Weekly Outlook

Click here for The Week Ahead by Reuters

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

Economic reports for the week include:

Mon. - Chicago Purchasing Manager

Tues. - Personal Income, Personal Spending, PCE Core, Construction Spending, ISM Manufacturing, ISM Prices Paid, Pending Home Sales, Total Vehicle Sales

Wed. - ADP Employment Change

Thur. - Initial Jobless Claims, Continuing Claims, Factory Orders, ISM Non-Manufacturing

Fri. - Change in Non-farm Payrolls, Unemployment Rate, Change in Manufacturing Payrolls, Average Hourly Earnings

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

Mon. - Avon Products(AVP), Chipotle Mexican Grill(CMG), Comverse Technologies(CMVT), Exelon Corp.(EXC), Freddie Mac(FRE), Humana(HUM), Juniper Networks(JNPR), Metlife Inc.(MET), Tyson Foods(TSN), Vulcan Materials(VMC), Whole Foods Market(WFMI)

Tues. - Administaff(ASF), Alliant Techsystems(ATK), Archer-Daniels-Midland(ADM), CAN Financial(CAN), Coach Inc.(COH), Computer Sciences(CSC), Eastman Kodak(EK), Electronic Data Systems(EDS), Electronic Arts(ERTS), Emerson Electric(EMR), Equity Office Properties(EOP), Hilton Hotels(HLT), IAC/InterActiveCorp(IACI), International Paper(IP), Loews Corp.(LTR), Marathon Oil(MRO), Pappa John’s(PZZA), Sirius Satellite(SIRI), Southern Copper(PCU), St Joe(JOE), TXU Corp.(TXU), Valero Energy(VLO), Verizon Communications(VZ), Vornado Realty(VNO), Wynn Resorts(WYNN)

Wed. - Allergan(AGN), Alltel(AT), Cigna(CI), Clorox(CLX), Devon Energy(DVN), Dolby Labs(DLB), Expedia(EXPE), GlobalSantaFe(GSF), Infospace(INSP), Las Vegas Sands(LVS), Mastercard(MA), Netease.com(NTES), PG&E Corp.(PCG), Procter & Gamble(PG), Starbucks(SBUX), Time Warner(TWX)

Thur. - Activistion(ATVI), Altera Corp.(ALTR), Cardinal Health(CAH), Cephalon(CEPH), CVS Corp.(CVS), DreamWorks(DWA), Duke Energy(DUK), El Paso Corp.(EP), Kerr McGee(KMG), MGM Mirage(MGM), Noble Energy(NBL), OfficeMax(OMX), Patterson-UTI(PTEN), Sabre Holdings(TSG), Sina Corp.(SINA), Sprint Nextel(S), Transocean(RIG), Tyco Intl.(TYC), Univision(UVN), Williams Cos(WMB)

Fri. - Crown Castle(CCI), Maxim Integrated(MXIM), Medco Health Solutions(MHS), Occidental Petroleum(OXY)

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

Mon. - None of note

Tue. - None of note

Wed. - CSFB Electrical Equipment Conference

Thur. - CIBC Wireless 1-on-1 Conference, CSFB Electrical Equipment Conference

Fri. - CSFB Electrical Equipment Confernce

BOTTOM LINE: I expect US stocks to finish the week modestly 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 still giving mostly bearish signals and the Portfolio is 100% net long heading into the week.

Chart of Interest

Bottom Line: Notwithstanding the current bout of modest cyclical inflation, the secular trend of disinflation is still in tact.

Market Week in Review

S&P 500 1,278.55 +3.09%*



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was very bullish. The advance/decline line rose sharply, almost every sector gained and volume was above average on the week. Measures of investor anxiety were mostly lower. The AAII % Bulls rose to 34.88% this week from 23.85% the prior week. This reading is still below average levels. The AAII % Bears fell to 43.02% from 57.80% the prior week. This reading is still above average levels. Moreover, the 10-week moving average of the % Bears is 46.04%. It has been this high only 1 other time since record-keeping began in 1987, the significant market bottom during the 1990 recession and Gulf War. It never even reached current levels during the depths of one of the greatest stock market collapses in US history during 2002. Many other measures of investor sentiment are still near levels associated with meaningful market bottoms.

The average 30-year mortgage rate fell 8 basis points to 6.72%, which is 151 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 begun an intermediate-term move lower, which should help stabilize housing over the next few months.

The benchmark 10-year T-note yield fell 5 basis points on the week as economic data were mixed, oil prices declined and the Fed made dovish comments in its Beige Book report. Inflation concerns have likely 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 fell and are now 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 19.8% from 36% late last year. I continue to believe the elevated level of gas prices related to crude oil production disruption speculation will further dampen fuel demand over the coming months, sending gas prices back to reasonable levels.

US oil inventories are at 7-year highs. Since December 2003, global oil demand is down 1.19%, while global supplies have increased 5.19%. 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 couple of months as demand destruction further accelerates. 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.

Natural gas inventories fell more than expectations this week. Supplies are now 21.6% above the 5-year average, a high level for this time of year, even as some daily Gulf of Mexico production remains shut-in. Natural gas prices have plunged 54.1% since December 2005 highs. At this time last year, 5 tropical storms and 3 hurricanes had already threatened Gulf of Mexico production. There is now some evidence of a pick-up in industrial demand for the commodity. Natural gas has likely made an intermediate-term bottom before moving to new cycle lows in December or January.

