Weekly Outlook

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Click here for Stocks in Focus for Monday by MarketWatch

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

Economic reports for the week include:

Mon. - Advance Retail Sales, Empire Manufacturing, Net Long-term TIC Flows, Business Inventories, NAHB Housing Market Index

Tues. - Consumer Price Index, Housing Starts, Building Permits, Industrial Production, Capacity Utilization, weekly retail sales reports

Wed. - weekly MBA Mortgage Applications report, weekly EIA energy inventory report

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. - Amylin Pharmaceuticals(AMLN), Citigroup(C), Eaton Corp.(ETN), Eli Lilly(LLY), Expeditors Intl(EXPD), Mattel(MAT), Wachovia Corp.(WB)

Tues. - Adtran Inc.(ADTN), American Greetings(AM), Coca-Cola(KO), Comerica Inc.(CMA), CSX Corp.(CSX), Dow Jones(DJ), EMC Corp.(EMC), Intel Corp.(INTC), International Business Machines(IBM), JB Hunt(JBHT), Johnson & Johnson(JNJ), JOS A Banks(JOSB), Keycorp(KEY), Linear Technology(LLTC), M&T Bank(MTB), Marshall & Iisley(MI), Mellon Financial(MEL), Regions Financial(RF), Seagate Technology(STX), State Street(STT), SunTrust Banks(STI), TD Ameritrade(AMTD), Trustmark(TRMK), US Bancorp(USB), Washington Mutual(WM), Wells Fargo(WFC), Yahoo!(YHOO)

Wed. - Abbott Labs(ABT), Alliance Data(ADS), Allstate Corp.(ALL), Bank of NY(BK), CIT Group(CIT), Commerce Bancorp(CBA), CR Bard(BCR), Cymer Inc.(CYMI), E*Trade Financial(ETRD), Gilead Sciences(GILD), Illinois Tools Works(ITW), Illumina(ILMN), JPMorgan(JPM), Motorola(MOT), Novellus Systems(NVLS), Piper Jaffray(PJC), PNC Financial(PNC), Stryker Corp.(SYK), Teradyne Inc.(TER), Tribune Co.(TRB), United Technologies(UTX)

Thur. - Advanced Micro Devices(AMD), American Express(AXP), American Standard(ASD), Amphenol Corp.(APH), AMR Corp.(AMR), Bank of America(BAC), Baxter Intl.(BAX), BB&T(BBT), Capital One Financial(COF), Continental Air(CAL), DR Horton(DHI), eBay Inc.(EBAY), Fairchild Semi(FCS), Fifth Third Bancorp(FITB), First Data(FDC), Gannett Co(GCI), Genuine Parts(GPC), Harley-Davidson(HOG), International Game Tech(IGT), Intuitive Surgical(ISRG), Johnson Controls(JCI), Kinder Morgan(KMI), Kraft Foods(KFT), MDC Holdings(MDC), Merck & Co.(MRK), Merrill Lynch(MER), Mohawk Industries(MHK), Noble Corp.(NE), Nucor Corp.(NUE), OSI Restaurant Partners(OSI), Owens & Minor(OMI), Peabody Energy(BTU), Schering-Plough Corp.(SGP), Sherwin-Williams(SHW), SiRF Tech(SIRF), Southwest Air(LUV), St Jude Medical(STJ), Taubman Centers(TCO), Textron(TXT), Thornburg Mortgage(TMA), Total System Services(TSS), Union Pacific(UNP), UnitedHealth Group(UNH), Wyeth(WYE)

Fri. - Altria Group(MO), Armor Holdings(AH), Bandag(BDG), Briggs & Stratton(BGG), Capstead Mortgage(CMO), Caterpillar Inc.(CAT), Cerner Corp.(CERN), Charles Schwab(SCHW), ChoicePoint(CPS), Comverse Tech(CMVT), Equifax(EFX), Ford Motor(F), Freddie Mac(FRE), General Motors(GM), Google Inc.(GOOG), Hershey Co(HSY), Honeywell International(HON), Hutchinson Tech(HTCH), Leggett & Platt(LEG), Manpower(MAN), Marriott Intl.(MAR), McDonald’s Corp.(MCD), Medimmune(MEDI), Nasdaq Stock Market(NDAQ), Pfizer Inc.(PFE), PMC-Sierra(PMCS), PPG Industries(PPG), Quest Diagnostics(DGX), Reliance Steel(RS), Robert Half(RHI), Rogers Corp.(ROG), Royal Caribbean(RCL), Schlumberger Ltd.(SLB), SLM Corp.(SLM), Sunpower Corp.(SPWR), XTO Energy(XTO)

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

Mon. - AG Edwards Media & Entertainment Conference, Fed’s Poole speaking, Fed’s Plosser speaking, Fed’s Fisher speaking

Tue. - CIBC Real Estate Conference, AG Edwards Media & Entertainment Conference, (JCP) analyst meeting, Fed’s Plosser speaking

Wed. - CIBC Energy Conference, AG Edwards Media & Entertainment Conference, (JCP) analyst meeting, (EK) conference call

Thur. - CIBC Energy Conference, AG Edwards Media & Entertainment Conference

Fri. - (PFE) analyst meeting

BOTTOM LINE: I expect US stocks to finish the week modestly higher on better economic data, a firmer US dollar, buyout speculation, better-than-expected earnings reports, lower energy prices, short-covering and bargain-hunting. My trading indicators are now giving bullish signals and the Portfolio is 100% net long heading into the week.

