Weekly Outlook

Click here for The Week Ahead by Reuters

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

Economic reports for the week include:

Mon. - 2Q Current Account Balance, Net Foreign Security Purchases, NAHB Housing Market Index

Tues. - Producer Price Index, Housing Starts, Building Permits

Wed. - FOMC Rate Decision

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

Fri. - None of note

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

Mon. - None of note

Tues. - Autozone(AZO), CBRL Group(CBRL), Chaparral Steel(CHAP), Darden Restaurants(DRI), Factset Research(FDS), Oracle Corp.(ORCL)

Wed. - Carmax(KMX), Cintas Corp.(CTAS), Circuit City(CC), Herman Miller(MLHR), Morgan Stanley(MS), Stage Stores(SSI), Steelcase(SCS)

Thur. - AG Edwards(AGE), Bed Bath & Beyond(BBBY), Biomet(BMET), Carnival Corp.(CCL), ConAgra Corp.(CAG), FedEx Corp.(FDX), Finish Line(FINL), General Mills(GIS), Nike Inc.(NKE), Palm Inc.(PALM), Scholastic Corp.(SCHL)

Fri. - KB Home(KBH)

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

Mon. - Bank of America Investment Conference, TGT Mid-month Sales Update

Tue. - CSFB Chemical Conference, UBS Global Paper and Forest Products Conference, Bank of America Investment Conference

Wed. - CSFB Chemical Conference, UBS Global Paper and Forest Products Conference, Bank of America Investment Conference, Goldman Sachs Communacopia Conference

Thur. - Oppenheimer Diabetes Conference, Bank of America Investment Conference

Fri. - None of note

BOTTOM LINE: I expect US stocks to finish the week modestly higher on short-covering, bargain hunting, decelerating inflation readings, no Fed rate hike, less hawkish Fed policy comments, mostly positive earnings reports and less pessimism. My trading indicators are still giving bullish signals and the Portfolio is 100% net long heading into the week.

Market Week in Review

S&P 500 1,319.87 +1.61%*



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, most sectors gained and volume was above average on the week. Measures of investor anxiety were mixed. The AAII percentage of Bulls rose to 47.95% this week from 42.99% the prior week. This reading is now slightly above average levels. The AAII percentage of Bears rose to 38.36% this week from 29.91% the prior week. This reading is now again above average levels. The 10-week moving average of the percent Bears is currently 40.04%. The 10-week moving-average of percent Bears was 43.0% at the major bear market lows during 2002. The only other times it was higher than these levels, since record keeping began in 1987, were the significant market bottom during the 1990 recession/Gulf War and in October 1992. In my opinion, the fact that bullish sentiment is moving up from excessively depressed levels is a positive. The steadfastly high bearish percentage, given recent gains, is still providing a wall of worry for stocks to climb higher. I continue to believe the “irrational pessimism” aimed towards most US stocks has never been this great in history given the positive macro backdrop.

The average 30-year mortgage rate fell another 4 basis points to 6.43%, which is 37 basis points below July 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 Case-Shiller housing futures are still projecting a 5% decline in the average home price over the next 9 months. Considering the average house has appreciated over 50% during the last few years, this would be considered a “soft landing.” The overall negative effects of housing on the US economy are currently being exaggerated, in my opinion. Housing has been slowing substantially for 13 months and has been mostly offset by other very positive aspects of the economy.

The benchmark 10-year T-note yield rose 2 basis points on the week on profit-taking and more economic optimism. The CRB Commodities Index, the main source of inflation fears, has now declined 4% over the last 12 months and is down 16.0% from May highs, approaching bear market territory. I believe inflation concerns have 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 rose less than expectations as refinery utilization fell. Unleaded Gasoline futures dropped substantially again and are now 45.9% 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. Gasoline demand is estimated to rise .8% this year versus a 20-year average of 1.7% demand growth. According to TradeSports.com, the percent chance of a US and/or Israeli strike on Iran this year has fallen to 10% from 36% late last year. The elevated level of gas prices related to crude oil production disruption speculation is further dampening fuel demand, which is sending gas prices back to more reasonable levels.

