Mid-day Update

S&P 500 1,115.72 -.86%
NASDAQ 1,965.28 -2.06%

Leading Sectors
Iron/Steel +.98%
Energy +.36%
Foods unch.

Lagging Sectors
Semis -4.12%
Software -4.81%
Computer Boxmakers -5.20%

Other
Crude Oil 39.55 +3.0%
Natural Gas 6.43 +4.51%
Gold 392.60 -1.56%
Base Metals 110.71 +.70%
U.S. Dollar 88.14 -.10%
10-Yr. T-note Yield 4.47% +.43%
VIX 16.58 +10.08%
Put/Call 1.17 +44.44%
NYSE Arms 2.35 -19.34%

Market Movers
VRTS -36.0% after cutting 2Q estimates and JP Morgan downgrade to Neutral.
BRCM -8.83% on CNXT shortfall.
NNI +14.2% on CSFB upgrade to Outperform, target $26.
KVHI -19.0% after lowering 2Q estimates.
ESPD -10.45% on continued fall after announcing disappointing 2Q.
UNFI -10.0% after lowering 05 forecast.

Economic Data
ISM Non-Manufacturing for June came in at 59.9 versus expectations of 63.0 and 65.2 in May.

Recommendations
Goldman Sachs reiterated Outperform on VOD, KO, IACI, YHOO, EBAY, NFP, BSX, INTC, AMD, AMX, SAP, FS and IGT. Goldman reiterated Underperform on UNM. Citi SmithBarney reiterated Buy on IGT, target $50. Citi reiterated Buy on INFA, target $10.50. BOBJ cut to Underweight at JP Morgan. KTO raised to Overweight and JP Morgan. GENZ raised to Outperform at CSFB, target $58. NNI raised to Outperform at CSFB, target $26. GNW rated Buy at UBS. STLD raised to Overweight at Morgan Stanley, target $40. VRC raised to Overweight at Morgan Stanley, target $29. GT raised to Overweight at JP Morgan. VRNT cut to Reduce at UBS, target $31.50. IFS rated Overweight at Lehman, target $17.

Mid-day News
U.S. stocks are lower mid-day on earnings shortfalls, political worries and higher energy prices. Senator Kerry has chosen North Carolina Senator John Edwards as his vice-presidential running mate, NBC News reported. Tradesports.com is showing the chances of President Bush being re-elected falling 3 points to 54%. As well, Bush's chances of winning Edward's home state of North Carolina are falling 14 points to 62%. Iraqi oil exports, cut by half since Saturday because of damage to a pipeline in the south of the country, will return to normal tomorrow after repairs are completed, Al Arabiya tv news reported. General Motors may produce a hybrid gas-electric sport utility vehicle in China to compete with Japanese rivals, the Detroit News reported. Jeff Schwartz, CEO of Autobytel, told CNBC that a recent round of consumer surveys show sales of sports-utility vehicles have dropped 20-30% while smaller, fuel-efficient vehicles, particularly hybrids, are up 20-30%, Bloomberg reported.

BOTTOM LINE: The Portfolio is lower today on weakness in my technology longs. I took profits in a number of long positions and added a few new shorts this morning, bringing the Portfolio's market exposure to 50% net long. One of my new shorts is SWIR and I am using a $38.25 stop-loss on the position. The market is falling today on concerns over technology sector earnings, future anti-business political rhetoric and rising oil prices. While it does appear that the fundamentals in the tech sector have deteriorated a bit recently, I continue to expect a pick-up later this quarter. Anti-business political rhetoric will likely accelerate as the party conventions approach. Finally, I expect oil to begin to decline before week's end. Overall, it now appears the recent trading range will continue to hold until later in the year.

Monday Watch

Earnings of Note
Company/Estimate
AYI/.44

Splits
None of note.

Economic Data
ISM Non-Manufacturing for June estimated at 63.0 versus 65.2 in May.

