Weekly Outlook

Click here for The Week Ahead by Reuters

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

Economic reports for the week include:

Mon. - Factory Orders, Pending Home Sales
Tues. - Final 4Q Non-farm Productivity, Final 4Q Unit Labor Costs, Consumer Credit
Wed. - None of note
Thur. - Trade Balance, Initial Jobless Claims
Fri. - Change in Non-farm Payrolls, Unemployment Rate, Change in Manufacturing Payrolls, Average Hourly Earnings, Wholesale Inventories, Monthly Budget Statement

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

Mon. - Allied Capital(ALD), Bausch & Lomb(BOL), Inamed Corp.(IMDC), KFx Inc.(KFX), Medarex(MEDX), Semtech(SMTC)
Tues. - Albertson’s(ABS), Cooper Cos.(COO), Copart Inc.(CPRT), Dick’s Sporting Goods(DKS), Kroger Co.(KR), Martek Biosciences(MATK), OSI Pharmaceuticals(OSIP), Pixar(PIXR), Sports Authority(TSA)
Wed. - Dynegy(DYN), Liberty Media(L), Michaels Stores(MIK), Tech Data(TECD), Wind River(WIND)
Thur. - Aeropostale Inc.(ARO), Andrx Corp.(ANDX), Blockbuster Inc.(BBI), Claire’s Stores(CLE), DreamWorks(DWA), Hansen Natural(HANS), Hibbett Sporting Goods(HIBB), McData Corp.(MCDTA), National Semiconductor(NSM), Quiksilver Inc.(ZQK), Renal Care(RCI), Sears(SHLD), Urban Outfitters(URBN)
Fri. - AnnTaylor Stores(ANN), Children’s Place(PLCE)

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

Mon. - Morgan Stanley Semiconductor Conference, Cowen & Co. Healthcare Conference, Raymond James Institutional Investors Conference
Tue. - Cowen & Co. Healthcare Conference, Citigroup Global Industrial Manufacturing Conference, Raymond James Institutional Investors Conference, Morgan Stanley Semiconductor Conference, Bear Stearns Consumer Conference
Wed. - Morgan Stanley Semiconductor Conference, Cowen & Co. Healthcare Conference, Lehman Brothers Global Healthcare Conference, Raymond James Institutional Investors Conference, Citigroup Global Industrial Manufacturing Conference, Bear Stearns Consumer Conference, Thomas Weisel Internet Conference
Thur. - Cowen & Co. Healthcare Conference, Lehman Brothers Global Healthcare Conference, Bear Stearns Consumer Conference, Thomas Weisel Internet Conference
Fri. - Bear Stearns Consumer Conference, Lehman Brothers Global Healthcare Conference

BOTTOM LINE: I expect US stocks to finish the week mixed as mostly positive economic data, short-covering and lower energy prices offsets higher long-term rates. My trading indicators are now giving mostly bullish signals and the Portfolio is 75% net long heading into the week.

Market Week in Review

S&P 500 1,287.23 -.17%*



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was slightly bullish considering the rise in long-term rates, weaker housing data and increase in oil prices. The advance/decline line fell slightly, most sectors rose and volume was above average on the week. Measures of investor anxiety were mostly higher. The AAII % Bulls fell to 40.94% and is now below average levels, which is a positive. The average 30-year mortgage rate fell to 6.24% which is only 103 basis points above all-time lows set in June 2003. The benchmark 10-year T-note yield rose 11 basis points on the week as most economic data points were positive. However, the yield is still 25 basis points lower than it was in 2004 and 209 basis points below levels at the peak of the bubble in 2000.

