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Monday Watch

Weekend Headlines
Bloomberg:
- Japanese Prime Minister Koizumi meets Chinese President Jintao today, after three weekends of anti-Japan rallies in China tattered relations between Asia's two biggest economies.
- Wal-Mart Stores today said April sales at US stores open at least one year are rising within its forecast range.
- EU Trade Commissioner Mandelson will consider limiting imports of nine categories of Chinese products from men's trousers to socks and stockings in an attempt to protect producers in Europe.
- Syria will complete the pullout of its forces from Lebanon tomorrow, complying with international demand after three decades in the country.
- Crude oil is rising, heading for its biggest five-day rally in four months, on speculation US refiners may increase demand to boost gasoline stockpiles before the peak summer motoring season.
- Hellman & Friedman LLC, a San Francisco buyout firm, agreed to buy Internet ad company DoubleClick for $1.1 billion.

Wall Street Journal:
- Ken Langone, Home Depot's co-founder, is considering making a bid for Archipelago Holdings, rivaling an offer made by the NYSE.
- Valero Energy agreed to buy Premcor Inc. for $8.7 billion including debt.
- Google is to make changes designed to help it attract more big, brand-name advertising, which is 98% of the US ad market.

New York Times:
- The expiration of the US ban on assault weapons last September didn't have the much-feared result of boosting weapons sales or increasing gun crimes.
- Dell and Microsoft are among the technology stocks liked by Chip Dickson, chief US strategist at Lehman Brothers.

Washington Post:
- Chinese President Hu Jintao is trying to tighten the Communist Party's grip on power and is willing to curb freedom of speech and other civil liberties to do it.

San Francisco Chronicle:
- Yahoo! and Google probably will expand their ad networks to television and mobile phones as the two media converge.
- San Francisco-area average monthly rents and occupancy rates were unchanged in the first quarter from the year-earlier period and when compared with the fourth quarter.

LA Times:
- New Mexico Governor Bill Richardson yesterday filed a lawsuit to stop the US Bureau of Land Management from allowing oil and gas drilling on Otero Mesa, a stretch of desert grassland on federal land.

Philadelphia Inquirer:
- More than half of the state legislatures in the US are considering measures that would prohibit lawsuits that claim a person's obesity problem is linked to fast food consumption.
- AstraZeneco Plc CEO McKillop said that US regulators are becoming excessively careful about drug safety, a problem that drove pharmaceutical companies out of Europe.

Financial Times:
- Auditors fees resulting from the introduction of the Sarbanes-Oxley act may fall by as much as 25% in 2005.
-French rejection of the EU's constitutional treaty in a national referendum on May 29 would "be a catastrophe for France" and result in "the fall of Europe," said former EU Commission President Romano Prodi.
- US tech entrepreneur Ed Iacobucci, who co-founded Citrix Systems, will today announce an air taxi service called DayJet that seeks to offer passengers the ability to fly to cities not served by scheduled services.

Reuters:
- BMW AG's sales fell 10% in China in the first quarter from a year ealier.

London-based Times:
- Walt Disney Studios Chairman Cook wants a new agreement with Pixar on their film-distribution partnership.

Cinco Dias:
- EADS will announce a US partner in the next two months with which it will bid for US military contracts.

Daily Telegraph:
- GlaxoSmithKline Plc is creating a new unit that will seek agreements with smaller biotechnology companies and academic institutions to develop drugs.

Observer:
- ICAP Plc, the world's largest broker of trades between banks, plans to expand in the US by starting a new broker dealer operation there.
- Constellation Brands hired NM Rothschild & Sons to advise it on a possible rival bid for Allied Domecq Plc.

Journal du Dimanche:
- Illycafe SpA, a closely held Italian coffee maker, plans to open 500 coffee bars by 2008 to keep market share as Starbucks expands in Europe.

JoongAng Newspaper:
- MCI Inc., via a subsidiary, agreed to pay $2 billion for telecommunications technology rights from South Korea's Exscoms.

Business Standard:
- Indian steelmakers such as Tata Steel Ltd. plan to spend as much as $18 billion to double capacity.

Weekend Recommendations
Bulls and Bears:
- Had guests that were positive on STLD, ATVI, DRS, GM, GOOG, CME, DAL, LSI, FO, mixed on ATI and negative on BUD.

Forbes on Fox:
- Had guests that were positive on ADP, CREE, MSFT, DLM, PFE and mixed on CMX.

Cashin' In:
- Had guests that were positive on NXTP, SO and mixed on TRB, JPM.

Cavuto on Business:
- Had guests that were positive on EBAY, C, CHL and mixed on AX.

Forbes:
- Ken Fisher has a positive column, recommending KRB, FISV, BG and TLD.