US oil inventories have only been higher during one other period over the last 7 years. Since December 2003, global oil demand is only up .1%, while global supplies have increased 5.3%, according to the Energy Intelligence Group. 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. Oil closed the week at $63.33/bbl., breaking clearly below its major uptrend line at $66.33 despite the fact that we are in a seasonally strong period for the commodity. A major top in oil is likely already in place. However, a Gulf hurricane will likely lead to a bounce higher in price over the next month further accelerating demand destruction, resulting in a complete technical breakdown in crude. 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 from current levels over the intermediate-term.

Natural gas inventories rose more than expectations this week, sending prices for the commodity plunging further. Supplies are now 12.4% above the 5-year average, a record high level for this time of year, even as some daily Gulf of Mexico production remains shut-in. Natural gas prices have collapsed 68.2% since December 2005 highs. It is very likely US natural gas storage will become full during October, creating the distinct possibility of a “no-bid” situation for the physical commodity. Colorado State recently reduced its forecast from three to two major hurricanes for this season versus seven last year. The peak of hurricane season was September 10. Natural gas made new cycle lows again this week despite the fact that the commodity is in its seasonally strong period.

Gold fell on the week as the US dollar strengthened and inflation fears continued to diminish. The US dollar rose on more US economic optimism, lower commodity prices and weaker international economic reports. I continue to believe there is almost zero chance of a Fed rate hike at the September 20 meeting and very little chance of another hike this year.

Investment Banking stocks outperformed for the week on more US stock market optimism and strong earnings reports. Commodity stocks underperformed substantially again as the mania for these shares continues to subside in the face of falling prices and declining inflation worries. S&P 500 profit growth for the second quarter came in a strong 16.3% versus a long-term historical average of 7%, according to Thomson Financial. This is 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 77.1% 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 15.1. The 20-year average p/e for the S&P 500 is 24.4. The S&P 500 is now up 7.2% and the Russell 2000 Index is up 9.2% year-to-date. The DJIA is only 190 points away from its all-time high reached on January 14, 2000. I expect the Dow to breach this level convincingly during the fourth quarter.

Current stock prices are still providing longer-term investors very attractive opportunities in many equities 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. A recent CSFB report confirmed this view. The report concluded that on a price-to-cash flow basis growth stocks are now cheaper than value stocks for the first time since at least 1977. Almost the entire decline in the S&P 500’s p/e, since the bubble burst in 2000, is a function of growth stock multiple contraction. The p/e on value stocks is back near high levels. I still expect the most overvalued economically sensitive and emerging market stocks to continue underperforming over the intermediate-term as the manias for those shares subside and global growth slows to more average rates. I believe a chain reaction of events has begun that will 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. One of the characteristics of the current “negativity bubble” is that most potential positives are undermined, downplayed or completely ignored, while almost every potential negative is exaggerated and promptly priced in to stock prices. This “irrational pessimism” by investors is resulting in a dramatic decrease in the supply of stock as companies buy back shares, IPOs are pulled and secondary stock offerings are canceled.

Over the coming months, an end to the Fed rate hikes, lower commodity prices, seasonal strength, the November election, decelerating inflation readings, lower long-term rates, increased consumer/investor 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 expect the S&P 500 to return a total of at least 15% for the year. The ECRI Weekly Leading Index rose again this week and is forecasting healthy US economic activity.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,319.87 +1.61%
DJIA 11,560.77 +1.48%
NASDAQ 2,235.99 +3.22%
Russell 2000 729.35 +2.94%
Wilshire 5000 13,193.31 +1.66%
S&P Barra Growth 614.22 +1.87%
S&P Barra Value 703.37 +1.36%
Morgan Stanley Consumer 650.81 +1.10%
Morgan Stanley Cyclical 815.78 +1.07%
Morgan Stanley Technology 521.98 +3.84%
Transports 4,403.71 +4.97%
Utilities 425.94 -1.88%
MSCI Emerging Markets 96.82 +.77%
S&P 500 Cum A/D Line 7,447.0 +10%
Bloomberg Oil % Bulls 21.21 -15.2%
CFTC Oil Large Speculative Longs 177,047 -1.0%
Put/Call .81 -19.80%
NYSE Arms 1.16 -1.77%
Volatility(VIX) 11.76 -10.64%
ISE Sentiment 67.0 -46.40%
AAII % Bulls 47.95 +11.54%
AAII % Bears 38.36 +28.25%
US Dollar 85.97 +.03%
CRB 306.32 -4.39%
ECRI Weekly Leading Index 136.60 +.66%

