Monday Watch

Weekend News
China's steel production capacity will rise to 350 million metric tons this year as new mills start operating, 21st Century Business Herald said. Clear Channel Communications, the biggest US radio broadcaster, is planning a bid for Mean Fiddler Music Group Plc, the Independent reported. Hamas, a radical Islamic movement, will take part in Palestinian legislative elections in July, ending the group's boycott of mainstream politics, AFP reported. Italian intelligence officers in Iraq didn't tell US forces about the release of kidnapped anti-war journalist Giuliana Sgrena before a US patrol fired on the car carrying her, La Repubblica reported. Syrian President al-Assad has agreed to withdraw all military and intelligence personnel from Lebanon, AFP reported. EBay CEO Whitman has withdrawn as a candidate to replace Michael Eisner as Walt Disney's CEO, the Wall Street Journal reported. Charles Schwab is cutting prices and adding services as the company's founder, Charles R. Schwab, seeks to reclaim customers who have defected, the NY Times reported. Howard Stringer, who was named Sony Corp.'s first non-Japanese CEO this week, expects change to come slowly at the consumer-electronics maker, Barron's reported. The number and value of leveraged buyouts among US businesses are increasing to their highest levels in more than a decade as companies sell off lagging divisions, Barron's reported. Commercial airline travelers in the US are finding it much more difficult to easily redeem frequent-flier miles granted by major airlines on flights and times of their choosing, the NY Times reported. Republican Senator Ted Stevens, chairman of the US Senate Commerce Committee, said that cable providers should also offer groups of channels free of indecent material, Reuters reported. Israel has made plans for air and ground attacks on targets in Iran should diplomatic efforts fail to halt an Iranian nuclear program, the London-based Times reported. OPEC this week may informally allow members to pump oil above official output limits, Reuters reported. Walt Disney's board is close to announcing that President Robert Iger will succeed Michael Eisner as CEO, Dow Jones Newswires said. China's President Hu Jintao called for an end to breakneck economic expansion and urged more focus on the quality of growth to ease pressure on the country's environment and energy supplies, the Xinhua news agency reported. Motorola and Chinese phone-equipment make Huawei Technologies are open to looking at Siemens AG's mobile-phone unit, weekly magazine Focus said. Two-thirds of Massachusetts residents support stem-cell research using human embryos, a Boston Globe poll showed today. Iraq-based terrorist Abu Musab al-Zarqawi may be plotting ways to attack schools, movie theatres, restaurants and other so-called soft targets in the US, Time magazine reported. Brazil's economy may expand 4% to 5% in 2005 as exports rise and the currency strengthens, O Globo reported. Federal lawmakers are considering restrictions to prevent the spread of tribal casinos into urban areas in California and other states, away from reservations, the San Francisco Chronicle reported. JC Penney or Nordstrom may purchase stores closed by Federated Department Stores, Barron's said. Taiwan President Chen Shui-bian has asked for a million of the island's people to join a protest march this week against China's planned anti-secession law, the Financial Times reported. Qingdao Haier, a unit of China's biggest home-appliance maker, has orders an undisclosed number of flat panel television screens from AU Optronics to start selling TVs in Europe, the Commercial Times reported. Las Vegas Sands is close to signing up Marriott International, Starwood Hotels & Resorts Worldwide and several other hotel groups to its $1.8 billion casino project in Macau, the Asian Wall Street Journal reported. Och-Ziff Capital Management and Cerberus Capital Management are among hedge funds recruiting executives from private equity companies to help them expand in leveraged buy-outs, the Financial Times reported. Macquarie Bank Ltd., AES Corp., Genting International Plc, Keppel Corp. and Meiya Power Co. may bid for El Paso Corp's Asian power plants, Project Finance International reported. Iran played down the significance of trade incentives offered by the European Union and the US, saying they won't deprive the country of its "right" to build up nuclear power, Bloomberg reported. Wal-Mart Stores said March sales are rising within its forecast as shoppers spend more on food, Bloomberg said. US Secretary of State Condoleezza Rice today opposes a plan by China's legislature to pass a law authorizing an attack on Taiwan should the island declare independence, Bloomberg reported. Philip Morris agreed to buy 40% of PT HM Sampoerna Tbk, Indonesia's third-largest tobacco company, for $2 billion, Bloomberg said. Italy's ENI SpA, ChevronTexaco Corp. and China National Offshore Oil Corp. are all considering bids for Unocal Corp., the Wall Street Journal reported.