Weekend Recommendations
Forbes on Fox had guests that were positive on F, KKD, HAIN, WEN, WFMI and mixed on PLMO. Bulls and Bears had guests that were positive on SNP, IMOS and mixed on IPMT, SLR, DLX and ELX. Cashin' In had guests that were positive on BA, mixed on RIMM and negative on ADSK, WGO. Louis Rukeyser's Wall Street had guests that were positive on CD, SDS, EOP, SPG, MDT, CMCSA, URS, AXK and PRV. Wall St. Week w/Fortune had guests that were positive on TLT, BAC, NOK and APCC. Barron's had positive comments on BA. Goldman Sachs reiterated Outperform on WAG, SYMC, MERQ, BSX and Underperform on INFA.

Weekend News
Libya started exporting oil to the U.S after the two countries renewed diplomatic ties last week, ending 24 years of estrangement, al-Hayat newspaper said. The number of U.S. travelers taking trips abroad has rebounded from a slump after the Sept. 11, 2001, terrorist attacks, with international traffic on U.S. airlines up 20% this year through May, the LA Times reported. Senator Kerry has tempered his message about the importance of deficit reduction and instead is talking more about his health-care policy, the NY Times reported. Kerry is also trying to win the votes of rural and small-town voters by convincing them that he supports gun ownership, the NY Times said. Pennsylvania lawmakers approved bills that legalize slot machines at horse-racing tracks and use the estimated $1 billion a year in tax revenue to pay for property-tax reductions, the AP reported. China's central bank probably won't raise interest rates in the short-term, the official Xinhua news agency reported. Boeing expects to win a $23 billion order to supply the Air Force with refueling tankers based on its 767 plane in 2005, Handelsblatt reported. Nortel Networks plans to install SAP AG's software companywide to oversee its accounting, Handelsblatt said. Iraq plans to buy 200 megawatts of electricity from Kuwait and link its power grid with other neighboring countries to meet local electricity demand, the Kuwait news agency reported. Kuwait Oil Minister al-Sabah said OPEC would raise its output ceiling as planned next month to push prices in New York down below $35 a barrel, the Kuwait News Agency reported. North Korea and the U.S. made enough progress at last month's six-nation talks for specific accords to be reached on dismantling North Korea's nuclear program, Interfax said. Shanghai General Motors was China's top car seller in June, beating Volkswagen's local venture for the first time, Shanghai Daily reported. A 20-ton cornerstone of Adirondack Mountain granite inscribed with a tribute to the victims of the Sept. 11 attacks was lowered into the pit at New York's World Trade Center site, signaling the start of construction on the 1,776-foot Freedom Tower. Aluminum prices may rise 3.2% in the second half to the highest six-month average in nine years, benefiting producers, a survey of analysts showed. Premier Wen Jiabao's effort to cool China's growth rate to about 7% from last year's 9.1% may trim global growth by half a percentage point in 2005 and Asia's expansion by a full percentage point, said Stephen Roach of Morgan Stanley. Crude oil futures in New York are rising after a pipeline ruptured in Iraq, halving exports, Bloomberg reported.

Late-Night Trading
Asian indices are mostly higher, unch. to +1.0% on average.
S&P 500 indicated +.11%.
NASDAQ 100 indicated +.10%.

BOTTOM LINE: I expect U.S. stocks to open modestly higher tomorrow as there were no significant terrorist attacks over the holiday weekend. Rising oil prices will likely temper gains. The Portfolio is 100% net long heading into the week.

Chart of the Week

Bottom Line: According to AMG Data, Equity funds reported net cash inflows totaling $3.753 billion in the week ended June 30, with $2.25 billion going to the iShares Russell 2000 index fund. This bodes well for continuing outperformance by small-caps. Moreover, the recent downtrend in overall equity fund flows has been broken, as shown in the chart above.

Weekly Outlook

There are a couple of important economic reports and a few significant corporate earnings reports scheduled for release this week. Economic reports this week include ISM Non-manufacturing, Initial Jobless Claims, Consumer Credit and Wholesale Inventories. ISM Non-manufacturing and Initial Jobless Claims both have market-moving potential.

Accenture(ACN), Alcoa(AA), Genentech(DNA), Yahoo!(YHOO), Schnitzer Steel(SCHN), Abbott Labs(ABT), PPG Industries(PPG) and General Electric(GE) are some of the more important companies that release quarterly earnings this week. There are also a few other events that have market-moving potential. The Fed's Broaddus speaking on the U.S. economy to tax administrators, the U.S. Oil and Gas Investment Symposium and the Fed's Hoenig speaking on monetary policy could also impact trading this week.

