biggest drop since April 2003, after falling 5.7% the month before, Bloomberg reported.

Advance Retail Sales for December rose 1.2% versus estimates of a 1.1% increase and a .1% gain in November. Retail Sales Less Autos for December rose .3% versus estimates of a .4% increase and a .4% rise in November. Retail Sales rose 8% for the year, the most in five years. Excluding autos, retail sales surged 8.9%, the strongest performance in 12 years, Bloomberg reported. The economy created 2.2 million jobs in 2004, leading to a pickup in incomes that is likely to keep people buying and the economy expanding, Bloomberg said. "Once again the consumer proves healthier than expected, with big-ticket goods like furniture, appliances and autos leading the way," said Christopher Low, chief economist at FTN Financial.

Initial Jobless Claims for last week rose to 367K versus estimates of 340K and a downwardly revised 357K the prior week. Continuing Claims fell to 2631K, the lowest since April 2001, versus estimates of 2775K and 2850K prior. Claims for jobless benefits typically increase around the start of the year because of seasonal job cuts at retailers and construction companies, Bloomberg said. "We continue to feel that 2005 will see a sustained strengthening of the labor market," said Steve Pogorzelski, president of Monster North America, a unit of Monster Worldwide. Last year, payrolls averaged 185,920 a month. Job growth of about 100,000 to 150,000 is needed to keep pace with the increase in the labor force and keep the unemployment rate from rising, according to most economists.

The Producer Price Index for December fell .7% versus estimates of a .1% decline and a .5% increase in November. PPI Ex Food & Energy for December rose .1% versus estimates of a .2% increase and a .2% gain in November. "Inflation is still low in the absolute sense but the net of the recent data is that inflation is moving up and that keeps pressure on the Fed to keep raising rates," said James O'Sullivan, senior economist at UBS Securities. The price of gasoline fell 11.1% last month, the largest decline since April 2003, Bloomberg said. Moreover, Federal Reserve Bank of New York President Geithner said in a recent speech that "core inflation is moderate and various measures of inflation expectations suggest confidence in the outlook for price stability."

Business Inventories for November rose 1.0% versus estimates of a .6% increase and a .4% gain in October. The buildup, in conjunction with rising consumer spending, likely boosted economic growth in the final three months of the year and will help ease some of the negative impact of a high trade deficit on GDP in the quarter, economists said. The ratio of inventories to sales, a measure of how long goods remain in store at the current pace of demand, rose to 1.31 months, compared with October's record-tying low of 1.3 months, Bloomberg said.

Industrial Production for December rose .8% versus estimates of a .4% gain and a .2% increase in November. Capacity Utilization for December came in at 79.2% versus estimates of 78.9% and 78.6% in November. Gains in production of metals and computers helped push up the index, Bloomberg said. The manufacturing sector is doing very well," said Stephen Stanley. "We've seen continued strength in orders which bodes well for 2005."

Bottom Line: Overall, last week's economic data were modestly positive. Inventory gains are helping to boost economic growth and illustrate manager's confidence in the economy. The US trade deficit will likely worsen slightly before it gets better. The budget deficit should shrink this year as tax receipts remain strong and government spending decelerates. The rate of inflation will slow in 2005, with the CPI likely rising below its long-term average of 3.0%. The fact that retail sales, excluding autos, rose the most in 12 years last year is remarkable considering the negativity from the election, terrorism fears, worries over the financial health of the consumer and higher interest rates. The recent rise in jobless claims is likely the result of seasonal factors rather than real weakness in the labor market. Manufacturing has been exceptionally strong as of late and capacity utilization is nearing its long-term average of around 81.0%. The ECRI Weekly Leading Index has now declined the most in the last 2 weeks since before it began trending higher in 2002.

Weekly Scoreboard*

Indices
S&P 500 1,184.52 -.14%
Dow 10,558.00 -.43%
NASDAQ 2,087.91 -.03%
Russell 2000 617.48 +.70%
DJ Wilshire 5000 11,635.73 +.06%
S&P Equity Long/Short Index 1,006.96 +.01%
S&P Barra Growth 571.23 +.07%
S&P Barra Value 608.88 -.36%
Morgan Stanley Consumer 582.05 -.19%
Morgan Stanley Cyclical 765.78 +.37%
Morgan Stanley Technology 484.13 -.11%
Transports 167.49 -2.29%
Utilities 332.29 +2.34%
Put/Call .73 -23.16%
NYSE Arms .79 -37.30%
Volatility(VIX) 12.43 -7.86%
ISE Sentiment 157.00 -1.88%
AAII % Bulls 33.99 -10.79%
US Dollar 82.97 -.75%
CRB 283.22 +1.56%

