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Monday Watch

Weekend Headlines
Bloomberg:
- Iraqi Prime Minister Nuri al-Maliki won parliamentary approval for his new cross-party government after five months of negotiations, seeking to end sectarian violence.
- President Bush today called Iraqi Prime Minister Nuri al-Maliki to congratulate him on the formation of a new government and said Iraq’s transformation would be a “devastating defeat” for terrorists.
- President Bush said the Senate should at by the end of the month on “comprehensive” immigration legislation that tightens the US-Mexico border and create an immigrant guest worker program.
- Israeli Prime Minister Olmert said Iran is “months” away from being able to make a nuclear weapon.
- Embattled New Orleans Mayor Ray Nagin turned back a re-election challenge from Louisiana Lieutenant Governor Landrieu and will be sworn in for a second term on May 31, the day before the hurricane season begins.
- Chilean President Bachelet said that high prices for copper, Chile’s top export, will be “temporary” and reiterated that the government will save its windfall from the metal.
- Seven of the ten worst performers out of 80 stock indexes tracked globally by Bloomberg this year are Arab indexes.
- US Treasuries surged this week, with the 10-year note posing its biggest gain since September, as comments by Fed officials spurred confidence that the central bank will maintain its focus on containing inflation.
- Schlumberger(SLB), America’s largest oil service company, registered to sell 4.6 million shares for insiders after the close on Friday.
- Marc Faber, who told investors to bail out of US stocks a week before the 1987 Black Monday Crash, is telling clients that commodity prices may plunge as much as 30% in three to six months.
- The Australian dollar weakened as last week’s biggest drop in commodities prices in 25 years raised concern the rally in metals that has helped the currency gain 3.4% this year has gone too far.
- Copper and aluminum futures in Shanghai fell by the maximum 4% after the Shanghai futures exchange said copper stockpiles rose 18% and aluminum inventories gained 1.6% last week.

Wall Street Journal:
- Bill Ford Jr., CEO of Ford Motor(F), supports the idea of the National Highway Traffic Safety Administration overhauling fuel economy standards.
- US tax receipts from investments and dividends soared 17% in April from a year earlier, citing US Treasury statistics.

NY Times:
- Venezuelan President Chavez has angered Latin American neighbors such as Peru, Nicaragua, Argentina and Brazil, who are resentful of what they see as interference in their affairs.
- Geek squad founder Robert Stephens said service industries are moving toward charging flat fees rather than hourly rates.
- The chief UN aid coordinator told the UN Security Council that the international assistance effort in the Sudan region of Darfur may collapse in weeks.
- The global e-mail security industry is expected to expand to $2.6 billion by 2009 compared with $675 million in 2004, citing research firm IDC.

Business Week:
- With high gas prices making alternate fuels increasingly attractive, no alternative fuel has received as much attention as ethanol.

AP:
- US Democratic Representative William Jefferson’s office was searched by FBI agents late today in connection with a bribery investigation.

LA Times:
- The US is talking with Arab Persian Gulf countries including Saudi Arabia, the United Arab Emirates and Qatar about military plans to contain Iran’s influence in the region.

Barron’s:
- Joe Rosenberg, Chief Investment Strategist at Loews Corp.(LTR), said the recent increase in commodity prices in “overdone.” “The sudden shift in the demand side is not a consequence of a sudden boom in China and India,” Rosenberg said. “More likely it’s caused by a bunch of hedge funds just pilling in.” Rosenberg also said emerging market debt is overpriced.

CNET News.com:
- Symantec Corp.(SYMC) raised the alert level for a cyberattack on a security hole in Microsoft’s(MSFT) Word program.

Crain’s Chicago Business:
- Motorola Inc.(MOT) plans to open its first cell-phone store on June 5, a retail outlet on Chicago’s Michigan Avenue, to counter a Nokia Oyj(NOK) store that will open nearby.

Sunday Times:
- Royal Mail Group Plc, Britain’s postal service, is in negotiations to forge a European strategic alliance with either FedEx Corp.(FDX) or United Parcel Service(UPS).

Sunday Telegraph:
- NYSE Group(NYX) will today submit a proposal outlining a $21 billion merger of equals with Euronext NV.
- Google’s(GOOG) European head said Europe’s businesses trail their US rivals in exploiting the commercial power of the Internet, citing an interview with Google’s Nikesh Arora.

Globe and Mail:
- Canada won’t support efforts by other countries to set deeper emission-reduction targets for the second phase of the Kyoto Protocol after 2012.

China Securities Journal:
- China’s central bank said it will control the pace of lending growth and increase flexibility in the yuan this year.

Folha de S. Paulo:
- Brazilian Economy Ministry officials said higher US interest rates would weaken the country’s currency as reais-denominated assets become less attractive.

Weekend Recommendations
Barron's:
- Had positive comments on (YHOO), (MSFT), (JNJ), (PFE), (WMT) and (CTAC).

Night Trading
Asian indices are -.75% to +.25% on average.
S&P 500 indicated +.19%.
NASDAQ 100 indicated +.30%.