Barron's:
- Had positive comments on ZQK, INTC and PLT.
- Had negative comments on LZB, ETH, WSM, PIR and RSTO.

Night Trading
Asian indices are -.50% to +.50% on average.
S&P 500 indicated -.07%.
NASDAQ 100 indicated +.03%.

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Earnings of Note
Company/Estimate
ALTR/.15
ACI/.23
BYD/.52
CD/.24
CB/1.95
KMB/.93
IVX/.14
PVN/.38
RBK/.69
SBC/.33
SII/.62
TRI/.74
ZMH/.67

Splits
LNG 2-for-1

Economic Releases
10:00 EST
- Existing Home Sales for March are estimated at 6.79M versus 6.79M in February.

BOTTOM LINE: Asian Indices are mostly higher on optimism over earnings in the region. I expect US stocks to open modestly higher in the morning on a bounce from Friday's sell-off and merger activity. However, rising energy prices will likely mute gains. China's Shanghai A-Share Index is falling 1.5% again tonight and is trading at fresh six-year lows. The index is now down 28% over the last 12 months and 44% from its all-time high. The Portfolio is 25% net long heading into the week.

Weekly Outlook

There are several important economic reports and a number of significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. - Existing Home Sales
Tues. - Consumer Confidence, New Home Sales
Wed. - Durable Goods Orders
Thur. - Advance 1Q GDP, Initial Jobless Claims, Help Wanted Index
Fri. - Personal Income, Personal Spending, 1Q Employment Cost Index, Final Univ. of Mich. Consumer Confidence, Chicago Purchasing Manager

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

Mon. - Altera Corp.(ALTR), Cendant Corp.(CD), Chubb Corp.(CB), Kimberly Clark(KMB), SBC Communications(SBC), Zimmer Holdings(ZMH)
Tues. - Aflac(AFL), Amazon.com(AMZN), American Express(AXP), BJ Services(BJS), Chicago Merc.(CME), Coach Inc.(COA), ENSCO Intl.(ESV), Express Scripts(ESRX), Hilton Hotels(HLT), ImClone Systems(IMCL), Infospace Inc.(INSP), Lockheed Martin(LMT), Medco Health Solutions(MHS), Monster Worldwide(MNST), Schlumberger(SLB)
Wed. - Allergan(AGN), Anheuser-Busch(BUD), Baker Hughes(BHI), Biogen Idec(BIIB), Boeing(BA), Chiron(CHIR), Colgate-Palmolive(CL), ConocoPhillips(COP), Diamond Offshore(DO), JDS Uniphase(JDSU), Newmont Mining(NEM), Phelps Dodge(PD), Pulte Homes(PHM), Starbucks(SBUX), Verizon Communications(VZ), XM Satellite Radio(XMSR)
Thur. - Barrick Gold(ABX), Beazer Homes(BZH), Black & Decker(BDK), Bristol-Myers(BMY), Comcast(CMCSA), Dow Chemical(DOW), Estee Lauder(EL), Exxon Mobil(XOM), Kellogg(K), Kla-Tencor(KLAC), Microsoft(MSFT), Northrup Grumman(NOC), Procter & Gamble(PG), Sirius Satellite(SIRI), Starwood Hotels(HOT)
Fri. - Archer-Daniels(ADM), Cardinal Health(CAH), ChevronTexaco(CVX), Clear Channel(CCU), Electronic Arts(ERTS)

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

Mon. - Fed's Pianalto speaks
Tue. - Lehman Brothers Annual Retail Seminar
Wed. - Lehman Brothers Annual Retail Seminer
Thur. - CSFB Power Producers/Utilities Conference, Smith Barney Software Conference, Fed's Hoenig speaks, Fed's Santomero speaks
Fri. - Smith Barney Software Conference

BOTTOM LINE: I expect US stocks to finish the week modestly higher on bargain hunting, short-covering, good earnings reports and low long-term interest rates. While I believe that US growth is slowing, an imminent recession is highly unlikely. As well, inflation measures are in the process of peaking, in my opinion. Thus, the chances of a period of stagflation are even more remote. Sentiment is currently near levels normally associated with meaningful market bottoms. Given the overall positive fundamentals and the p/e on the S&P 500's forward earnings estimates is at 15.63 and falling daily, stocks are becoming too cheap to ignore. I continue to expect the second half to be much better for US equities than the first half as inflation decelerates, commodities prices fall, long-term interest rates remain low, low valuations tempt investors, growth accelerates, the US dollar remains firm, employment continues to improve and merger activity continues. As I have stated previously, it is my belief that longer-term investors should use any further weakness over the coming weeks to begin building positions in favorite longs. Homebuilder, Retail, Biotech, Airline, Financial, Internet and Gaming shares should outperform in the second half of the year, given my outlook. My trading indicators are still bearish and the Portfolio is 25% net long heading into the week.

