Monday, May 31, 2004

Chart of the Week



Bottom Line: Spending on information technology is increasing at the fastest annual rate since the mania of the late 90's. Unlike the bubble period, current spending is from companies with solid balance sheets and real business models. Moreover, corporate IT spending, which is highly correlated to labor growth, should accelerate throughout the year. Researcher Gartner Inc. now expects PC sales growth of 14% in the second quarter, matching their prior projections for all of 2004. A need to replace almost 100 million obsolete PCs this year will also contribute to gains, Gartner said.

Weekly Outlook

There are a number of important economic reports and only a few significant corporate earnings reports scheduled for release this week. Economic reports this week include Construction Spending, ISM Manufacturing/Prices Paid, Auto Sales, Non-farm Productivity, Unit Labor Costs, Initial Jobless Claims, Factory Orders, ISM Non-Manufacturing, Unemployment Rate, Average Hourly Earnings, Change in Non-farm Payrolls and Average Weekly Hours. The ISM reports, Productivity, Unit Labor Costs, and Change in Non-farm Payrolls all have market-moving potential.

Hovnanian Enterprises(HOV), Albertson's(ABS), Neiman-Marcus(NMG/A), Comverse Technology(CMVT) and Mandalay Resort Group(MBG) are some of the more important companies that release quarterly earnings this week. There are also a few other events that have market-moving potential. The Citi SmithBarney Semiconductor Conference, ASCO 2004 Annual meeting, American Society of Clinical Oncology Conference, Flextronics(FLEX) Mid-quarter Update and Intel(INTC) Mid-quarter Update could all impact trading this week.

Bottom Line: I expect U.S. stocks to rise this week on strong economic reports, declining energy prices and stabilizing interest rates. As well, positive news from mid-quarter updates and several conferences should push stocks higher. The relatively high Put/Call and ARMS readings at the end of last week and fall in the AAII % Bulls also bode well for stocks this week. Recent price action in the major U.S. indices is very similar to that seen right after the lows in March 03. Breadth is very good, small-caps are outperforming and tech is recovering. I expect biotechnology and technology shares to outperform this week, while homebuilders and retailers lag. My short-term trading indicators all still giving buy signals and the Portfolio is 125% net long heading into the week.

Sunday, May 30, 2004

Market Week in Review

S&P 500 1,120.68 +2.48%

Technology and interest rate-sensitive shares led U.S. stocks to their best performance in almost two months last week on falling energy prices, declining interest rates, strong economic reports and an improving situation in Iraq. Even a government warning that al-Qaeda or other terror groups are in the U.S. preparing to launch a major attack this summer could not push equity prices lower. Breadth was much improved as almost every sector rose last week. Stocks were also buoyed mid-week by a government report that showed the biggest increase in corporate profits in two decades and faster first-quarter U.S. economic growth than earlier reported. Finally, global economic optimism got a boost from Asia as Japanese household spending rose a seasonally adjusted 9.3% from March, the largest increase since the survey began in 1975. Job growth sparked consumer spending, which makes up more than half the Japanese economy, Bloomberg reported.

There were several other developments with positive implications for U.S. stocks last week. Medtronic, the world's largest maker of devices that regulate heartbeats, said 4th quarter revenue rose 24%, beating expectations. Swift Transportation, a $1.5 billion trucking company, raised 2nd quarter guidance substantially as a result of getting better trucking rates and strong economic growth. Comcast, the largest American cable company, said it plans to offer digital phone service using VOIP technology to almost all its customers by the end of 2006. Tech Data, a $2.3 billion distributor of technology products, beat first quarter estimates substantially and raised second quarter guidance, citing strength in Europe. Lastly, Novellus, a large semiconductor equipment maker, raised its forecasts for second quarter orders, profits and sales.

Bottom Line: The key takeaway from last week was that investor psychology has changed for the positive. Psychology has been the main culprit weighing on U.S. stocks as the underlying fundamentals are excellent. Stocks are cheaper now than in 1987 and 1994, years preceding major bull runs. U.S. stock valuations are down 40%, and falling, from their peaks during the bubble of the late 90's. During that period most stocks were declining while a few were soaring. Currently, most stocks are rising while only a few are falling. Corporate accounting is much more conservative and trustworthy than during the 90's. As well, inflation and interest rates are now significantly lower than during those time periods. In 1987 the 10-yr T-note yielded close to 10%, in 1994 it yielded 8% and today the yield is 4.65%. Corporate profits are at all-time highs and are accelerating at the fastest pace on record. As profits soar, companies are boosting production and hiring more workers. U.S. economic growth is the best since the early 80's. American's net worth is at all-time highs as the housing market will hit another record high this year, notwithstanding higher rates and energy prices. All these many positives have been forgotten as the mainstream press focuses intensely on the few negatives. However, with interest rates falling, energy prices declining and Iraq improving it will be much harder for the media to constantly make the negative argument for the Bears.

Economic Week in Review

ECRI Weekly Leading Index 133.80 unch.

