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Monday Watch

Weekend Headlines
Bloomberg:
- Wal-Mart Stores said June sales at its US stores open at least a year are rising within its forecast as groceries led the week's gains for the 18th time in the past 21 weeks.
- President Bush in his weekly radio address today called on Congress to "sustain" the US economy by passing an energy bill, limiting growth in federal spending, expanding free trade with Central America and adopting his proposal to shift a small fraction of Social Security payroll taxes into individually owned personal accounts.
- Shares of Asian steelmakers such as Posco and BluScope Steel fell over the last three months and investors such as Gary Armor said they expect further losses. "Rising Chinese production is colliding with a fall-off in global demand," said Armor, who helps manage $2.9 billion at AMP Capital Investors in Sydney.
- Citigroup and Nordea Bank AB, the two biggest arrangers of loans to buy ships, say they may raise interest rates on borrowings to fund a record $159 billion of new vessels ordered during the past three years.

New York Times:
- Peet's Coffee & Tea is expanding in the western US beyond the San Francisco Bay Area to win more customers.
- The US Department of Homeland Security advocates the use of sophisticated machines to detect explosives and more guards in screening lands to improve airline security.
- The ACLU has been shredding some documents over the objections of its records manager and the organization's own policies.
- Bristol-Myers Squibb may pay fines of almost $300 million to settle a government investigation of accounting practices.

LA Times:
- Mark McClellan, director of the Medicare system, has proposed steps to give US drug regulators faster alerts about harmful, unintended side effects in prescriptions issued to 43 million people.
- Occidental Petroleum's recent oil exploration contracts and financial performance may make it a takeover for larger oil companies.

Cnetnews.com:
- Apple Computer will unveil plans to switch to chips from Intel Corp. from those made by IBM.

Financial Times:
- European Union leaders are pressuring UK prime Minister Tony Blair to give up some of the country's EU budget refund or risk pushing Europe into deeper political disorder.
- Administrators looking after about a third of the world's hedge-fund assets are so overloaded they could end up mis-pricing credit instruments.
- Crude oil futures are rising to a six-week high in NY, after Exxon Mobil and Hovensa LLC shut down equipment at two refineries in the US.

Daily Telegraph:
- Asbestos injury claims from more than 730,000 people have cost about $70 billion to US businesses and insurance companies. Claimants received about 42 cents of every dollar spent on asbestos litigation.

Le Parisien:
- Europe's common currency, the euro, isn't threatened by votes in France and the Netherlands to reject the European Union constitution, said Bank of France Governor Christian Noyer.

Globe and Mail:
- Research in Motion Ltd. is "actively" looking at potential acquisitions.

Sunday Times:
- Viacom may be interested in buying Telewest Global's Living and Challenge UK cable tv channels for as much as $1.45 billion.
- UK Prime Minister Tony Blair is determined to abandon the European Constitution after its rejection by French and Dutch voters last week.

Observer:
- MBNA plans to bid $1.63 billion for the British Internet bank Egg Plc.

Independent:
- The US Department of Justice has stepped up its campaign against online gambling over the past few months.

Haaretz:
- Google plans to set up an Israeli subsidiary that will create and operate a Hebrew version of its portal.

Globes:
- The NYSE has begun a campaign to coax Israeli companies into listing their shares.

China Business News:
- China Deputy Finance Minister Lou Jiwei said the country isn't yet ready for a floating currency because the financial system isn't mature enough.

Weekend Recommendations
Bulls and Bears:
- Had guests that were positive on KFX, SYMC, EXPD, DV, TEVA, mixed on GOOG, SIMGE, IBN and negative on TELK.

Forbes on Fox:
- Had guests that were positive on GE, BRCM, GS and mixed on SSL, KYO, BR.

Cashin' In:
- Had guests that were positive on MIC, IJR, XXIA, HLEX, mixed on PFE and negative on CHD.

Cavuto on Business:
- Had guests that were positive on FINL and mixed on LOW.

Barron's:
- Had positive comments on EBAY, WWY, MRO and AIG.

Goldman Sachs:
- Reiterated Outperform on IBM and FCEA.

Night Trading
Asian indices are -.50% to +.50% on average.
S&P 500 indicated -.01%.
NASDAQ 100 indicated +.03%.

