Weekly Outlook

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

Economic reports for the week include:

Mon. - None of note
Tues. - Produce Price Index, Advance Retail Sales
Wed. - Consumer Price Index, Business Inventories, Empire Manufacturing, Net Foreign Security Purchases, Industrial Production, Capacity Utilization, NAHB Housing Market Index, Fed's Beige Book
Thur. - Housing Starts, Initial Jobless Claims, Philadelphia Fed.
Fri. - Current Account Balance, Univ. of Mich. Consumer Confidence

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

Mon. - None of note
Tues. - BearingPoint(BE), Best Buy(BBY), Krispy Kreme(KKD), Lehman Brothers(LEH), Pier 1 Imports(PIR)
Wed. - Bear Stearns(BSC)
Thur. - Adobe Systems(ADBE), Carnival Corp.(CCL), Goldman Sachs(GS), KB Home(KBH)
Fri. - Circuit City(CC)

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

Mon. - Thomas Weisel Growth Conference, Morgan Stanley Small-cap Conference, Goldman Sachs Healthcare Conference, CSFB Retail, Apparel and Restaurants Conference
Tue. - Goldman Sachs Healthcare Conference, Morgan Stanley Small-cap Conference, Thomas Weisel Growth Conference, Deutsche Bank Electric Power Conference, Fed's Bies Speaks, Fed's Lacker speaks, Fed's Poole speaks
Wed. - Goldman Sachs Healthcare Conference, Deutsche Bank Electric Power Conference, Fed's Minehan speaks, Morgan Stanley Small-cap Conference, Merrill Lynch Paper & Packaging Conference, Thomas Weisel Growth Conference
Thur. - Deutsche Bank Electric Power Conference, Goldman Sachs Health Care Conference, Piper Jaffray Global Internet Summit, Merrill Lynch Paper & Packaging Conference, Semi Book-to-Bill, Fed's Hoenig speaks, Fed's Minehan speaks
Fri. - None of note

BOTTOM LINE: I expect US stocks to finish the week mixed as lower inflation readings and declining commodity prices offset less optimism for a Fed "pause." The PPI/CPI and Fed comments will be the main focus of traders this week. A further rise in the US dollar may lead to a continuation of recent small-cap outperformance. I expect tech stocks to underperform again this week on further consolidation after recent gains. 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 132.90 +.68%

Consumer Credit for April fell to $1.3B versus estimates of $7.4B and an upwardly revised $6.9B in March. Borrowing by US consumers grew in April at the slowest pace in five months. Credit-card borrowing fell for a second straight month, Bloomberg reported. "This slowdown in consumer credit outstanding fits the soft-patch economy story hand-in-glove," said Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi. The average annual credit-card interest rate rose from 13.2% in 2004 to 14.1% in the first quarter, according to the Fed. The total US credit card delinquency rate is now 3.71%, down 26.0% since 2001 and at its lowest level since early 1995.

Wholesale Inventories for April rose .8% versus estimates of a .4% increase and an upwardly revised .6% increase in March. Stockpiles at US wholesalers rose more than forecast in April, led by machinery and other business equipment. However, sales increased by the most in a year and twice as much as inventories. The inventory-to-sales ratio declined to 1.18 months from 1.19 months in March, the lowest since January, which suggests factories may not need to continue trimming production. Sales of machinery jumped 6.5% in April and were up 17% from the year-earlier month, Bloomberg reported. "Wholesalers in general are experiencing fairly lean inventory levels," said Michael Englund, chief economist at Action Economics.

Initial Jobless Claims for last week fell to 330K versus estimates 333K and 351K the prior week. Continuing Claims fell to 2588K versus estimates of 2591K and 2592K prior. Jobless filings jumped in the prior week because of temporary layoffs in the automobile industry, the government said. The four-week average of jobless claims dropped to 331,750 from 334,500, Bloomberg reported. The claims figures are consistent with much stronger hiring than the unexpectedly small 78,000 gain in May payrolls reported by the Labor Department last week, economists said. The four-week moving average of continuing claims declined to 2.587 million from 2.589 million. Finally, the uninsured unemployment rate, which corresponds with the US unemployment rate, held at 2.0%.

The Trade Deficit for April widened to -$57.0B versus estimates of -$58.0B and a narrower-than-expected -$53.6B in March. The US trade deficit widened as Americans paid more for oil and bought more goods from China. However, US exports hit an all-time record. The number showing March’s deficit was narrower than first reported suggests first-quarter economic growth will be revised higher. "The US trade deficit may finally be stabilizing," said Peter Kretzmer, a senior economist at Banc of America.