U.S. Existing Home Sales rose 2.5% in April to 6.64 million houses at an annual rate, the second-highest level on record and above estimates of 6.46 million. Increased hiring and tax cuts has given consumers more money to buy while forecasts for higher interest rates may be encouraging some people to purchase homes now, Bloomberg reported. "Continued vigorous job gains and accompanying income growth are likely to partially offset the impact of the run-up in borrowing costs," said Stephen Stanley, chief economist at RBS Greenwich Capital.

The Conference Board's Consumer Confidence Index rose to 93.2 in May versus expectations of 94.0 and a reading of 93.0 in April. The final Univ. of Mich. Consumer Confidence reading for May was 90.2 versus expectations of 94.2 and a prior forecast of 94.2. The constant barrage of negative headlines on Iraq and rising gasoline prices is taking its toll on the consumer's psyche, Bloomberg said. While the strongest job gains since the stock market bubble burst in 2000 are barely reported, they have a much greater affect on consumer spending. If the recent increase in oil costs are maintained this year it will subtract about $35 billion from after-tax income. However, a 200,000 increase in payrolls a month on average for the remainder of the year will boost incomes by $71 billion, Bloomberg reported. Consumer spending is currently projected to rise 3.9% this year, the most since 2000. This improvement will contribute to a 4.6% increase in U.S. economic growth, the best performance in two decades, according to the median forecast.

Durable Goods Orders for April fell 2.9% versus estimates of a .9% decline and a 5.7% rise in March. A drop in bookings for commercial aircraft and automobiles led the decline. "The two previous months were huge increases, so you can't be surprised if it gives back some of those gains," Ken Mayland, president of Clear View Economics said. The two-month gain before April was the biggest since record-keeping began in 1992, Bloomberg reported. Shipments of personal computers will probably rise 14% in the second quarter, matching the projected increase for all of 2004, researcher Gartner Inc. said. A need to replace almost 100 million obsolete PCs this year will contribute to the gains, Bloomberg said.

New Home Sales for April fell to 1093K versus estimates of 1200K and a level of 1239K in March. Last month's sales pace was the slowest since November and follows an all-time record in March. The median sale price of a new home climbed to $221,200 from $203,300. California home prices had their second-biggest increase in 26 years in April as the median price rose 24.6% from a year earlier, the state Association of Realtors said. "I don't think the case is there yet that housing is weakening significantly. This could just be payback for March's record high," said James O'Sullivan, senior economist at UBS Securities. Even with the April decline, the sales pace so far this year corresponds with another all-time record for new home sales.

The U.S. economy grew at a 4.4% annual pace in the first quarter, faster than estimated last month, but below the most recent estimates of 4.5% growth. Corporate profits jumped 31.6% in the 12 months ended in March, the biggest increase since the first quarter of 1984. Increasing sales and profits have given companies the confidence to ramp up production and increase hiring, Bloomberg reported. "We have moved clearly into a self-sustaining expansion," said Peter Kretzmer, a senior economist at Banc of America Securities. Moreover, the report showed the U.S. economy expanded 5% during the 12 months ended in March, the most since 1984. As well, nominal GDP rose 7.2% during this period. Rising oil prices don't threaten the U.S. economy enough to make the IMF change its forecast of 4.6% growth this year, the most since 1984, Bloomberg reported. Finally, the personal consumption expenditures price index excluding food and energy, Greenspan's favorite inflation gauge, rose only 1.7% in the first quarter.

Personal Income for April rose .6% versus estimates of a .5% gain and a .4% rise in March. Personal Spending in April rose .3% versus estimates of a .2% gain and a .5% rise in March. The rise in American incomes was the most in 3 years, Bloomberg said. "Consumer spending is hanging in there, and it will get help from the pick up in the labor market," said James O'Sullivan, senior economist at UBS Securities. "Inflation is poised to continue to rise at a measured pace, which is also likely to be the speed at which the Fed moves to raise interest rates," said Joseph LaVorgna, chief US fixed-income strategist at Deutsche Bank.

Initial Jobless Claims for last week were 344K versus expectations of 335K and 347K the prior week. Continuing claims came in at 2948K versus estimates of 2923K and 2929K the prior week. The four-week moving average of jobless claims came in at 335,500, the lowest since 2000. Chicago-based CPRi, which provides temporary staffing and recruiting for companies including AT&T and General Motors has seen a jump in demand for its services in the past few months, Bloomberg reported.

The Chicago Purchasing Manager report came in at 68.0 in May versus expectations of 62.0 and 63.9 in April. The May reading was the highest since July 1988. A gauge of new orders also showed the highest reading since then. The index of prices paid was the highest since 1995. "Overall, this was a very strong report and suggests we're going to just keep trotting along here," said Kevin Harris, chief economist at Informa Global Markets.