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FCEL/-.40
JOSB/.46
ZQK/.27

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BEBE 3-for-2
MUR 2-for-1
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SWN 2-for-1

Economic Releases
None of note

BOTTOM LINE: Asian Indices are mixed as losses in China are being offset by gains in India. I expect US stocks to open modestly lower as oil climbs back above $55/bbl. and apprehension rises ahead of the Fed's Greenspan's comments. The Portfolio is 75% net long heading into the week.

Weekly Outlook

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

Economic reports for the week include:

Mon. - None of note
Tues. - Consumer Credit
Wed. - Wholesale Inventories
Thur. - Initial Jobless Claims
Fri. - Trade Balance, Import Price Index, Monthly Budget Statement

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

Mon. - Quicksilver Inc.(ZQK)
Tues. - Albertson's(ABS), Cooper Companies(COO), Toys R US(TOY)
Wed. - H&R Block(HRB)
Thur. - Martek Biosciences(MATK), National Semiconductor(NSM), Navistar International(NAV)
Fri. - Polo Ralph Lauren(RL), Cyberonics(CYBX), Quality Systems(QSII)

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

Mon. - Deutsche Bank Global Retail Conference, Pacific Growth Life Sciences Conference, Fed's Greenspan speaks, Deutsche Bank Media Conference
Tue. - Pacific Growth Life Sciences Conference, Piper Jaffray Consumer Conference, Deutsche Bank Global Retail Conference, Deutsche Bank Media Conference, Merrill Lynch Telecom/Media/Tech Conference, Bear Stearns Tech Conference, Merrill Lynch Global Transport Conference
Wed. - Bank of America Health Care Conference, Piper Jaffray Consumer Conference, CSFB Global Oil/Gas Conference, Bear Stearns Tech Conference, Merrill Lynch Global Transport Conference, Merrill Lynch Telecom/Media/Tech Conference, Pacific Growth Life Sciences Conference, Deutsche Bank Media Confernece
Thur. - Merrill Lynch Global Transport Conference, Goldman Sachs International Business Services Conference, INTC Mid-quarter Update, CSFB Global Oil/Gas Conference, Fed's Greenspan speaks, Merrill Lynch Telecom/Media/Tech Conference
Fri. - None of note

BOTTOM LINE: I expect US stocks to finish the week mixed as profit-taking and global growth concerns offset more optimism for a Fed "pause." Intel's mid-quarter update, energy prices and Greenspan's comments will be the main focus of investors this week. I expect Intel to raise guidance slightly. Greenspan will likely make mixed comments regarding the possibility of an upcoming "pause." Energy prices may rise early in the week, before declining after Wednesday's inventory report. My trading indicators are still giving bullish signals and the Portfolio is 75% net long heading into the week.

Economic Week in Review

ECRI Weekly Leading Index 132.00 -.60%

Consumer Confidence for May rose to 102.2 versus estimates of 96.1 and a reading of 97.5 in April. US consumer sentiment unexpectedly rose in May for the first time in four months. As well, the present situation component of the index rose to 116.7 from 113.8. The % of consumers who saw jobs as plentiful rose to 22.6% from 20.4% in April. The percentage expecting more jobs to be available six months from now increased to 14.9% from 14.0%. Those expecting fewer jobs fell to 15.9% from 18.4%. The percentage expecting to buy a home in the next six months dropped to 3.5% from 4.1%. However, those expecting to purchase an auto increased to 7.6% from 5.8%. Confidence in New England experienced the greatest regional gain, rising 24.2% to 92.40 from 74.40. "The economic backdrop is pretty solid, and as long as energy prices don't flare up again we may have seen the worst of it" for confidence, said Jonathan Basile, an economist at CSFB. "People really have a lot of income out there and that's why spending has been so strong," said Joseph LaVorgna, chief fixed income economist at Deutsche Bank Securities.

The Chicago Purchasing Manager Index for May fell to 54.1 versus estimates of 61.4 and a reading of 65.6 in April. The Chicago PMI fell in May to the lowest level in almost two years. Readings above 50 indicate growth. The employment component of the index fell to 54.7 from 62.3, while the new orders index declined to 57.9 from 71.0. On the positive side, the prices paid component fell to 54.3 from 66.1. The prices paid index has now plunged by 38.9% since November 30, 2004. "We're transitioning from the early years of a cycle when all businesses are experiencing increases in demand to the middle years where there are ups and downs," said Michael Englund, chief economist at Action Economics.

