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Monday Watch

Weekend Headlines
Bloomberg:
- New Orleans residents were orders to evacuate the city today as Hurricane Katrina, one of the most powerful and potentially deadly storms ever to threaten the US Gulf Coast, approached land with its 160 mph winds. Here are a few New Orleans WebCams.
- Wal-Mart Stores said August sales at US stores open at least a year rose about 3.3%, within its forecast range, as surging gasoline prices led shoppers to limit purchases to food and basic back-to-school merchandise.
- The EU may start to unblock millions of Chinese garments from customs warehouses by mid-September.
- Crude oil is soaring to a record above $70/bbl. in NY after Hurricane Katrina forced companies including Exxon Mobil and Chevron to shut operations in the Gulf of Mexico.
- The US dollar is declining against the euro in Asia on speculation rising energy prices and declining consumer confidence will hamper growth in the US.
- Iraqi lawmakers completed a constitution to put before voters in an October referendum after Kurds and Shiite and Sunni Arabs failed to agree on all issues.

Barron’s:
- Oracle, IBM, Microsoft and SAP AG may be planning acquisitions to add customers because growth in the software market has slowed.
- The new US bankruptcy code, which will take effect on Oct. 17, may have companies such as Delphi and Northwest Air reconsidering reorganization as rules become more stringent.
- Share-price appreciation may be little-related to earnings growth and more driven by changes in p/e ratios, citing its own study of the past five decades.

New York Times:
- Apple Computer faces demands from at least two of the four major record companies that may jeopardize the flat 99-cent fee its iTunes service charges for downloaded songs.
- KPMG LLP will pay $456 million to settle a US Justice Department case over allegedly illegal tax shelters and accept an outside monitor.
- US patients suffering from chronic and acute back pain from broken vertebrae are clamoring for a surgical procedure that injects a form of cement into the bone and eases the pain.
- Barr Pharmaceuticals may conduct a new label-comprehension study to sell its Plan B “morning after” contraceptive over the counter.
- Shares of Microsoft may rise as the company introduces new versions of its Xbox game, SQL Server and Windows operating system.

San Francisco Chronicle:
- California’s Air Resources Board has proposed regulations that would require public transit systems to replace diesel buses with vehicles that run on natural gas.

Detroit News:
- The United Auto Workers won’t accept Delphi’s request for $2.5 billion of concessions.

Washington Post:
- Washington-area residents are diving less because of high gasoline prices, diminishing the fuel tax receipts used to fund local transportation projects.
- The US government plans to triple the number of airport quarantine stations to prevent the spread of deadly infectious diseases by international travelers.
- Starbucks, McDonald’s and other US companies such as grocery chains and clothing retailers are selling or giving away technology including video rentals and cell phone ring tones.

AFP:
- The US military freed 1,000 prisoners from Iraq’s Abu Ghraib prison.

London-based Times:
- Nasdaq Stock Market and Instinet Group’s planned merger is being further examined by the US Dept. of Justice over competition concerns.

Xinhua news:
- China’s lawmakers ratified a ban on cigarette vending machines in a bid to cut the incidence of smoking among minors.

China Business News:
- China’s government won’t repeat its decision last month to raise the value of the yuan and will instead allow supply and demand to drive the currency rate.

Weekend Recommendations
Forbes on Fox:
- Had guests that were positive on FDX, PKI, BMET and mixed on CAL, RYAAY.

Cashin' In:
- Had guests that were positive on GNSS, ENER, WMG, PVH, MDT, mixed on VCG and negative on GTW.

Barron's:
- Had positive comments on ALEX, ASI and BKS.

Goldman Sachs:
- None of note

Night Trading
Asian indices are -1.50% to -1.0% on average.
S&P 500 indicated -.75%.
NASDAQ 100 indicated -.70%.

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Earnings of Note
Company/Estimate
AES/.15
MBT/.62

Upcoming Splits
DADE 2-for-1
SPF 2-for-1

Economic Releases
None of note

BOTTOM LINE: Asian Indices are lower, spurred by losses in exporters in the region as Hurricane Katrina causes a spike in energy prices. I expect US stocks to open lower on losses in Asia and higher energy prices. The Portfolio is 75% net long heading into the week.