Unleaded Gasoline futures bounced again for the week, but have collapsed 40% from September highs even as refinery utilization remains below normal as a result of the hurricanes last year, 24.2% of Gulf of Mexico oil production remains shut-in and fears over Iranian/Nigerian production disruptions persist. Natural gas inventories fell slightly more than expected this week. However, supplies are now 48.2% above the 5-year average, approaching an all-time record high for this time of year, even as 15.2% of daily Gulf of Mexico production remains shut-in. Natural gas prices have plunged 57% in 11 weeks. Many oil bulls point to the potential for a supply disruption as the main reason oil prices remain extremely elevated while fundamentals for the commodity deteriorate. I would point out that natural gas bulls used the same rationale before the historic supply disruptions related to the hurricanes. This did not prevent a collapse in the price of natural gas. I expect deteriorating fundamentals for oil to trump fear over the intermediate-term, thus sending prices substantially lower. Gold rose modestly for the week as the US dollar weakened and energy prices rose. The dollar’s decline was mainly the result of hawkish comments from central bankers in Asia and Europe.

Small-caps continue to outperform as the Russell 2000 has already gained almost 10% for the year. Moreover, technology stocks outperformed for the week, led by Networking shares on more evidence of increased spending by telecom companies. S&P 500 earnings growth for the fourth quarter was up about 15.0% year-over-year, more than double the long-term average. This is 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. I continue to believe the S&P 500’s forward p/e multiple will expand back to around 19 by year-end, thus helping to push the index about 15% higher for the year. The average stock, as measured by the Value Line Geometric Index, is already up 6.2% this year. The ECRI Weekly Leading Index fell slightly, but is still forecasting healthy, but decelerating, US economic activity. I expect US GDP growth to peak for the year this quarter, rising a brisk 4-4.5%. Growth should moderate to more average levels of around 3% the remainder of the year.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,287.23 -.17%
DJIA 11,021.59 -.36%
NASDAQ 2,302.60 +.68%
Russell 2000 738.44 +.25%
Wilshire 5000 12,982.57 -.06%
S&P Equity Long/Short Index 1,158.72 +.44%
S&P Barra Growth 608.78 -.17%
S&P Barra Value 674.93 -.17%
Morgan Stanley Consumer 604.15 -.10%
Morgan Stanley Cyclical 790.50 -.29%
Morgan Stanley Technology 541.32 +1.75%
Transports 4,509.29 +1.66%
Utilities 411.88 -.02%
S&P 500 Cum A/D Line 8,371 -1.0%
Bloomberg Crude Oil % Bulls 35.0 +7.2%
Put/Call .86 -3.37%
NYSE Arms .87 -17.93%
Volatility(VIX) 11.96 +4.36%
ISE Sentiment 169.00 -5.59%
AAII % Bulls 40.94 -5.25%
AAII % Bears 29.13 +2.57%
US Dollar 89.66 -.99%
CRB 331.34 +.74%
ECRI Weekly Leading Index 137.20 -.15%

Futures Spot Prices
Crude Oil 63.67 +1.47%
Unleaded Gasoline 174.31 +8.4%
Natural Gas 6.79 -7.75%
Heating Oil 181.28 +4.30%
Gold 568.00 +1.72%
Base Metals 170.11 +2.41%
Copper 226.20 +6.35%
10-year US Treasury Yield 4.68% +2.41%
Average 30-year Mortgage Rate 6.24% -.32%

Leading Sectors
Networking +3.65%
Disk Drives +3.33%
Semis +3.19%
Defense +2.79%
Oil Service +2.53%

Lagging Sectors
Insurance -1.05%
Restaurants -1.40%
Hospitals -1.60%
Papers -1.84%
Homebuilders -2.12%

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

*5-Day % Change

Stocks Modestly Higher into Final Hour on Economic Optimism

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Internet longs, Retail longs and Networking longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is modestly positive as the advance/decline line is slightly higher, sector performance is mixed and volume is above average. NYSE short interest as a % of total shares is currently 2.2%, down slightly from all-time record levels of 2.4% reached three months ago. The current reading is also up from 1.0% in late 1999, the lowest since record-keeping began in 1995. I expect US stocks to trade mixed into the close from current levels as short-covering offsets higher long-term rates.