Construction Spending for April rose .5% versus estimates of a .6% increase and a .6% gain in March. US construction spending rose in April to an all-time record level. Homebuilding gained .6% and accounted for more than half the total. Non-residential construction rose 1.3% in April, the highest since May 2002. Construction of commercial buildings rose 3.8%. Thirty-year mortgage rates have averaged 5.78% this year, near the four-decade low of 5.21% seen in June 2003. The average mortgage rate since the start of 1980 is 9.58%. As well, construction spending has grown in every month starting with February 2004, the longest stretch since comparable records began in 1993. "This suggests building activity will again contribute positively to overall economic growth," said Steven Wood, president of Insight Economics LLC.

ISM Manufacturing for May fell to 51.4 versus estimates of 52.0 and a reading of 53.3 in April. ISM Prices Paid for May fell to 58.0 versus estimates of 67.5 and a reading of 71.0 in April. The pace of US manufacturing growth slowed in May for a sixth straight month. The index is the lowest since June 2003. The new orders gauge of the index fell to 51.7 from 53.7 in April. The production index fell to 54.9 from 56.7. The ISM Prices Paid Index fell to 58.0, the lowest since September 2003, from 71 in April. Prices Paid has now plunged 34.1% since April 30, 2004. The employment component of the index decreased to 48.8 from 52.3 in April. Consumer spending and business investment to update equipment will probably keep manufacturing from slipping much further, economists said. "Businesses have been paring back inventories, and that makes for sluggish growth," said Michael Gregory, a senior economist at BMO Nesbitt Burns.

Total Vehicle Sales for May fell to 16.7M versus estimates of 16.7M and 17.5M in April. Domestic Vehicle Sales for May fell to 13.3M versus estimates of 13.5M and 13.9M in April. General Motors, Ford and Honda said US sales last month fell more than 11% from May 2004, the second-strongest month for sales last year, Bloomberg reported. Toyota Motor's sales declined .5% while Nissan Motor sales rose. Ford also announced it would trim North American production 2.3% in the third quarter, Bloomberg said. GM said it will try to boost sales by offering its employee-discount program to all customers through July 5. "Its going to be more of the same with domestics continuing to lose ground and the Asians continuing to gain ground," said Frank Ursomarso, a Wilmington, Delaware, auto dealer.

Final 1Q Non-farm Productivity rose 2.9% versus estimates of 3.0% and a prior estimate of 2.6%. Final 1Q Unit Labor Costs rose 3.3% versus estimates of 2.2% and a 2.2% prior estimate. Productivity rose in the first quarter at the fastest pace in 9 months. Productivity gains exceeded 4.0% in each of the last three years. At no time in history had there even been back-to-back increases greater than 4.0%. The year-over-year increase in unit labor costs was 4.3%, the most since the third quarter of 2000. "Rising unit labor costs are only inflationary if they translate into price increases," said Joshua Shapiro, chief economist at Maria Fiorini Ramirez.

Factory Orders for April rose .9% versus estimates of a 1.1% gain and an upwardly revised .7% increase in March. US factory orders rose the most since November, spurred by demand for autos, aircraft and computers. Excluding transportation equipment, orders fell .2%. Orders for capital goods excluding aircraft, a proxy for future business investment, rose 1.7% in April after declining 1.6% in March. "Factory orders are in better shape than they seemed to be in the first quarter, but not as strong as you would like," said Kevin Harris, chief economist at Informa Global Markets.

The Unemployment Rate for May fell to 5.1% versus estimates of a 5.2% rate and a 5.2% rate in April. Average Hourly Earnings for May rose .2% versus estimates of a .2% increase and a .3% gain in April. The Change in Non-farm Payrolls for May was 78K versus estimates of 175K and 274K in April. The Change in Manufacturing Payrolls for May was -7K versus estimates of -5K and -9K in April. US employers added 78,000 workers to their payrolls last month, the fewest since August 2003. The unemployment rate unexpectedly fell to 5.1% from 5.2% in April and is now the lowest since September 2001. There were job gains in education and health services, while losses were mainly in the information services, real estate and leisure/hospitality industries. The divergent reports created "confusion and uncertainty about underlying conditions in the job market," said David Resler, chief economist at Nomura Securities. Sherry Cooper, chief economist at BMO Nesbitt Burns said the jobs number "all but seals the deal on a coming cessation in Fed tightening."

