Monday, March 01, 2004

Mid-day Update

S&P 500 1,151.96 +.61%
NASDAQ 2,040.39 +.52%

Leading Sectors
Homebuilders +3.47%
Gaming +3.37%
Iron/Steel +3.06%

Lagging Sectors
Computer Services -.08%
Transports -.68%
Hospitals -2.51%

Crude Oil 36.36 +.53%
Natural Gas 5.50 +1.64%
Gold 399.80 +.76%
Base Metals 115.37 +2.05%
U.S. Dollar 87.52 +.25%
10-Yr. Long-Bond Yield 3.98% +.34%
VIX 14.63 +.55%
Put/Call 1.09 +51.39%
NYSE Arms .66 -50.38%

Market Movers
SEPR +45.2% as the company neared U.S. regulatory approval of its Estorra sleeping pill.
MEDI -6.7% on statement that FluMist won't lift revenue before 2007.
SNDK +5.0% on positive comments in Barrons.
AAII -36.0% as the company appointed a committee of its board to look into reported sales of Brethine and Darvocet. It believes their findings will materially affect their 1Q and full-year forecasts.
IDSA +23.4% due to small-cap with increasing sales to China.
MGAM +14% as U.S. Supreme Court avoids Indian gambling dispute over machines. MGAM says significant legal uncertainties have ended.
CYTC +14.6% on acquisition of privately held Novacept for $311M to add to its women's health products.
UHS -16.2% on comments that its 1Q earnings would drop 25%, as unpaid bills hurt results.
HCA -5.5% on UHS news.
Homebuilders up across the board on a technical break-out and continued rotation out of tech.

Economic Data
Personal Income rose .2% vs. expectations of a .5% rise.
Personal Spending rose .4% vs. expectations of a .3% rise.
Construction Spending fell .3% vs. expectations of a .3% rise.
ISM Manufacturing for Feb. came in at 61.4 vs. expectations of 62.0.
ISM Prices Paid for Feb. came in at 81.5 vs. expectations of 71.7.

FON raised to Buy at UBS. UBS also raised price target on FS. SEPR raised to Buy at Deutshe Bank. Deutshe also raised price targets on MWD and GS. PHS raised to Overweight at Lehman. AAII cut to Neutral at Bank of America. JP Morgan cut ratings on INTC and AMD to Neutral. JPM also raised IGT to Overweight. Goldman Sachs is reiterating that the cruise industry is a multi-year investment opportunity. GS lowering estimates on STX ahead of quarterly update. Easy comps, tax-cut stimulus and good weather should deliver robust February results for retailers, says Goldman. GS favorite retailers are WMT, TGT and TIF. GS says drugstores should have good February, likes WAG best. Goldman says 04 should be very strong year for computer resellers CDWC and NSIT, as average selling prices are stabilizing and replacement cycle is accelerating. GS also still likes PMMAY and raised estimates and target. GS doesn't expect INTC to raise guidance at mid-quarter update Thur. Finally, GS raised FON to Outperform. Citi Smith Barney reiterates Buy on FDC.

Mid-day News
Major U.S. indices are having a very good day, as the employment portion of the ISM Manufacturing Index rose to its highest reading since 1987. The rally is broad-based outside of tech, with homebuilding, gaming and commodity-related stocks taking the lead. For the first time in years, Citi Smith Barney is hearing that telecom equipment biz is so strong that they are beginning to hire sales people, engineers and service/support staff to keep up with customer demand. Citi is also hearing that PC chip demand appears to have rebounded strongly in recent weeks after what appears to be a seasonal bottom on a monthly basis in Jan. The weaker US dollar is helping US competitiveness in Europe, Robert Hormats of Goldman Sachs told CNBC. IBM's CEO told investors at the PartnerWorld conference in Las Vegas that he is more optimistic about 04 than he has been in a long time. The ISM Manufacturing Index remained near a two-decade high, with all 20 manufacturing industries reporting growth. The ISM Prices Paid Index was the highest since 1995, resulting in some inflation worries by traders. Economists are now predicting that corporate spending will be 3 times higher than last year, the Blue Chip Survey reported.

BOTTOM LINE: The Portfolio is having a good day. I added a few longs on the open to bring net long market exposure to 100%. The huge rise in the Put/Call ratio shows that traders are skeptical of this rally, thus making it more likely to continue. This is turning into the most broad-based economic recovery since the mid-80's, with almost every industry participating. The signs are everywhere that the economy is in the midst of a significant expansion that will lead to strong job growth. With interest rates near 46-year lows and a P/E for the S&P 500 of a relatively low 18.7 on 04 estimates, I continue to expect a very good year for U.S. stocks.

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