Market Week in Review

S&P 500 1,289.12 -1.52%*

BOTTOM LINE: Overall, last week's market performance was mildly bearish. The advance/decline line fell, almost every sector fell and volume was about average on the week. Measures of investor anxiety were mostly higher. The AAII % Bulls fell to 45.36% and is still only around average levels, which is a positive considering this year’s gains. The average 30-year mortgage rate rose to 6.49% which is 128 basis points above all-time lows set in June 2003.

I continue to believe housing is slowing to more healthy sustainable levels. This will also likely result in the slowing of consumer spending back to around average levels. The benchmark 10-year T-note yield rose 7 basis points on the week even as the Import Price Index fell. I expect inflation concerns to begin declining again later this quarter as economic growth slows to average levels, unit labor costs remain subdued and commodity prices weaken from current levels.

Unleaded Gasoline futures rose again this week, but are still 27.6% below September 2005 highs even as refinery utilization remains below normal as a result of the hurricanes last year, 22.7% of Gulf of Mexico oil production remains shut-in and fears over Iranian/Nigerian production disruptions persist. Natural gas inventories rose less than expected this week. However, supplies are now 63.4% above the 5-year average, near an all-time record high for this time of year, even as 13.6% of daily Gulf of Mexico production remains shut-in. Natural gas prices have plunged 54.5% since December 2005 highs.

OPEC said recently that global oil demand will average 84.5 million barrels/day for the remainder of the year. The most recent data from Energy Intelligence shows global oil supplies at 85.6 millions barrels/day. Since Dec. 2003, global oil supplies have risen 13.1% while demand has risen 5.0%. U.S. oil inventories are now close to 8-year highs. I continue to believe oil is priced above $60/bbl. on fear and record speculation, not fundamentals. Demand for oil can and will fall, even with healthy economic growth, as we saw in the U.S. last year. As the fear premium in oil dissipates back to more reasonable levels and supplies continue to rise, crude should head meaningfully lower over the intermediate-term.

Gold rose modestly for the week as higher energy prices and mostly positive economic data more than offset the unexpected decline in the Import Price Index. The US dollar rose as speculation increased that the Fed will continuing hiking rates as a result of rising commodity prices and a strong US economy.

Interest rate sensitive stocks such as Homebuilders, REITs and Utilities underperformed for the week as long-term interest rates rose. The average US stock, as measured by the Value Line Geometric Index(VGY), is still up a strong 7.2% so far this year. Moreover, the Russell 2000 Index is up 11.9% year-to-date. I still believe US economic growth peaked for the year during the first quarter and will decelerate back to around average levels through year-end.

I expect stocks to continue trading mixed-to-lower over the next few weeks. Subsequently, a reversal lower in long-term rates and/or energy prices should provide the catalyst for another push higher by the major averages. The ECRI Weekly Leading Index fell slightly this week and is still forecasting healthy, but decelerating, US economic activity.

*5-day % Change

Chart of Interest

Weekly Scoreboard*

Indices
S&P 500 1,289.12 -1.52%
DJIA 11,137.65 -.70%
NASDAQ 2,326.11 -1.48%
Russell 2000 751.11 -1.97%
Wilshire 5000 13,031.95 -1.58%
S&P Equity Long/Short Index 1,167.29 unch.
S&P Barra Growth 604.91 -1.56%
S&P Barra Value 681.31 -1.48%
Morgan Stanley Consumer 598.66 -1.67%
Morgan Stanley Cyclical 828.46 -.55%
Morgan Stanley Technology 550.23 -1.87%
Transports 4,645.76 -1.76%
Utilities 382.49 -2.70%
S&P 500 Cum A/D Line 7,844.0 -9.0%
Bloomberg Crude Oil % Bulls 45.0 -6.25%
Put/Call .84 +9.09%
NYSE Arms .70 -7.79%
Volatility(VIX) 12.38 +7.77%
ISE Sentiment 102.00 -40.70%
AAII % Bulls 45.36 -4.85%
AAII % Bears 27.84 +19.69%
US Dollar 89.56 +.66%
CRB 342.32 +.87%
ECRI Weekly Leading Index 137.30 -.51%

Futures Spot Prices
Crude Oil 69.52 +2.09%
Unleaded Gasoline 210.80 +5.71%
Natural Gas 7.15 +2.96%
Heating Oil 199.10 +4.93%
Gold 601.90 +.42%
Base Metals 197.30 +5.10%
Copper 281.35 +6.18%
10-year US Treasury Yield 5.05% +1.40%
Average 30-year Mortgage Rate 6.49% +.93%

Leading Sectors
Gaming unch.
Restaurants -.05%
Software -.27%
Banks -.73%
Wireless -.93%

Lagging Sectors
Networking -3.30%
Airlines -3.38%
Homebuilders -3.93%
REITs -4.28%
Oil Tankers -6.44%

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

*5-Day % Change

Stocks Mixed into Final Hour on Light Volume

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Networking longs and Semi longs. I covered some of my (IWM) and (QQQQ) longs today, thus leaving the Portfolio 75% net long. The tone of the market is slightly positive as the advance/decline line is higher, most sectors are rising and volume is light. The AAII percentage of Bulls fell to 45.36% this week from 47.67% the prior week. This reading is now back to average levels. The AAII percentage of Bears rose to 27.84% this week from 23.26% the prior week. This reading is also back to average levels. Considering the average stock, as measured by the Value Line Geometric Index, is 7.4% higher already this year, these numbers still show muted bullishness which bodes well for further gains. I expect bullish sentiment to fall next week. I expect US stocks to trade mixed into the close from current levels as higher long-term rates and oil prices offset positive economic data.

