Monday Watch

Weekend Headlines
Bloomberg:
- Israel and Hezbollah intensified their attacks as the UN prepared a resolution that US Secretary of State Condoleezza Rice said is a first step to ending fighting in Lebanon now in its fourth week.
- The US and France agreed on a proposed UN Security Council resolution designed to end the fighting between Israel and the militant Islamic group Hezbollah in Lebanon.
- Iran won’t suspend uranium enrichment even after the UN Security Council called for it to do so or face possible sanctions.
- President Bush said comprehensive immigration overhaul must begin with border security and include a guest-worker program and a means for many of the undocumented workers in the US to gain legal status.
- Senator Joe Lieberman, trailing an anti-war challenger in Connecticut’s Democratic primary election race, said his support for President Bush’s decision to liberate Iraq doesn’t mean he’s turned his back on fellow Democrats.
- Crude oil rose after BP Plc shut Alaska’s Prudhoe Bay field, the largest in the US, because it found a pipeline was corroded.

Wall Street Journal:
- DirectTV Group(DTV) and EchoStar Communications(DISH), US satellite tv providers, are gaining few customers as cable companies offer telephone and Internet service.

NY Times:
- New York will require all school children to take a language exam after the federal government ordered it to improve testing of students who speak limited English.
- Adobe Systems(ADBE) is concerned Microsoft Corp.(MSFT) users will be blocked from using its software to create PDF documents, citing CEO Chizen.

EE Times:
- Strong sales of high-definition TVs and other consumer electronics are projected to continue the second half of the year, according to an executive for Sony Electronics Inc.(SNE)

Washington Post:
- Energy-efficient techniques are spreading in commercial real-estate construction and renovation in a bid to control energy costs. Innovations including sun-reflecting ceramic dots in windows, giant vats of ice for overnight energy storage, plant-covered rooftops, bigger eaves and compact fluorescent lighting are being used. Experts say new energy-saving devices, better construction and smarter management can reduce electricity consumption by 20% in older commercial buildings and as much as 50% in new ones.

San Jose Mercury News:
- Venture capital investments in alternative energy start-up companies rose almost 400% in the second quarter from year-ago levels, citing data from research group VentureOne.

Crain’s Chicago Business:
- RR Donnelley & Sons(RRD) CEO Angelson held discussions with a group of buyout firms in recent months.

LA Times Times:
- Steven Spielberg, Jeffrey Katzenberg and Haim Saban are among prominent Democratic donors in Hollywood endorsing Republican California Governor Arnold Schwarzenegger’s re-election bid.

Sunday Times:
- Iran is trying to import uranium from the Democratic Republic of Congo, citing a UN report and unidentified Tanzanian customs officials.

Il Sole/24 Ore:
- The European Central Bank will continue to raise interest rates in coming months as economic growth accelerates, Lorenzo Bini Smaghi, an ECB executive board member said.

Independent:
- Iran will consider “painful” reprisals if the UN imposes sanctions over its refusal to suspend its uranium enrichment program, citing Ali Larijani, Iran’s nuclear negotiator. Iran may use its oil exports as a “weapon,” Larijani said.

Nihon Keizai:
- Japan’s government is discussing countermeasures after China National Offshore Oil Corp. said on Friday it started gas production in the East China Sea near territory claimed by Japan.

Commercial Times:
- AU Optronics(AUO) and Chi Mei Optronics Corp., Taiwan’s two biggest makers of display panels used in televisions, are considering investing in production of solar cells.

Business Standard:
- Starbucks Corp.(SBUX) plans to open outlets in India in 2007.

Weekend Recommendations
Barron's:
- Had positive comments on (IP).
- Had negative comments on (ADM) and (DELL).

Night Trading
Asian indices are -.25% to +.25% on average.
S&P 500 indicated -.07%
NASDAQ 100 indicated -.03%.

