Mid-day Update

S&P 500 1,131.96 -.23%
NASDAQ 2,004.69 +.45%

Leading Sectors
Wireless +1.24%
Biotech +1.15%
Gaming +.98%

Lagging Sectors
Homebuilders -1.16%
I-Banks -1.24%
Airlines -1.73%

Other
Crude Oil 37.75 +.03%
Natural Gas 5.59 -.36%
Gold 401.80 +.05%
Base Metals 115.07 +1.89%
U.S. Dollar 89.79 -.17%
10-Yr. Long-Bond Yield 4.35% +.23%
VIX 15.68 +4.95%
Put/Call .67 -12.99%
NYSE Arms 1.23 -15.28%

Market Movers
DRIV +23.2% after announcing it will buy Element 5 AG for $120M and raising earnings forecasts for the 2nd quarter and year.
IMCL +12.3% after saying federal regulators had agreed to review a license for a new facility to make Erbitux and Bank of America Buy rating.
ASKJ +8.9% on multiple upgrades.
CNJ +13.9% after receiving an unsolicited buyout offer of $451M in cash from Moulin Intl., topping Luxottica Group's $401M bid the day before shareholders were to vote on it.
MOSY -41.6% after SNPS terminated its merger agreement with the company.
SWIR -11.3% after meeting 1Q estimates, but lowering 2Q guidance.

Economic Data
Leading Indicators for March +.3% versus +.3% estimate and 0.0% in February.

Recommendations
VLO raised to Overweight at JP Morgan. ORCL added to JP Morgan Focus List. JP Morgan rated PCO Buy. AMD raised to Buy at Deutsche Bank. ASKJ raised to Outperform at Thomas Weisel. NOK cut to Underweight at Prudential. QCOM rated Outperform at CSFB. IMCL rated Buy at Bank of America, target $91. UAG rated Buy at Merrill, target $33. Goldman Sachs reiterated Underperform on GAS, RKY, QLGC, DPH and RSH. GS reiterated Outperform on CMA, SYMC, PH, DTV, KMT, CAH, MCK, N, MDT, COH, CCE, NAV, PH, KMT, AG, NSIT, ZION and USB. GS thinks GLW is very attractive under $11 ahead of earnings. Citi Smith Barney's March CIO Macro Trends Survey shows continued optimism and an acceleration in spending by U.S. companies. 52% of all U.S. respondents expect spending to accelerate over the next 12 months. Citi says this should benefit DELL, MSFT, HPQ, SAP, SEBL, ADSK, ADBE, COGN, BOBJ, SAGE, INFA and RSAS the most. Citi rated APCS Buy ahead of earnings, $10 target. Citi reiterated Buy on PTV, FITB and SEE. Citi reiterated Sell on WWCA, TPC and USM. Citi reiterated Buy on SPLS, $31 target.

Mid-day News
U.S. stocks are mixed mid-day as the NASDAQ finds support at the 1990-2000 level and is bouncing. Hawaii will team with five other U.S. states in the first-ever Medicaid multi-state pooling initiative to cut drug prices, the AP said. MetroFi Inc. plans to install wireless-networking gear that will allow anyone within the city limits of Santa Clara, California to access the Internet for 20-30$/month, the San Francisco Chronicle reported. Italian Prime Minister Silvio Berlusconi said that Italy is the U.S.'s closest ally after the U.K., Bloomberg reported. McDonald's CEO James Cantalupo died of an apparent heart attack in Orlando, Florida, Bloomberg reported. The U.S.-led coalition said it won an agreement to help end tensions in the Iraqi town of Fallujah, Bloomberg reported. The index of leading U.S. economic indicators rose .3% in March as tax refunds put more money in the hands of consumers, jobless claims fell and companies took longer to fill orders, Bloomberg reported. Computer Associates fired nine employees in its legal and finance departments after three executives pleaded guilty to securities fraud last week.

BOTTOM LINE: The Portfolio is down slightly today as my shorts are up a little more than my longs. A few of my tech and biotech shorts hit stop losses, thus I exited those positions, raising the Portfolio's market exposure to 25% net long. U.S. stocks appear as though they will head lower in the short-run and I will look for additional shorts this afternoon.

Monday Watch

Earnings Announcements
Company/Estimate
MMM/.87
CD/.41
CF/.69
CNF/.36
LLY/.66
FNM/1.91
JCOM/.23
LXK/.72
LNCR/.56
MVK/.46
MSPD/-.11
SSNC/.17
WM/1.04

Splits
HIBB 3-for-2
SHFL 3-for-2

Economic Data
Leading Indicators for March estimated +.3% versus unchanged in February.

Weekend Recommendations
Forbes on Fox had guests that were positive on VLO and mixed on RGS, IGT, CMX, NXTL and PHM. Bulls and Bears had guests that were positive on SBUX, MCD, KROL, CCU, SIRI, FBR and FNF. Cashin' In had guests that were positive on CME, IPG, PPR, NT, LU and mixed on COH and HD. Louis Rukeyser's Wall Street had guests that were positive on EXBD, TRB, DELL, JNJ, LLY, TXU, APCC, ALL, CNX and negative on IR. Wall St. Week w/Fortune had guests that were positive on AH, FLIR, DHB, CRDN, ANT, ACE, AEP, S, JPM, GM, HIG and PHS. Barron's had positive columns on CL, RESP, RMD, AGIX and KRYX. Ned Davis, of Ned Davis Research, told Barron's he expects the S&P 500 to rise above 1,200 this year.