Bottom Line: I expect U.S. stocks to rise this week in a delayed reaction to falling interest rates, declining energy prices, improvements in Iraq, increasing consumer confidence and moderating inflation fears. I am not concerned about a significant slowdown in economic growth. Exceptionally strong home sales and summer travel may be cannibalizing auto and retail sales to an extent. As well, corporate spending should accelerate in the second half of the year as companies flush with cash upgrade operations. Historically, stocks perform the best when economic growth and inflation are moderate rather than high. My short-term trading indicators are giving mixed signals and the Portfolio is 100% net long heading into the week.

Market Week in Review

S&P 500 1,125.38 -.80%

U.S. indices finished modestly lower last week on weakness in technology and retail shares. Stocks fell slightly on Monday after the early handover of power to Iraq failed to generate buying enthusiasm ahead of the Fed rate-hike and employment report. Stocks rallied mid-week on a much stronger-than-expected consumer confidence report and diminishing inflation fears after the Fed raised rates. The week ended on a weaker note as rising energy prices, concerns over technology earnings and a weaker-than-expected jobs report spurred profit-taking.

There were several notable movers last week. Shares of Research in Motion(RIMM) gained 16.8% after the company raised its forecasts for profit and sales growth this quarter. Electro Scientific(ESIO) rose 23.8% after it said sales in the fourth quarter more than tripled from a year earlier. Washington Mutual(WM) fell 7.1% after the company slashed its 2004 profit forecast because customers are cutting back on home loans. Kmart(KMRT) increased 5.2% after saying it will sell as many as 54 store to Sears for about $621 million. Gtech Holdings(GTK) dropped 16.1% after the company cut its fiscal second-quarter and 2005 profit forecasts because a judge in Brazil withheld revenue. AutoZone(AZO) declined 12.2% after saying sales at stores open more than a year fell 1% in the first seven weeks of the fiscal fourth quarter and retail same-store sales fell 3%. Target Corporation(TGT) fell 6.1% after saying June sales will be "well below" its expectations. Shares of Cardinal Health(CAH) fell 24.9% after saying 2004 profit missed forecasts and its accounting is being probed by federal prosecutors. Emulex(ELX) plunged 48.2% after saying fiscal fourth-quarter profit and sales were less than forecast. Finally, Mamma.com(MAMA) dropped 15.9% after it was reported that Mark Cuban sold his 9.2% stake.

Bottom Line: Investor psychology, while improving, is still overly pessimistic. Just a week ago Thomson First Call said positive-to-negative earnings pre-announcements were running at a record high. However, a few bad reports last week sent entire sectors reeling. Moreover, technology investors continue to view the glass as half empty. However, I expect technology companies to exceed expectations for the third and fourth quarters. The continuing declines in the CRB Index and interest rates point to an abatement in inflation fears which is a very positive development. Higher interest rates and inflation have been the bears' main arguments for lower stock prices. While Target, Wal-Mart and some auto-makers recently reported disappointing sales forecasts, lower interest rates and higher consumer confidence should result in another strong sales spurt in the next few months. Unfortunately for the bulls, the handover of power to Iraq, a break-out in consumer confidence and lower interest rates could not push stocks higher. A failure by stocks to move higher in the coming week will likely result in a continuation of the current trading range for longer than I had anticipated.

Economic Week in Review

ECRI Weekly Leading Index 131.50 -.60%

Personal Income for May rose .6% versus expectations of a .5% rise and a .6% rise in April. Personal Spending for May rose 1.0%, the largest increase since October of 2001, versus estimates of a .8% rise and a .2% rise in April. The PCE Core Index, Greenspan's favorite measure of inflation, rose 1.6% year-over-year. Rising incomes reflect an economy that has created 1.3 million jobs this year, Bloomberg said. "We're very optimistic," said Tom Golisano, CEO of Paychex, a provider of payroll and employee-benefit services.

