Market Week in Review

S&P 500 1,503.35 +.05%

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Weekly Scoreboard*

Indices
S&P 500 1,503.35 +.05%
DJIA 13,408.62 +.36%
NASDAQ 2,603.23 +.55%
Russell 2000 833.70 -.13%
Wilshire 5000 15,163.08 +.03%
Russell 1000 Growth 595.22 -.03%
Russell 1000 Value 858.51 +.07%
Morgan Stanley Consumer 728.96 +.39%
Morgan Stanley Cyclical 1,076.43 -.59%
Morgan Stanley Technology 622.61 -.14%
Transports 5,098.88 -.18%
Utilities 498.17 +2.64%
MSCI Emerging Markets 131.11 -.45%

Sentiment/Internals
NYSE Cumulative A/D Line 74,318 -2.49%
Bloomberg New Highs-Lows Index +144 +136.1%
Bloomberg Crude Oil % Bulls 48.0 +28.0%
CFTC Oil Large Speculative Longs 197,493 -1.63%
Total Put/Call 1.01 -1.94%
NYSE Arms 1.41 +57.47%
Volatility(VIX) 16.23 +3.05%
ISE Sentiment 166.0 +30.71%
AAII % Bulls 39.02 -9.59%
AAII % Bears 35.77 +6.2%

Futures Spot Prices
Crude Oil 70.47 +2.22%
Reformulated Gasoline 223.75 -.16%
Natural Gas 6.78 -5.23%
Heating Oil 203.79 -.19%
Gold 651.50 -.91%
Base Metals 251.09 -.14%
Copper 343.0 +1.84%

Economy
10-year US Treasury Yield 5.03% -10 basis points
4-Wk MA of Jobless Claims 316,000 +.3%
Average 30-year Mortgage Rate 6.67% -2 basis points
Weekly Mortgage Applications 618.60 -3.90%
Weekly Retail Sales +1.70%
Nationwide Gas $2.97/gallon -.02/gallon
US Cooling Demand Next 7 Days 5.0% below normal
ECRI Weekly Leading Economic Index 142.80 unch.
US Dollar Index 81.93 -.50%
CRB Index 315.74 +.32%

Leading Sectors
Disk Drives +2.96%
Utilities +2.64%
Telecom +2.60%
Wireless +2.2%
Internet +2.2%

Lagging Sectors
I-Banks -1.55%
Gold -1.87%
Coal -1.97%
Homebuilders -2.94%
Oil Service -3.55%

One-Week High-Volume Gainers

One-Week High-Volume Losers

*5-Day Change

Stocks at Session Lows into Final Hour on Terrorism Fears, Subprime Worries and End-of-Quarter Profit-taking

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my I-Banking longs, Software longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly negative as the advance/decline line is mildly lower, most sectors are lower and volume is about average. The PCE Core year over year rose 1.9% in May, the smallest increase since March 2004. This is also well below the 20-year average of 2.5% and within the Fed's comfort zone. The myth of problematic inflation lives on; however, if oil begins collapsing in the third quarter as it did last year, this argument will become extremely difficult to make. The fundamentals for oil are even worse this year, in my opinion. The 10-year yield is at session lows, falling 8 basis points. It has dropped 30 basis points in less than two weeks. The NYSE Arms is an above-average 1.23, the VIX is rising 8.2% and the CBOE total put/call is an above-average 1.0. Sloppy action over the last few days appears to me to be a function of buyers stepping away after a great quarter and aggressive funds selling/shorting winners. I expect large buyers to re-emerge next week. I also think better-than-expected earnings, a break below 5% in the 10-year yield, diminishing subprime fears and a large acquisition could provide upside catalysts for the broad market over the coming weeks. I expect US stocks to trade modestly higher into the close from current levels on lower long-term rates and subsiding end-of-quarter profit-taking.

Today's Headlines

Bloomberg:
- The DJIA is poised to post its best quarterly performance since the fourth quarter of 2003.
- UK police dismantled a car bomb found outside a nightclub packed with hundreds of people near London’s Piccadilly Circus, raising concern about terrorism.
- US treasuries are rising after a government report showed the Fed’s most closely watched measure of inflation slowed in May. The 10-year yield has plunged 27 basis points in less than 2 weeks.
- The Canadian dollar fell after the nation’s economy unexpectedly registered zero growth in April.
- Washington Mutual(WM), the biggest US savings and loan, will refinance up to $2 billion in subprime loans. The loans will be refinance or modified at discounted rates to help borrowers’ stabilize their finances and avoid foreclosure.
- BP Plc(BP), Europe’s second-largest oil company, and UK biofuels developer D1 Oils Plc said they plan to start a joint venture to plant jatropha for use as biodiesel.
- General Motors(GM) will invest $945 million over the next five years in Europe to introduce more fuel-efficient vehicles that cause less pollution.
- The price of US steel sheet fell for a third straight month in June because of reduced demand from manufacturers and a drawdown of inventories by distributors, Purchasing magazine said.
- Corn plunged to a 12-week low in Chicago after a government report said US farmers planted more acres than forecast in March.
- Crude oil rose to a 10-month high in NY on speculation by investment funds that low supplies of gas will continue to boost prices into the summer.
- Talbots Inc.(TLB) appointed apparel-industry veteran Trudy Sullivan as its new CEO in an effort to stem five years of declining profit at the women’s clothing retailer.
- Chicago Board of Trade’s(BOT) largest shareholder, Sydney-based hedge fund Caledonia Investments, has voted against the proposed sale to the Chicago Mercantile Exchange because the price is too low.
- Bear Stearns(BSC) hired Jeffrey Lane from Lehman Brothers Holdings(LEH) to run its asset-management division after the near-collapse of two hedge funds forced the firm to put up $1.6 billion for a bailout.

