Monday Watch

Weekend Headlines
Bloomberg:
- Israel suspended air strikes in southern Lebanon for 48 ours while it investigates the bombing yesterday of the Lebanese town of Qana that killed at least 54 people.
- The House voted to boost the minimum wage in Republican-backed legislation that also cuts $310 billion in taxes.
- One person was killed and five were wounded by gunfire at the Jewish Federation Building in downtown Seattle. The suspect told building staff members before he began shooting that he was “a Muslim American” who was “angry at Israel.”
- US 10-year Treasuries rose for a fifth straight week, pushing yields below 5%, as reports showing the US economy slowed fueled speculation the Fed will stop raising interest rates next month.
- Wal-Mart Stores(WMT) said July same-store sales in the US rose about 2.4% versus estimates of a 1-3% gain.
- The NY Times endorsed Ned Lamont over three-term US Senator Joe Lieberman in Connecticut’s Aug. 8 Democratic primary, criticizing the incumbent for a “warped version of bipartisanship,” including support of President Bush on national security issues.
- Nanotech is luring bankers and venture capitalists with promise of a $1 trillion market.
- SanDisk(SNDK), the world’s largest maker of memory cards for portable electronics, agreed to buy M-Systems Flash(FLSH) for about $1.3 billion in stock to add storage products for mobile phones.
- Crude oil traded near a one-week low in NY on signs of slowing global growth and as Israel called a temporary halt to air strikes in Lebanon.

Barron’s:
- China’s expanding economy ay stumble amid concerns about an aging population, lax environmental protections and increasing corruption.

NY Times:
- Apple Computer(AAPL) won some intellectual property protections from French judges, who declared unconstitutional a law to force companies to make online music playable on any device.
- A federal grand jury is investigating the leak of classified information about US intelligence programs and subpoenaed a former National Security Agency employee.
- Netgear Inc.(NTGR) and three other manufacturers will begin shipping wireless fidelity, or Wi-Fi, phones in September that are compatible with Skype Technologies SA’s Internet calling service.
- The two major US political parties, Democrats and Republicans, are now more divided over the Iraq War than their members ever were during the Vietnam War, citing pollsters. 75% of Republicans in the latest NY Times/CBS poll supported the war in Iraq, while only 24% of Democrats did.
- Larry Sonsini and his law firm, Wilson Sopnsini Goodrich & Rosati, represented “just under 50%” of the Silicon Valley companies implicated in the probe of backdating stock options.

Time Magazine:
- Senator John McCain’s son has joined the Marine Corps and could be sent to Iraq.

Washington Post:
- The Bush administration is waging a fight against bioterrorism by authorizing realistic tests of some of the pathogens and tactics that might be used in an attack.
- US Senate Majority Leader Frist needs to line up 60 votes to overcome Democrats’ threats of a filibuster over reducing the death tax.

The Economist:
- High-tech entrepreneurs recently unveiled a sporty electric car.

Crain’s Chicago Business:
- US automobile insurers such as Allstate Corp.(ALL) and State Farm Insurance Cos. have seen accident claims drop for four straight years, helping them achieve record profits. Insurance companies are baffled by the decline. The advance several possible reasons: Cars are safer, the baby-boom generation has reached the safest driving age, 45-64, or drivers aren’t filing claims for “fender-benders.”

LA Times Times:
- Viacom’s Paramount Pictures unit told Washington lawmakers this spring that director Oliver Stone’s film on the 9/11 terrorist attacks, “World Trade Center,” doesn’t promote conspiracy theories.

Financial Express:
- Property prices in India may drop 10% over an unspecified period as demand slows, citing officials from three property developers.

Spiegel:
- BASF CEO Hambrecht said the economic outlook for the remainder of the year is “very positive” and business in its markets around the world is “good.” The head of the world’s biggest chemical maker said he’s “fairly certain” the price of oil will decline as investments in the industry start to pay off.

Neue Zuercher Zeitung:
- The situation in Iraq is “not as bad as it’s portrayed,” and the number of car bombings has declined since last year, citing Iraqi President Jalal Talabani. The number of car bombs in Baghdad has gone down from an average of 14/day last year to 2-4/day this year.

The Globe and Mail:
- Grupo Mexico SA may bid for Phelps Dodge(PD), complicating Phelps Dodge’s bid for Inco Ltd.(N).

Kydo News:
- The United States told Japan that North Korea’s long-range Taepodong-2 missile, test-fired on July 5, disintegrated within 1.5 Km of the launch pad, flying far less than Japan had estimated.

AFP:
- The head of Iran’s Revolutionary Guards urged his troops to prepare “to get even” with Israel and the US.

China Securities Journal:
- Short selling and margin trading on the Shanghai Stock Exchange may reach up to $1.5 billion when a trial program starts on Aug. 1.

Weekend Recommendations
Barron's:
- Had positive comments on (EP), (DNR), (RRC), (TTEK) and (COH).

Night Trading
Asian indices are unch. to +1.0% on average.
S&P 500 indicated -.09%
NASDAQ 100 indicated -.12%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Before the Bell CNBC Video(bottom right)
Global Commentary
Asian Indices
European Indices
Top 20 Business Stories
In Play
Bond Ticker
Daily Stock Events
Macro Calls
Rasmussen Consumer/Investor Daily Indices
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Earnings of Note
Company/Estimate
- (AG)/.55
- (AVP)/.35
- (CELL)/.16
- (CMG)/.25
- (CMVT)/.19
- (EXC)/.80
- (FRE)/1.17
- (HUM)/.35
- (ISSX)/.22
- (IRBT)/-.20
- (JNPR)/.19
- (MET)/1.14
- (TSN)/-.03
- (VMC)/1.28
- (WFMI)/.34

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- Chicago Purchasing Manager for July is estimated to fall to 56.0 versus a reading of 56.5 in June.

BOTTOM LINE: Asian Indices are higher, boosted by technology shares in the region. I expect US stocks to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the week.

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.