Sunday, March 21, 2004

Market Week in Review

S&P 500 1,109.78 -.96%

U.S. stocks fell last week, sending the S&P 500 to its first back-to-back weekly decline since November. Benchmark indices reached new lows for the year Monday on a possible al-Qaeda link to the March 11 attack in Madrid. Airline and Semiconductor companies led the way on the downside. Stubbornly high energy prices and fears that terrorism would slow travel hurt the Airline Index. Semiconductors were weaker on fears that a significant increase in Chinese production next year will result in overcapacity and price erosion. Base metal and mining stocks were the only consistently positive groups on the week as Nucor, the largest U.S. maker of steel using recycled metal, boosted its profit forecast dramatically and commodity prices continued their rise on insatiable Chinese demand.

Positive comments by the Fed with respect to the timing of a possible rate hike and reports that al-Qaeda's al-Zawahri was surrounded on the Afghan border provided the catalyst for a brief rally mid-week. Very good earnings reports from 3M, GE, Bear Stearns, Lehman Brothers and Morgan Stanley also contributed to the short-lived rally. By Friday, the bears had regained control as rumors surfaced that al-Zawahri had escaped the Pakistani-led assault. Reports that Microsoft failed to reach an agreement in settlement talks with the EU and extreme weakness in semiconductors on negative comments by Taiwan Semi also contributed to Friday's sell-off.

BOTTOM LINE: The Semiconductor Index(SOX) is trading right on its 200 day moving average at 463. If the recent correction is nearing an end I would expect to see this level hold. However, if the SOX breaks 463 convincingly I will anticipate further down-side in the NASDAQ which will in turn lead to further overall market erosion and a continuation of the recent correction. I doubt that China will be able to produce enough high-quality semiconductors next year to significantly hurt global pricing. This will likely become a problem at some point in the future, but not next year. While foreign travel may be hurt as a result of terrorism, I believe that domestic travel will be exceptionally strong this season on American's record-high net-worth, tax-cut stimulus and historically low interest rates. However, a continuation of the recent increases in crude oil prices will seriously damage the financial health of some U.S. airlines in the future. I view Microsoft's problems as mostly temporary and would recommend long-term conservative investors seeking tech exposure to begin buying at current levels. Overall, last week saw quite a bit of fundamentally positive news. Earnings at major U.S. corporations continue to surprise analysts on the up-side, leading to rapidly falling price/earnings ratios. With interest rates remaining near 46-year lows, the strongest economic growth since the mid-80's and record-high corporate profitability I continue to believe that the recent decline is just a healthy correction within the confines of a bull market that began a year ago.

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