Monday Watch

Weekend Headlines
Bloomberg:
- Those who lost brothers and sisters at New York’s World Trade Center returned today to the site of its destruction to market the fourth anniversary of the Sept. 11 attacks and recite the names of the 2,749 people who died there.
- Toyota Motor will increase its production of hybrid cars to meet expectations for an expansion in sales, a company spokesman said.
- Al-Qaeda issued a new videotape on the fourth anniversary of the Sept. 11 attacks in which a US-born supporter threatens attacks against Los Angeles and Melbourne, Australia.
- New Orleans officials say the city’s death toll from Katrina may be less than previously estimated.
- Wal-Mart Stores said September sales at its US stores open at least a year are rising within its forecast range in the aftermath of Katrina.
- US Treasuries are likely to extend a 14-month rally as the Fed sticks to its “measured” pace of interest-rate hikes to keep inflation from accelerating after Katrina.
- The yen is rising after Japanese Prime Minister Koizumi, who is credited with reviving the world’s second-largest economy, was returned to office with an increased majority in national elections.
- New Orleans began to show signs of returning to normal today as commercial cargo flights landed again at the city’s airport and repair crews continued restoring power to much of the hurricane-damaged region.
- Japanese stocks are rising, with key benchmarks set for their highest close in more than four years, after Prime Minister Koizumi won a landslide election victory, giving him a mandate to sell state assets.
- China’s consumer prices rose in August at the slowest pace in almost 2 years as food costs moderated, and clothing and mobile phones became cheaper.
- The euro is falling against the dollar and yen after polls showed Germany’s opposition Christian Democratic Union may find it more difficult to beat Chancellor Gerhard Schroeder’s party in elections of Sept. 18.

Barron’s:
- Apple Computer’s shift to flash memory for its new iPod nano digital music player shows flash prices have declined enough compared with hard drives for the technology to be used in small mobile devices.

New York Times:
- Some New Orleans hotels and restaurants are reopening in the aftermath of Hurricane Katrina to cope with the influx of thousands of emergency workers, journalists, contractors and cleanup crews.
- Evergreen Solar, DayStar Technologies, Spire Corp., and Energy Conversion Devices have more than doubled in price in the last year and stand to benefit more as the solar market expands amid subsides and rising energy prices.
- China deployed five warships Sept. 9 near a gas field in the East China Sea that is disputed with Japan.

Washington Post:
- Delta Air Lines may file for Chapter 11 bankruptcy protection next week, providing it can obtain a loan to cover operating expenses, citing sources familiar with the plan.
- The Red Cross says it is paying the hotel bills of at least 57,000 people who fled Hurricane Katrina.

San Jose Mercury News:
- Siebel Systems has met with Oracle in recent weeks, and may be discussing a takeover by its larger rival.

AP:
- Northwest Airlines’ mechanics union expects to reach a deal with the airline, though striking workers likely won’t be happy with it.

AFP:
- A group linked to al-Qaeda said in a statement over the Internet that it may use chemical and other non-conventional weapons against coalition forces and Iraqi soldiers.

Spiegel:
- Adnan Shihab-Eldin, acting secretary-general of OPEC, said members will announce measures to increase oil output by about 2 million barrels a day in order to help reduce crude prices.

Weekend Recommendations
Barron's:
- Had positive comments on DELL, RL, CCL and RCL.

Goldman Sachs:
- Reiterated Outperform on STR, XOM, PFGC, BBY and FDC.
- Reiterated Underperform on THC.

Night Trading
Asian indices are unch. to +1.0% on average.
S&P 500 indicated +.08%.
NASDAQ 100 indicated +.12%.

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

Earnings of Note
Company/Estimate
CPB/.21
ENER/-.26
MWD/1.04

Upcoming Splits
FDG 3-for-1

Economic Releases
- None of note

BOTTOM LINE: Asian Indices are higher, spurred by gains in Japanese shares. I expect US stocks to open modestly higher on gains in Asia and diminishing terrorism/hurricane fears. The Portfolio is 100% 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. - Producer Price Index, Trade Balance, Monthly Budget Statement
Wed. - Advance Retail Sales, Industrial Production, Capacity Utilization
Thur. - Empire Manufacturing, Consumer Price Index, Business Inventories, Initial Jobless Claims, Philly Fed
Fri. - 2Q Current Account Balance, Net Foreign Security Purchases, Univ. of Mich. Consumer Confidence

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

Mon. - Campbell Soup(CPB), Morgan Stanley(MWD)
Tues. - Best Buy(BBY)
Wed. - Lehman Brothers(LEH)
Thur. - Adobe Systems(ADBE), Bear Stearns(BSC), Pier 1 Imports(PIR), Saks Inc.(SKS)
Fri. - Carnival Corp.(CCL), Cintas Corp.(CTAS)