Economic Week in Review

ECRI Weekly Leading Index 135.30 +.07%

The NAHB Housing Market Index for April fell to 68 from 70 in March. "Builders continue to express confidence in the overall housing market and expect sales to remain strong during the next six months," said Dave Wilson, president of the association. Mortgage interest rates within a percentage point of four-decade lows are helping to sustain strong demand for housing. The average 30-yr. mortgage rate fell to 5.80% this week from 6.04% at the beginning of the month. "Many builders are reporting higher lot prices and some difficulty in finding available land, both symptoms of strong demand for new homes," said Dave Sanders, chief economist for the builders' group.

The Producer Price Index for March rose .7% versus estimates of a .6% increase and a .4% gain in February. The PPI Ex Food & Energy for March rose .1% versus estimates of a .2% increase and a .1% gain in February. The core rate suggests companies are having limited success in passing on higher energy costs, reinforcing forecasts that Fed policy makers won't step up the pace of interest rate increases as the economy shows signs of slowing, Bloomberg said. "This takes pressure off the Fed to be more aggressive," said Michael Englund, chief economist at Action Economics. Energy prices surged 3.3% last month, the biggest rise since October, after rising 1.4% in February, Bloomberg reported.

Housing Starts for March fell to 1837K versus estimates of 2090K and an upwardly revised 2229K in February. Building Permits for March fell to 2023K versus estimates of 2090K and an upwardly revised 2107K in February. The March data probably exaggerated any slowdown in housing, economists said. "Starts in January and February were lights-out numbers, way above last year, and totally unsustainable," said Roger Kubarych, a senior economic advisor at HVB America. Builders broke ground on new housing at a 2.063 million annual rate in the first three months of 2005. If continued, that pace would make this year the strongest since 1972, Bloomberg reported. The housing "market is easing but not having major problems," said Joel Naroff, president of Naroff Economic Advisors. "The frothiness that we saw over much of the last 24 months is subsiding a little bit and that's a good thing because the increasing home values it produced were pricing some people out of the market." The gap between housing starts and permits is notably large and suggest that housing starts will rebound in April," said Gary Bigg, an economist at Banc of America Securities.

The Consumer Price Index for March rose .6% versus estimates of a .5% gain and a .4% increase in February. The CPI Ex Food & Energy for March rose .4% versus estimates of a .2% increase and a .3% gain in February. The increase in core inflation suggests companies were more able to pass along some costs for higher fuel and energy prices. Central bankers still are likely to confine rate increases to quarter-point steps, economists said after the report. "You still see some increases in inflation, but it's still not enough to be a major concern at this point," said Glenn Haberbush, an economist at Mizuho Securities. The year-over-year increase in core consumer prices decelerated for the first time since last August, Bloomberg reported. Also, the core index was pushed up by a 3.9% jump in lodging costs, which economists said is typically a volatile category, Bloomberg said. Year-over-year, all consumer prices rose 3.1%, near the long-term average of 3.0%, Bloomberg reported. Inflation "remains well contained, and things look good going forward," said Janet Yellen, president of the Federal Reserve Bank of San Francisco.

US factories, retailers and service companies were able to pass on to consumers some of the higher costs of energy and other raw materials, the Fed said in its Beige Book survey. "Reports from many districts suggested that upward price pressures have strengthened, although actual increases in vendor prices and selling prices have generally remained moderate," according to the report. In two-thirds of the Fed's 12 districts, "retail or tourism contacts expressed concern that high energy prices were already, or could soon be, damping consumer demand," the Fed said. "Manufacturing activity is sturdy and consumers continue to spend at a relatively healthy rate. These anecdotes on growth suggest that any slowing in the economy is likely to be temporary," said Joseph LaVorgna, chief fixed income economist at Deutsche Bank. Wage pressures were "modest or moderate" in most regions of country. Wages account for about two-thirds of the final costs of goods and services, Bloomberg said.

Initial Jobless Claims for last week fell to 296K versus estimates of 329K and 332K the prior week. Continuing Claims fell to 2638K versus estimates of 2655K and 2655K prior. The figures were distorted by this year's early Easter holiday, the Labor Dept. said. "When companies are trying to contain costs in an expanding economy, they don't hire workers as much and they don't fire workers as much," said Diane Swonk, chief economist at Mesirow Financial.

The Leading Indicators for March fell .4% versus estimates of a .3% decline and a .1% increase in February. "March wasn't pretty at all," said Tim Rogers, chief economist at Briefing.com. "The economy still has plenty of momentum, so the downtrend should bring us to just average growth," Rogers said. The Conference Board has indicated that conditions suggesting imminent risk of recession would be a six-month annualized decline of 3.5% or more. The decline through March was only .5%, Bloomberg said.