Weekend Recommendations
- Bulls and Bears: Had guests that were positive on VLO, XOM, DIS, BRK/B, HON, SBUX, MSFT, MANH, mixed on IPXL, BRO, ELY and negative on TOL, EBAY.
- Cavuto on Business: Had guests that were mixed on NKE, PMMAY, PEP and SWC.
- Barron's: Had positive comments on JPM, WM, BAC, MRK, PFE, KMG, OXY, DOW and FCX. Had negative comments on WMT and ERICY.
- Forbes: Had a negative column on RIMM.
- Goldman Sachs: Reiterated Outperform on BBG, EBAY, ACS and HOT.

Night Trading
Asian indices are mostly lower, -.50% to +.25% on average.
S&P 500 indicated +.11%.
NASDAQ 100 indicated +.16%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Before the Bell Video(bottom right)
Asian Indices
European Indices
Top 20 Business Stories
In Play
Bond Ticker
Analyst Actions
Macro Calls
CNBC Guest Schedule

Earnings of Note
Company/Estimate
CMVT/.09
ELBO/1.62
LBTYA/-.03
OMX/.18
PDLI/-.15
SSI/.23
URI/.26
WPSC/.35

Splits
AET 2-for-1

Economic Data
None of note

BOTTOM LINE: I expect US stocks to open modestly higher in the morning on a bounce from last week's declines. However, shares may weaken later in the day on continuing worries over the recent rise in energy prices/interest rates and rising geopolitical tensions. The Portfolio is Market Neutral heading into the week.

Weekly Outlook

There are a number of important economic reports and some significant corporate earnings reports scheduled for release this week. Economic reports for the week include:

Mon. - None of note
Tues. - Empire Manufacturing, Advance Retail Sales, Business Inventories, Net Foreign Security Purchases, NAHB Housing Market Index
Wed. - Current Account Balance, Housing Starts, Industrial Production
Thur. - Initial Jobless Claims, Leading Indicators, Philadelphia Fed.
Fri. - Import Price Index, Preliminary Univ. of Mich. Consumer Confidence

Some of the more noteworthy companies that release quarterly earnings this week are:

Mon. - Comverse Technology(CMVT), Electronics Boutique(ELBO), OfficeMax(OMX)
Tues. - Albertson's(ABS), Lehman Brothers(LEH), Wynn Resorts(WYNN), Liberty Media(L)
Wed. - Bear Stearns(BSC), General Mills(GIS)
Thur. - Adobe Systems(ADBE), AnnTaylor Stores(ANN), Barnes & Noble(BKS), Cintas Corp.(CTAS), EchoStar Communications(DISH), FedEx Corp.(FDX), Goldman Sachs(GS), Morgan Stanley(MWD), Nike Inc.(NKE), Jabil Circuit(JBL)
Fri. - None of note

Other events that have market-moving potential this week include:

Mon. - CSFB Global Services Conference, SG Cowen Health Care Conference, Fed's Yellen speaks
Tue. - SG Cowen Health Care Conference, CSFB Global Services Conference, Merrill Lunch Chemicals Conference, Banc of America Consumer Conference, AG Edwards Energy Conference
Wed. - Banc of America Consumer Conference, SG Cowen Health Care Conference, CSFB Global Services Conference, AG Edwards Energy Conference, Merrill Lynch Chemicals Conference
Thur. - Banc of America Consumer Conference, Semi Book-to-Bill, AG Edwards Energy Conference, SG Cowen Health Care Conference
Fri. - None of note

BOTTOM LINE: I expect US stocks to finish the week modestly lower on continuing worries over higher interest rates and technical deterioration. Investors will likely pay closer attention than usual to the report on Net Foreign Security Purchases due to recent worries over talk of foreign Central Bank "diversification." The Import Price Index on Fri. will also garner attention and is likely to exceed expectations of a .7% increase due to the recent rise in commodities prices. Homebuilding stocks may continue to underperform on worries over rising long-term interest rates and disappointing fundamentals due to one of the wettest winters in US history. I will look to accumulate shares in this group on any substantial pullback from current levels as I view these problems as short-term in nature. Overall, I expect US stocks to trade mixed-to-weaker over the next few weeks until commodity prices and long-term interest rates begin to stabilize. My trading indicators are mostly bearish and the Portfolio is Market Neutral(% Long - % Short=0) heading into the week.