Futures Spot Prices
Crude Oil 63.35 -4.25%
Unleaded Gasoline 157.45 -2.42%
Natural Gas 5.01 -11.48%
Heating Oil 171.08 -7.30%
Gold 584.10 -2.27%
Base Metals 222.74 -6.15%
Copper 333.0 -2.75%
10-year US Treasury Yield 4.79% +.63%
Average 30-year Mortgage Rate 6.47% +.42%

Leading Sectors
I-Banks +7.39%
Airlines +6.68%
Retail +6.14%
Homebuilders +5.79%
Semis +5.69%

Lagging Sectors
Utilities -1.88%
Coal -2.81%
Energy -4.05%
Oil Service -4.69%
Gold & Silver -10.25%

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

*5-Day % Change

Stocks Modestly Higher into Final Hour on More Positive Economic Data

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech, Retail, Semi, Medical and Internet longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly positive as the advance/decline line is slightly higher, most sectors are rising and volume is above average. Bloomberg is reporting that the CRB Index is poised to post its worst three-week decline in almost 26 years. 1980 also happened to be the year the Consumer Price Index(CPI) peaked at 14.8% and began a secular move lower. It is no coincidence that another secular bull market in U.S. stocks began around this time. The major indices have given up some of this mornings' gains. The "sell every rally" mentality is still firmly in place. I suspect the viability of this widely used tactic will fade over the coming months. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering.

Today's Headlines

Bloomberg:
- Commodity prices are falling again, capping the biggest three-week plunge in almost 26 years.
- Crude oil fell below $63 bbl. in NY for the first time since March on rising US fuel inventories and signs that consumption will ease.
- US ethanol prices slumped to the lowest in almost eight months, extending a five-week slide, on expanding domestic suppliers of the grain-based gasoline additive and slower demand after the summer driving season.
- President Bush said CIA intelligence-gathering that has already thwarted al-Qaeda attacks on the US would stop unless Congress passes his proposed rules for treating suspected terrorists.
- Treasuries were little changed, paring earlier gains, after Fed Bank of Kansas president Thomas Hoenig suggested lower energy prices may support consumer spending and sustain economic growth.
- Financial regulators need to pay more attention to whether margin requirements placed on investors such as hedge funds are adequate, said NY Fed President Geithner.

Wall Street Journal:
- General Motors(GM) expects to make a profit selling compact cars after slashing costs, citing Chairman Bob Lutz.
- KSL Capital Partners LLC, a US buyout firm, is in exclusive talks to acquire ClubCorp USA Inc., which owns and operates golf clubs.
- Chinese local authorities are funding a “frenzy of construction,” defying Beijing’s attempts to rein in excessive investment and threatening the global economy.
- Fisher-Price is planning to recreate the craze of the first Tickle Me Elmo doll when it releases the 10th anniversary edition of the toy next week by keeping details secret.

NY Times:
- Hedge fund Fortress Investment Group LLC is planning an IPO that would value the company between $5 billion and $7 billion.
- A wealthy high school in Long Island, NY, helped a poorer rival raise money to fund its interscholastic sports program.
- Radio companies including Clear Channel Communications(CCU) and CBS Corp.(CBS) are considering selling some of its stations in smaller markets as they compete with satellite and Internet broadcasts.
- US mutual funds focusing on energy and natural resources, among the best performers in the past year, have lost 6.7% of their value in a month, citing Morningstar.

