Saturday, February 04, 2006

Market Week in Review

S&P 500 1,264.03 -1.53%*

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Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was negative as US stocks posted losses even as economic data was mostly positive, energy prices fell and long-term rates were stable. The advance/decline line fell, most sectors declined and volume was heavy on the week. Measures of investor anxiety were higher. However, the AAII % Bulls rose to 44.7% and is now back to average levels. The average 30-year mortgage rate rose to 6.23% which is still only 102 basis points above all-time lows set in June 2003. The benchmark 10-year T-note yield increased 1 basis point on the week as mostly positive economic data and mixed inflation readings offset worries over Iran and a rising US dollar.

Unleaded Gasoline futures fell again and are now 42% below September highs even as refinery utilization remains below normal as a result of the hurricanes and fears over Iranian production disruptions persist. Natural gas inventories fell as expected this week. However, supplies are now 28.0% above the 5-year average, still approaching an all-time record high for this time of year, even as 17% of daily Gulf of Mexico production remains shut-in. Natural gas prices have plunged over 45% in 7 weeks. Gold was about unchanged on the week as geopolitical concerns and mixed inflation data were offset by a rising US dollar.

I still believe prices for many commodities are being driven by fear and record capital inflows into commodity funds, rather than fundamentals. I continue to expect global energy demand destruction, decelerating economic growth and a significant increase in supplies into 2006 to push oil prices substantially lower from current levels. Elevated prices related to Iran only make this outcome more likely. The latest weekly energy data show US oil demand is already down .8% over the last 4 weeks from the same period last year. The EIA is currently projecting US oil demand growth of 1.6% for all of 2006, which is highly unlikely given last year’s decline.

Small-caps outperformed, falling less than the broad market. The Russell 2000 is still up a very strong 7.7% for the year. In my opinion, US small-caps offer similar return potential to that of most emerging international markets with much less risk going forward. Technology shares underperformed this week as investors were disappointed with the forward earnings guidance by several sector leaders. S&P 500 earnings growth for the fourth quarter is still on pace to rise 13% year-over-year, almost double the long-term average. This would be the 15th consecutive quarter of double-digit profit growth, the best streak since record-keeping began in 1936. Moreover, companies have sufficiently lowered the bar as to allow for better-than-expected 1Q results. As of now, analysts are projecting 9.8% earnings growth for the first quarter, still very good by historic standards.

The ECRI Weekly Leading Index fell slightly from cycle highs and is forecasting continued healthy US economic activity. While volatility will likely increase going forward, I still expect the S&P 500 to return 15% this year, notwithstanding any temporary weakness related to issues with Iran. High single-digit earnings growth, average economic growth of around 3%, an end to Fed rate hikes, low long-term interest rates, lower energy prices, a healthy labor market, a more sustainable housing market, p/e multiple expansion, a stable US dollar, decelerating inflation, increased corporate spending, rising demand for US assets and a lifting of irrational pessimism should provide the catalysts for strong gains this year.


*5-day % Change

Friday, February 03, 2006

Weekly Scoreboard*

Indices
S&P 500 1,264.03 -1.53%
DJIA 10,793.62 -1.04%
NASDAQ 2,262.58 -1.81%
Russell 2000 724.22 -1.09%
S&P Equity Long/Short Index 1,164.53 +1.73%
S&P Barra Growth 611.84 -1.57%
S&P Barra Value 657.78 -1.49%
Morgan Stanley Consumer 589.28 -1.62%
Morgan Stanley Cyclical 779.83 -2.37%
Morgan Stanley Technology 526.48 -3.01%
Transports 4,263.56 -1.07%
Utilities 405.37 -2.57%
S&P 500 Cum A/D Line 7,796 -7.0%
Bloomberg Crude Oil % Bulls 40.0 -31.61%
Put/Call 1.06 +35.90%
NYSE Arms 1.21 +32.97%
Volatility(VIX) 12.96 +8.27%
ISE Sentiment 159.00 -19.70%
AAII % Bulls 44.70 +45.27%
AAII % Bears 33.33 unch.
US Dollar 89.89 +.63%
CRB 345.90 -.31%
ECRI Weekly Leading Index 138.20 -.07%

Futures Spot Prices
Crude Oil 65.37 -3.64%
Unleaded Gasoline 168.17 -7.34%
Natural Gas 8.61 +.38%
Heating Oil 178.16 -3.17%
Gold 571.60 +.07%
Base Metals 175.83 +4.13%
Copper 230.40 +3.41%
10-year US Treasury Yield 4.52% +.22%
Average 30-year Mortgage Rate 6.23% +1.80%

Leading Sectors
Airlines +4.16%
Alternative Energy +3.56%
HMOs +3.19%
Restaurants +2.14%
Networking +1.57%
Telecom +.72%

Lagging Sectors
Utilities -2.57%
Software -2.60%
Tobacco -2.78%
Internet -3.65%
Semis -4.02%

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

*5-Day % Change

Stocks Lower into Final Hour on Fed Rate Hike Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Semiconductor longs, Medical longs and Internet longs. I took profits in some existing longs and added to my (IWM) and (QQQQ) shorts this afternoon, thus leaving the Portfolio 75% net long. The tone of the market is mildly negative as the advance/decline line is slightly lower, most sectors are declining and volume is heavy. The ECRI Weekly Leading Index fell slightly to 138.20 this week from 138.30 the prior week. This is still near last week's cycle high and up from 132.00 during the last week of May 2005. This gauge of future economic activity is still forecasting healthy U.S. growth. Measures of investor anxiety are mostly lower. I expect US stocks to trade modestly higher into the close from current levels on lower long-term rates and short-covering.

