Weekly Outlook

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

Economic reports for the week include:

Mon. - Existing Home Sales
Tues. - Consumer Confidence
Wed. - Durable Goods Orders, New Home Sales, Fed's Beige Book
Thur. - Initial Jobless Claims
Fri. - Advance 2Q GDP, Advance 2Q Personal Consumption, Advance 2Q GDP Price Index, 2Q Employment Cost Index, Final Univ. of Mich. Consumer Confidence, Chicago Purchasing Manager

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

Mon. - Altera Corp.(ALTR), American Express(AXP), Cendant Corp.(CD), Lincare Holdings(LNCR), Texas Instruments(TXN)
Tues. - ADP(ADP), Aflac Inc.(AFL), Amazon.com(AMZN), Biogen Idec(BIIB), BJ Services(BJS), Burlington Northern(BNI), Centex(CTX), Chicago Merc(CME), Corning(GLW), Electronic Arts(ERTS), Imclone(IMCL), Infospace(INSP), Lexmark Intl.(LXK), Lockheed Martin(LMT), Medco Health(MHS), Omnicom Group(OMC), Starwood Hotels(HOT), Valero Energy(VLO), Verizon Communications(VZ)
Wed. - Amerada Hess(AHC), Anheuser-Busch(BUD), Boeing(BA), Chiron(CHIR), Computer Assoc.(CA), ConocoPhillips(COP), Diamond Offshore(DO), HCA Inc.(HCA), Newmont Mining(NEM), Pulte Homes(PHM), Sprint Corp.(FON), Starbucks(SBUX), Zimmer Holdinga(ZMH)
Thur. - Aetna Inc.(AET), Apache Corp.(APA), Beazer Homes(BZH), Dow Chemical(DOW), Exxon Mobil(XOM), McAfee(MFE), Nabors Industries(NBR), Phelps Dodge(PD), Symantec(SYMC), Whole Foods Market(WFMI), XM Satellite Radio(XMSR)
Fri. - Archer-Daniels(ADM), Baker Hughes(BHI), Chevron(CVX), Gillette(G)

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

Mon. - None of note
Tue. - MOT Analyst Meeting, XLNX Analyst Meeting
Wed. - BofA Specialty Pharmaceuticals Conference
Thur. - MSFT Analyst Meeting, BofA Specialty Pharmaceuticals Conference
Fri. - None of note

BOTTOM LINE: I expect US stocks to finish the week modestly higher on good earnings reports, short covering and mostly positive economic data. However, stocks are still extended near-term, thus a healthy consolidation period remains likely. I continue to believe US stocks will mount a significant rally sometime over the next several months and finish the year 10%+ higher from current levels, giving the S&P a 13-15% gain for the year. My trading indicators are still giving bullish signals and the Portfolio is 100% net long heading into the week.

Economic Week in Review

ECRI Weekly Leading Index 134.70 +.90%

Net Foreign Security Purchases for May rose to $60.0B versus estimates of $60.0B and $47.8B in April. International investors increased their holdings of US assets in May by the most since February as the world’s largest economy outperformed rivals in Europe and Asia, Bloomberg reported. The US economy expanded 3.7% in the first quarter, the most of any Group of Seven industrialized country. Caribbean holdings, which analysts link to hedge funds located in the region, only increased by $1.3 billion. Japan accounts for $685.7 billion of Treasuries held by overseas investors, followed by China with $243.5 billion and the UK with $132.5 billion. "There is renewed foreign interest in the US," said Michael Gregory, a senior economist at BMO Nesbitt Burns in Toronto. "The US is not having any trouble financing its current-account deficit," Gregory said.

Housing Starts for June were 2004K versus estimates of 2050K and 2004K in May. Building Permits for June rose to 2111K versus estimates of 2085K and 2062K in May. US housing starts were unchanged in June, suggesting builders may have paused to finish homes already under construction, Bloomberg reported. Backlogs jumped to a 26-year high, while permits rose. Backlogs rose 7.8% to 241,000 units at an annual rate, up 19% from June 2004.

The US economy is in a "sustained" expansion that will require the central bank to continue raising interest rates at a "measured" pace, Federal Reserve Chairman Greenspan told the House Financial Services Committee. "Our baseline outlook for the US economy is one of sustained economic growth and contained inflation pressures," Greenspan said.