The ISM Non-Manufacturing Index for May fell to 58.5 versus estimates of 60.0 and a reading of 61.7 in April. The ISM Non-manufacturing Index fell to a two-year low in May, but is still at relatively high levels. The index of new orders for non-manufacturing companies rose to 59.7 from 58.8. The index of order backlogs rose to 56.5 from 54.0. Export orders increased to 62.0 from 52.5. The gauge of prices paid declined to 57.9 from 61.9. This is the lowest level for prices paid since August 2003 and is down 22% since October 2004. "The activity level is still at a relatively high level," said Ralph Kauffman, chairman of the institute's non-manufacturing survey.

BOTTOM LINE: Overall, last week's economic data were modestly negative. Rising stock prices, a booming housing market, lower long-term interest rates, lower gas prices and rising incomes boosted consumer confidence. While we have likely seen the lows in sentiment for the year, the recent rise in energy prices and mixed employment report may suppress confidence awhile longer. The ongoing inventory correction will continue to dampen manufacturing activity for a couple more months. However, I expect manufacturing to accelerate thereafter as consumer spending remains very healthy. I continue to believe construction will help sustain modest US growth through at least year-end. Problems in the European Union, slowing global growth and much better inflation readings are resulting in lower long-term interest rates in the US. The rise in productivity is a welcome positive, considering the increase in unit labor costs. So far, there is little evidence that these costs are being passed to the consumer. Moreover, increasing labor costs haven’t pressured corporate profits to any extent. US corporate profits grew 4.5% in the first quarter and accounted for the largest share of the US economy since early 1967. I also expect moderating job gains over the coming months to dampen labor costs somewhat going forward. Finally, the steep declines in the prices paid indices bode well for future inflation readings. The employment report was mixed and strengthened my view that the Fed tightens once more in June before a “pause.” Average monthly non-farm payroll gains of 100,000-125,000 are enough to hold down unemployment and limit any acceleration in unit labor costs. I continue to believe GDP growth is temporarily slowing to around 2.5% this quarter, spurred by weakness in the manufacturing sector. Low interest rates, an end to the inventory correction, falling commodity prices, a booming housing market, improving consumer sentiment, rising stock prices, improving trade/budget deficits and a firmer US dollar should propel growth back to around average levels sometime during the third quarter. A recession in Europe or "hard landing" in China could potentially alter my future US growth expectations. Finally, the ECRI Weekly Leading Index fell .60% to 132.00 and is still forecasting slowing, but healthy levels of economic activity.

Market Week in Review

S&P 500 1,196.06 -.13%



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was mixed. The advance/decline rose slightly, sector performance was mixed and volume was about average on the week. Measures of investor anxiety were mixed. The AAII % Bulls rose again, but is still only around average levels. Mortgage rates continued to drop and are now only 41 basis points away from all-time lows set in June 2003. Long-term treasury yields fell significantly as multiple measures of inflation fell, concerns over global growth rose, the US dollar rallied and the Fed's Fisher made dovish comments. Fisher said that "there's room to tighten a little bit further" and that "we're in the eighth inning of the rate cycle.” I am now more confident in my prediction of a few weeks ago that the Fed would raise 25 basis points at the June meeting and remove the word "measured" from the policy statement, thus paving the way for a "pause" in their rate of hikes. Commodity prices rose sharply as investors began to anticipate an end to the Fed rate hikes and strengthening demand. Energy was especially strong even as inventories climbed further. Oil supplies last week were 11.4% higher than a year ago at this time. Crude inventories were 26 million barrels, or 8.4% above the five-year average. Stockpiles have now risen in 14 of the last 16 weeks. API implied US crude demand last week was down 2.68% from a year earlier. I believe the recent commodity rally will be short-lived as global growth falls more than is generally expected, supplies increase and the US dollar rises further.