Today's Headlines

Bloomberg:
- The wave of sectarian violence in Iraq that was sparked by the bombing of a Shiite mosque last week has abated, the top US general in Iraq said.
- Google(GOOG), criticized going into a meeting with analysts yesterday for being too secretive, appeased Wall Street with a more open tone and upbeat predictions for the search engine’s efforts to dominate the ad industry.
- Intel(INTC) cut its first-quarter revenue forecast on market share loss.
- Warren Buffett has produced below-average returns since 2001 and lost money for his shareholders over the past year.
- General Electric(GE) CEO Immelt will take his 2005 bonus, worth as much as $5.99 million in shares instead of cash after the company’s stock trailed the market for the first time in three years.
- President Bush said America is entering a new phase of its partnership with India in a speech concluding his three-day trip to the country.
- Dana Corp.(DCN) filed for bankruptcy for its US operations, becoming the fourth major US auto-parts maker to seek protection in the past 13 months as Ford(F) and GM(GM) cut production.

Wall Street Journal:
- Leaders of Hamas, the governing party of the Palestinian Territory, will today visit Moscow in one of the clearest signs yet that Russia is trying to assert itself in the Middle East.
- The US Justice Department is investigating four of the largest music companies for possible collusion in settling online music prices.
- Morningstar Inc.(MORN), the US research firm known for its mutual-fund rankings, plans to introduce a service today that can be used to compare exchange-traded funds.
- Mexican shoppers are flocking to Federated Dept. Stores(FD) and JC Penney(JCP) outlets along the border in Texas, creating a retail boom in the region.
- Walt Disney’s ABC(DIS) refused to air KFC’s new television commercial which invites viewers to slowly replay the ad to find a secret message, because of a ban on subliminal advertising.
- The NYSE has asked the SEC for permission to introduce trading of new bonds, as it tries to capture more of the $5 trillion corporate bond market.
- IBM(IBM), Sun Microsystems(SUNW), Oracle Corp.(ORCL) and the American Library Assoc. have joined to promote a common format for storing and creating documents.

Business Week:
- Texas Instruments(TXN) is likely to benefit “significantly” over the next three years from a US mandate that requires televisions made from 2009 onward to be digital.

Pittsburgh Post-Gazette:
- US Steel(X) is in negotiations to buy AK Steel(AKS), which would create the world’s sixth-largest steel producer.

NY Times:
- Wal-Mart(WMT) is seeking to increase the dominance of its grocery business by playing a role in the creation of food and beverage products.
- The European Union is a union in name only, given the way France, Spain and Italy have reacted to possible cross-border company investments.

AP:
- Khaled Mashaal, the political leader of Hamas, said today in Moscow that the militant Palestinian group won’t change its position on refusing to recognize Israel.

Financial Times:
- Aviva Plc, the British insurer which announced a 29% rise in operating profit yesterday, might consider acquisitions, perhaps in the US, to keep profit growing.

Confidence Remains Muted, Service Sector Strong, Measure of Inflation Decelerates Further

- Final Univ. of Mich. Consumer Confidence for February fell to 86.7 versus estimates of 87.5 and a prior estimate of 87.4.
- ISM Non-Manufacturing for February rose to 60.1 versus estimates of 58.0 and a reading of 56.8 in January.

BOTTOM LINE: Confidence among US consumers fell for a second month in February, Bloomberg reported. The expectations component of the index, a gauge of future spending, rose to 74.5 from a prior estimate of 74.4. I still expect consumer sentiment to reach cycle highs later this year as stock prices rise, housing stabilizes at more healthy sustainable levels, the job market remains firm, energy prices fall, irrational pessimism lifts further, long-term rates remain relatively low and inflation decelerates.

Growth in US services industries accelerated in February as consumer and corporate spending bolstered the largest part of the economy, Bloomberg said. Service companies are benefiting from strong economic growth as a result of the best consumer spending in six months in January and increasing equipment sales. The order backlog component of the index increased to 54 versus 52.5 the prior month. The employment component of the index surged to 58.2, the highest in 6 months. The prices paid component of the index fell to 64.8 and is now down 17.3% since September of last year. I expect the ISM Non-manufacturing index to fall modestly over the intermediate-term, but remain at healthy levls.