Gold rose on the week on Middle East tensions, US dollar weakness and dovish Fed commentary. The US Dollar fell on a dovish Fed Beige Book report and increased speculation for a Fed pause. I continue to believe the Fed is done hiking rates for this cycle.

Technology and commodity stocks outperformed for the week as worries over an imminent recession faded and most earnings exceeded estimates. Profit growth for the second quarter is coming in at about 12%. This would mark the 16th straight quarter of double-digit profit growth, the best streak since recording keeping began in 1936. Despite a 71.0% 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 down .6% this year. The Russell 2000 Index is still up 4.7% 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 to around average levels 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 fell this week and is forecasting healthy, but decelerating, US economic activity.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,278.55 +3.09%
DJIA 11,219.70 +3.23%
NASDAQ 2,094.14 +3.65%
Russell 2000 700.03 +4.18%
Wilshire 5000 12,789.01 +3.22%
S&P Barra Growth 588.87 +2.92%
S&P Barra Value 688.30 +3.25%
Morgan Stanley Consumer 621.43 +2.07%
Morgan Stanley Cyclical 779.46 +2.51%
Morgan Stanley Technology 468.53 +3.85%
Transports 4,414.90 -.93%
Utilities 435.02 +1.63%
S&P Emerging Markets 804.05 +2.81%
S&P 500 Cum A/D Line 6,587.0 +13.0%
Bloomberg Oil % Bulls 45.0 -10.0%
CFTC Oil Large Speculative Longs 185,092 -4.0%
Put/Call .88 -29.60%
NYSE Arms .93 -48.62%
Volatility(VIX) 14.33 -17.64%
ISE Sentiment 96.0 -23.20%
AAII % Bulls 34.88 +46.25%
AAII % Bears 43.02 -25.57%
US Dollar 85.38 -.64%
CRB 343.83 +1.24%
ECRI Weekly Leading Index 136.30 -.44%

Futures Spot Prices
Crude Oil 73.36 -2.38%
Unleaded Gasoline 222.40 -3.93%
Natural Gas 7.24 +7.58%
Heating Oil 194.65 -1.19%
Gold 646.40 +3.42%
Base Metals 224.18 +5.53%
Copper 355.40 +5.15%
10-year US Treasury Yield 4.98% -1.19%
Average 30-year Mortgage Rate 6.72% -1.18%

Leading Sectors
Oil Service +8.36%
Telecom +7.75%
Semis +7.10%
Steel +6.74%
Computer Hardware +6.25%

Lagging Sectors
Broadcasting +.81%
Foods +.29%
Hospitals -1.46%
Gaming -2.35%
HMOs -5.22%

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

*5-Day % Change

Stocks Sharply Higher into Final Hour as Long-term Rates Fall

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Internet longs, Retail longs and Biotech longs. I added to my (PWR) long and covered my remaining (IWM) and (QQQQ) hedges today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is substantially higher, almost every sector is rising and volume is about average. Many are suggesting that recent stock gains are just a function of increased speculation that the Fed is done. The Fed is only done if inflation fears have peaked, which I believe to be the case. The 10-year yield, the best predictor of future inflation, would not be falling if inflation fears were rising. Other Fed pause speculation periods were accompanied by higher long-term rates as investors anticipated a pickup in growth and inflation. This is an "inflation has peaked" rally, which has meaningful longer-term consequences that are overwhelmingly positive for U.S. stocks. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, mostly positive earnings reports, lower long-term rates, lower energy prices and bargain-hunting.

Today's Headlines

Bloomberg:
- Crude oil is falling after a government report showed that US economic growth slowed and China said it planned to implement new energy pricing measures to increase efficiency.
- General Motors(GM), the best performing stock in the Dow Jones Industrial Average, would tie a 22-year record for consecutive daily gains with an increase today.
- Treasuries are rising, pushing yields on 10-year notes below 5% on declining inflation worries and increased speculation for a Fed “pause.”
- Bank of America(BAC) is on the brink of overtaking Citigroup as the world’s.

Wall Street Journal:
- Israeli and Lebanese bloggers are providing live updates, comment and links to each other across the firing lines. The dialogue marks a breakthrough in communications between residents of the two countries, who until now had no phone connections and little ability to talk to each other.
- General Motors’(GM) rising share price has caused hedge funds to lose money, as traders incorrectly bet against the carmaker turning around its losses.
- US conservatives trying to hold down taxes are expanding a campaign to impose spending limits on state legislatures.
- Hedge funds could receive more money from pension funds if the US Congress passes the pension bill currently before it. A little-noticed provision in the bill would change existing law, which states that if hedge funds obtain more than 25% of their total assets from pension funds they become fiduciaries, with resulting restrictions and increased scrutiny. It the bill is passed in its present form, public-employee or foreign pension plans would no longer be counted in the capped amount, thus allowing funds to accept unlimited amounts from them.

NY Times:
- About 60% of likely car buyers now say fuel economy is a priority, compared with 22% of prospective buyers in 2002.

Central People’s Radio:
- China will change how it prices energy products to reflect the resource scarcity in the country. Officials hope a reformed pricing mechanism for energy will raise efficiency.