The Conference Board's Consumer Confidence Index for June rose to 101.9, the highest level in two years, versus expectations of 95.0 and a reading of 93.1 in May. Job gains, wage increases, improvements in Iraq and falling gas prices spurred confidence, Bloomberg said. The percentage of consumers that said they saw jobs as hard to find was the lowest since 2002. "Money in your pocket speaks the loudest," said Ellen Beeson, an economist at Bank of Tokyo-Mitsubishi. "Consumer perceptions of the labor market have finally caught up to reality and are outweighing concerns over Iraq and energy prices." Moreover, gasoline prices have fallen for five straight weeks, bolstering consumer attitudes, Bloomberg reported. "Leisure travel is very strong, and business travel is steadily getting better," said Thomas Parrington, CEO of Lodgian, an owner of 88 hotels. Finally, the survey showed the percentage of people planning to buy a major appliance in the next six months rose to 33.7, the highest in 6 years.

The Chicago Purchasing Manager Index fell to 56.4 in June versus expectations of 65.0 and a reading of 68.0 in May. The index had reached a 16-year high in May. "You can't accelerate forever once you hit your top speed," said Kevin Logan, a senior market economist at Dresdner Kleinwort Wasserstein. "We are still in growth mode, but the intensity of the pick-up is slowing down." A reading greater than 50 signals growth and the index has averaged 62.6 so far this year, one of the best averages on record, Bloomberg reported.

Federal Reserve policy makers raised the U.S. benchmark interest rate by a quarter-point to 1.25% and reiterated that further increases can come at a "measured" pace, as long as inflation remains "relatively low." The first increase since May 2000 came on a unanimous vote, a sign that no Fed member saw enough of an inflation threat to seek a more aggressive move. "Although incoming inflation data are somewhat elevated, a portion of the increase in recent months appears to have been due to transitory factors," the Fed said in their policy statement. "The economy is getting better and it needs to get better at a nice, gradual rate," said Charles Holliday, CEO of DuPont. "It doesn't need to soar up because then it soars down too fast."

The ISM Manufacturing Index came in at 61.1 in June versus expectations of 61.0 and a reading of 62.8 in May. ISM Prices paid fell to 81.0 in June versus estimates of 82.0 and a reading of 86.0 in May. The manufacturing index's reading of 61.1 was the eighth straight month it exceeded 60, the longest such stretch since July 1983-February 1984, Bloomberg reported. Business inventories held at a record low relative to sales at the start of the quarter, suggesting production gains in coming months will help lift the economy. "Ongoing strong demand, depleted inventory levels, and the more attractive value of the dollar relative to recent years all bode will for manufacturing over the near-term," said Michael Englund, chief economist at Action Economics.

The Unemployment rate for June held at 5.6%, meeting estimates. The Change in Non-farm Payrolls for June was 112,000 versus estimates of 250,000 and a downwardly revised 235,000 in May. The Change in Manufacturing Payrolls for June was -11,000 versus an estimate of 30,000 and a downwardly revised 24,000 in May. The U.S. economy has now created 1.3 million jobs this year, the best 6-month performance since the stock market bubble burst and the economy began to plunge into recession in 2000, Bloomberg reported. Recent evidence that the economy is slowing modestly from its torrid growth rate over the last year may support Federal Reserve policy makers' view that they need to raise interest rates at only a "measured" pace to contain inflation, Bloomberg said.

Bottom Line: Personal Income and Spending remained robust in May. As well, Greenspan's favorite inflation indicator, the core PCE Index, remained near historically low levels. The substantial increase in consumer confidence is a result of increasing wages, improving job prospects, falling gasoline prices and improvements in the big picture in Iraq. This is a very positive development as the good news on the economy is finally penetrating the media's negative filter and affecting consumer attitudes. This summer is shaping up to be one of strongest domestic travel seasons ever. Moreover, the scorching pace of home-sales bodes well for the purchase of new household appliances. Manufacturing appears to be slowing from its 20-year highs in growth to more sustainable levels. However, a pause should be expected as factories re-tool this summer for anticipated strong demand. Recent declines in commodity prices and interest rates should allow the Fed to raise rates at a measured pace. Current market expectations of 100 basis points of tightening through December are likely too high. While the volatile employment numbers were a bit disappointing, the trend is still very strong job creation for the U.S. economy. I would begin to worry if we see a few more weak months. Overall, the data last week appear to show that the U.S. economy is either pausing before finishing the year with another strong spurt of growth or is transitioning to more sustainable growth levels.