The Import Price Index for May fell 1.3% versus estimates of a .4% decline and an upwardly revised 1.2% increase in April. Prices of goods imported into the US declined in May for the first time this year, reflecting a drop in the costs of petroleum, building materials and automobiles. Excluding petroleum, the import price index declined .3%, the largest drop since August 2003. The price of imported building materials fell 3.9% in May after falling 2.0% a month earlier. Steel imports rose 30% during the first quarter versus a year earlier. This is one of the main reasons for the roughly 30% decline in prices for the metal since August of last year. "With these prices under control it reduces the pricing power of domestic manufacturers," said Anthony Chan, senior economist at JP Morgan Asset Managemnent.

The Budget Deficit for May narrowed to -$35.3B versus estimates of -$45.0B and -$62.5B in April. The U.S. budget deficit narrowed to $35.3 billion in May from a year earlier, a larger improvement than expected, as tax revenue soared. This was the smallest May budget shortfall since 2001. The Treasury said that overall tax receipts rose 32% to $152.7 billion during May compared with a year earlier. Moreover, tax receipts from individuals were up 88% from May 2004, the biggest jump since the height of the stock market bubble in 2000. "This reflects the continued growth in the economy and growing profitability," said Patrick Fearon, an economist at AG Edwards. US employers have added almost 2 million jobs in the last 12 months, helping increase tax revenue.

BOTTOM LINE: Overall, last week's economic data were positive. The decline in consumer credit is welcome and has not had a noticeable impact on retail sales so far. The fall in long-term rates since April should boost consumer credit in subsequent months. The decline in the Wholesale Inventory/Sales ratio is a big positive and suggests a stabilization of manufacturing activity. However, cutbacks in US auto production will continue to dampen factory readings for several more months. The decline in jobless claims bodes well for a modestly better employment report for June. I continue to believe the labor market is cooling from more vigorous levels, which should result in a deceleration in unit labor costs over the coming months. This is likely the Fed's main area of concern as most other measures of inflation are already decelerating. The US trade deficit is stabilizing and should improve modestly through year-end. However, any significant improvement is unlikely as the US economy remains much stronger than that of most other industrialized nations. Import prices should continue to moderate through year-end which will help keep inflation in check, but result in less pricing power for US corporations. Rising incomes, low unemployment, a booming housing market and healthy consumer spending should continue to boost Treasury receipts. I expect the 2004 U.S. budget deficit to come in substantially better than the $427 billion forecast by the White House. Long-term interests rates may move a bit higher in the short-run, but yields continue to look lower longer-term as global investors increase US asset exposure, global growth slows, inflation decelerates, the US dollar continues to firm and US deficits improve. Finally, the ECRI Weekly Leading Index rose .68% to 132.90 and is forecasting moderating, but healthy levels of economic activity.

Market Week in Review

S&P 500 1,198.11 +.18%



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was mixed. I view the week's action as a healthy consolidation after recent gains. The advance/decline fell slightly, sector performance was mixed and volume was below average on the week. Measures of investor anxiety were mixed. The Tech sector underperformed for the first time in a number of weeks even as Intel and Texas Instruments boosted forward guidance. As well, positive developments with GM failed to boost stocks. The AAII % Bulls fell and is back to average levels. Mortgage rates continued to drop and are now only 35 basis points away from all-time lows set in June 2003. Long-term treasury yields rose as Fed Chairman Greenspan made positive statements about the US economy, leading investors to conclude the Fed would continue hiking rates at a "measured" pace. There are still a number of important data points between now and the June 30 Fed meeting. I continue to believe the Fed will 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 fell on the week as the US dollar strengthened. Considering oil inventories fell for the third time in 17 weeks and a possible hurricane moved towards the Gulf, the decline in crude was welcome. I continue to 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.

Weekly Scoreboard*

Indices
S&P 500 1,198.11 +.18%
DJIA 10,512.63 +.49%
NASDAQ 2,063.00 -.41%
Russell 2000 626.33 +.97%
DJ Wilshire 5000 11,865.65 +.27%
S&P Equity Long/Short Index 1,016.95 +.50%
S&P Barra Growth 576.78 -.11%
S&P Barra Value 616.95 +.45%
Morgan Stanley Consumer 582.00 -.28%
Morgan Stanley Cyclical 720.50 -.20%
Morgan Stanley Technology 479.07 -.76%
Transports 3,521.49 -2.97%
Utilities 373.16 +1.09%
S&P 500 Cum A/D Line 7,392.00 -1.94%
Bloomberg Crude Oil % Bulls 43.0% -2.27%
Put/Call .71 -28.28%
NYSE Arms .89 -40.67%
Volatility(VIX) 11.96 -1.56%
ISE Sentiment 163.00 -4.12%
AAII % Bulls 45.98 -5.41%
US Dollar 88.69 +.80%
CRB 302.48 -1.38%