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Earnings of Note
Company/Estimate
- (CPB)/.35
- (LOW)/.94
- (MNT)/.39

Upcoming Splits
- (ZVXI) 3-for-2
- (CMC) 2-for-1
- (TTI) 2-for-1
- (TOT) 2-for-1

Economic Releases
- None of note

BOTTOM LINE: Asian Indices are mostly lower, weighed down by commodity shares in the region. I expect US stocks to open modestly higher and to build on gains into the afternoon. The Portfolio is 75% net long heading into the week.

Weekly Outlook

Click here for The Week Ahead by Reuters

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

Economic reports for the week include:

Mon. - None of note

Tues. - Richmond Fed Manufacturing Index

Wed. - Durable Goods Orders, New Home Sales

Thur. - Preliminary 1Q GDP, Preliminary GDP Price Index, Preliminary Personal Consumption, Preliminary Core PCE, Initial Jobless Claims, Continuing Claims, Existing Home Sales

Fri. - Personal Income, Personal Spending, PCE Deflator, PCE Core, Final Univ. of Mich. Consumer Confidence

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

Mon. - Campbell Soup(CPB), Guidant Corp.(GDT), Key Energy Services(KEGS), Lowe’s(LOW), Mentor Corp.(MNT), Mills Corp.(MLS), Tekelec(TKLC)

Tues. - Borders Group(BGP), CBRL Group(CBRL), Computer Sciences(CSC), Medtronic(MDT), Phillips-Van Heusen(PVH), Tech Data(TECD), Toll Brothers(TOL)

Wed. - Coldwater Creek(CWTR), Dillard’s(DDS), Dollar Tree(DLTR), Eaton Vance(EV), JLG Industries(JLG), Network Appliance(NTAP), Williams-Sonoma(WSM)

Thur. - Brown-Forman(BF/A), Chico’s FAS(CHS), Donaldson Company(DCI), Hormel Foods(HRL), Joy Global(JOYG), Michaels Stores(MIK), Patterson Cos(PDCO), Petco Animal Supplies(PETC), Polo Ralph Lauren(RL), Telephone & Data Systems(TDS), Toro Co(TTC)

Fri. - Bausch & Lomb(BOL), Flowserve(FLS), US Cellular(USM)

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

Mon. - Lehman Brothers Worldwide Wireless, Wireline and Media Conference, Morgan Stanley Enterprise Computing Symposium, JP Morgan Tech Conference, Bear Stearns Internet Roundtable, UBS Global Oil & Gas Conference

Tue. - JP Morgan Tech Conference, Bear Stearns Internet Roundtable, Morgan Keegan Security Conference, UBS Global Oil & Gas Conference, Lehman Brothers Worldwide Wireless, Wireline and Media Conference, UBS Enterprise Tech Conference, Goldman Sachs Basic Materials Conference, Morgan Stanley Media & Communications Conference

Wed. - UBS Enterprise Tech Conference, Thomas Weisel GPS & RFID Conference, JP Morgan Tech Conference, Goldman Sachs Basic Materials Conference, Goldman Sachs Internet Conference, Wachovia Media and Communications Conference, Morgan Stanley Media & Communications Conference, Morgan Keegan Security Conference

Thur. - Thomas Weisel GPS & RFID Conference, Goldman Sachs Internet Conference, UBS Global Oil & Gas Conference, Goldman Sachs Basic Materials Conference

Fri. - None of note

BOTTOM LINE: I expect US stocks to finish the week higher on lower energy prices, short-covering, bargain hunting and declining long-term rates. My trading indicators are now giving mostly bearish signals and the Portfolio is 75% net long heading into the week.

Market Week in Review

S&P 500 1,267.03 -1.87%*



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was bearish. The advance/decline line fell, most sectors declined and volume was heavy on the week. Measures of investor anxiety were mixed. The AAII % Bulls fell sharply to 39.39% and is now below average levels, which is a positive. The average 30-year mortgage rate rose to 6.60% which is 139 basis points above all-time lows set in June 2003. I still believe housing is in the process of slowing to more healthy sustainable levels. This will likely result in the slowing of consumer spending, and thus US GDP growth, back to around average rates over the coming months. US economic growth is now estimated by economists to have risen a booming 5.8% during the first quarter.

The benchmark 10-year T-note yield plunged 15 basis points on the week as housing data came in below estimates, the US dollar rose, commodities plunged the most in 25 years and Fed members made mostly hawkish comments. I now believe inflation concerns have peaked for the year as investors begin to anticipate slower economic growth, unit labor costs remain subdued and the mania for commodities continues to reverse course. The 10-year yield has likely peaked for the year, as well.

Unleaded Gasoline futures fell this week and are now 30.0% below September 2005 highs even as refinery utilization remains below normal as a result of the hurricanes last year, a significant amount of Gulf of Mexico oil production remains shut-in and fears over future production disruptions persist. The EIA reported this week that gasoline supplies rose again as demand continued to wane. This is a result of conservation, substitution and demand destruction. Ford Motor reported a few weeks ago that sales for the Explorer, America’s top-selling SUV, plunged 42% in April as purchases of more fuel efficient models remained brisk. Moreover, Bloomberg reported this week that high gas prices are having a staggering impact on truck sales in Texas. The elevated level of gas prices related to shortage speculation should further dampen demand over the coming months, sending gas prices back to reasonable levels.

