Economic Week in Review

ECRI Weekly Leading Index 131.70 -.60%

Advance Retail Sales for August fell .3% versus estimates of a .1% decline and a .8% increase in July. Retail Sales Less Autos for August rose .2% versus estimates of a .2% increase and a .3% gain in July. "The August results show a decidedly mixed sales pattern but suggest that consumer spending is emerging from the second quarter "soft patch," said Parul Jain, deputy chief economist at Nomura Securities. "There was a shift in the Labor Day period and that threw us off a little bit," said Terry Lundgren, CEO of Federated. "I'm still optimistic about the fourth quarter." Hurricane Frances, which battered Florida for three days during the Labor Day weekend, reduced profit at the Cincinnati-based retailer, which owns Macy's and Bloomingdale's.

Empire Manufacturing for September rose to 28.3 versus estimates of 20.0 and a reading of 13.2 in August. The gain was the largest since June of last year. Readings above 0 indicate expansion. The employment component of the index rose to the highest level in four months as more factories added workers to meet demand. Production has been spurred by corporate replacement of aging equipment and additions to inventories that are close to a record low relative to sales, Bloomberg said. "The manufacturing expansion is continuing to move forward at a decent pace," said Ian Morris, chief U.S. economist at HSBC Securities. "The jump in the index is consistent with booming manufacturing output growth."

Industrial Production for August rose .1% versus estimates of a .5% increase and a .6% gain in July. Business inventories rose .9% in July versus estimates of a .8% gain and a 1.1% increase in June. Capacity Utilization for August was 77.3% versus estimates of 77.4% and 77.3% in July. "This report was a lot stronger than the headline number suggests, because it was weighed down by utility output," said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez. Electric and gas utility production "fell significantly," as the average temperature for August was the seventh-coolest since record-keeping began in 1895, Bloomberg reported.

The Consumer Price Index for August rose .1% versus estimates of a .1% increase and a .1% decline in July. CPI Ex Food & Energy for August rose .1% versus estimates of a .2% increase and a .1% gain in July. Prices for new automobiles fell .3%, airfares plunged 3.7%, gasoline prices dropped 1.4%, prices for dairy products fell 1.8% and clothing prices declined .2%, Bloomberg said. Federal Reserve Chairman Greenspan said in congressional testimony last week that inflation expectations have eased, Bloomberg reported.

Initial Jobless Claims for last week were 333K versus estimates of 340K and 317K the prior week. Continuing Claims were 2882K versus estimates of 2880K and 2885K prior. For the year, initial filings have averaged almost 344K, down from 402K in 2003, Bloomberg said. "The job market is improving and companies are beginning to ramp up hiring again," said Lynn Reaser, chief economist at Banc of America Capital. Brad Anderson, CEO of Best Buy, said he expects job growth will contribute to improved sales in the Christmas shopping season, Bloomberg reported. "There is much reason for optimism as unemployment rates currently are lower than they were a year ago and consumer confidence levels are substantially improved." Manpower Inc. found in a survey of employers that 28% planned to add workers from October through December, compared with 22% in last year's fourth quarter. Finally, a poll by Careerbuilder.com found 49% of hiring managers plan to increase payrolls in the final three months of this year, Bloomberg said.

The Philly Fed came in at 13.4 in September versus estimates of 25.0 and 28.5 in August. Even with the decline in the general index, measures for new orders and employment improved, indicating continued expansion as manufacturing helps pull the U.S. economy out of a mid-year lull, Bloomberg said. "The components of this survey are more positive," said Chris Rupkey, senior economist at Bank of Tokyo Mitsubishi. The general index may have fallen for a variety of reasons, including concerns over terrorism or the impact of the Florida hurricanes on demand, economists said. "It's more significant that both the Philly Fed and Empire State manufacturing surveys reported higher orders and employment this month, which suggests there's really not much of a slowdown going on and that we can anticipate a rise in the overall index next month," said David Sloan, senior economist at 4Cast.

The University of Michigan Consumer Confidence Index for September was 95.8 versus estimates of 96.7 and 95.9 in August. The measure has held above 95 for the last four months, the longest such string since the stock market bubble burst and the economy began to plunge into recession in 2000, Bloomberg reported. The expectations component of the index, based on optimism about the next one to five years, increased to 89.4 from 88.2 last month, Bloomberg said. The university's sentiment index averaged 93.8 in the six months leading up to the 1996 presidential election. "Just how optimistic or pessimistic consumers feel seems to help determine if the incumbent stays or goes," said Neal Soss, chief economist at CSFB.

