Tuesday Close

S&P 500 1,156.99+.98%
NASDAQ 2,080.35+1.30%

Leading Sectors
Wireless+3.98%
Airlines+3.26%
Iron/Steel+3.18%

Lagging Sectors
Broadcasting+.34%
Fashion+.07%
Transports-.25%

Other
Crude Oil 35.14-.14%
Natural Gas 5.31-.17%
Base Metals 112.43+2.63%
U.S. Dollar Index 84.87-.11%
10-Yr. Long-Bond Yield 4.04%-.05%

After-hours Movers
NTAP+9.5% on exceeding 3Q earnings/sales and raised 4Q guidance.
BRCM+7.1% after setting conference call tomorrow to discuss "stronger business outlook."
EP-11.1% after slashing its assessment of natural gas and oil reserves by 41%.
ANF+5.1% after meeting 4Q earnings/missing sales targets and reaffirming 1Q guidance on price increases for their clothes, baffling analysts.
BRKT+19.4% after significantly beating 4Q earnings estimates and raising 1Q guidance.
DITC+14.7% after beating 3Q estimates and raising 4Q guidance.
NTES+7.7% on excellent 4Q earnings above estimates.
PLAB+7.1% after significantly beating 1Q earnings estimates.
TXCC+5.6% on announcement that Samsung selected it as preferred VLSI component supplier for W-CDMA wireless platforms.

After-hours News
U.S. stocks advanced today on optimism an increase in merger activity is a sign that shares are cheap. Exceedingly strong corporate profits and low interest rates also helped. A U.S. appeals court rejected the challenge to the "Do not call" list. Rambus(RMBS) won a ruling from a U.S. FTC judge that may help it reap as much as $3B/year from semi makers. Japan's economy grew at a 7% annual pace last quarter, the fastest in 13 years. NYSE specialists settled with SEC for $240M.


BOTTOM LINE: Asian indices are indicated higher as prospects for the first synchronized global recovery in decades are brightening. The Portfolio had a very good day, notwithstanding its conservative position at the start of the day. It is now 100% net long. I added long positions in the basic material, overseas telecom and energy-related sectors. I expect more follow-through tomorrow, with tech leading the way after a multitude of good earnings reports after-hours. I may rotate into some tech if my short-term indicators give buy signals on the open.

Mid-day Update

S&P 500 1,156.86+.96%
NASDAQ 2,079.13+1.25%

Leading Sectors
Wireless+3.72%
Iron/Steel+3.08%
Homebuilders+2.55%

Lagging Sectors
Fashion+.07%
Drugs+.44%
Transports-.26%

Other
Crude Oil 34.62+.17%
Natural Gas 5.31-3.81%
Gold 416.70+1.44%
Copper 129.9+4.46%

Market Movers
AWE+15.7% on Cingular's $41B takeover bid.
NXTL+6.2% on AWE news and anticipation of strong earnings report.
RTRSY+20.2% on strong earnings and raised guidance.
IDXC+9.2% on Suntrust and Maxim upgrades to "Strong Buy".
SLAB-5.6% on Morgan Stanley downgrade to "Equal-weight".
OMC-2.2% on earnings report that disappointed some.
DE+4.7% on significantly better-than-expected 1st Q earnings and raised guidance.

Recommendations
Morgan Stanley positive on large-cap integrated oil-service companies. INTC developer forum Feb.17-19 is being watched closely. Goldman Sachs has positive comments on AZO. Goldman also saying Oil/E&P shares can rally to peak valuations, up 30% from current levels, and AMAT quarterly report should be VERY strong. Finally, Goldman likes cell-tower stocks as consolidation news is now out. Citigroup raised estimates for Samsung. Also said prices for power amps and linear IC's have risen 80% and 60%, respectively at TXN and NSM. NSM says 6-inch fabs running at full capacity and TXN has extended lead-times to 12-16 weeks from 6-8 weeks. Citigroup says SEBL favorite play on applications recovery. OSI raised to "Buy" at BB&T Capital. CIEN raised to "Buy" at W.R. Hambrecht. UNA raised to "Buy" at Robert Baird.

Mid-day News
U.S. stocks advanced on optimism an increase in mergers is a sign that shares are cheap even after an 11-month rally and corporate profits will keep rising. The Empire Manufacturing reading came in at 42.05, higher than the 37.0 estimates. Industrial Production met expectations, rising .8%. Capacity Utilization rose to 76.2%, modestly below expectations of 76.4%. Foreigners purchases of U.S. debt, corporate bonds and stocks rose by a net $75B in Dec., dispelling the notion that the falling U.S. dollar and larger budget/trade deficits are hurting demand for U.S. assets. Moreover, the report showed foreigners added 23% to their net holdings of U.S. securities for all of 2003. National City agreed to buy Provident Financial for $2.1B.

BOTTOM LINE: A very good day. Only one sector I follow is down today. However, my short-term indicators are still giving sell signals on the NASDAQ and the technology sector, but buys in many other sectors and the broad market. Thus, I have taken my market exposure back to 100%, adding new positions in a variety of sectors, excluding technology.