Economic Week in Review

ECRI Weekly Leading Index 135.20 +.22%

Consumer Credit for January rose $11.5B versus estimates of a $5.2B gain and an upwardly revised $8.7B increase in December. Consumer spending, which accounts for two-thirds of the US economy, picked up even after the Fed raised rates to 2.25% in December from 1% in June to stem inflation, Bloomberg said. "The outlook for consumer spending continues to brighten, and the big jobs report last Friday can only help to make consumers more confident in the future," said Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi. "Consumers tend to delay paying off their credit card bills in the first month after year-end holidays. Consumer debt levels are probably not rising as fast as the January figures indicate," he said. Moreover, US bankruptcy filings actually dropped in 2004 for the first time in 4 years, led by a decline in applications from consumers as the economy improved, according to a report from the Administration Office of the US Courts.

Manufacturers in parts of the US found it easier to pass on rising material and labor costs to customers in January and February, the Federal Reserve said in its Beige Book report. Even so, "retail prices were generally flat or up modestly," said the survey. Moreover, prices paid by US consumers rose only .1% in January, Bloomberg said. Wage increases were "moderate" in all regions, the Beige Book said. Industries with the best wage gains were legal services, accounting, securities and trucking. "The big picture for inflation is still benign, but the rumblings get a little louder with each succeeding beige book," said Stephen Stanley, chief economist for RBS Greenwich Capital. Fed officials including Governor Ben Bernanke and St. Louis Fed Bank President William Pool said this week that inflation is well controlled, Bloomberg reported. "With the economy strengthening, with inflation stable, at this point my expectation is that the committee will continue to remove policy accommodation in a measured way," Bernanke said in a speech in Chicago.

Initial Jobless Claims for last week rose to 327K versus estimates of 310K and 310K the prior week. Continuing Claims rose to 2703K versus estimates of 2662K and 2664K prior. The four-week average of claims, a less volatile measure, increased to 312,500 from 306,750, which was the lowest in more than four years, Bloomberg reported. Part of the larger-than-forecast level of claims may have been a rebound from the prior week, when the President's Day holiday limited the number of days people could file, Bloomberg said. "The labor market's not tight but it's tightening," said Roger Kubarych, a former Federal Reserve economist who is now a senior adviser at HVB America. "We're doing right now annually about 7,000 searches or so and that's kind of doubled from where it was two to three years ago," said Gary Burnison, COO of Korn/Ferry International, the world's largest executive search firm.

Wholesale Inventories for January rose 1.1% versus estimates of a .6% increase and a .4% gain in December. Wholesaler sales in January rose for a record 20th consecutive month, and the ratio of stocks to sales was near historic lows, Bloomberg said. The increase was led by a gain of 2.2% for automobiles and parts and 2.2% as well for metals, Bloomberg reported. The buildup in stockpiles is likely to reinforce expectations that the economy will grow faster this quarter than at the end of 2004, Bloomberg reported. "I view the solid growth in inventories and sales in January and the low ratio of inventories to sales as a sign that this is an intentional buildup," said Mick Englund, chief economist at Action Economics. "It says firms know that their sales are increasing," he said.

The Monthly Budget Statement for February was -$113.9B versus estimates of -$100.0B and -$96.7B in January. An early rush of tax refunds helped magnify the shortfall in February, said David Resler, chief economist at Nomura Securities. "We still expect the fiscal year 2005 deficit to narrow to about $372.0B," he said. For the first five months of the year, the deficit totaled $223.4B, down 2.2% from the first five months of the previous year, Bloomberg reported. "The key period is really the March-to-May period as the bulk of refunds go out then and the April 15 payments start to come in," said Stephen Stanley, chief economist at RBS Greenwich Capital.