Futures Spot Prices
Crude Oil 48.38 +7.15%
Unleaded Gasoline 127.61 +5.64%
Natural Gas 6.39 +6.85%
Heating Oil 135.09 +6.12%
Gold 422.30 +1.12%
Base Metals 119.14 +.08%
Copper 139.60 +1.90%
10-year US Treasury Yield 4.21% -1.05%
Average 30-year Mortgage Rate 5.74% -.52%

Leading Sectors
Oil Service +6.11%
HMOs +4.88%
Homebuilders +4.42%

Lagging Sectors
Restaurants -2.18%
Airlines -2.53%
Telecom -3.25%

*% Gain or loss for the week

Mid-day Report

S&P 500 1,183.37 +.50%
NASDAQ 2,082.76 +.59%

Leading Sectors
Airlines +2.04%
Iron/Steel +2.03%
Semis +1.72%

Lagging Sectors
Biotech +.04%
Boxmakers -.07%
Telecom -.25%

Other
Crude Oil 48.30 +.54%
Natural Gas 6.38 -.93%
Gold 423.00 -.49%
Base Metals 119.14 -.17%
U.S. Dollar 83.02 +.62%
10-Yr. T-note Yield 4.21% +1.17%
VIX 12.49 -2.73%
Put/Call .70 -15.66%
NYSE Arms .87 -40.82%
ISE Sentiment 134.00 -14.10%

Market Movers
CREE -24.66% after missing 2Q estimates and lowering 3Q forecast.
EPIX -29.5% after the company and its German partner, Schering AG said US regulators demanded more data before approving its scan contrast product MS-325.
CAAS +16.4% after announcing it has signed a technology licensing agreement with Korea Delphi Automotive Systems to manufacture and export its M150/M200 model automotive steering systems.
NX +11.2% after boosting 1Q estimates.
ASKJ +9.1% on Piper Jaffray upgrade to Outperform.
AIT +12.8% after beating 2Q estimates and raising 3Q forecast.
GMTN -16.6% after cutting 4Q forecast.

Economic Data
Producer Price Index for December fell .7% versus estimates of a .1% fall and a .5% increase in November.
PPI Ex Food & Energy for December rose .1% versus estimates of a .2% increase and a .2% gain in November.
Business Inventories for November rose 1.0% versus estimates of a .6% increase and a .4% rise in October.
Industrial Production for December rose .8% versus estimates of a .4% gain and a .2% increase in November.
Capacity Utilization for December came in at 79.2% versus estimates of 78.9% and an upwardly revised 78.6% in November.

Recommendations
-Goldman Sachs: Reiterated Outperform on HD and BAX. Reiterated Underperform on BE.
-Banc of America: Upgraded NOVL to Buy, target $8.50. Rated LLY Buy, target $67. Rated WYE Buy, target $46. Rated SGP Sell, target $17.
-Citi SmithBarney: Upgraded ELOS to Buy, target $37. Upgraded RSAS to Buy.
-CSFB: Raised STX to Outperform.
-JP Morgan: Cut JTX, KSS to Underweight. Raised RA, AMB to Overweight. Rated NINE Overweight.
-UBS: Raised FLEX to Buy, target $17. Raised KNX to Buy, target $28. Rated OS Buy, target $26.
-Deutsche Bank: Rated VSEA Buy, target $39. Rated SPRT Buy, target $9. Raised ABX to Buy, target $26.50.
-Thomas Weisel: Rated CPC Outperform.
-Morgan Stanley: Raised DISH to Overweight, target $40.
-Prudential: Rated NWAC Overweight, target $16. Rated LUV Overweight, target $22. Rated JBLU Overweight, target $28. Rated DAL Underweight, target $9. Rated AMR Overweight, target $17. Rated AAI Overweight, target $15. Cut UST to Underweight, target $40.
-Legg Mason: Rated AOC Sell.
-Merrill Lynch: Raised DIS to Buy, target $35.