Today's Headlines

Bloomberg:
- American scientists plan to create a human clone using stem cells, a feat that Korean scientists faked. US researchers at Harvard University and in California said they first will create “cloned” human embryos in the lab by combining women donors’ egg cells with DNA provided by other adults. The scientists will then isolate and extract stem cells from the embryos.
- Palm Inc.(PALM), whose Treo phone and e-mail devices have taken market share in the US, is now trying to crack Europe.
- US 10-year Treasury note yields rose to 5% for the first time since June 2002.
- General Electric(GE) said first-quarter profit rose 14%, driven by demand for jet engines, health-care services and financing.

Wall Street Journal:
- Pop star Michael Jackson, acquitted last year on child-molestation charges, may be forced to sell half of his 50% stake in a music publishing catalog that included 251 Beatles songs to Sony Corp.(SNE) as part of a loan refinancing agreement.
- Rules introduced by the SEC last year to stop “naked shorting” haven’t stopped the practice.
- Finish Line(FINL) will debut a new chain tomorrow that it hopes will appeal to affluent women, instead of its customer base of young males.

Daily Deal:
- SanDisk(SNDK) is considering an unsolicited bid for Lexar Media(LEXR).

Washington Post:
- Terrorists are beginning to worry about their online privacy and security.

NY Times:
- Owners of Nascar automobile racing tracks are building more luxury condominiums as the market for trackside housing heats up.
- Medical diagnostics, increasingly using sophisticated genetic and protein tests, is turning into a high-profit business.

NY Post:
- Morgan Stanley(MS) created a team of in-house bond traders to wager the firm’s own money, creating a potential conflict with hedge-fund clients.

Financial Times:
- Alan Greenspan said the US would probably alter parts of Sarbanes-Oxley corporate governance law that are discouraging companies from tapping US markets.

Inflation Measure Falls, Retail Sales Rebound, Job Market Still Healthy, Confidence Still Subdued

- The Import Price Index for March fell .4% versus estimates of a .2% increase and a .5% decline in February.
- Advance Retail Sales for March rose .6% versus estimates of a .4% increase and a .8% decline in February.
- Retail Sales Less Autos for March rose .4% versus estimates of a .5% increase and a .3% decline in February.
- Initial Jobless Claims for last week rose to 313K versus estimates of 305K and 301K the prior week.
- Continuing Claims fell to 2424K versus estimates of 2450K and 2428K prior.
- Preliminary Univ. of Mich. Consumer Confidence for April rose to 89.2 versus estimates of 89.0 and a reading of 88.9 in March.

BOTTOM LINE: Prices of goods imported into the US unexpectedly fell in March, held back by cheaper natural gas, oil and industrial supplies, Bloomberg said. Excluding petroleum, prices still fell .3%. Less expensive consumer goods from China and other Asian countries helped bring prices down. I still believe most measures of inflation will continue to decelerate through year-end.

Retail Sales in the US rose more than forecast in March as an improving labor market sparked demand for cars, building materials and furniture, Bloomberg reported. The strong employment picture is bolstering confidence among American consumers, helping them weather higher prices at the pump. Consumer spending is projected to grow 3% this quarter, slowing from a 4.7% gain in the first quarter. I continue to believe consumer spending will slow to average levels from robust rates through year-end.

First-time claims for US unemployment benefits rose to a level that still signals strength in the labor market, and the total number of Americans on jobless rolls fell to a five-year low, Bloomberg said. The four-week moving-average of claims fell to 307,500 from 309,000 the prior week. The US economy has generated 590,000 new jobs in the first quarter of the year. The unemployment rate among those eligible for benefits, which tracks the unemployment rate, remained at 1.9%. I still expect the job market to remain healthy without generating substantial unit labor cost increases over the intermediate-term.

Americans grew more confident for a second month in April as rising wages and job growth muffled the impact of higher gas prices, Bloomberg said. The expectations component of the index fell to 75.1 from 76.0 in March. The current conditions gauge, which measures consumer perceptions regarding the perception of their financial situation and if it’s a good time to buy large items, increased to 111.1 from 109.1. I continue to believe consumer sentiment is irrationally low and will rebound to cycle highs by year-end as employment remains healthy, interest rates fall, energy prices decline and stocks rise.