Weekly Scoreboard*

Indices
S&P 500 1,452.85 +.60%
DJIA 12,612.13 +.34%
NASDAQ 2,491.94 +.80%
Russell 2000 819.38 +.52%
Wilshire 5000 14,683.35 +.62%
Russell 1000 Growth 573.32 +.60%
Russell 1000 Value 838.36 +.21%
Morgan Stanley Consumer 717.87 +.91%
Morgan Stanley Cyclical 977.50 +.78%
Morgan Stanley Technology 576.45 +.69%
Transports 5,035.00 +2.31%
Utilities 510.22 +.04%
MSCI Emerging Markets 122.17 +2.01%

Sentiment/Internals
NYSE Cumulative A/D Line 73,123 +1.6%
Bloomberg New Highs-Lows Index +296 -30.5%
Bloomberg Crude Oil % Bulls 48.0 -45.1%
CFTC Oil Large Speculative Longs 202,367 +3.1%
Total Put/Call .95 +26.7%
NYSE Arms .80 -7.4%
Volatility(VIX) 12.2 -7.2%
ISE Sentiment 122.0 -5.6%
AAII % Bulls 40.9 +26.6%
AAII % Bears 38.0 -4.4%

Futures Spot Prices
Crude Oil 63.49 -.61%
Reformulated Gasoline 217.14 +2.67%
Natural Gas 7.77 +2.50%
Heating Oil 189.60 +2.2%
Gold 688.90 +1.58%
Base Metals 268.41 +.95%
Copper 354.55 +4.62%

Economy
10-year US Treasury Yield 4.76% +1 basis point
4-Wk MA of Jobless Claims 323,300 +2.2%
Average 30-year Mortgage Rate 6.22% +5 basis points
Weekly Mortgage Applications 646.60 -.45%
Weekly Retail Sales +4.2%
Nationwide Gas $2.80/gallon +.01/gallon
US Heating Demand Next 7 Days 44.0% above normal
ECRI Weekly Leading Economic Index 140.60 +.29%
US Dollar Index 82.15 -.66%
CRB Index 317.93 +.10%

Leading Sectors
Drugs +3.45%
Oil Service +2.98%
Engineering & Construction +2.85%
Biotech +2.39%
Steel +2.35%

Lagging Sectors
Tobacco -.47%
Oil Tankers -.47%
Telecom -.53%
Computer Hardware -.62%
REITs -.77%

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

*5-Day Change

Stocks Surging into Final Hour on Rising Earnings Optimism

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Telecom longs, Semi longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly positive as the advance/decline line is mildly higher, almost every sector is rising and volume is about average. The chance of a U.S. recession beginning this year on Intrade.com has plunged to 16.5% from a high of 35% in January. It is also down from 28% during the spike in subprime fears and Greenspan's recession talk in March. Moreover, the ECRI Weekly Leading Index rose again and is just off cycle highs. The 10-week moving-average is just off highs, as well. The growth rate of this index is currently 3.8%, while the growth rate of the future inflation gauge is falling at a -3.1% rate. I continue to believe that the 10-year yield will average around 4.75% this year and the Fed will remain on hold, while making both dovish and hawkish comments depending on current market perceptions. After a likely sluggish first quarter, I still expect U.S. economic growth to re-accelerate and begin moving back to more average levels this quarter, which should help companies beat lowered earnings' expectations. I suspect diminishing recession fears are the main reason for the recent modest rise in long-term rates. Considering the historically extreme readings in many gauges of investor angst over the last six weeks, the fact that earnings expectations have been lowered dramatically, that short interest is at record highs and that even most bulls hate earnings season and have raised cash, I wonder if upcoming earnings reports will provide another upside catalyst for stocks. As well, the large "sell in May" crowd has likely already sold ahead of these reports. Hmmm ...I expect US stocks to trade mixed-to-higher into the close on short-covering, rising earnings optimism and bargain-hunting.