Mid-day News
U.S. stocks are modestly higher mid-day on good economic data and a technical bounce after yesterday’s sell-off. Marsh & McLennan offered to pay $600 million to settle allegations of contract bid-rigging, the Wall Street Journal said. Boeing will end production of its 717 short-haul airliner after completing outstanding orders for the 117-seat jet, the Wall Street Journal reported. Fannie Mae and Freddie Mac earned about $4 billion last year through guarantees fees, at the expense of millions of homeowners, the Wall Street Journal said. Cosmetics makers Revlon, L’Oreal SA and Unilever Plc said they no longer use phthalates in their products, because of concern that the chemicals may be harmful to health, the Wall Street Journal reported. US trade and budget deficits are unlikely to slow efforts by the Bush administration to tackle meaningful reform of the tax code and Social Security, the Wall Street Journal reported. A new US law that requires employers to destroy papers containing personal information of workers such as nannies may boost sales of shredding machines, USA Today reported. Harvard University has hired 2004 graduate Zac Corker, who helped create a Web site that posts party information, drinking-game rules and tips on how to unhook a bra, as its new social programmer to help students unwind, the Boston Herald reported. The NY Metropolitan Transportation Authority will start operating its first computer-run subways in July on the L line, the NY Times reported. Hewlett-Packard will combine its printing and personal computer units and said Executive Vice President Duane Zitzner, who ran the PC group, left the company, Bloomberg reported. Shares of Verizon Communications fell for the 13th consecutive day amid concern by some investors that cable and wireless companies will win local-calling customers, Bloomberg said. Merck and Johnson & Johnson provided an “adequate rationale” for selling the cholesterol medication Mevacor without a doctor’s prescription, Bloomberg reported. US industrial production increased more than expected in December, making last year the busiest for factories, mines and utilities since 2000, Bloomberg said. US wholesale prices fell a larger-than-expected .7% last month, the biggest decline since April 2003 and led by falling energy costs, Bloomberg reported. The US dollar is gaining against the euro after a Fed official said policy makers may drop their plan to lift interest rates at a “measured” pace “at some point,” Bloomberg said.

Bottom Line: The Portfolio is slightly higher mid-day on gains in my homebuilding longs and software shorts. I have not traded today and the Portfolio remains 25% net long. The tone of the market is better today, however volume is lighter and most measures of investor anxiety are falling. The homebuilders’ ability to add to yesterday’s gains with long-term interest rates rising today is a positive for the group. I continue to believe the Fed is trying to jawbone the dollar and do not expect an accelerated pace of rate hikes. I expect US stocks to trade mixed-to-weaker into the close.

Friday Watch

Earnings of Note
Company/Estimate
BBT/.76

Splits
None of note.

Economic Data
Producer Price Index for December estimated down .1% versus a .5% increase in November.
PPI Ex Food & Energy for December estimated to rise .2% versus a .2% increase in November.
Business Inventories for November estimated up .6% versus a .2% increase in October.
Industrial Production for December estimated up .4% versus a .2% increase in November.
Capacity Utilization for December estimated at 78.9% versus 78.7% in November.

Recommendations
Goldman Sachs reiterated Outperform on MSFT and RE. Goldman said restrictions for the American Jobs Creation Act repatriation provision include: share buybacks, dividend payments to shareholders, portfolio investments or payment of taxes. Important permitted uses include: debt repayment, research and development, employee benefit plan contributions, acquisition of intangible property including patent rights, advertising and marketing and certain acquisitions. Goldman also thinks payment of tort liabilities could be included.

Late-Night News
Asian indices are mostly higher, led by technology stocks in the region. Rio Tinto, the biggest supplier of iron ore to Japan, has asked Nippon Steel to pay 50% more for the material, the Nihon Keizai newspaper reported. International Data Group's venture capital unit in China will open a $150 million venture capital fund in February to invest in consumer Web services, digital media and software companies, Business Week reported. China's State Administration of Radio, Film and Television is keeping curbs on foreign investment in media by restricting overseas companies to one venture in film production and in television, South China Morning Post reported. St. Louis Federal Reserve Bank President William Poole said the central bank will eventually have to drop its commitment to increasing interest rates at a "measured" pace, Reuters reported. Corporate information technology budgets may show their biggest increase since 2001, rising by an average 2.5% this year, the Financial Times said. Howard Dean paid Jerome Armstrong and Markos Zuniga, who publish the political blogs MyDD and DailyKos, $12,000 each to promote his unsuccessful Democratic presidential nomination campaign on their sites last year, the Wall Street Journal reported. China's crude oil demand may expand at a rate of 6.4% this year, down from 14.2% last year, Xinhua news agency reported. President Bush said his administration has a "strong dollar policy" and is confident foreign investors will continue to find America a good place to invest, USA Today reported. Viacom's CBS unit may cancel "60 Minutes Wednesday," which aired the discredited report on President Bush's National Guard record, when the television season ends in May, the NY Times reported. Samsung Electronics, Asia's biggest electronics maker by market value, said profit in the final three months of 2004 fell for the first time in six quarters as prices of mobile phones, flat-panel displays and chips dropped, Bloomberg said. The threat of terrorist attacks in Indonesia prompted the U.S. to issue an alert to its citizens and the U.K. to close its embassy and consulate offices in the capital, Jakarta, Bloomberg reported.

Late-Night Trading
Asian Indices are -.25%. to +1.0% on average.
S&P 500 indicated +.07%.
NASDAQ 100 indicated +.10%.

BOTTOM LINE: I expect U.S. equities to open modestly higher on strength in Asia, lower interest rates and a bounce from today's sell-off. However, stocks may fall later in the day on worries over too many Fed rate hikes and higher energy prices. The Portfolio is 25% net long heading into tomorrow.