Weekend News
Cingular Wireless may reduce cell-phone suppliers to 4 from 6 next year to reduce costs, the Chicago Tribune reported. A BJ's Wholesale Club store in Natick, Mass. had a credit-card security breach that may result in millions of dollars being swiped by Russian and Asian thieves, the Boston Herald reported. Wireless computer networks often lack security measures needed to keep hackers out, which suggests there may be a U.S. boom in identity theft, the Philadelphia Inquirer reported. Barry Diller, chairman of InterActiveCorp, is trying to increase its share of the residential real estate market by taking aim at Henry Silverman's Cendant Corp., the NY Times reported. 2 out of 5 Internet users in the U.S. have high-speed access at home, the AP said. The IMF will ask the U.S. Federal Reserve to prepare the world economy for a rise in interest rates, the Financial Times said. Nokia won a contract to build a 3G mobile phone network for Vodafone in New Zealand, the New Zealand Herald reported. Abdel Aziz Rantisi, the new leader of Hamas, was killed in an Israeli missile strike, CNN reported. The U.S. military is leaning toward ending the standoff with insurgents in Fallujah by force as negotiations yield no results, the NY Times reported.

Late-Night Trading
Asian indices are mostly lower, -1.0% to +.25% on average.
S&P 500 indicated -.25%.
NASDAQ indicated -.24%.

BOTTOM LINE: The Portfolio is market neutral(longs-shorts=0) heading into the week. The mainstream press reached new all-time highs in negative reporting this weekend as 9 out of 10 articles I read, across a wide array of publications, had a negative spin. I believe that the vast majority of Americans do not enjoy this type of destructive reporting and would really appreciate a good mix of positive and negative stories. Negative headlines over the weekend, weakness in Asia and inflation concerns will likely lead to a weaker open for U.S. stocks in the morning.

Weekly Outlook

There are relatively few economic reports scheduled for release this week. However, there are a number of notable U.S. companies due to report earnings. Scheduled economic reports include Leading Indicators, Initial Jobless Claims, Continuing Claims and Durable Goods Orders. Leading Indicators and Durable Goods Orders are the most important releases this week.

3M(MMM), Fannie Mae(FNM), Lexmark(LXK), Altria(MO), General Motors(GM), Lucent(LU), Pfizer(PFE), Centex(CTX), General Dynamics(GD), Harrah's Entertainment(HET), eBay(EBAY), Qualcomm(QCOM), Starbucks(SBUX), American International Group(AIG), SAP AG(SAP), United Parcel Service(UPS), American Express(AXP), Amazon(AMZN), Nextel(NXTL), Broadcom(BRCM), Microsoft(MSFT) and Schlumberger (SLB) are some of the more important companies that release quarterly earnings this week. The SEMI Book-to-Bill, Greenspan's testimony to the Senate Banking Committee and the Fed's Broaddus speech on the economy also have market-moving potential.

BOTTOM LINE: Numerous corporate earnings reports on tap this week should continue to paint a very positive picture of the current state of the U.S. economy. However, many stocks have been dropping on great reports due to overriding inflation and war/terrorism fears. I expect the NASDAQ to drop further and the broad market to remain neutral to slightly lower in the short-run. I would like to see the Put/Call, Arms, VIX and Bullish % readings show less investor complacency. I expect this will occur this week.

Chart of the Week

BOTTOM LINE: The above chart shows the year-over-year change in the Core Consumer Price Index(the red line) for the last 20 years. While current prices are rising, they are well within the 20-year downtrend in their rate of change. The latest CPI report showed core prices rising at a 1.6% annual rate. This is not a rate to be overly concerned about at the present time.

Market Week in Review

S&P 500 1,134.61 -.41% for the week.

U.S. stocks finished mostly lower on the week as investors rotated out of perceived riskier and interest-rate sensitive stocks and into energy and defensive shares. Pharmaceuticals paced gains for the week on this rotation and Johnson and Johnson's strong 1st quarter report. Energy-related stocks continued their outperformance on rising crude oil prices as very strong U.S. and Asian economies spur demand.

Small-caps and technology shares fell on the week as investors fear rising rates will hurt riskier stocks the most. The exceptionally strong retail sales report sparked fears that the Fed is falling behind the curve on inflation, thus sending interest rates higher. This resulted in continued selling in interest-rate sensitive sectors such as homebuilding and financials. Finally, small/mid-cap security-related stocks plummeted as traders began to sober up on the prospects for many of these companies, thus putting an end to the recent mania in these shares.