The Trade Balance for January widened to -$58.3B versus estimates of -$56.8B and -$55.7B in December. China, whose textile exports surged after quotas ended this year, accounted for more than a quarter of the shortfall, Bloomberg said. Americans' appetite for new cars, clothes, furniture and televisions caused imports to swell to a record $159.1B, Bloomberg reported. An increase in the price of oil since January may further widen the gap. "Import growth is definitely stronger than anticipated, and that's just another indication of strong demand in the US," said Stephen Stanley. Economists at Morgan Stanley lowered their 1Q GDP forecast after the report to 4% from 4.5%, Bloomberg said. Also, the US dollar fell to near a two-month low against the euro, leaving it little changed so far this year. Countries that use the euro as their currency are forecast to grow 1.6% this year, according to economists surveyed this month by Blue Chip Economic Indicators. "Should globalization continue unfettered and thereby create an ever-more flexible international financial system, history suggests that current account imbalances will be defused with modest risk of disruption," Fed Chairman Greenspan said in a recent speech.

BOTTOM LINE: Overall, last week's economic data were mixed. The US consumer continues to defy the bears as an improving labor market, relatively low interest rates and investment gains are spurring strong consumption. Spending should remain healthy over the course of the year. In my opinion, many factors are contributing to the increasing trade deficit, but the main reason is the exceptional strength of the US economy compared to other industrialized nations whose economy's are mired in stagnation as a result of high taxation and overregulation. The trade deficit will likely worsen in the near-term before improving in the second half of the year. The market appears to have overreacted to the Beige Book report, considering the recent decline in many other gauges of inflation. I continue to expect inflation to rise around the 40-year long-term average of 3.0% this year. Historically, modest inflation has been a positive for stock prices. The rise in Initial Jobless Claims is a positive as a deceleration in employment gains from last month's strong pace would calm fears over the possibility of rising unit labor costs. Inventory rebuilding, as a result of strong sales, will likely offset the negative effects of the trade deficit, leading to around 4% GDP growth for the first quarter. The increase in the Budget Deficit was likely an anomaly and should reverse over the next few months and begin improving again. Finally, the ECRI Weekly Leading Index rose .22% to 135.20 and is at cycle highs set in April 2004.

Market Week in Review

S&P 500 1,200.08 -1.80%


Click here for the Weekly Wrap by Briefing.com.

Bottom Line: Overall, last week's market performance was negative. The advance/decline line fell, almost every sector declined and volume was light. Measures of investor anxiety were mixed on the week, which is a negative considering the steep losses in many market-leading stocks. The CRB Index has gone parabolic over the last 3 weeks and is now up 13.7% for the year. I suspect we have entered the blow-off phase in commodity prices before declines begin sometime during the next 2 quarters. The sharp losses in commodity-related stocks, even with the rise in the CRB, may be a result of investors anticipating the declines I foresee in the underlying commodity prices. Small-caps and interest rate sensitive sectors also underperformed for the week as worries over inflation increased. On the positive side, technology shares outperformed even with Friday's sell-off in the Semis. As well, the economically sensitive Transports hit an all-time high earlier in the week and finished roughly unchanged. Finally, volume was pretty light, which is also a positive.

Weekly Scoreboard*

Indices
S&P 500 1,200.08 -1.80%
Dow 10,774.36 -1.52%
NASDAQ 2,041.60 -1.40%
Russell 2000 626.84 -2.81%
DJ Wilshire 5000 11,820.74 -1.81%
S&P Equity Long/Short Index 1,037.72 +.36%
S&P Barra Growth 577.68 -1.76%
S&P Barra Value 618.01 -1.85%
Morgan Stanley Consumer 583.21 -1.42%
Morgan Stanley Cyclical 776.87 -.94%
Morgan Stanley Technology 469.11 -1.09%
Transports 3,832.09 +.03%
Utilities 354.15 -2.10%
Put/Call .98 +19.51%
NYSE Arms 1.03 -6.36%
Volatility(VIX) 12.80 +7.20%
ISE Sentiment 142.00 -6.58%
AAII % Bulls 49.66 +25.69%
US Dollar 81.42 -1.33%
CRB 318.61 +3.06%