Natural gas inventories rose more than expectations this week and supplies are now 53.2% above the 5-year average, at an all-time record high for this time of year, even as some daily Gulf of Mexico production remains shut-in. Natural gas prices have plunged 62.2% since December 2005 highs. Notwithstanding this collapse, industrial demand for natural gas has shown few signs of increasing.

US oil inventories are still approaching 9-year highs. Since December 2003, global oil demand is down .24%, while global supplies have increased 4.94%. Moreover, worldwide inventories are poised to begin increasing at an accelerated rate over the next year. I continue to believe oil is priced at extremely elevated levels on fear and record speculation by investment funds, not fundamentals. As the fear premium in oil dissipates back to more reasonable levels and supplies continue to rise, crude oil should head meaningfully lower over the intermediate-term.

Gold fell for the week as the US dollar rose, inflation fears subsided and speculators took profits. The US dollar rose on more hawkish Fed commentary. I expect the dollar to begin to firm over the next few months.

The most economically sensitive stocks underperformed for the week. S&P 500 earnings growth for the 1st quarter was up 16.7% year-over-year, more than double the long-term average and substantially above expectations of 8-9% growth. This marks the 16th consecutive quarter of double-digit profit growth, the best streak since record-keeping began in 1936. The forward p/e on the S&P 500 has contracted relentlessly during this time period and now stands at a very reasonable 14.8.

The average US stock, as measured by the Value Line Geometric Index(VGY), is still up 4.0% so far this year, notwithstanding the recent correction. Moreover, the Russell 2000 Index is up 8.0% year-to-date. In my opinion, the current pullback has provided longer-term investors very attractive opportunities in many stocks that have been punished indiscriminately. However, the most overvalued economically sensitive and emerging market stocks should continue to underperform over the intermediate-term as the manias for those shares subside.

While the major averages have likely bottomed for the year, a test of recent lows could occur over the coming weeks as economic data disappoint. An ensuing Fed pause, lower commodity prices, decelerating inflation readings, lower long-term rates, increased consumer confidence and the realization that growth is only slowing should provide the catalysts for another substantial push higher in the major averages through year-end as p/e multiples begin to expand. I continue to believe the S&P 500 will return a total of around 15% for the year. The ECRI Weekly Leading Index fell this week and is forecasting healthy, but decelerating, US economic activity.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,267.03 -1.87%
DJIA 11,144.06 -2.08%
NASDAQ 2,193.88 -2.22%
Russell 2000 722.54 -2.67%
Wilshire 5000 12,775.71 -2.10%
S&P Equity Long/Short Index 1,188.48 -.73%
S&P Barra Growth 587.21 -1.58%
S&P Barra Value 677.97 -2.16%
Morgan Stanley Consumer 602.48 -.78%
Morgan Stanley Cyclical 834.88 -3.33%
Morgan Stanley Technology 505.33 -2.59%
Transports 4,626.23 -4.43%
Utilities 396.75 -.83%
S&P 500 Cum A/D Line 6,982 -13.0%
Bloomberg Crude Oil % Bulls 30.4 -39.2%
Put/Call 1.22 -5.43%
NYSE Arms .87 -34.61%
Volatility(VIX) 17.18 +21.0%
ISE Sentiment 143.00 +.70%
AAII % Bulls 39.39 -28.25%
AAII % Bears 43.64 +58.98%
US Dollar 84.89 +1.15%
CRB 338.64 -6.39%
ECRI Weekly Leading Index 137.60 -.51%

Futures Spot Prices
Crude Oil 68.38 -4.69%
Unleaded Gasoline 203.00 -6.06%
Natural Gas 5.96 -4.91%
Heating Oil 192.10 -6.15%
Gold 660.10 -3.58%
Base Metals 222.52 -11.31%
Copper 346.25 -7.17%
10-year US Treasury Yield 5.05 -2.70%
Average 30-year Mortgage Rate 6.60% +.3%

Leading Sectors
HMOs +4.14%
Disk Drives +.46%
Hospitals +.39%
Semis -.39%
Retail -.52%

Lagging Sectors
Oil Service -7.20%
Steel -8.30%
Alternative Energy -8.37%
Coal -9.15%
Gold & Silver -12.15%

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

*5-Day % Change

Stocks Finish Near Session Highs on Bargain Hunting, Lower Interest Rates and Declining Commodity Prices

BOTTOM LINE: The Portfolio finished substantially higher today on gains in my Retail longs, Semi longs, Networking longs, Medical longs, Base Metal shorts and Energy-related shorts. I covered my some of my (QQQQ), (EEM) and (IWM) shorts and took profits in a portion of my commodity shorts today, thus leaving the Portfolio 75% net long. The tone of the market was positive as the advance/decline line finished higher, most sectors rose and volume was heavy. This is the best opportunity for tech stocks since the bottom of the bear market in 2002, in my opinion. We may have a re-test over the coming weeks as economic data disappoint, but there are too many bargains to ignore for the intermediate term investor.