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. - Consumer Confidence, Factory Orders and Fed Minutes
Wed. - 2Q GDP, 2Q GDP Price Index, 2Q Personal Consumption and Chicago Purchasing Manager
Thur. - Personal Income, Personal Spending, PCE Deflator, PCE Core, Initial Jobless Claims, Continuing Claims, Construction Spending, ISM Manufacturing, ISM Prices Paid, Pending Home Sales and Total Vehicle Sales
Fri. - Unemployment Rate, Average Hourly Earnings, Change in Non-farm Payrolls

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

Mon. - AES Corp.(AES)
Tues. - Zale Corp.(ZLC)
Wed. - Freddie Mac(FRE), Tiffany & Co.(TIF)
Thur. - H&R Block(HRB), Saks Inc.(SKS)
Fri. - Del Monte Foods(DLM)

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

Mon. - None of note
Tue. - GM Analyst Event, NVLS Mid-Quarter Update
Wed. - Fed’s Santomero speaks, Fed’s Yellen speaks
Thur. - None of note
Fri. - None of note

BOTTOM LINE: I expect US stocks to finish the week modestly higher on higher volatility. Equities will likely come under pressure early in the week on fears over a spike in commodity prices related to Hurricane Katrina. According to Stratfor.com, the Port of Southern Louisiana is the fifth-largest port in the world and the biggest port in the United States. It is a key global port for the export and import of commodities. The port could become unusable if levees burst, thus substantially impacting global agricultural prices as peak harvest time is over the next 30 days. Gasoline prices would also rise on any significant and sustained disruption to transportation systems to and from the port. About 2% of global oil production and about 25% of US produced oil comes from the Gulf, according to Stratfor. Later this week, US stocks should rally as the negative economic impact of the hurricane is viewed as mostly temporary and economic data come in better-than-expected. I continue to believe we are in a consolidation phase within a significant intermediate-term move higher in the major averages. My trading indicators are now giving mixed signals and the Portfolio is 75% net long heading into the week.

Economic Week in Review

ECRI Weekly Leading Index 135.40 -.07%

Existing Home Sales for July fell to 7.16M versus estimates of 7.25M and 7.35M in June. US sales of previously owned homes slowed in July, leaving the rate of purchases at the third-highest on record as low interest rates and growing employment supported demand, Bloomberg reported. The median price of an existing home rose .5% to $218,000 in July. The median price is 14% above year-ago levels. Re-sales fell 7.5% in the West, 3.3% in the Northeast and 1.8% in the Midwest. The South was unchanged. The supply of homes for sale increased to 4.6 months’ worth, the highest since November 2003, from 4.4 months’ worth in June. “The economy is good, jobs are being created, interest rates are still at historic lows, demographics are overwhelming, which should drive demand,” said James Gillespie, CEO of Coldwell Banker Real Estate.

Durable Goods Orders for July fell 4.9% versus estimates of a 1.5% decrease and an upwardly revised 1.9% gain in June. Durables Ex Transportation for July fell 3.2% versus estimates of a .8% fall and an upwardly revised 3.6% gain in June. US orders for durable goods declined more than forecast in July after a three-month surge, reflecting less demand for aircraft, computers and communications equipment, Bloomberg reported. Orders for non-defense capital goods excluding aircraft, a proxy for future corporate investment, declined 3.7% last month, the largest amount since October 2004. “New orders have been much stronger than shipments recently, suggesting that capital spending is likely to accelerate during the second half of the year despite this month’s weakness,” said Steven Wood, chief economist at Insight Economics.

New Home Sales for July rose to 1410K versus estimates of 1328K and 1324K in June. US new home sales unexpectedly rose to a another all-time high last month as mortgage rates below 6% and steady employment gains sent American streaming into the housing market, Bloomberg said. The median price of a new home fell to $203,800, the lowest since December 2003. New Home Sales rose 36% in the West and 10.1% in the Northeast. However, they fell 13.5% in the Midwest and 3.5% in the South. Finally, the supply of new homes for sale at the current pace fell to 4 months from 4.1 months in June. “Today’s report is another very robust signal for the housing market,” said Dean Maki, chief US economist at Barclays Capital.

Initial Jobless Claims for last week fell to 315K versus estimates of 315K and 319K the prior week. Continuing Claims fell to 2578K versus estimates of 2575K and 2587K prior. The number of Americans filing first-time claims for jobless benefits fell to 315,000 last week as companies held on to workers in an expanding economy, Bloomberg reported. The four-week moving-average rose to 315,000 from 313,750. However, the four-week moving-average of continuing claims was the lowest since March 2001. The insured employment rate, which tends to track the US unemployment rate, was unchanged at 2.0%. “This data supports the idea that payrolls will be strong again in August,” said Ellen Beeson, an economist at Bank of Tokyo-Mitsubishi Ltd.