Today's Headlines

Bloomberg:
- Crude oil in NY is falling .30/bbl. after Valero Energy, the nation’s largest refiner, said it will restart a facility that had been closed due to “fire damage.” Refiner “outages” across the country have resulted in low production of gasoline and a decline in supplies, which has boosted gasoline prices to record highs for this time of the year. US oil inventories are still near eight year highs.
- Cisco Systems(CSCO) is at the high end of its long-term sales forecast for growth of 10-15%, said Chief Development Officer Charlie Giancarlo. The company is seeing “very strong demand,” Giancarlo said.
- Blackstone Group LP is considering a $20 billion takeover offer for SLM Corp.(SLM), the largest US student loan provider.
- General Electric(GE) said first-quarter profit rose 8% as CEO Immelt’s strategy of selling more power-plant and aviation equipment overseas paid off.
- McDonald’s(MCD) said first quarter profit rose, topping analyst estimates, on the biggest European sales gain since 1994.
- Genentech(DNA) is testing a breast-cancer treatment that may add $1.5 billion in annual sales to its Herceptin drug business.
- The dollar fell to a two-year low against the euro and weakened versus the yen, despite a better trade deficit report, as core producer prices came in below estimates.
- Merck’s(MRK) share jumped the most in more than two years after the drugmaker said profit rose 13%, beating estimates, as sales of its newer products offset losses to generic competition.

Wall Street Journal:
- China has renamed the 50-year-old Chinese Export Commodities Fair as an import-export exposition and for the first time set aside 315 stands for foreign companies out of a total of 31,000.
- US automakers, including General Motors(GM), are looking for an American alternative to the next generation of hybrid-car batteries coming out of Japan.

NY Post:
- Jones Apparel Group(JNY) may sell the Barneys NY apparel and accessories chain to Istithmar, the private equity firm owned by Dubai, for about $950 million.

Boston Global:
- Boston Mayor Thomas Menino has implemented a plan to reduce greenhouse-gas emissions throughout the city. Menino plans to reduce fuel consumption by city-owned vehicles 5% within 5 years. The city also plans to buy at least 15% of its electricity from renewable energy sources and recycle 10% more material within five years.

Washington Post:
- The SEC will change its process for settling with companies, which could reduce penalties that businesses pay, citing officials.

Euro am Sonntag:
- SAP AG(SAP) expects sales to grow significantly more than the overall market for business-management software in 2007, helped by new products for mid-sized companies, deputy CEO Leo Apotheker said.

Energy News Today:
- Valero Energy(VLO) restarted a crude unit capable of processing 104,000 barrels of oil a day at its “fire-damaged” refinery near Sunray, Texas.

Xinhua News Agency:
- China’s stock transaction tax revenue surged six-fold in the first quarter as its stock markets rose, citing Shu Qiming, a State Administration of Taxation official.

Trade Deficit Shrinks Again, Core PPI Flat, Confidence Declines

- The Trade Deficit for February shrank to -$58.4 billion versus estimates of -$60.0 billion and -$58.9 billion in January.
- The Producer Price Index for March rose 1.0% versus estimates of a .7% gain and a 1.3% rise in February.
- The PPI Ex Food & Energy for March was unch. versus estimates of a .2% rise and a .4% gain in February.
- The preliminary Univ. of Mich. Consumer Confidence reading for April fell to 85.3 versus estimates of 87.5 and a reading of 88.4 in March.

BOTTOM LINE: The US trade deficit unexpectedly narrowed in February from the previous month, as the US purchased fewer goods from China and imported less petroleum, Bloomberg reported. Imports from China fell to the lowest since May 2006. Exports of consumer goods during January and February were the best on record for any two-month period. Oil imports fell to $20.7 billion, the lowest since June 2005 as both volume and prices fell. The trade deficit with China fell to $18.4 billion in February versus $21.3 billion the prior month. I expect the trade deficit to only improve modestly over the intermediate-term as falling commodity prices more than offset improving US growth relative to other developed nations.

Prices paid to US producers rose more than forecast in March, however core prices were unexpectedly flat, Bloomberg reported. The core reading shows that companies are mainly absorbing higher energy prices rather than passing them along to customers. Producer Prices rose 3.2% year-over-year in March, around long-term average levels. The Core PPI has shown deceleration the past 4 months despite the recent bounce higher in commodity prices, which is a positive. I expect the PPI to decelerate from current levels as commodity prices fall.

Overall consumer confidence declined in April as energy prices rose, Bloomberg reported. The expectations component fell to 74.3 from 78.7 the prior month. However, the current conditions component of the index is still a healthy 102.4 versus 103.5 the prior month. Regular gas prices at the pump rose to $2.79/gallon on April 10, the highest since last August. While consumer confidence remains muted, mainly due to the rise in gas prices and media's obsession with housing, recent strong retail sales reports show they continue to spend. I still expect consumer confidence to head back to cycle highs over the intermediate-term as energy prices fall, the job market remains healthy, stocks rise further, housing sales stabilize at relatively high levels, interest rates remain low and inflation decelerates.

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