Tuesday Watch

Earnings Announcements
Company/Estimates
ANF/.95
A/.22
DE/.52
NTES/.32
NTAP/.10

Economic Data
Empire Manufacturing estimated at 37 vs. 39.2 last month.
Industrial Production estimated at .8% vs. .1% last month.
Capacity Utilization estimated at 76.4% vs. 75.8% last month.

Weekend News
U.N. says bird flu eradication may take years. Disney(DIS) may be worth up to $35/share according to Goldman Sachs and Bear Stearns, the company's advisers. The Democratic Party wants to increase taxes on the wealthy to spend as much as $6B more annually on education, according to the Washington Post. Senator Kerry's chances of winning the Democratic nomination rebounded to 95% over the weekend, as no additional news regarding the intern scandal surfaced. The NYPD has been preparing for possible nuclear, biological or chemical weapons attacks, the NY Times reported. Wal-Mart said February sales at U.S. stores are rising at the high end of its forecast, as shoppers purchased more coats, food and Valentine's items last week. U.K. warns major terror attacks may be imminent in Saudi Arabia. North Fork Bancorp confirmed rumors that it would buy GreenPoint Financial for $6.3B.

Weekend Recommendations
Guests on "Forbes on Fox" made positive comments on APC,COP,CAM,POG and NWL. On "Cashin N", ATVI, MX, TELK, NGG and VE were talked up. ATVI, NTOP, GNSS, LUV, and TXN were recommended on "Bulls and Bears". Barron's had positive comments on LORLF, DIS, JNS, HZO, CLE, FITE, ANN and CHS. It had negative analysis on CMCSK, FD, MAY, DDS, SKS and the technology sector.

Late-Night Trading
Asian indices are up on average .75% to 1.25%.
S&P 500 indicated +.24%.
NASDAQ indicated +.47%.

BOTTOM LINE: With my short-term indicators on "sell", I have positioned the Portfolio conservatively at 40% net long. It looks like the markets may try and rebound on the open from the end-of-week selling. I will closely watch the strength of this rebound and my short-term indicators. I am very bullish intermediate-term, but I don't want to fight the tape.

Weekly Outlook

U.S. stocks should extend recent gains this week, as the release of a number of key economic indicators should confirm brisk growth with little inflation. As well, recent merger activity should continue and a number of leading U.S. companies are set to release earnings. Reports over the weekend say North Fork is nearing an agreement to acquire GreenPoint Financial for about $6.2B in a union of two similarly sized New York regional banks. Shares of AT&T Wireless and Disney gained in Europe on Mon., as investors speculated there will be takeover battles for the 3rd-largest U.S. mobile phone provider and the No. 2 U.S. media company. Agilent(A), Applied Materials(AMAT), Hewlett-Packard(HPQ), Intuit(INTU), Nextel(NXTL), Nordstrom(JWN), Wal-Mart(WMT) and Target(TGT) report this week. Options expiration should add to volatility towards the end of the week.

BOTTOM LINE: The short-term technical indicators I follow turned negative last week, thus my Portfolio's relatively low(40% net long) level of market exposure. I believe we are still consolidating from the markets extraordinary strength over the last 12 months before we make new highs. While I am cautious short-term, I am getting more and more positive on the markets potential performance for the year. Valuations are LOW for the general market on expected 04 earnings relative to interest rates. With an expected P/E of 18.8 and interest rates at 46-year lows, the S&P 500 should continue a meaningful advance. Fed Fund futures are now showing market expectations that the Fed will remain on hold until Oct. I can't emphasize enough how positive the recent acceleration in merger and acquisition activity is for the market. Venture capital, for the first time in several years, is accelerating its flow into many promising U.S. start-ups. Investors have poured $31B into equity mutual funds just this year, according to recent data. The media harps on the decline in the dollar and large budget/trade deficits scaring away foreign investors, yet recent data suggest otherwise. Foreigners' appetite for U.S. stocks and bonds remains voracious. In November, foreign purchases of U.S. stocks and bonds jumped 217% to 87.6 billion, after a 560% jump in October according to The Street.com. A quiet IPO/secondary market, major Merger/acquisition activity and increasing inflows into U.S. equity funds all paint a very bright supply/demand picture for the market. Economic data points released this week should confirm accelerated spending by corporate America. Finally, with asset values increasing, debt service burdens decreasing, interest rates/inflation low, large increases in income tax refunds and income/job growth steadily accelerating, the consumer should continue to contribute meaningfully to economic growth. Strong housing and retail markets will provide a significant boost to 1st Q GDP, propelling it above 5% for the quarter. Overall, despite the negativity conveyed by most of the mainstream media, 04 is shaping up to be another very good year.

