Weekly Outlook

Click here for The Week Ahead by Reuters

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

Economic reports for the week include:

Mon. - Wholesale Inventories, Consumer Credit

Tues. - None of note

Wed. - Trade Balance

Thur. - Initial Jobless Claims, Continuing Claims, Monthly Budget Statement

Fri. - Import Price Index, Advance Retail Sales, Univ. of Mich. Consumer Confidence, Business Inventories

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

Mon. - Alcoa Inc.(AA), Shaw Group(SGR)

Tues. - Flowserve(FLS), Genentech(DNA), Ruby Tuesday(RI)

Wed. - Chaparral Steel(CHAP), Commerce Bancshares(CBSH), Fastenal(FAST), Gannett Co.(GCI), Genzyme Corp.(GENZ), Resources Connection(RECN)

Thur. - Cintas Corp.(CTAS), Marriott Intl.(MAR), Polaris Industries(PII), Progressive Corp.(PGR), Texas Industries(TXI), Tribune Co.(TRB)

Fri. - EW Scripts(SSP), General Electric(GE), Rambus Inc.(RMBS), Regions Financial(RF)

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

Mon. - SEMICON West

Tue. - SEMICON West, CIBC Consumer Growth Conference

Wed. - CIBC Consumer Growth Conference, SEMICON West

Thur. - SEMICON West

Fri. - SEMICON West

BOTTOM LINE: I expect US stocks to finish the week mixed as continuing worries over slowing economic growth offset short-covering, lower energy prices and bargain hunting. My trading indicators are still giving neutral signals and the Portfolio is 50% net long heading into the week.

Market Week in Review

S&P 500 1,265.48 -.58%*



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was mildly bearish. The advance/decline line fell, most sectors declined and volume was below average on the week. Measures of investor anxiety were mostly higher. The AAII % Bulls fell to 37.70% and is still below average levels. The % Bears rose to 42.62% and is still above average levels. Many other measures of investor sentiment are still near levels associated with meaningful market bottoms.

The average 30-year mortgage rate rose to 6.79% which is 158 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. Mortgage rates have likely peaked for the year and will trend lower over the intermediate-term.

The benchmark 10-year T-note yield was unchanged on the week as economic data were mixed. I still believe inflation concerns have peaked for the year as investors continue to anticipate slower economic growth, unit labor costs remain subdued and the mania for commodities continues to reverse course.

The EIA reported this week that gasoline supplies rose more than expectations even as refinery utilization fell. Unleaded Gasoline futures were unchanged and are still 23.3% below September 2005 highs even as refinery utilization remains below normal as a result of the hurricanes last year, some Gulf of Mexico oil production remains shut-in and fears over future production disruptions persist. According to TradeSports.com, the percent chance of a US and/or Israeli strike on Iran this year has fallen to 10.6% from 36% late last year. I continue to believe the elevated level of gas prices related to shortage speculation and crude oil production disruption speculation will further dampen fuel demand over the coming months, sending gas prices back to reasonable levels.

Natural gas inventories rose more than expectations this week. Supplies are now 29.2% above the 5-year average, 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 65.1% since December 2005 highs. There is still little evidence of a pick-up in industrial demand for the commodity despite the collapse in price.

US oil inventories are still approaching 9-year highs. Since December 2003, global oil demand is down 1.19%, while global supplies have increased 5.19%. Currently, global supplies of oil are exceeding demand by 2.1 million barrels per day. 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, global growth slows and supplies continue to rise, crude oil should head meaningfully lower over the intermediate-term. This will likely begin to happen later this quarter.

Gold rose for the week on US dollar weakness, short-covering and geopolitical concerns. The US dollar fell as economic data came in mixed and speculation increased for a Fed “pause.”

Technology stocks underperformed for the week on disappointing earnings forecasts and fears over a decline in consumer spending. In my opinion, fears over an increase in inventories in some areas of tech are overdone. Despite a 70% total return for the S&P 500 since the October 2002 bottom, its forward p/e has contracted relentlessly and now stands at a very reasonable 14.7. The average US stock, as measured by the Value Line Geometric Index(VGY), is up .95% this year. The Russell 2000 Index is still up 6.0% year-to-date, notwithstanding the recent correction. In my opinion, the current pullback is still providing longer-term investors very attractive opportunities in many stocks that have been punished indiscriminately. In my entire investment career, I have never seen the best growth companies in the world priced as cheaply as they are now relative to the broad market. 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. I continue to believe a chain reaction of events has begun that will eventually result in a substantial increase in demand for US stocks.

In my opinion, the market is still factoring in way too much bad news at current levels. Problematic inflation, substantially higher long-term rates, a significant US dollar decline, a “hard-landing” in housing, a plunge in consumer spending and ever higher oil prices appear to be mostly factored into stock prices at this point. I view any one of these as unlikely and the occurrence of all as highly unlikely.