Initial Jobless Claims for last week fell to 303K versus estimates of 325K and 337K the prior week. Continuing Claims fell to 2577K versus estimates of 2589K and 2618K prior. The number of US workers filing first-time applications for state jobless benefits fell to 303,000 last week, the lowest level since April, as automakers completed factory retooling more quickly than government statisticians expected, Bloomberg reported. The decline was the largest since December 2002. The four-week moving-average of claims fell to 318,000 from 321,250. The insured employment rate, which tracks the US unemployment rate, fell to 2.0% from 2.1%.

Leading Indicators for June rose .9% versus estimates of a .5% increase and an upwardly revised 0.0% change in May. The Leading Indicators report shows the first major revision in how the index is compiled since 1996. Higher consumer confidence, building permits and stock prices spurred gains in the index.

Philly Fed for July rose to 9.6 versus estimates of 10.0 and a reading of -2.2 in June. Manufacturing in the Philadelphia region rebounded this month after a first-quarter inventory build prompted companies to place fewer orders, Bloomberg reported. Manufacturing is gaining traction after slowing in March and April as companies such as GM reduced inventories that swelled earlier in the year, Bloomberg reported. "The soft readings on the economy are over," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi. "The survey snapped back smartly and this bodes well for economic activity in coming months," said Rupkey.

BOTTOM LINE: Overall, last week's economic data were positive. I expect foreign demand for US assets to continue increasing as the dollar remains firm, US economic growth stays healthy and global growth slows. Housing starts will likely increase near-term as builders try to work off the record backlog amid an all-time high home sales pace in the first half. I continue to believe housing will remain strong by historic standards with price appreciation moderating but not plunging. The Fed will likely continue to raise rates at a "measured" pace as the economy has accelerated modestly from its recent "soft patch." I do not believe they are overly concerned with inflation anymore, however worries over the housing market and the desire for more ammunition in case of an emergency will prompt further hikes. The labor market appears to accelerating, however it is hard to gauge at this particular time. The sharp gain in the leading indicators bodes well for future economic readings. As I stated last week, manufacturing is improving after an inventory adjustment period and should begin adding to growth again over the coming months. Finally, the ECRI Weekly Leading Index rose .90% to 134.70 and is forecasting moderately accelerating healthy growth.

Market Week in Review

S&P 500 1,233.68 +.47%*

BOTTOM LINE: Overall, last week's market performance was positive as stocks built on recent gains even with more terrorism in London, mildly hawkish commentary from Alan Greenspan and China's yuan revaluation. With 40% of the S&P 500 reporting, 72% of companies have beaten estimates versus a normal average of 59%. The advance/decline line fell slightly, almost every sector gained and volume was slightly above-average on the week. Measures of investor anxiety were mostly higher. The AAII % Bulls fell substantially for the week and is now slightly below average levels. Mortgage rates rose, but are still only 52 basis points away from all-time lows set in June 2003. The benchmark 10-year T-note yield continued to rise on mostly positive economic reports and China's yuan revaluation. As well, small-caps, commodity and cyclical stocks outperformed meaningfully on economic optimism and strong earnings reports. This led to underperformance in defensively-oriented healthcare stocks. Finally, oil declined modestly for the week on more signs that global demand for the commodity is faltering.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,233.68 +.47%
DJIA 10,651.18 +.10%
NASDAQ 2,179.74 +1.06%
Russell 2000 677.78 +2.11%
DJ Wilshire 5000 12,311.03 +.66%
S&P Equity Long/Short Index 1,042.03 +.04%
S&P Barra Growth 591.97 +.78%
S&P Barra Value 637.30 +.16%
Morgan Stanley Consumer 586.54 +.14%
Morgan Stanley Cyclical 758.47 +2.29%
Morgan Stanley Technology 498.75 -.31%
Transports 3,780.03 +3.67%
Utilities 392.92 +.05%
S&P 500 Cum A/D Line 8,217.00 -.94%
Bloomberg Crude Oil % Bulls 20.0 -34.44%
Put/Call .80 +17.65%
NYSE Arms 1.02 -4.67%
Volatility(VIX) 10.52 +1.84%
ISE Sentiment 160.00 -5.33%
AAII % Bulls 41.18 –28.87%
US Dollar 89.64 -.09%
CRB 304.25 -1.72%