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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
CNBC Guest Schedule

Earnings of Note
Company/Estimate
- (AES)/.16
- (AMT)/.02
- (ACF)/.55
- (CPKI)/.29
- (CUZ)/.27
- (EP)/.18
- (FST)/.55
- (FTO)/1.05
- (HANS)/.28
- (FLSH)/.22
- (MVL)/.11
- (MDR)/.53
- (MNT)/.27
- (OSIP)/-.03
- (PCLN)/.50
- (ELOS)/.39
- (WGR)/.61

Upcoming Splits
- None of note

Economic Releases
3:00 pm EST
- Consumer Credit for June is estimated to fall to $3.6 billion versus $4.4 billion in May.

BOTTOM LINE: Asian Indices are mixed as gains in mining stocks are being offset by losses in exporting shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the week.

Chart of Interest

Weekly Outlook

Click here for The Week Ahead by Reuters

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

Economic reports for the week include:

Mon. - Consumer Credit

Tues. - Preliminary 2Q Non-farm Productivity, Preliminary 2Q Unit Labor Costs, FOMC Rate Decision

Wed. - Wholesale Inventories

Thur. - Trade Balance, Initial Jobless Claims, Monthly Budget Statement

Fri. - Import Price Index, Advance Retail Sales, Business Inventories

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

Mon. - AES Corp.(AES), American Tower(AMT), California Pizza Kitchen(CPKI), Cousins Property(CUZ), El Paso Corp.(EP), Forest Oil(FST), Hansen Natural(HANS), Marvel Entertainment(MVL), McDermott(MDR), Priceline.com(PCLN)

Tues. - Andrx Corp.(ADRX), BMC Software(BMC), Cablevision Systems(CVC), Caremark(CMX), Cisco Systems(CSCO), Clear Channel(CCU), Flour Corp.(FLR), Foundry Networks(FDRY), Jack in the Box(JBX), News Corp.(NWS/A), Overseas Shipholding(OSG), Polo Ralph Lauren(RL), Sara Lee(SLE), Seagate Technologies(STX)

Wed. - American International Group(AIG), Cendant(CD). Comverse Tech(CMVT), Federated Dept. Store(FD), Thomas Weisel(TWPG), Viacom(VIA), Walt Disney(DIS)

Thur. - Analog Devices(ADI), Brinker Intl.(EAT), CA Inc.(CA), EchoStar(DISH), Expedia Inc.(EXPE), Goldcorp(GG), JC Penney(JCP), Kohl’s(KSS), Nvidia(NVDA), Target Corp.(TGT), Urban Outfitters(URBN)

Fri. - None of note

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

Mon. - JPMorgan Auto Conference

Tue. - JPMorgan Auto Conference, RBC North American Tech Conference

Wed. - Bank of America Specialty Pharma Conference, RBC North American Tech Conference, CIBC Software Conference, JPMorgan Auto Conference

Thur. - Bank of America Specialty Pharma Conference, CIBC Software Conference, RBC North American Tech Conference

Fri. - Bank of American Specialty Pharma Conference

BOTTOM LINE: I expect US stocks to finish the week modestly higher on mostly positive earnings reports, a Fed “pause”, a calming in Middle Eastern tensions, short-covering and bargain hunting. My trading indicators are now give neutral signals and the Portfolio is 100% net long heading into the week.

Market Week in Review

S&P 500 1,279.36 +.06%*



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was neutral. The advance/decline line rose, sector performance was mixed and volume was about average on the week. Measures of investor anxiety were mostly higher. The AAII % Bulls fell to 31.46% this week from 34.88% the prior week. This reading is now approaching depressed levels again. The AAII % Bears rose to 47.19% from 43.02% the prior week. This reading is now approaching elevated levels again. Moreover, the 10-week moving average of the % Bears is 45.98%. 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 one of the greatest stock market collapses in U.S. history from 2000-2003. Many other measures of investor sentiment are still near levels associated with meaningful market bottoms.