USA Today:
- Some newly formed cities are outsourcing tasks to private companies, saying these firms can operate more efficiently than government.

AP:
- Morgan Stanley decided to join an agreement among brokerages that makes it easier for brokers to change firms without being sued, citing a Morgan Stanley spokesman.
- Philadelphia Mayor John Street signed a bill yesterday that bans smoking in all restaurants and many bars.

Star-Ledger:
- Schering-Plough(SGP) has been considering for several months a merger with Bristol-Myers Squibb(BMY) and has yet to approach the company.

Globe and Mail:
- Western Oil Sands may face a proxy battle from shareholders who are unhappy with the Canadian oil-sands company’s decision to invest in Iraq.

Xinhua:
- Foreign direct investment in China fell 2.1% in the first eight months from a year earlier. For August alone, foreign direct investment declined 8.5%.
- China closed more than 320 Web sites and deleted 15,000 items of “hazardous” information from the Internet from Sept. 6-8.

Inflation Decelerates, NY Manufacturing Bounces, Industrial Production Falls, Capacity Utilization Lower, Confidence Improves

- The Consumer Price Index for August rose .2% versus estimates of a .2% increase and a .4% gain in July.
- The CPI Ex Food & Energy for August rose .2% versus estimates of a .2% gain and a .2% increase in July.
- Empire Manufacturing for September rose to 13.8 versus estimates of 13.5 and a reading of 11.0 in August.
- Industrial Production for August fell .1% versus estimates of a .2% decline and a .4% rise in July.
- Capacity Utilization for August declined to 82.4% versus estimates of 82.5% and a reading of 82.7% in July.
- Univ. of Mich. Consumer Confidence for September rose to 84.4 versus estimates of 84.0 and a reading of 82.0 in August.

BOTTOM LINE: Prices paid by US consumers rose in August at half the pace of the previous month, pointing to slower inflation as predicted by Fed Chairman Bernanke. Energy prices rose .3% in August versus a 2.9% increase in July. Gasoline prices increased .2% versus a 5.3% gain in July. Airline fares fell 1.9%, the largest decline since December. The recent substantial decline in energy prices should lead to an even better CPI next month. I continue to believe inflation fears have peaked for this cycle as the mania for commodities continues to reverse course and unit labor cost increases remain subdued.

Manufacturing in NY state expanded at a faster pace this morning as shipments rose and order backlogs increased, Bloomberg reported. The prices paid component of the index fell to 41 versus a reading of 44.3 in August. The employment component of the index rose to 12.5 versus a reading of 6.5 the prior month. A plunge in energy prices may cut manufacturing costs further and keeping factories humming. The average price of a gallon of regular grade gasoline has fallen from $2.95 in August to $2.67 this month. I continue to believe manufacturing will remain relatively healthy over the intermediate-term as companies rebuild depleted inventories as they gain confidence in the sustainability of the current expansion.

Industrial production in the US unexpectedly fell in August, led by a decline in utility use and mining, Bloomberg said. A return to more normal temperatures after July’s heat wave, helped curtail utility production. Mine production, which includes oil, gas and minerals fell last month versus a .6% gain in July. Business equipment production surged 13.5% from year ago levels. Industrial Production should continue to decelerate modestly over the intermediate-term. Capacity Utilization will likely trend around average levels.

Confidence among US consumers this month rose for the fist time since June, helped by declining gasoline prices and strength in the labor market, Bloomberg reported. The expectations component of the index surged to 77.1, the best since January, versus a reading of 68 the prior month. Consumers said they expect inflation to rise 3.1% over the next 12 months versus expectations of a 3.8% increase the prior month. Consumer confidence should continue to improve meaningfully over the intermediate-term as energy prices continue to fall, inflation decelerates, interest rates remain low, stocks rise, housing stabilizes, the job market remains healthy and irrational pessimism lifts.