Sunday, March 14, 2004

Weekly Outlook

Investors will have a number of economic data points to study in the coming week, as well as a few important earnings reports. Empire Manufacturing, Industrial Production, Capacity Utilization, Housing Starts, CPI, Philly Fed and Leading Indicators are all scheduled for release next week. Industrial Production, CPI and Housing Sales are the most important releases. Industrial Production is estimated +.4% in February versus a .8% increase in January. The CPI is expected to have risen .3% in February versus a .5% rise in January. Finally, Housing starts in February are estimated at 1940K versus 1903K in January.

Cintas(CTAS), Imclone(IMCL), Tenet Healthcare(THC), Lennar(LEN), FedEx(FDX), Adobe(ADBE), Biogen(BGEN), Barnes & Noble(BKS), Morgan Stanley(MWD), Paychex(PAYX), Nike(NKE), OfficeMax(OMX), Solectron(SLR), Williams-Sonoma(WSM) and Carnival(CCL) are some of the more important companies that release quarterly earnings this week. The FOMC policy meeting, semiconductor book-to-bill, Hewlett-Packard's annual meeting and Friday's "triple witching" option expiration also have market-moving potential.

BOTTOM LINE: The Homebuilding, I-banking and Retail sectors should outperform this week as falling interest rates, tax-cut stimulus and better weather provided the back-drop for better-than-expected earnings reports. The Fed will leave rates unchanged at its policy meeting, however the market will focus intensely on any statements it makes regarding inflation or job creation. Notwithstanding al-Qaeda's apparent involvement in the Madrid bombings, I expect the market to follow-through on Friday's rally early this week. I would like to see better volume on the up-side. The Portfolio is 75% net long and I will look to add recently beaten-up stocks in the morning, with the intention of selling them as the rally runs out of steam later in the week. I am not ruling out the possibility that the major indices formed an intermediate-term bottom last week as fundamentals have improved with falling stock prices, leaving many sectors at very attractive valuation levels. The S&P 500 2004 P/E is 18.1(where it is was in the late 80's and down over 60% from its high set in 02), the economy is growing the fastest since the mid-80's, interest rates are still near 46-year lows, corporate profitability is at all-time highs, American's net-worth is at all-time highs, corporate spending is improving, consumer spending remains strong, the Fed remains on hold as inflation hovers near all-time lows, energy prices will likely fall into the spring, the unemployment rate is falling with improvement in job creation around the corner and the U.S. dollar has stabilized. These are all very important reasons that I believe the recent weakness is just a healthy correction in a good bull market that began a year ago.

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