Weekly Outlook

Click here for The Week Ahead by Reuters

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

Economic reports for the week include:

Mon. - Empire Manufacturing, Industrial Production, Capacity Utilization

Tues. - Producer Price Index, Net Foreign Security Purchases, NAHB Housing Market Index

Wed. - Consumer Price Index, Housing Starts, Building Permits, Bernanke Report on Economy & Fed Policy

Thur. - Initial Jobless Claims, Leading Indicators, Philly Fed., FOMC Minutes

Fri. - None of note

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

Mon. - Charles Schwab(SCH), Citigroup(C), Commerce Bancorp(CBH), Eaton Corp.(ETN), Harley-Davidson(HDI), Mattel Inc.(MAT)

Tues. - AmSouth Bancorp(ASO), BlackRock Inc.(BLK), Coca-Cola(KO), Forest Labs(FRX), Freeport-McMoRan(FRX), IBM(IBM), Johnson & Johnson(JNJ), Merrill Lynch(MER), Southern Copper(PCU), State Street(STT), TD Ameritrade(AMTD), Teradyne(TER), US Bancorp(USB), Wells Fargo(WFC), Yahoo!(YHOO)

Wed. - Abbott Labs(ABT), Allstate Corp.(ALL), AMR Corp.(AMR), Apple Computer(AAPL), Bank of America(BAC), Cheesecake Factory(CAKE), E*Trade Financial(ET), eBay Inc.(EBAY), General Dynamics(GD), Intel Corp.(INTC), JPMorgan(JPM), Juniper Networks(JNPR), Kinder Morgan(KMI), Lam Research(LRCX), Motorola(MOT), Novellus Systems(NVLS), Qualcomm(QCOM), Ryland Group(RYL), Seagate Technology(STX), Southwest Airlines(LUV), St. Jude Medical(STJ), SunTrust Banks(STI), UnitedHealth Group(UNH), Washington Mutual(WM)

Thur. - Advanced Micro Devices(AMD), Amgen Inc.(AMGN), Baxter Intl.(BAX), Broadcom Corp.(BRCM), Capital One Financial(COF), Cerner Corp.(CERN), Comerica(CMA), Domino’s Pizza(DPZ), DR Horton(DHI), F5 Networks(FFIV), Ford Motor(F), Gilead Sciences(GILD), Google Inc.(GOOG), ImClone Systems(IMCL), Intl. Game Tech(IGT), Medimmune(MEDI), Microsoft(MSFT), Peabody Energy(BTU), Pfizer Inc.(PFE), Union Pacific(UNP), Wachovia Corp.(WB), Wyeth(WYE), Xilinx(XLNX)

Fri. - Caterpillar(CAT), Eli Lilly(LLY), Halliburton(HAL), Hershey(HSY), McDonald’s(MCD), Nucor(NUE), RadioShack(RSH), Schlumberger(SLB), Sybase(SY)

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

Mon. - None of note

Tue. - None of note

Wed. - None of note

Thur. - None of note

Fri. - None of note

BOTTOM LINE: I expect US stocks to finish the week higher on mostly positive earnings reports, increased speculation for a Fed “pause”, a calming in Middle Eastern tensions, short-covering and bargain hunting. My trading indicators are giving mostly bearish signals and the Portfolio is 75% net long heading into the week.

Market Week in Review

S&P 500 1,236.20 -2.31%*



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 about average on the week. Measures of investor anxiety were mostly higher. The AAII % Bulls fell to 36.50% and is still below average levels. The % Bears fell to 42.62% and is still above average levels. Moreover, the 10-week moving average of % Bears is 42.4%, the highest since the bear market bottom in October 2002. Many other measures of investor sentiment are still near levels associated with meaningful market bottoms.

The average 30-year mortgage rate fell to 6.74%, which is 153 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 fell 7 basis points on the week as economic data were mixed, import prices decelerated and violence in the Middle East spurred safe haven buying. 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 fell more than expectations as refinery utilization declined. Unleaded Gasoline futures rose, but are still 20.2% 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 16.5% 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 27.4% 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 60.0% since December 2005 highs. There is still little evidence of a pick-up in industrial demand for the commodity despite the collapse in price. Natural gas has likely made an intermediate-term bottom before moving to new cycle lows in November or December.

US oil inventories are still around 8-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. Escalating violence in the Middle East and the onslaught of hurricane season will likely lead to a major top in oil over the next few months as demand destruction accelerates further. 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.

Gold and the US Dollar rose for the week on safe haven buying as a result of rising geopolitical concerns.

Technology and cyclical stocks underperformed for the week on disappointing earnings forecasts and fears over a decline in consumer spending. Despite a 69.2% 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 14.4. The average US stock, as measured by the Value Line Geometric Index(VGY), is down 2.7% this year. The Russell 2000 Index is still up 1.8% 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. By contrast, “value” stocks are quite expensive in many cases. Moreover, 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 again this week and is forecasting healthy, but decelerating, US economic activity.