Futures Spot Prices
Crude Oil 54.43 +1.45%
Unleaded Gasoline 151.75 +.56%
Natural Gas 6.77 +.33%
Heating Oil 154.27 +3.96%
Gold 446.80 +2.52%
Base Metals 130.99 +.54%
Copper 147.90 -1.14%
10-year US Treasury Yield 4.54% +5.34%
Average 30-year Mortgage Rate 5.85% +1.04%

Leading Sectors
Networking +.86%
Broadcasting -.22%
Software -.23%

Lagging Sectors
Homebuilders -5.01%
Iron/Steel -5.12%
Oil Service -5.53%

*% Gain or loss for the week

Mid-day Report

Indices
S&P 500 1,205.01 -.35%
Dow 10,817.96 -.31%
NASDAQ 2,049.43 -.50%
Russell 2000 628.02 +.17%
DJ Wilshire 5000 11,862.00 -.25%
S&P Barra Growth 580.25 -.39%
S&P Barra Value 620.13 -.34%
Morgan Stanley Consumer 585.40 -.45%
Morgan Stanley Cyclical 779.11 +.82%
Morgan Stanley Technology 472.07 -.92%
Transports 3,843.38 +.63%
Utilities 355.64 -.27%
Put/Call 1.06 +7.07%
NYSE Arms .84 +15.07%
Volatility(VIX) 12.45 -.32%
ISE Sentiment 133.00 +2.31%
US Dollar 81.39 -.25%
CRB 317.84 +.85%

Futures Spot Prices
Crude Oil 54.45 +1.70%
Unleaded Gasoline 151.15 +1.95%
Natural Gas 6.81 +.62%
Heating Oil 154.80 +2.58%
Gold 447.00 +.81%
Base Metals 130.99 +.08%
Copper 147.80 -1.20%
10-year US Treasury Yield 4.52% +1.41%

Leading Sectors
Iron/Steel +2.79%
Oil Service +.88%
Gaming +.50%

Lagging Sectors
Networking -1.39%
I-Banks -1.39%
Semis -2.50%

Market Movers
ERES -18.53% after cutting 1Q estimates.
S +5.2% on UBS upgrade of KMRT to Buy. KMRT +9.3%.
VC +17.1% after Ford Motor agreed to provide it some assistance while continuing to negotiate broader changes in their 2000 spinoff agreement and multiple upgrades.
NUE +6.85% after raising 05 guidance substantially.
SKO +12.53% after beating 4Q guidance and raising 05 outlook.
PETC +6.8% on ThinkEquity upgrade to Buy and continued optimism over 4Q results.
FRO +5.5% after Persian Gulf oil-tanker rates rose.
ZQK +6.54% after beating 1Q estimates and raising 05 outlook.
HORC +8.2% after pricing a secondary offering of 1.5M shares yesterday at $36.25.
JILL -13.0% after meeting 4Q estimates, lowering 1Q guidance and multiple downgrades.
LIN -12.2% after lowering 1Q outlook and CIBC downgrade to Sector Perform.
WBSN -4.79% on Deutsche Bank downgrade to Hold.
TECD -6.5% after beating 4Q estimates, lowering 1Q guidance and multiple downgrades.
NTMD -10.6% on disappointing 4Q results.

Mid-day Overview
Market Internals
I-Watch Sector Overview
NYSE Unusual Volume
NASDAQ Unusual Volume
NASDAQ 100 Heatmap
DJIA Quick Charts
Chart Toppers
Hot Spots
Option Dragon
Real-time Intraday Chart/Quote

Economic Data
- The Trade Balance for January fell to -$56.8B versus estimates of -$56.8B and -$55.7B in December.