BOTTOM LINE: Reports from Intel, Nokia and IBM contributed to the weakness in tech stocks. I viewed both the Intel and IBM reports as moderately positive and think both will be higher by the end of the year. Nokia has its own company-specific problems and I would not be a buyer at these levels. Small-caps hit an all-time high two weeks ago. It is not surprising that these stocks are seeing the majority of the profit-taking on interest rate fears. In the short-run, I expect tech to continue to underperform. However, I think this sector will significantly outperform in the second half of the year. Interest-rate sensitive sectors will remain under pressure until the first Fed rate hike. I also expect energy-related stocks to continue to outperform as there is no quick fix for the world's current energy shortage. Finally, I expect pharmaceutical shares will outperform until the first rate hike. However, I then expect political banter to bring these shares back to the low end of their trading ranges.

I was disappointed to see the amount of complacency displayed by investors last week. Notwithstanding steep loses across a broad array of technology stocks, rising energy prices and rising interest rates, the AAII Bullish % rose 8.46% last week and the VIX fell 8.12%. This, along with the short-term sell signals generated by my technical models, leads me to believe that the tech sector has further to go on the downside, while the broad market should remain neutral to slightly lower in the short-run.

Economic Week in Review

ECRI Weekly Leading Index 134.30 -.89%

Advance Retail Sales for March rose 1.8% versus expectations of .7% and a 1.0% rise the prior month. Retail Sales Less Autos for March rose 1.7% versus expectations of .6% and a .6% gain in February. This was the strongest retail performance since just before the stock market bubble burst in March of 2000. "This is a huge number, one of the strongest I've ever seen," said Cary Leahey, a senior economist at Deutsche Bank. Moreover, building material and garden supply stores sold 10.6% more last month, the biggest increase ever recorded. Finally, Wal-Mart, J.C. Penney and Target said that March sales were stronger than expected, as shoppers spent tax refunds and demand for spring clothing surged. Consumer spending, which accounts for 70% of GDP, is now projected to grow 3.7% this year after a 3.1% gain in 2003. "Consumers are spending as if job and income prospects are solid," wrote Deutsche Bank economists LaVorgna and Riccadonna, in a report to clients.

The Consumer Price Index for March rose .5% versus expectations of .3% and a .3% rise the prior month. CPI Ex Food & Energy rose .4% in March versus a .2% forecast and a gain of .2% in February. So far this year, consumer prices are rising at a 5.1% annual rate compared with a 5.4% pace at the same time last year. Increasing demand is helping companies lift prices and giving them more confidence to hire. Finally, San Francisco Fed Bank President Robert Parry told reporters that while the rise in prices wasn't "comforting," the Fed won't become "excessively concerned" until there's a series of similar monthly increases.

The Empire Manufacturing Index rose to 36.05 in April versus expectations of 28.25 and a reading of 25.33 in March. The Empire Manufacturing Hiring Index more than doubled this month to 19.8 from 9.7 in March. The Philadelphia Fed reported a rise to 32.5 in April versus expectations of 26.1 and 24.2 the prior month.

Industrial Production in March fell .2% versus expectations of a .3% rise and up .8% in February. The drop in production at the nation's factories, mines and utilities was the first since May. "It really was held down by utilities, and that is just a weather effect," said Robert Mellman, an economist at JP Morgan. The third-warmest March in 110 years depressed utility production.

The University of Michigan Consumer Confidence Index preliminary April reading fell to 93.2 versus expectations of 97.0 and 95.8 last month. A burst of violence in Iraq, the 9/11 hearings and record-high gas prices contributed to the drop.

The economy is now projected to grow 4.6% this year, the most since 1984, according to the median estimate of 74 economists surveyed by Bloomberg News. One sign companies are having trouble keeping up with demand is that inventories in February were enough to last only 1.33 months, the leanest ever. As well, Treasury Secretary John Snow said strong economic growth is lifting tax revenues and should reduce the Treasury's borrowing needs this year.

BOTTOM LINE: There are several key takeaways for the week. The exceptionally strong retail reports and inventory building leads me to believe that 1st quarter GDP growth will be closer to 6.0% than 5.0%. The current estimate by economists is for 4.8% growth. Improving job prospects, tax refunds, all-time high consumer net worth, the fastest U.S. economic growth in 20 years, relatively low interest rates and a stock market up almost 30% in the last 12 months are all contributing to a significant pick-up in spending by the U.S. consumer. Companies have begun building inventories, but not enough to meet rising demand. Thus, leaving inventories at record lows relative to sales, which bodes well for further inventory building in future months.

While prices of many goods are rising, they are only now back to their 20-year trend and are increasing at a slower rate than at this same time last year. Subdued unit labor costs and a rising U.S. dollar will likely keep inflation in check for the foreseeable future. Without the burst of violence in Iraq and the politically-charged 9/11 hearings, I believe consumer confidence would have risen substantially. The fact that it is now apparent that there was not a "mass up-rising" in Iraq and the end of the 9/11 hearings should lead to a much better consumer confidence report next month. The bears and the mainstream press harped incessantly about the "weakness" of the "jobless" recovery. Now that these arguments appear ridiculous, inflation will be the scare tactic of choice. Deflation was the worry just a few months ago. 70% of inflation comes from unit labor costs which are historically low, only 5% comes from commodity costs. While it is possible that inflation will become a problem within the next 5 years, I don't expect it to rise substantially in the foreseeable future.