Today's Headlines

Bloomberg:
- The US Senate’s approval of a $70 billion tax-cutting measure opens the way for negotiations with the House on final legislation that may produce a two-year extension of the 15% rate on dividends and capital gains.
- The US dollar is rising to a high for the year against the yen and climbed versus the euro after a government report signaling a stronger US labor market will continue to propel US growth higher than that of other industrialized nations.
- Research In Motion’s chances of avoiding the US shutdown of its BlackBerry wireless e-mail service improved this week after decisions by two government agencies, legal analysts said.
- European news organizations, citing freedom of speech, showed cartoons that sparked outrage among Muslims, as protests spread across the Islamic world.
- The UN nuclear watchdog delayed voting on a resolution to send Iran to the UN Security Council over its atomic program because some countries want the measure to declare the Middle East a nuclear weapons-free zone.

Wall Street Journal:
- The US is likely to avoid a military confrontation with Iran because of concern over a backlash in the region and possible retaliation against the US and Israel.
- The SEC’s new registration requirements allow potential investors to review hedge fund managers’ registration forms, adding that since the rule was passed 934 hedge fund advisers have registered.
- Investors are betting on a wave of steel-industry mergers, whether or not Mittal Steel succeeds with its $23.7 billion hostile bid for Arcelor SA.

NY Times:
- US deaths of car drivers struck by a sport utility vehicle or pickup have dropped sharply after automakers reluctantly agreed in 2003 to adopt design changes.

CNet News.com:
- Google(GOOG), fighting a US Justice Dept. demand for records to help the government defend an anti-pornography law, will take its case to a federal court on March 13.

USA Today:
- Some US cities are displaying “wanted” posters on billboards in a bid to capture criminals.

Unemployment Falls Again, Wages Rise More Than Estimates, Confidence Revised Slightly Lower, Factory Orders Climbing, ISM Non-Manufacturing Healthy

- The Change in Non-farm Payrolls for January was 193K versus estimates of 250K and an upwardly revised 140K in December.
- The Unemployment Rate for January fell to 4.7% versus estimates of 4.9% and 4.9% in December.
- The Change in Manufacturing Payrolls for January was 7K versus estimates of 7K and a downwardly revised -1K in December.
- Average Hourly Earnings for January rose .4% versus estimates of a .3% increase and a .4% gain in December.
- Final Univ. of Mich. Consumer Confidence for January fell to 91.2 versus estimates of 93.4 and a prior estimate of 93.4.
- Factory Orders for December rose 1.1% versus estimates of a 1.0% gain and an upwardly revised 3.3% increase in November.
- ISM Non-Manufacturing for January fell to 56.8 versus estimates of 60.0 and a reading of 61.0 in December.
BOTTOM LINE: American employers added 193,000 workers in January and the unemployment rate fell to 4.7%, the lowest since July 2001, as the US economy strengthened and builders took advantage of warm weather, Bloomberg said. The economy added a revised 1.98 million jobs last year. Warm weather contributed to the addition of 46,000 new construction jobs versus a gain of 5,000 in December. As well, average hourly earnings have increased .4% or more 8 other time since 2001. At this point, worries over rising unit labor costs are overdone.

Confidence among US consumers remained close to a five-month high in January as job growth boosted incomes and natural gas prices plunged, helping to cushion the effects of home-heating costs, Bloomberg reported. The current conditions component of the index which gauges American’s sentiment about whether or not it’s a good time to buy big-ticket items, such as autos, rose to 110.3 from 109.1 the prior month. Retail sales climbed a very strong 5.1% in January, the Intl. Council of Shopping Centers recently reported. I continue to expect consumer sentiment to make new cycle highs later this year as the job market improves modestly from current levels, energy prices continue to fall, stock prices rise, long-term rates remain historically low, corporate spending improves and inflation decelerates.

US factory orders rose for a third consecutive month in December as demand for new autos rebounded and businesses added equipment and inventories, Bloomberg said. Orders for computers increased 4.4% after rising 11% in November. Orders for capital goods excluding aircraft, a barometer of future corporate spending, rose 4.1% versus a .1% gain in November. The inventory-to-shipments ratio fell to 1.15 months from 1.17 months in November. I continue to believe manufacturing will add to US growth over the intermediate-term on hurricane rebuilding, increased corporate spending and inventory restocking.

Growth in the US services industry eased in January as new orders slowed after a very robust showing the month before, Bloomberg said. The employment component of the index fell to 51.1 from 56.9 in December. The prices paid component of the index remained at 67.2, the same as December. The service sector should remain healthy as consumer spending stays firm, consumer sentiment rises and energy prices fall further.

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