Over the coming months, an end to the Fed rate hikes, lower commodity prices, decelerating inflation readings, lower long-term rates, increased consumer confidence, rising demand for US stocks and the realization that economic 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 still believe the S&P 500 will return a total of around 15% for the year. The ECRI Weekly Leading Index rose this week and is forecasting healthy, but decelerating, US economic activity.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,265.48 -.58%
DJIA 11,090.67 -.89%
NASDAQ 2,130.06 -2.04%
Russell 2000 709.30 -.70%
Wilshire 5000 12,729.05 -.62%
S&P Equity Long/Short Index 1,129.31 +.08%
S&P Barra Growth 583.91 -.79%
S&P Barra Value 680.07 -.37%
Morgan Stanley Consumer 610.0 unch.
Morgan Stanley Cyclical 812.77 -1.46%
Morgan Stanley Technology 481.95 -2.89%
Transports 4,843.20 -.96%
Utilities 416.65 +.92%
S&P 500 Cum A/D Line 6,566.0 -4.0%
Bloomberg Oil % Bulls 68.0 +28.45%
CFTC Oil Large Speculative Longs 176,166 +3.0%
Put/Call .89 +34.85%
NYSE Arms 1.52 +245.45%
Volatility(VIX) 13.97 +7.21%
ISE Sentiment 124.00 +18.10%
AAII % Bulls 37.70 -2.33%
AAII % Bears 42.62 +7.17%
US Dollar 85.01 -1.06%
CRB 348.05 +1.68%
ECRI Weekly Leading Index 136.80 +.66%

Futures Spot Prices
Crude Oil 73.86 -.09%
Unleaded Gasoline 222.62 -.02%
Natural Gas 5.51 -9.57%
Heating Oil 201.20 -1.34%
Gold 630.80 +2.62%
Base Metals 227.41 +4.48%
Copper 352.60 +4.94%
10-year US Treasury Yield 5.13% unch.
Average 30-year Mortgage Rate 6.79% +.15%

Leading Sectors
Gold & Silver +3.18%
Airlines +3.02%
Drugs +2.08%
REITs +1.94%
Tobacco +1.83%

Lagging Sectors
Oil Service -2.20%
Homebuilders -2.70%
Networking -2.99%
Computer Hardware -3.52%
Semis -4.91%

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

*5-Day % Change

Stocks Sharply Lower into Final Hour on Worries Over Slowing Economic Growth

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Retail longs, Networking longs and Semi longs. I added to my (EEM), (IWM) and (QQQQ) shorts today, thus leaving the Portfolio 50% net long. The tone of the market is very negative as the advance/decline line is substantially lower, almost every sector is lower and volume is about average. The 10-year yield is down 5 basis points, near session lows, to 5.13%. The yield is now back below where it was prior to ADP's overly optimistic forecast for today's employment report. I still believe data over the coming weeks will prompt the Fed to pause. I don't believe they will hike at the August meeting, notwithstanding the market's current expectations. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering and lower long-term rates.

Today's Headlines

Bloomberg:
- Bill Miller, whose $19 billion Legg Mason Value Trust has beaten the S&P 500 for 15 straight years, said the biggest US companies are ripe for investment because they have slumped over five years.
- US authorities uncovered a plot by a group possibly linked to slain al-Qaeda in Iraq leader Abu Musab al-Zarqawi to bomb NY’s Holland Tunnel and flood the city’s financial district.
- Regal Entertainment Group, AMC Entertainment and Cinemark USA may borrow $1 billion to transform 13,000 US theater screens to digital film from reel-to-reel.
- 3M(MMM) said second-quarter profit missed its forecast on costs to start an optical film unit and slack demand from flat-panel TV makers.
- US Treasuries rose for a second day after a government report showed the economy created fewer jobs last month than analysts forecast, damping speculation the Fed will lift interest rates next month.
- Crude oil fell after Iran’s nuclear negotiator said he had constructive talks with a top EU official over the country’s proposed uranium enrichment program.

Wall Street Journal:
- Verizon Communications(VZ) is close to spinning off its directories business in a transaction that could be worth as much as $13 billion.
- The SEC asked the accounting regulator to delay guidance related to backdating stock options.

Street.com:
- HBK Investments, a Dallas-based hedge fund, is under investigation by the SEC for possible involvement in stock shorting before its acquisition of private shares in Plug Power(PLUG).

NY Post:
- The Children’s Place(PLCE) Retail Stores has boosted sales and pared operating losses at its Disney Store unit by bringing in new merchandise lines and setting everyday prices lower.

USA Today:
- Recent college graduates are applying at record levels to volunteer service organizations such as Teach for America, AmeriCorps and the Peace Corps.

CNBC:
- ImClone Systems’(IMCL) planned sale was postponed until mid-July from late June.

Kydo News:
- North Korea said Japan must lift sanctions imposed in response to the communist country’s missile tests or face “strong measures.”

Die Welt:
- The number of Germans leaving the country rose to he highest since 1950 last year as young and highly qualified Germans sought better prospects abroad.

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