Futures Spot Prices
Crude Oil 53.54 -2.80%
Unleaded Gasoline 154.36 -.73%
Natural Gas 6.93 +.76%
Heating Oil 160.74 +.43%
Gold 428.90 +.12%
Base Metals 123.78 -2.54%
Copper 156.45 +.10%
10-year US Treasury Yield 4.05% +1.96%
Average 30-year Mortgage Rate 5.56% -1.07%

Leading Sectors
Oil Service +3.80%
Energy +2.51%
Networking +2.39%

Lagging Sectors
Internet -1.48%
Steel -1.96%
Oil Tankers -2.21%

*5-Day % Change

Stocks Lower Mid-day on Weakness in Tech

Indices
S&P 500 1,195.30 -.47%
DJIA 10,477.74 -.24%
NASDAQ 2,060.37 -.80%
Russell 2000 625.43 -.13%
DJ Wilshire 5000 11,842.16 -.41%
S&P Barra Growth 575.29 -.74%
S&P Barra Value 615.72 -.20%
Morgan Stanley Consumer 580.23 -.47%
Morgan Stanley Cyclical 719.76 +.22%
Morgan Stanley Technology 477.45 -1.33%
Transports 3,517.74 -.32%
Utilities 373.20 +.59%
Put/Call .71 -19.32%
NYSE Arms 1.0 +35.92%
Volatility(VIX) 12.18 +.83%
ISE Sentiment 153.00 -14.04%
US Dollar 88.68 +.69%
CRB 302.93 -.40%

Futures Spot Prices
Crude Oil 53.80 -.88%
Unleaded Gasoline 154.80 -1.49%
Natural Gas 6.99 -.71%
Heating Oil 161.70 -.53%
Gold 429.30 +.75%
Base Metals 123.80 +.45%
Copper 156.25 +1.0%
10-year US Treasury Yield 4.02% +2.03%

Leading Sectors
Gold & Silver +3.17%
Steel +.88%
Restaurants +.68%

Lagging Sectors
Software -1.24%
HMOs -1.36%
Semis -1.95%

BOTTOM LINE: The Portfolio is slightly lower mid-day on losses in my Internet and Semiconductor longs. I took profits in a Base Metal short and added to an Oil Tanker short this morning, thus leaving the Portfolio 75% net long. The tone of the market is modestly negative as the advance/decline line is lower, most sectors are declining and volume is below average. Measures of investor anxiety are mostly higher. Today’s overall market action is negative considering the decline in energy prices, GM’s positive news and Intel’s guidance boost. The US budget deficit narrowed to $35.3 billion in may from a year earlier, a larger improvement than expected, as tax revenue soared. This was the smallest May budget shortfall since 2001. The Treasury said that tax receipts rose 32% to $152.7 billion during May compared with a year earlier. I expect the 2004 US budget deficit to come in substantially better than the $427 billion forecast by the White House. I expect US stocks to trade mixed into the close as profit-taking offsets positive fundamental developments.

Today's Headlines

Bloomberg:
- Intel will work with Nokia Oyj to develop products that deliver high-speed wireless Internet access over long distances.
- Crude oil is falling, heading for the first weekly decline in three, amid higher-than normal US inventories.
- China and the European Union agreed to limit shipments of Chinese textiles to the 25-nation bloc through 2007, repairing relations between the world’s two biggest clothing exporters.
- The US dollar reached a nine-month high against the euro after the US trade deficits in March and April were less than expected.
- US 10-year T-notes fell for the third day, the longest drop since March, on speculation yields near their lowest in 14 months don’t reflect prospects for economic growth and Federal Reserve interest-rate increases.
- GM shares are rising as much as 11% after reports that the world’s largest automaker is pressing the UAW for concessions and that the union authorized leaders to negotiate.

Wall Street Journal:
- Krispy Kreme Doughnuts’ Canadian franchise is selling the operator’s doughnut-making equipment, store leases and assets.

NY Times:
- Democratic Party Chairman Howard Dean met some Democrat senators that were concerned over his recent remarks that “Republicans haven’t earned an honest living in their lives.”
- Microsoft is nearing an agreement with News Corp.’s Twentieth Century Fox and Vivendi Universal’s Universal Pictures to produce a movie based on the Xbox video game “Halo.”
- High beer prices are promting consumers to buy chicken and pork.
- A suspected fourth case of a rare and potentially fatal nerve disorder in a patient taking Biogen Idec’s multiple-sclerosis drug Tysabri may have been a misdiagnosis.

USA Today:
- The US Army plans to double the cash bonus for some new recruits to $40,000.

Financial Times Deutschland:
Amgen is considering expanding its research into stem cells, an area in which it currently has a peripheral interest.