Final Univ. of Mich. Consumer Confidence for August fell to 89.1 versus estimates of 92.5 and a prior estimate of 92.7. US consumer confidence fell for the first time in three months in August as Americans paid record prices at the gas pump, Bloomberg reported. The average retail price of a gallon of regular gas increased to $2.61 this week. The current conditions component of the index, which measures whether or not consumers feel it’s a good time to buy big-ticket items, fell to 108.2 from 113.5 in July. The expectations component of the index fell to 76.9 from 85.5 the prior month. “Up until now, we haven’t seen any backlash to record prices at the pump from consumers, but now the story is changing,” said Richard Yamarone, chief economist at Argus Research.

BOTTOM LINE: Overall, last week's economic data were mixed. I continue to believe the rate of home price appreciation will slow over the coming months, not plunge. I do not believe a slowing from record levels to more healthy sustainable rates will have a meaningfully negative impact on the economy. The decline in Durable Goods Orders is not likely the beginning of a trend. I expect orders to bounce back next month. Recent jobless claims figures point to healthy employment gains of about 200,000 in the upcoming employment report. I continue to believe consumer sentiment will make new cycle highs over the coming months as employment prospects continue to improve slowly, energy prices fall, inflation decelerates, interest rates remain relatively low, the housing market stays strong by historic standards and the stock market rallies further. I expect the US economy to grow a robust 4%+ during the second half of the year. Finally, the ECRI Weekly Leading Index fell .07% to 135.40 and is forecasting stable healthy growth.

Market Week in Review

S&P 500 1,205.10 -1.20%*



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was negative. The advance/decline line fell slightly, most sectors declined and volume was very light on the week. Measures of investor anxiety were mostly higher. However, the AAII % Bulls rose for the week, but is still at below average levels. The average 30-year mortgage rate fell to 5.77% and is only 56 basis points above all-time lows set in June 2003 and down from 2005 highs of 6.04% set in April. As well, the benchmark 10-year T-note yield fell another 3 basis points on the week as economic data spurred fears of a slowdown. Economic worries also resulted in the underperformance by cyclical stocks and spurred losses in the US dollar. Small-caps outperformed on the week even as the dollar weakened. Finally, crude oil failed to move higher even as hurricane fears intensified and gasoline supplies fell, which is a negative for the commodity.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,205.10 -1.20%
DJIA 10,397.29 -1.53%
NASDAQ 2,120.77 -.69%
Russell 2000 684.64 -.59%
DJ Wilshire 5000 12,020.59 -1.05%
S&P Equity Long/Short Index 1,054.08 -.01%
S&P Barra Growth 577.33 -1.10%
S&P Barra Value 623.50 -1.29%
Morgan Stanley Consumer 577.97 -1.18%
Morgan Stanley Cyclical 730.13 -1.48%
Morgan Stanley Technology 491.06 -1.23%
Transports 3,667.36 -1.38%
Utilities 399.90 +1.37%
S&P 500 Cum A/D Line 7,706.00 -.57%
Bloomberg Crude Oil % Bulls 50.85 -9.20%
Put/Call 1.18 +13.46%
NYSE Arms 1.68 +44.83%
Volatility(VIX) 13.72 +2.23%
ISE Sentiment 172.00 +43.33%
AAII % Bulls 36.14 +23.39%
US Dollar 87.86 -.81%
CRB 317.10 +.61%

Futures Spot Prices
Crude Oil 66.13 +.27%
Unleaded Gasoline 192.69 +1.15%
Natural Gas 9.79 +7.60%
Heating Oil 183.66 +.09%
Gold 442.50 -.18%
Base Metals 129.99 +.74%
Copper 164.20 +.06%
10-year US Treasury Yield 4.18% -4.75%
Average 30-year Mortgage Rate 5.77% -.52%

Leading Sectors
Alternative Energy +4.63%
Utilities +1.37%
Semis +.38%

Lagging Sectors
Gold & Silver -2.44%
Banks -2.52%
Tobacco -3.19%

One-Week High-Volume Gainers
One-Week High-Volume Losers

*5-Day % Change