Futures Spot Prices
Crude Oil 58.65 -1.10%
Unleaded Gasoline 172.80 +2.0%
Natural Gas 7.38 -5.45%
Heating Oil 158.19 -5.27%
Gold 425.60 +1.04%
Base Metals 124.73 +.87%
Copper 160.10 +2.10%
10-year US Treasury Yield 4.22% +1.34%
Average 30-year Mortgage Rate 5.73% +1.24%

Leading Sectors
Steel +14.21%
Oil Service +8.57%
Energy +4.50%

Lagging Sectors
Telecom -1.26%
Hospitals -1.38%
HMOs -7.73%

*5-Day % Change

Stocks Mixed Mid-day as Rates Fall and Energy Rises

Indices
S&P 500 1,228.83 +.15%
DJIA 10,605.24 -.20%
NASDAQ 2,171.82 -.31%
Russell 2000 670.97 +.58%
DJ Wilshire 5000 12,272.84 +.32%
S&P Barra Growth 590.70 +.16%
S&P Barra Value 635.48 +.42%
Morgan Stanley Consumer 585.18 +.13%
Morgan Stanley Cyclical 755.97 +.01%
Morgan Stanley Technology 497.61 -.18%
Transports 3,765.62 -.37%
Utilities 391.75 +.81%
Put/Call .79 -14.13%
NYSE Arms 1.08 -23.36%
Volatility(VIX) 10.94 -.27%
ISE Sentiment 155.00 -25.48%
US Dollar 89.55 +.70%
CRB 303.93 +1.05%

Futures Spot Prices
Crude Oil 58.15 +1.79%
Unleaded Gasoline 170.00 +1.13%
Natural Gas 7.37 +.96%
Heating Oil 158.30 +.90%
Gold 425.00 unch.
Base Metals 124.73 +.21%
Copper 160.50 +.09%
10-year US Treasury Yield 4.22% -1.25%

Leading Sectors
Oil Service +4.88%
Energy +3.16%
Steel +2.25%

Lagging Sectors
Drugs -.92%
Biotech -2.22%
Airlines -2.34%

BOTTOM LINE: The Portfolio is lower mid-day on losses in my Internet, Biotech and Networking longs. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is neutral as the advance/decline line is slightly higher, sector performance is mixed and volume is about average. Measures of investor anxiety are mostly lower. Today’s overall market action is neutral considering the rise in energy prices and decline in long-term rates. The U.K. economy, Europe's second-largest, grew 1.7% in the second quarter. I expect the Bank of England to cut rates next month or sooner. The ECB won't be too far behind. This should spur further gains in the U.S. dollar. Industrial production in England fell .4% in the second quarter after a .9% decline the previous quarter. Oil prices have a high correlation with global industrial production. I expect stocks to trade mixed-to-higher into the close as falling long-term rates more than offsets higher energy prices.

Today's Headlines

Bloomberg:
- The UK economy, Europe’s second largest, grew in the second quarter at the slowest annual pace in more than 12 years as the expansion in services slowed and industry fell into recession.
- President Bush’s energy bill may include a provision for companies such as Lyondell Chemical to pay $2 billion to $4 billion into a fund to clean up drinking water polluted by the gasoline additive MTBE.
- Microsoft said it chose Windows Vista as the name of its next Windows operating system, and said the version is on schedule for release in the second half of 2006 after a two-year delay.
- The US dollar is gaining against the yen and euro on speculation its drop yesterday following China’s currency revaluation was excessive.
- US 10-year T-notes are rising for a third day in four after a decline that pushed yields to the highest in more than two months attracted investors.
- US companies have reported an 8% gain in second-quarter earnings so far, with more than a third of the S&P 500’s Index having reported results, including Citigroup, Microsoft and Yahoo!.

Wall Street Journal:
- A compromise energy bill proposal in the US Congress would cut to one rather than two months a proposed extension of daylight savings time.
- US Senate Republicans say they plant to schedule a vote for next week on a proposal to abolish the death tax in a bid to force a compromise with Democratic opponents of the repeal.
- US sales of DVDs are slowing, with dire implications for media companies such as News Corp., Time Warner and Walt Disney.

NY Times:
- Wal-Mart Stores and Best Buy are among retailers that may not carry a cleaned-up version of Take-Two Interactive Software’s “Grand Theft Auto: San Andreas” video game.

TradeWinds:
- Some Chinese shipyards have started to cut prices as demand for new ships drops, citing unidentified shipbrokers.
- Greek shipping companies cut first-half new ship orders by 60%, in terms of cargo capacity, as prices rose and freight rates fell.