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

Mon. - Bear Stearns Healthcare Conference, ThinkEquity Growth Conference and Deutsche Bank Gaming Investment Forum
Tue. - Bear Stearns Healthcare Conference, ThinkEquity Growth Conference and Deutsche Bank Gaming Investment Forum
Wed. - CSFB Homebuilders Conference and Merrill Lynch Global Pharma, Biotech & Medtech Conference
Thur. - Merrill Lynch Media and Entertainment Conference
Fri. - None of note

BOTTOM LINE: I expect US stocks to finish the week modestly higher. US equities have displayed extraordinary resiliency in recent weeks. I continue to believe a significant intermediate-term move higher in the major averages is underway that will last at least through year-end. My trading indicators are giving mostly bullish signals and the Portfolio is 100% net long heading into the week.

9/11 Day of Remembrance

Click here for The Darkest Day video.

Economic Week in Review

ECRI Weekly Leading Index 135.90 +.44%

ISM Non-Manufacturing for August rose to 65.0 versus estimates of 60.0 and a reading of 60.5 in July. Growth at US service companies unexpectedly accelerated in August, suggesting the economy was strong even as energy prices rose before Hurricane Katrina struck, Bloomberg said. The new orders component of the index rose to 65.8, the highest in two years. Export orders soared from 53.5 in July to 63.5. The prices paid component of the index fell to 67.1 from 70.3 in July. Finally, the employment gauge rose to 59.6 from 56.2 in July. “The economy had a lot of momentum before the hurricane,” said James O’Sullivan, a senior economist at UBS Securities. “September numbers are going to be a lot weaker just because of the local hit to Alabama, Mississippi and Louisiana. More likely it will prove to be a temporary weakening.

Final 2Q Non-farm Productivity rose 1.8% versus estimates of a 2.1% increase and a 2.2% prior estimate. Final 2Q Unit Labor Costs rose 2.5% versus estimates of a 1.4% gain and a 1.3% prior estimate. US worker productivity grew at a slower-than-expected pace from April through June and labor costs accelerated, which may prompt the Fed to keep raising interest rates, Bloomberg reported. “This is an argument for the Fed raising rates. We expect they’ll continue to do so even with the effects of the hurricane,” said David Sloan, senior economist at 4Cast Inc.

The US economy expanded in the six weeks before Hurricane Katrina struck, led by car sales and tourism, the Fed’s Beige Book report stated. Eleven of the 12 Fed districts reported increased economic growth, Bloomberg reported. “Growth was widespread,” the report said. “A few districts reported softening in residential real estate markets, albeit from still brisk levels,” Bloomberg reported. Forecasts for US economic growth are being pared back after the hurricane. The effects of the storm, especially rising energy costs, may slow growth by as much as a full percentage point during the second half of the year, according to the Congressional Budget Office.

Initial Jobless Claims for last week fell to 319K versus estimates of 315K and 320K the prior week. Continuing Claims fell to 2593K versus estimates of 2582K and 2598K prior. The number of Americans filing first-time claims for jobless benefits fell to 319,000 last week, as people thrown out of work by Hurricane Katrina weren’t able to apply for benefits, Bloomberg said. According to the CBO, Hurricane Katrina may cost the US economy 400,000 jobs this year. The four-week moving average of jobless claims rose to 318,500 from 316,500 the prior week. The insured employment rate, which tracks the US unemployment rate, was unchanged at 2%. “We do expect a surge in claims to the 360,000 to 380,000 area over the weeks ahead,” said Mike Englund, chief US economist at Action Economics LLC in Boulder, Colorado.

Wholesale Inventories for July fell .1% versus estimates of a .6% increase and a .4% gain in June. Stockpiles at US wholesalers unexpectedly fell in July for the first time in more than a year, led by a drop in supplies at computer-equipment, metals and pharmaceutical companies, Bloomberg said. Drug stockpiles fell 4.9%, the most on record. The inventory-to-sales ratio fell to 1.18 months, the lowest since April. “There will be a rebound in inventories, but it probably won’t happen in September because of Katrina,” said Mike Englund.

Consumer Credit for July fell to $4.4B versus estimates of $10.0B and $14.6B in June. Borrowing by US consumers increased for a second month in July as Americans financed new cars at discounted prices, Bloomberg reported. “Consumer credit growth, which does not include mortgage related debt, has growth very slowly over the last several year,” said Stephen Stanley, chief economist at RBS Greenwich Capital. “People are refinancing their mortgages and paying down credit card debt and people are in better financial shape.”