Bottom Line: Overall, last week's economic data were positive, notwithstanding some disappointment with a couple of the headline numbers. Retail Sales were pretty good considering the very bad weather in some parts of the country. Manufacturing appears to be accelerating after a pause as measures of new orders and employment showed considerable strength. Long-term interest rates fell again last week as another measure of inflation, the Consumer Price Index, showed decelerating inflation. "Soaring inflation" had been one of the main arguments of the Bears and perpetuated in the mainstream press. This myth should now be dispelled as inflation is clearly set to rise less than its 41-year average of 3.0% this year. Historically, mild inflation has benefited stock prices as companies regain some pricing power, boosting profits. Recent employment surveys have shown improvement and point toward even better conditions in the fourth quarter. A better job market, stronger economic growth, a rising stock market, diminishing domestic terrorism fears, an end to the bitter political rhetoric and falling energy prices should spur consumer sentiment over the next several months.

Weekly Scoreboard*

Indices
S&P 500 1,128.55 +.41%
Dow 10,284.46 -.28%
NASDAQ 1,910.09 +.83%
Russell 2000 573.17 +.57%
S&P Equity Long/Short Index 966.69 +.18%
Put/Call .82 -1.20%
NYSE Arms .73 -1.35%
Volatility(VIX) 14.03 +1.96%
AAII % Bulls 45.45 -10.0%
US Dollar 88.91 +.57%
CRB 274.41 +1.03%

Futures Spot Prices
Gold 407.60 +.94%
Crude Oil 45.59 +6.44%
Unleaded Gasoline 127.03 +8.57%
Natural Gas 5.11 +12.14%
Base Metals 109.57 +1.21%
10-year US Treasury Yield 4.12% -1.91%
Average 30-year Mortgage Rate 5.75% -1.37%

Leading Sectors
Oil Service +2.97%
Energy +2.91%
Homebuilders +2.82%

Lagging Sectors
Airlines -1.45%
Tobacco -1.70%
Networking -2.59%

*% Gain or loss for the week

Mid-day Update

S&P 500 1,128.75 +.47%
NASDAQ 1,906.77 +.13%

Leading Sectors
Oil Service +1.97%
Energy +1.55%
Semis +1.09%

Lagging Sectors
HMOs -.91%
I-Banks -1.05%
Broadcasting -1.28%

Other
Crude Oil 45.00 +2.55%
Natural Gas 5.15 +9.13%
Gold 407.20 +.17%
Base Metals 109.57 -.40%
U.S. Dollar 88.95 +.17%
10-Yr. T-note Yield 4.10% +.80%
VIX 14.10 -2.02%
Put/Call .85 +11.84%
NYSE Arms .67 -53.79%

Market Movers
QCOM -4.6% after boosting 4Q guidance, but not meeting optimistic projections.
CTAS +5.9% after meeting 4Q estimates and maintaining 05 guidance.
TEK +7.2% after beating 1Q estimates substantially and raising 2Q guidance.
ALO +10.7% after saying a U.S. appeals court lifted an order blocking the company from selling a generic version of the epilepsy treatment Neurontin, Pfizer's 4th largest drug.
TTEK -19.7% after cutting 4Q forecast.
SEE -7.95% after cutting 2004 outlook.
AXCA -8.3% on JP Morgan downgrade to Neutral.
NTBK -8.8% on Raymond James downgrade to Underperform.
FLML -25.2% after saying it ended an agreement with Bristol-Myers and Brean Murray downgrade to Sell.

Economic Data
Preliminary Univ. of Mich. Consumer Confidence for September was 95.8 versus estimates of 96.7 and a reading of 95.9 in August.

Recommendations
DO raised to Overweight at Lehman, target $37. TRDO raised to Outperform at Raymond James, target $12.50. ELOS rate Sector Outperform at CIBC, target $21. Goldman Sachs reiterated Outperform on GDT, PFE, BHI and NEM. Goldman reiterated Attractive view of Oil Service sector, favorites are RIG, DO, SLB, BHI and SII. Goldman raised NBP to Outperform, target $48. Citi SmithBarney said to increase exposure to Oil Service sector, favorites are NE, ESV and GSF. Citi reiterated Buy on JBL, target $32. Citi reiterated Buy on NT, target $5. Goldman reiterated Underperform on HRB. Laszlo Birinyi, president of Birinyi Associates, recommended purchase of shares of GOOG, EBAY and AMZN.