Market Week in Review

The S&P 500 advanced for an 11th week in 12 on Greenspan's testimony to Congress, takeover announcements and interest rates near 46-year lows. Greenspan told lawmakers Wednesday the U.S. economy may grow as much as 5% this year, the strongest pace since 1984, without sparking inflation. As a result, he said the Fed can be "patient" with respect to raising rates. Comcast's hostile bid for Disney and Juniper's acquisition of NetScreen generated excitement for further takeover announcements. Consolidation, in the form of increased mergers and acquisitions, is generally very positive for the overall market.

In other positive developments, Imclone's Erbitux received FDA approval for the treatment of colon cancer. PC motherboard shipments in Jan. rose much more than expected according to Smith Barney. The FCC ruled a computer-to-computer calling service isn't subject to traditional telephone rules, signaling it will take a hands-off approach to other internet-phone services as it begins a regulatory review of the VOIP industry. Commodity-related sectors exhibited tremendous strength throughout the week on price increases resulting from voracious Chinese demand and a significant improvement in U.S. growth.

While the S&P 500 rose modestly for the week, the NASDAQ fell .5%. This divergence and weakening breadth readings are a little worrisome and merit attention. OPEC's decision to cut production in April and stick to quotas resulted in a significant increase in energy prices. While Dell met expectations, it was more conservative than most investors expected on its conference call. I believe they are managing expectations to enable them to report a very good upside surprise next quarter. Lastly, Bank of America lowered expectations for Intel's 1st quarter sales and profits. I am not sure what to make of this, as it contradicts the Smith Barney motherboard report. Investors took profits across the board in technology the last two days of the week.

BOTTOM LINE: It appears as though last week's market action was a continuation of the recent consolidation that began a month ago. It wasn't a bad week, but with the exception of commodity-related sectors, not good either. It seems as though more consolidation needs to occur before a meaningful thrust through recent highs.

Economic Week in Review

ECRI Weekly Leading Index 131.7-.68%

Sales at U.S. retailers excluding auto dealers increased .9% in January, the biggest rise in 5 months, as consumers used their Christmas gift cards, taking advantage of post-holiday discounts. As well, cold weather across much of the nation led to increased sales of sweaters and coats. There does not appear to be a retail slow-down so far in February. The same bad weather that helped retailers hurt auto dealers. Including autos, sales fell .3% in January, the first drop since Sept. of 03. However, economists are expecting auto sales to snap back sharply in February with better weather conditions.

The number of Americans filing first-time jobless claims unexpectedly rose by 6,000 last week. Bad weather may have resulted in temporary layoffs at construction related companies, a government spokesman said. It is my opinion that the over-capacity created by the bubble of the late 90's is resulting in an extended time-line for our current recovery. All the expected signs of economic recovery are occurring, but at a leisurely pace. However, this over-capacity is finally being burned off with vigorous U.S. demand in many sectors reported during the last 2 quarters and extending into this quarter. Recently, Cisco Systems and Micron Technology, two of the largest U.S. tech companies, stated that component shortages in their latest quarters are causing them to increase purchases for their inventories from suppliers. Vanguard, one of the largest investment firms in the world, stated this week that a substantial increase in customer interest and activity has resulted in a need to hire a lot of new people quickly.

Furthermore, recent reports showing the ratio of inventories-to-sales at all-time record lows, orders improving for manufacturers more than at any time in 50 years, and a decrease in productivity from 9.2% in the 3rd Q to 2.7% in the 4th Q also point to an increase in hiring very soon. Greenspan went out of his way to point this out several times in his testimony to Congress. Companies have finally squeezed every last ounce of productivity out of their current employees. With GDP growth rising at its fastest past in 20 years, during the last six months, burning off most of the excess capacity produced during the bubble, companies are ready to start hiring again to meet increased demand. Employment has always been a lagging indicator by about 6 months after substantial economic growth. Since substantial growth didn't occur in this recovery until the 3rd Q of 03 and the over-capacity issue is resulting in a push-out of usual recovery characteristics, I believe we are right on schedule for significant job growth within the next 3 months.

The University of Michigan Consumer Confidence Index fell unexpectedly in February to 93.1 from January's near 4-year high reading of 103.8. It is my belief that this decline was a result of several factors. First, I have never seen a greater disconnect between what is really occurring and what the mainstream media are reporting. The media's constant focus and obsession with all things negative could be the result of election year politics or the incorrect assumption that Americans prefer this type of reporting. It is very rare to turn on the nightly news without hearing about how bad the employment situation is, another new terror threat, an attack in Iraq or a new political scandal. I also think an increase in energy prices may have contributed to the decline in sentiment. I am closely following this situation. I am worried that energy prices could cause significant harm to the U.S. economy within the next couple of years. Finally, January's reading of 103.8 was the highest reading since November of 2000. A fall in February from this sharp spike up should have been expected.

BOTTOM LINE: With tax refunds and an improving labor market on the near-tear horizon, it is likely that the consumer will continue to spend. As well, interest rates remain near 46-year lows. These factors, combined with the multi-decade highs in many data points related to increased corporate profitability and spending, leads me to believe that the possibility of a substantial period of U.S. economic prosperity is rising.