Wall Street Journal:
- Discover Financial Services, set to be spun off by Morgan Stanley(MS), is far smaller than rivals Visa USA Inc. and MasterCard Inc., yet its shares may be attractive because credit-card demand is growing.
- Delta Air Lines may be the leading contender to gain the first new non-stop flights between the US and China, to be awarded under agreements signed in May.
- Iowa Senator Charles Grassley, the top Republican on the Senate Finance Committee, may determine the outlook for legislative proposals to raise taxes on the hedge-fund and private-equity industries.
- Lawmakers moved to salvage parts of a grand compromise on immigration reform following the collapse of the broad package.

Boston Herald:
- Massachusetts is considering creating a loan pool backed by as much as $200 million in state bonds to enable homeowners to refinance unaffordable mortgages.

Washington Post:

- Russian authorities have shut down a US-funded non-profit training organization for journalists and filed criminal charges that critics say are politically motivated.

LA Times:
- Doug Frantz, managing editor of the LA Times, will become the Middle East bureau chief for the Wall Street Journal next month.

AP:
- The California State Assembly approved another 17,000 slot machines at casinos run by four Southern California tribes that will bring the state hundreds of millions of dollars in new revenue.

CNBC:
- The SEC is increasing its scrutiny of Bear Stearns’(BSC) hedge fund business.

Financial Times:
- Goldman Sachs Group(GS) was the top investment banking adviser in the world in the first half of 2007, citing Dealogic data.

China Knowledge:
- BP Plc(BP), Europe’s second-largest oil company, aims to double the import and sale of liquefied petroleum gas in China by 2010.

Incomes/Spending Rise Less Than Estimates, Inflation Decelerates Further, Chicago Manufacturing Strong, Construction Jumps, Confidence Revised Higher

- Personal Income for May rose .4% versus estimates of a .6% gain and a -.2% decline in April.

- Personal Spending for May rose .5% versus estimates of a .7% increase and a .5% gain in April.

- The PCE Core (MoM) for May rose .1% versus estimates of a .1% gain and a .1% increase in April.

- The Chicago Purchasing Manager Index for June came in at 60.2 versus estimates of 58.0 and a reading of 61.7 in May.

- Construction Spending for May rose .9% versus estimates of a .1% gain and a .2% increase in April.

- The Final Univ. of Mich. Consumer Confidence reading for June rose to 85.3 versus estimates of 84.0 and 83.7 in May.

BOTTOM LINE: Americans spent less than forecast in May and the Fed’s preferred inflation gauge cooled, Bloomberg reported. The Core PCE, the Fed’s favorite inflation gauge, rose 1.9% from a year earlier, the smallest gain since March 2004. This is also well below the 20-year average of 2.5% and within the Fed’s comfort zone. Consumer spending will come in below average rates this quarter, however spending should substantially exceed estimates of 2.5% in the second half of the year as interest rates come back down, energy prices fall substantially, sentiment improves, inflation decelerates further, stocks rise further, incomes continue to outpace inflation and housing sales stabilize at relatively high levels.

A measure of US business activity unexpectedly held near a two-year high this month, suggesting business spending will support continued growth, Bloomberg reported. The Prices Paid component fell to 68.1 from 70.2 in May. The Employment component of the index fell to 52.7 from 57.3 the prior month. The New Orders component fell to 65.7 from 71.1 the prior month. I continue to believe manufacturing will help boost US growth back to 3%+ this quarter.

Spending on US construction projects rose more than forecast last month as work on non-residential and government projects helped overcome cutbacks in homebuilding, Bloomberg said. The .9% increase was the biggest gain since February 2006. Every category besides residential construction showed an increase, spurred by the building of factories and utilities. I still expect construction spending to trend below average rates as homebuilders further pare down inventories and commercial construction slows modestly.

Confidence among US consumers came in above the level economists had expected for June, Bloomberg reported. While the average price of gas has fallen to $2.97/gallon from the record $3.23/gallon on May 23, it is still 28% higher this year. Consumers believe inflation will rise 2.9% over the next five years, down from 3.1% the prior month. I continue to believe both main gauges of consumer sentiment will rebound back near cycle highs before year-end.

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