Mid-day News
U.S. stocks are modestly higher mid-day as strength in the energy sector more than offsets higher energy prices. Reuters has officially placed Canada's government-run healthcare system on its list of humanitarian emergencies. Homemade bombs were discovered near southeastern Moscow's Vykhino subway station and in the suburban town of Liubertsy, Interfax reported. The Chanel SA and Donna Karen fashion labels are showcasing clothes and accessories on new television shows, including "The Mountain," on Time Warner's WB Network to try to boost retail sales, the Wall Street Journal reported. Recent guilty pleas by senior Enron Corp. executives have helped prosecutors build their conspiracy and fraud case against former Enron leaders Jeff Skilling and Ken Lay, the Washington Post said. The FTC said rewards of $100,000 to $250,000 may be needed to persuade people to turn in senders of unsolicited e-mail, called spam, over the Internet, the AP reported. California racetrack owners who want to add slot machines to their businesses filed a lawsuit yesterday to derail agreements giving five American Indian tribes the right to have unlimited numbers of slot machines, the LA Times reported. Russian President Putin said Russian armed forces are preparing "preventive action against terrorists" after attacks that cost at least 430 lives over the past month, Interfax reported. Ford Motor raised its forecast for third-quarter earnings by 10 cents a share, Bloomberg reported. Circuit City said its second-quarter loss narrowed as the company sold more plasma-screen tvs and benefited form the acquisition of a Canadian retailer, Bloomberg said. Cooper Tire agreed to sell its Cooper-Standard Automotive business for $1.17 billion to the Cypress Group and Goldman Sachs Capital Partners, Bloomberg reported. Qualcomm increased its fourth-quarter and 2004 forecasts and said it is reviewing how it accounts for royalty payments, Bloomberg said. Crude oil rose for a second day on concern that shutdowns caused by Hurricane Ivan will further reduce U.S. inventories that have dropped 8.7% since the beginning of July, Bloomberg reported.

BOTTOM LINE: The Portfolio is slightly higher mid-day on strength in my Chinese ADRs and security-related stocks. I have not traded today and the Portfolio is still 100% net long. The tone of the market is weaker today with volume relatively light and the advance/decline line falling. While I expect energy prices to decline next week, a rise from current levels would likely begin to pressure stocks. I expect U.S. stocks to trade mixed-to-weaker into the afternoon.

Friday Watch

Earnings of Note
Company/Estimate
CC/-.11
CCL/1.20
BMET/.35

Splits
None of note.

Economic Data
Preliminary Univ. of Mich. Consumer Confidence for September estimated at 96.7 versus 95.9 in August.

Recommendations
Central European Distribution(CEDS), the largest distributor of vodka in Poland, will benefit as demand in the region grows for other varieties of imported alcohol, Business Week reported. ABX Air(ABXA), a provider of air cargo transportation and services, is benefiting as its largest customer, DHL Worldwide Express, boosts its business in the U.S., Business Week said.

Late-Night News
Asian indices are mixed on strength in China and weakness in Japan. The U.S. agreed with France, Germany and the U.K. on a draft resolution for the United Nations that calls on Iran to immediately suspend all uranium enrichment activities, Agence France-Presse reported. China won't raise interest rates for at least three months, official news agency Xinhua reported. Bonds sold by Fannie Mae, the largest U.S. mortgage buyer, are no riskier than those sold by the 10 largest commercial banks, Business Week said. Alcatel SA may buy Spatial Wireless, a U.S. maker of mobile-phone operator devices, to expand into the American market after years of curtailment due to slow demand, the Wall Street Journal said. Crude oil prices may fall next week as companies including Royal Dutch/Shell Group restart platforms and tankers resume shipments in the Gulf of Mexico after Hurricane Ivan, a Bloomberg survey of traders and analysts shows. Honda Motor expects to almost double sales of so-called hybrid cars next year with the introduction of a third model, Bloomberg reported. President Bush leads Senator Kerry by 13 percentage points among likely voters, according to a Gallup poll conducted for CNN and USA Today. Dan Rather, of CBS News, is fighting to preserve his reputation after conceding misgivings about documents he used for a report attacking President Bush's military service, London's Telegraph reported.