The average 30-year mortgage rate fell 9 basis points to 6.63%, which is 17 basis points lower than recent highs. 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 10 basis points on the week on mixed economic data and diminishing inflation worries. Inflation concerns have likely peaked for the year as economic growth moderates to around average levels, unit labor costs remain subdued and the mania for commodities continues to reverse course.

The EIA reported this week that gasoline supplies fell less than expectations even as refinery utilization declined. Unleaded Gasoline futures rose slightly and are now 23.1% 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 20.8% 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 only up 1.2%, while global supplies have increased 5.1%. 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 rose slightly more than expectations this week. Supplies are now 19.2% 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. Colorado State reduced its forecast from five to three major hurricanes this season vs. seven last year. 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 rising expectations for a Fed “pause.” The US Dollar fell on increased speculation for a Fed pause. I continue to believe the Fed is done hiking rates for this cycle.

Homebuilding stocks outperformed for the week on bargain-hunting and lower long-term interest rates. Profit growth for the second quarter is coming in a strong 15%, according to Reuters. This would mark the 16th straight quarter of double-digit profit growth, the best streak since recording keeping began in 1936. Moreover, another double-digit gain is likely in the third quarter. Despite a 71.2% 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 14.7. The long-term historical average p/e for the S&P 500 is 24.4. The average US stock, as measured by the Value Line Geometric Index(VGY), is down .5% this year. The Russell 2000 Index is still up 4.9% 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 1,279.36 +.06%
DJIA 11,240.35 +.18%
NASDAQ 2,085.05 -.43%
Russell 2000 701.25 +.18%
Wilshire 5000 12,803.71 +.11%
S&P Barra Growth 588.49 -.06%
S&P Barra Value 689.59 +.19%
Morgan Stanley Consumer 620.46 -.16%
Morgan Stanley Cyclical 790.43 +1.41%
Morgan Stanley Technology 467.62 -.19%
Transports 4,378.56 -.82%
Utilities 434.05 -.22%
S&P Emerging Markets 813.46 +1.26%
S&P 500 Cum A/D Line 6,552.0 +1.0%
Bloomberg Oil % Bulls 40.0 -11.11%
CFTC Oil Large Speculative Longs 189,224 +2.0%
Put/Call 1.17 +32.95%
NYSE Arms 1.45 +55.91%
Volatility(VIX) 14.34 +.07%
ISE Sentiment 108.00 +12.5%
AAII % Bulls 31.46 -9.81%
AAII % Bears 47.19 +9.69%
US Dollar 84.58 -.94%
CRB 350.05 +1.81%
ECRI Weekly Leading Index 135.40 -.59%

Futures Spot Prices
Crude Oil 74.60 +.20%
Unleaded Gasoline 223.20 +.54%
Natural Gas 7.25 -11.26%
Heating Oil 208.70 +2.10%
Gold 657.70 +1.70%
Base Metals 229.60 +2.42%
Copper 363.50 +1.54%
10-year US Treasury Yield 4.89% -2.0%
Average 30-year Mortgage Rate 6.63% -1.34%

Leading Sectors
HMOs +6.52%
Homebuilders +3.15%
Hospitals +2.48%
I-Banks +2.19%
Retail +2.18%

Lagging Sectors
Internet -1.49%
Insurance -2.23%
Wireless -2.46%
Steel -2.85%
Airlines -2.95%

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

*5-Day % Change

Stocks Lower into Final Hour on Economic Growth Worries and Profit-taking

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Medical longs, Retail longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are falling and volume is above average. This morning, Citigroup reiterated that Apple Computer (AAPL) is its top computer hardware pick and its price target of $80. The firm said that the backdating issue will not affect recent or future earnings. It would only affect 1997-2001. Thus, the stock's valuation should not be at risk. Citigroup views the likelihood of Steve Jobs leaving or the stock being de-listed as remote possibilities.I agree with Citigroup's assessment and view today's sell-off as another buying opportunity before multiple significant catalysts over the next year. I remain long Apple(AAPL). I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower long-term rates, lower energy prices and bargain-hunting.