Recommendations
- Goldman Sachs: Reiterated Outperform on JTX, SSP and BBG.
- Smith Barney: Upgraded MANH to Buy, target $27. Reiterated Buy on INTC, target $29. Reiterated Buy on NSM, target $28. Reiterated Buy on UPS, target $90. Rated SFI Buy, target $47. Rated NLY Sell, target $16. Rated GKK Buy, target $25. Reiterated Buy on INTU, target $54. Reiterated Buy on NOI, target $57. Reiterated Buy on HAL, target $50. Reiterated Buy on FITB, target $58. Reiterated Buy on PETC, target $42. Reiterated Buy on F, target $16. Reiterated Buy on BVF, target $20.
- Piper Jaffray: Raised CNCT to Outperform, target $32. Raised BMC to Outperform, target $19.
- Banc of America: Rated PRU Buy, target $66. Rated UNM Buy, target $21.
- Deutsche Bank: Raised SIRF to Buy, target $14.
- Morgan Stanley: Rated INCY Overweight, target $11.
- CSFB: Downgraded AIV to Underperform, target $34. Rated TSS Underperform, target $14. Downgraded SAFT to Underperform, target $31.
- Raymond James: Downgraded KEG to Underperform.
- Lehman Brothers: Raised NSM to Overweight.

Mid-day News
US stocks are lower mid-day on contining worries over rising energy prices/interest rates and losses in the tech sector. Advantest, the world’s biggest maker of memory-chip testing equipment, cut its full-year profit forecast 9.3%, citing a slowdown in capital spending by its customers, Bloomberg reported. Iron-ore prices may be at their peak and could fall next year as demand from steelmakers fails to match supply, the Wall Street Journal reported. Starbucks Corp. will open its first Irish outlet in Dublin this summer, the Irish Times reported. Coach Inc. and LVMH Moet Hennessy Louis Vuitton SA are intensifying their rivalry in Japan, the Wall Street Journal reported. Every Japanese household will own a robot by 2015 because of technology advances, the Washington Post reported. Consumer spending on the Internet rose 14% last year to $1.8 billion, led by music and dating sites, the AP reported. Bear Stearns’ Merchant Banking Group bought a 50% stake in closely held 7 for All Mankind Jeans for as much as $100 million, the NY Times reported. Ford Motor is ending production of the Thunderbird convertible in July, the AP reported. SAP AG plans to simplify its pricing structure and expects to increase market share in the US this year, Euro am Sonntag reported. The average price of a condominium in Manhattan rose 19% to $969,000 in 2004, the NY Post reported. United Airlines plans to recall 500 flight attendants as the carrier adds flights because of increasing demand, the Rocky Mountain News reported. The Univ. of Colorado has reached an agreement for less than $500,000 with Professor Ward Churchill, who compared 9/11 victims to Nazis and praised the terrorists, for his dismissal from the school, the Denver Post reported. Siemens AG and Samsung Electronics are among mobile-phone makers that may have a tougher time convincing telephone companies to pick their new handsets as the service providers reduce their offerings to consumers, Bloomberg said. Syria has withdrawn about 6,000 soldiers from northern Lebanon, leaving only Syrian intelligence service offices to be evacuated from the area, AFP reported. The US trade gap widened in January as record imports for automobiles and other consumer goods outpaced exports, Bloomberg said. Interpublic Group may restate financial results for the second time in two years after the company found errors in its accounting for acquisitions, Bloomberg reported. President Bush called on Republicans and Democrats to stop criticizing each other over proposals to save Social Security and instead offer solutions to the problem, Bloomberg said. The US agreed to join Europe in offering Iran economic incentives to end its nuclear weapons program, Bloomberg reported. Crude oil in NY is rising after the IEA increased its estimate for global demand growth for a third straight month, Bloomberg said. US Treasury notes are falling, heading for their biggest weekly drop since May, as increased consumer demand for imported goods led to a wider trade deficit, Bloomberg rerpoted.

BOTTOM LINE: The Portfolio is slightly lower mid-day as losses in my Semi and Software longs are more than offsetting gains in my Steel and Oil Service longs. I exited a number of tech longs this morning as they hit stop-losses and added a few new tech shorts, thus leaving the Portfolio’s market exposure at 25% net long. One of my new shorts is FFIV and I am using a $59.25 stop-loss on this position. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is light. Measures of investor anxiety are mostly higher, which is a positive. Gains are mainly confined to commodity-related sectors and losses are heaviest in tech. Today’s overall market action is negative, considering recent positive news from the semis. I continue to expect US shares to trade mixed-to-weaker near-term until there is a clear stabilization in the rise in energy and interest rates. My trading indicators are now giving Sell signals. I expect US stocks to trade mixed-to-lower from current levels into the close on worries over rising interest rates/energy prices and technical deterioration.