Weekly Scoreboard*

Indices
S&P 500 1,236.20 -2.31%
DJIA 10,739.35%
NASDAQ 2,037.35 -4.35%
Russell 2000 681.24 -3.96%
Wilshire 5000 12,403.70 -2.56%
S&P Equity Long/Short Index 1,137.66 +.74%
S&P Barra Growth 570.70 -2.26%
S&P Barra Value 663.98 -2.36%
S&P Emerging Markets 768.69 -3.72%
Morgan Stanley Consumer 601.28 -1.43%
Morgan Stanley Cyclical 775.42 -4.59%
Morgan Stanley Technology 458.96 -4.77%
Transports 4,590.60 -5.22%
Utilities 418.12 +.35%
S&P 500 Cum A/D Line 5,855 -11.0%
Bloomberg Oil % Bulls 59.0 -13.77%
CFTC Oil Large Speculative Longs 193,203 +10.0%
Put/Call 1.24 +39.3%
NYSE Arms 1.17 -23.03%
Volatility(VIX) 18.05 +29.20%
ISE Sentiment 127.00 +2.42%
AAII % Bulls 36.50 -3.18%
AAII % Bears 39.42 -7.51%
US Dollar 86.10 +1.28%
CRB 357.21 +2.63%
ECRI Weekly Leading Index 136.90 +.37%

Futures Spot Prices
Crude Oil 76.80 +4.56%
Unleaded Gasoline 231.50 +6.34%
Natural Gas 6.34 +12.88%
Heating Oil 207.62 +5.77%
Gold 665.40 +6.38%
Base Metals 236.70 +4.09%
Copper 371.35 +3.38%
10-year US Treasury Yield 5.06% -1.17%
Average 30-year Mortgage Rate 6.74% -.74%

Leading Sectors
Oil Service +2.09%
Energy +1.99%
Utilities +.35%
Defense +.34%
Gold & Silver -.14%

Lagging Sectors
Alternative Energy -6.61%
Computer Hardware -7.16%
Homebuilders -7.54%
Networking -7.62%
Airlines -10.09%

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

*5-Day % Change

Stocks Lower into Final Hour on Rising Middle East Tensions

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Biotech longs, Internet longs and Retail longs. I added to my (EEM), (IWM) and (QQQQ) shorts and to my (GOOG) and (DNA) longs today, thus leaving the Portfolio 50% net long. The tone of the market is negative as the advance/decline line is substantially lower, most sectors are declining and volume is about average. Last month, I speculated that the Fed would raise one more time at the June meeting and then pause. Since then, economic data have weakened and forward-looking gauges of inflation have decelerated. Given the new developments in the Middle East, I am increasingly confident that the Fed will not hike rates at the Aug, 8 meeting. I expect Bernanke to make dovish comments during his speech next Wednesday to prepare the markets for a pause. I expect US stocks to trade modestly higher into the close from current levels on short-covering.

Today's Headlines

Bloomberg:
- Israeli forces bombed the Beirut headquarters of Hezbollah, and the chief of staff of the Israeli military said attacks would continue unit the Lebanese government exerts authority over southern Lebanon.
- Ford Motor(F), losing US market share to Asian rivals, had its credit rating cut further into junk status by Moody’s Investors Service on concern that the automaker won’t be able to stem North American losses.
- Crude oil rose .30 to $77 as concern mounted over escalating violence in the Middle East.
- Kentucky Derby winner Barbaro, who has both hind legs in casts, was upgraded to stable from guarded condition a day after his surgeon called his prognosis “poor” because of life-threatening inflammation.

Wall Street Journal:
- Brazilian President Luiz Inacio Lula da Silva said he is proposing a world forum on ethanol, the crop-based fuel additive, to promote and try to set it up for trade as a commodity.
- Student-run investment funds are taking off as a teaching tool at universities across the US.
- Hertz Corp. is making final preparations for an IPO.

Washington Post:
- A US Senate panel approved a fiscal 2007 budget for the EEOC of $327 billion, the same as last year, yet $4 million more than the Bush administration had requeted.

NY Times:
- Republicans are criticizing Democrats for an Internet ad that shows coffins arriving in the US from the Iraq war.

Financial Times:
- A drop in shares of Germany’s SAP AG(SAP) yesterday after the company said license revenue fell short of forecasts may make the software maker’s stock a good bet for traders.

Interfax:
- OAO Lukoil, Russia’s biggest oil producer, agreed to buy a controlling stake in a venture exploring for oil off West Africa’s Ivory Coast.

Import Prices Decelerate, Retail Sales Fall, Confidence Weakens, Inventories Rise

- The Import Price Index for June rose .1% versus estimates of a .2% increase and a 1.7% gain in May.
- Advance Retail Sales for June fell .1% versus estimates of a .4% increase and a .1% gain in May.
- Retail Sales Less Autos for June rose .3% versus estimates of a .4% increase and an upwardly revised .7% gain in May.
- Preliminary Univ. of Mich. Consumer Confidence for July fell to 83.0 versus estimates of 85.6 and a reading of 84.9 in June.
- Business Inventories for May rose .8% versus estimates of a .4% gain and a .7% rise in April.

BOTTOM LINE: The cost of goods imported into the US rose in June by the smallest amount in three months as petroleum prices fell, Bloomberg said. I expect import prices to bounce higher in the near-term before decelerating meaningfully over the intermediate-term.

Sales at US retailers unexpectedly fell in June as consumers, Bloomberg reported. I expect retail sales to continue to decelerate to around average levels of 2.8% through year-end.

Confidence among US consumers unexpectedly weakened this month, reinforcing concern about a cooling economy, Bloomberg reported. The current conditions component of the index, which is a gauge of Americans’ perceptions of their financial situation and whether it is a good time to buy big-ticket items, fell to 100.8 from 105.0 the prior month. Consumers expect the inflation rate to rise 3.1% over the next year versus expectations of a 3.3% 12-month increase in June. Consumer confidence will likely remain around current levels in the near-term before rebounding in the fourth quarter.

Inventories at US companies rose more than forecast in May, reflecting the biggest jump in unsold automobiles since March 1999 as dealers struggled with lackluster demand, Bloomberg said. Inventories relative to sales matched an all-time low. Inventories at auto dealers rose 3.2%, the biggest increase since March 1999. Sales of autos fell 2.1%. Inventory rebuilding should held cushion decelerating demand.