The Import Price Index for August rose 1.3% versus estimates of a 1.4% gain and a .8% increase in July. Prices of goods imported into the US rose in August by the most in five months as crude oil costs climbed even before Hurricane Katrina struck the Gulf Coast, Bloomberg said. The price of crude hit a record the day after Katrina struck. The cost of most other imported industrial goods and consumer products either declined or were mostly unchanged. Excluding petroleum, prices were up 1.8% year-over-year, the smallest increase since March 2004. As well, excluding energy, import prices have now fallen over the last four months. Moreover, the price of goods from China has declined 1.3% over the last 12 months. “Take out all the fuels, and import prices have fallen in the last four months, and that’s a lovely performance,” said Kevin Harris, chief economist at Informa Global Markets

BOTTOM LINE: Overall, last week's economic data were mixed. The ISM Non-Manufacturing was surprisingly strong. However, the negative effects of Katrina will hurt future readings for several months. The 2.5% increase in unit labor costs is still below the long-term average of a 3.4% quarterly increase. Hurricane rebuilding could temporarily push labor costs to unacceptable levels. I expect initial jobless claims to begin spiking next week as Katrina victims are able to file. Inventories should begin increasing again as port problems in Louisiana improve over the coming weeks. Consumer credit will remain subdued in the near-term as recent spending on autos and homes is digested. With the exception of commodity prices, most costs are well contained. This is likely the reason the 10-year T-note yield remains low even with the effects of Katrina. Looking past the temporary inflationary effects of Katrina, bond investors see decelerating inflation readings once again. The full impact of Katrina is hard to gauge at this point. US GDP growth, which was set to rise at a torrid 4.5%+ during the third quarter, will now likely rise around 3.0% due to the hurricane. The fact that energy prices are now below pre-Katrina levels, leads me to believe the Fed is less likely to “pause” after the Sept. meeting. Finally, the ECRI Weekly Leading Index rose .44% to cycle highs of 135.90 and is forecasting stable healthy growth. However, this reading will likely begin turning lower next week.

Market Week in Review

S&P 500 1,241.48 +1.63%*



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was very positive. The advance/decline line rose, almost every sector gained and volume was below average on the week. Measures of investor anxiety were lower. The AAII % Bulls rose for the week, but is still slightly below average levels. The average 30-year mortgage rate fell to 5.71% and is only 50 basis points above all-time lows set in June 2003 and down from 2005 highs of 6.04% set in April. The benchmark 10-year T-note yield rose 8 basis points on the week as economic data were generally more positive than had been anticipated and measures of inflation rose. These factors also boosted the US dollar and Gold. Earnings concerns resulted in the underperformance by transportation stocks. Tech stocks outperformed on the week as investors began to anticipate a strong fourth quarter. Finally, most commodity prices fell substantially as traders finally paid attention to mounting evidence of slowing global demand.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,241.48 +1.63%
DJIA 10,678.56 +2.09%
NASDAQ 2,175.51 +1.28%
Russell 2000 678.05 +1.44%
DJ Wilshire 5000 12,407.05 +1.56%
S&P Equity Long/Short Index 1,066.63 +.72%
S&P Barra Growth 594.26 +1.77%
S&P Barra Value 642.86 +1.49%
Morgan Stanley Consumer 592.16 +2.04%
Morgan Stanley Cyclical 747.20 +1.34%
Morgan Stanley Technology 506.20 +2.18%
Transports 3,622.39 -1.32%
Utilities 421.05 +1.16%
S&P 500 Cum A/D Line 7,886.00 +1.35%
Bloomberg Crude Oil % Bulls 46.0 -9.48%
Put/Call .76 -32.74%
NYSE Arms .74 -39.84%
Volatility(VIX) 11.98 -8.90%
ISE Sentiment 194.00 +2.11%
AAII % Bulls 42.31 +33.22%
US Dollar 86.89 +.38%
CRB 323.32 -3.83%

Futures Spot Prices
Crude Oil 64.08 -7.73%
Unleaded Gasoline 195.97 -18.68%
Natural Gas 11.26 -4.95%
Heating Oil 189.65 -13.79%
Gold 453.40 +1.32%
Base Metals 127.09 -3.65%
Copper 160.65 -3.97%
10-year US Treasury Yield 4.12% +2.03%
Average 30-year Mortgage Rate 5.71% unch.

Leading Sectors
Restaurants +5.27%
Networking +4.66%
Steel +4.51%

Lagging Sectors
Oil Service +.13%
Broadcasting -1.18%
Oil Tankers -2.06%

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

*5-Day % Change