Philadelphia Fed. for April rose to 25.3 versus estimates of 10.0 and a reading of 11.4 in March. Corporate purchases of new equipment are helping spur production as record crude oil prices dampen consumer spending, Bloomberg said. "Business sentiment was sorely depressed in March, but it has come roaring back in April," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi. The prices paid index for raw materials surged to 50.5 from 29.7, Bloomberg reported. The index of current manufacturing employment rose to 16.8 from 10.1 in March. As well, the new orders component of the index increased to 20.3 from 13.2, Bloomberg reported.

BOTTOM LINE: Overall, last week's economic data were mildly negative. I continue to believe the housing market is cooling from white hot levels to more sustainable and healthy rates. With the recent drop in mortgage rates and some pent-up demand from one of the wettest winters in US history, home sales should accelerate during the seasonably strong spring months. Measures of inflation were mostly higher last week. However, the .1% increase in the Core PPI is a big positive, considering the recent rise in energy prices. As well, the fact that the 10-yr T-note yield remained unchanged shows investors' future inflation expectations are beginning to diminish. I expect inflation measures to begin decelerating again over the next couple of months. I also continue to expect modest job gains over the coming months. The pace of improvement will allow unemployment to gradually decline without spurring a substantial increase in unit labor costs, which are the main component of inflation. The decline in the Leading Indicators suggests a modest slowdown in US growth is likely underway. As I have stated before, growth may temporarily slow to around 2% before bouncing back to 3% in the second half of the year. However, the sharp rise in the Philly Fed may mean the "soft patch" has not begun in earnest yet. I continue to believe the fact that oil inventories are 6% above historical averages is likely a result of companies expecting even higher prices in the future, which has temporarily resulted in an artificial boost in demand. As perceptions change regarding the future direction of oil prices, this demand will evaporate and likely cause an even greater decline in the price of crude than would otherwise be the case. I expect this to occur in the second half of the year. Finally, the ECRI Weekly Leading Index increased .07% to 135.30 and is still near cycle highs.

Market Week in Review

S&P 500 1,152.12 +.83%


Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was modestly positive, considering the rise in energy prices. The advance/decline fell slightly, sector performance was mixed and volume was above average. Small-cap, Cyclical and Tech shares all outperformed for the week as worries over a substantial economic slowdown diminished. As I stated last week, sentiment towards crude oil was too bearish for the underlying commodity to continuing declining at such a rapid pace. A retest of recent highs appears likely before the decline I see in the second half of the year. Measures of investor anxiety were mostly lower on the week. The fact that AAII % Bulls rebounded so strongly with the S&P 500 hitting a new yearly low on Wed. is a mild negative. Investors appear to be ratcheting down their future inflation expectations, even with last week's decline in the US dollar and rise in commodity prices. While I continue to believe the major indices have seen their lows for the year, Friday's action was disheartening for the bulls. However, volume was relatively light and most of the sell-off was related to news of a potential nuclear weapons test by N. Korea. If the lows are truly in, a bounce should be in order early next week.

Weekly Scoreboard*

Indices
S&P 500 1,152.12 +.83%
DJIA 10,157.71 +.70%
NASDAQ 1,932.19 +1.26%
Russell 2000 589.53 +1.51%
DJ Wilshire 5000 11,346.88 +.91%
S&P Equity Long/Short Index 1,005.66 -1.60%
S&P Barra Growth 557.78 +.76%
S&P Barra Value 589.99 +.91%
Morgan Stanley Consumer 574.37 -.79%
Morgan Stanley Cyclical 707.02 +2.04%
Morgan Stanley Technology 439.04 +3.32%
Transports 3,440.05 +1.69%
Utilities 366.35 +2.72%
Bloomberg Crude Oil % Bulls 41.0 +78.65%
Put/Call .92 -39.07%
NYSE Arms 1.44 -12.19%
Volatility(VIX) 15.38 -13.30%
ISE Sentiment 128.00 -9.86%
AAII % Bulls 36.84 +123.54%
US Dollar 83.50 -1.16%
CRB 307.29 +2.83%

Futures Spot Prices
Crude Oil 55.39 +6.32%
Unleaded Gasoline 165.23 +11.27%
Natural Gas 7.20 +2.93%
Heating Oil 154.51 +5.40%
Gold 436.10 +1.66%
Base Metals 126.42 +1.50%
Copper 148.10 +2.92%
10-year US Treasury Yield 4.24% unch.
Average 30-year Mortgage Rate 5.80% -1.86%

Leading Sectors
Steel +7.15%
Oil Service +6.39%
Networking +5.87%

Lagging Sectors
Drugs -1.49%
Broadcasting -2.17%
Hospitals -2.59%

*5-Day % Change