Late-Night Trading
Asian Indices are -.75% to +.75% on average.
S&P 500 indicated -.12%.
NASDAQ 100 indicated -.14%

BOTTOM LINE: I expect U.S. equities to open mixed in the morning as the major indices continue to consolidate after recent gains. I am not sure how much the Consumer Confidence reading will be hurt by the hurricanes and bitter political climate. However, diminishing domestic terrorism fears, falling interest rates and increasing stock prices should help. The Portfolio is 100% net long heading into tomorrow.

Thursday Close

S&P 500 1,123.50 +.28%
NASDAQ 1,904.08 +.40%

Leading Sectors
Homebuilders +1.44%
Fashion +1.30%
Iron/Steel +1.23%

Lagging Sectors
Commodity -.09%
Tobacco -.27%
HMOs -.42%

Other
Crude Oil 44.17 +.64%
Natural Gas 4.78 +1.29%
Gold 406.60 +.02%
Base Metals 110.01 +1.13%
U.S. Dollar 88.81 -.38%
10-Yr. T-note Yield 4.07% -2.22%
VIX 14.39 -1.71%
Put/Call .76 -19.15%
NYSE Arms 1.45 -22.46%

After-hours Movers
TEK +8.7% after beating 1Q estimates substantially and raising 2Q guidance.
CAMD +13.49% after reiterating 2Q guidance.
NTBK -7.54% after cutting 3Q outlook substantially.
MKSI -8.89% after cutting 3Q and 4Q guidance.

Recommendations
Goldman Sachs reiterated Outperform on PFE, NKE and NEM. Goldman reiterated Underperform on SGP, RAI and MRK.

After-hours News
U.S. stocks finished modestly higher today on optimism over falling interest rates and declining inflation fears. Mirant said its CEO, Marce Fuller, plans to resign, as its directors come up with a plan to exit from Chapter 11 bankruptcy protection, Dow Jones Newswires reported. General Electric is in talks to sell some or all of its GE Capital International Services unit in India for as much as $1 billion, the Wall Street Journal reported. SpectraSite, which owns and operates mobile-phone transmission towers, may be acquired by a larger rival such as Crown Castle International, Business Week reported. The benchmark 10-year U.S. Treasury note gained the most in six weeks after a measure of consumer prices advanced less than expected in August and an index of manufacturing fell, Bloomberg said. U.S. airport screeners will pat down some travelers and test their carry-on bags for bombs to tighten security a month after explosives destroyed two Russian passenger planes, Bloomberg reported. Texas Instruments said it will buy back $1 billion worth of its stock and increase its dividend by more than 17%, Bloomberg reported. Medicare said it will pay for brain scans to help detect Alzheimer's disease, which affects 4.5 million Americans, Bloomberg said. The U.S. mint will issue redesigned five-cents coins, each with a new image of President Thomas Jefferson on one side and either an American bison or the Pacific Ocean on the other, to celebrate the opening of the American West, Bloomberg reported. Tropical Storm Jeanne, which moved through the Caribbean today, is the fifth storm to threaten the U.S. this year, putting 2004 on a pace to be the worst season in 88 years, Bloomberg reported. Pfizer, GlaxoSmithKline and other antidepressant makers will be ordered within months by U.S. regulators to give U.S. doctors more information on suicidal behavior linked to the pills, Bloomberg reported. Hurricane Ivan weakened to a tropical storm today after slamming into the U.S. Gulf Coast and spawning tornadoes that caused at least eight deaths on Florida's panhandle and left more than 1.2 million people and businesses in the Southeast without power, Bloomberg said. A Palestinian living in Florida was charged by federal prosecutors with raising money for terrorists and recruiting them to commit "violent jihad" around the globe, the Justice Department said.

BOTTOM LINE: The Portfolio was unchanged today as my rising consumer-oriented shorts offset gains in my software and internet longs. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The overall tone today was constructive, however volume was light. Interest rates plunged again which will be viewed as a big positive once investors begin to see accelerating U.S. economic growth in the fourth quarter. Exaggerated inflation fears are diminishing which bodes well for the broad market. The S&P 500 has risen almost 6% off its lows for the year, yet the estimated P/E on the index is still below 17. With interest rates back near historically low levels and profit growth still at very high rates, the market deserves a premium multiple.