Bottom Line: Overall, last week's data continued to paint a very positive picture of the current state of the U.S. economy. U.S. home sales will definitely slow from their recent record-setting levels to more moderate and sustainable growth. However, I do not think the home market is about to collapse as the underlying fundamentals are far too strong. Good growth is always better than great growth for the long-run health of any market. The media's obsession with negativity definitely seems to be affecting consumer confidence as many positive stories are under-reported or un-reported. However, there is very little empirical evidence of a strong correlation between consumer confidence and spending patterns. The drop in volatile Durable Goods Orders from record-high levels is not of concern at this point. Gartner's recent projection of 14% growth for PCs in the second quarter bodes well for MSFT, INTC, DELL and the tech sector in general. Even with the rise in energy prices and interest rates, the U.S. economy is poised to post its best growth since 1984. Oil would have to double in price to equal the inflation-adjusted levels seen during the Iran hostage crisis. Moreover, the U.S. economy is much less dependent on oil now than in the past. Inflation, while rising, is currently not a significant threat to growth. Consumer spending continues at a healthy pace, while it appears corporate spending is strengthening. The recent acceleration in job growth and wages should offset most of the effects of higher interest rates and gas prices. Finally, evidence continues to mount that the health of U.S. manufacturers is improving significantly for the first time in many years.

Saturday, May 29, 2004

Weekly Scoreboard*

Indices
S&P 500 1,120.68 +2.48%
Dow 10,188.45 +2.22%
NASDAQ 1,986.74 +3.90%
Russell 2000 568.28 +4.12%
Wilshire 5000 10,926.27 +2.78%
Volatility(VIX) 15.50 -16.17%
AAII % Bulls 36.11 -1.53%
US Dollar 88.90 -1.92%
CRB 277.25 +2.77%

Futures Spot Prices
Gold 394.90 +2.17%
Crude Oil 39.88 +.07%
Natural Gas 6.44 +.42%
Base Metals 108.81 +3.64%
10-year US Treasury Yield 4.65% -2.31%
Average 30-year Mortgage Rate 6.32% +.32%

Leading Sectors
Disk Drives +8.51%
Homebuilders +8.13%
Nanotechnology +7.05%

Lagging Sectors
Airlines +1.42%
Tobacco -1.06%
Telecom -1.64%

*% Gain or loss for the week

Friday, May 28, 2004

Mid-day Update

S&P 500 1,120.43 -.08%
NASDAQ 1,986.24 +.09%


Leading Sectors
Broadcasting +3.86%
Oil Service +1.75%
Semis +1.55%

Lagging Sectors
Drugs -.68%
Iron/Steel -.99%
Airlines -1.05%

Other
Crude Oil 39.65 +.61%
Natural Gas 6.45 -1.87%
Gold 394.90 -.30%
Base Metals 108.81 +.60%
U.S. Dollar 88.97 +.34%
10-Yr. T-note Yield 4.64% +1.07%
VIX 15.55 +1.77%
Put/Call 1.01 +8.60%
NYSE Arms 1.13 +39.51%

Market Movers
UTSI +8.83% after announcing it will be added to the S&P 400 Index.
NVLS +5.4% after raising 2Q forecast substantially.
DITC +22.5% after beating 4Q estimates and raising 1Q guidance.
CAE +15.82% after beating 1Q estimates substantially.
NAP +11.31% after saying NCC is trying to sell its majority stake in the company.
BCSI -26.3% after missing 4Q estimates and lowering 1Q forecast.
OXM -6.18% after lowering 1Q and 04 forecasts.
ACDO -5.4% on speculation that Medi-Cal reimbursement cuts for blood factor will negatively impact earnings.

Economic Data
Personal Income for April +.6% versus expectations of +.5% and +.4% in March.
Personal Spending for April +.3% versus expectations of +.2% and +.5% in March.
PCE Deflator (Y-O-Y) for April +1.9% versus expectations of +1.8% and +1.5% in March.
U. of Mich. Consumer Confidence Final May reading 90.2 versus estimates of 94.2 and 94.2 prior.
Chicago Purchasing Manager report for May was 68.0 versus estimates of 62.0 and 63.9 in April.

Recommendations
BUD raised to Overweight at Morgan Stanley, target $60. BG rated Outperform at CSFB, target $46. Goldman Sachs reiterated Outperform on AUO, target $26.12. Goldman reiterated Buy on DELL, target $42. Goldman continues to believe there is meaningful upside in newspaper operating margins over the next few quarters, favorites are GCI, TRB and KRI. Goldman said to Buy SRE ahead of analyst meeting on June 2-3. Goldman reiterated Outperform on CDL. Citi SmithBarney reiterated Buy on KRB, target $31. Citi reiterated Buy on CCL, target $52. Citi reiterated Buy on PCG, target $34. Goldman reiterated Underperform on FGP. Legg Mason said SINT should benefit from a LMT win of the $15 billion homeland security contract that should be awarded any day as it is one of LMT's top 4 outsourcers.

Mid-day News
U.S. stocks are quietly mixed mid-day as investors decline to make big bets ahead of the holiday weekend. The Chicago Purchasing Managers' Index rose to a 16-year high in May, Bloomberg said. Consumer Sentiment fell more-than-expected in May as rising gas prices and violence in Iraq dominated headlines, drowning out other very positive developments, Bloomberg reported. Personal Incomes in April rose the most since the stock market bubble burst in 2000, Bloomberg reported. Internet sales of dolls that immortalize political figures such as President Bush and Senator Kerry are boosting sales of action figures in general, the Wall Street Journal reported. U.S. President Bush's planned visit to Rome next week carries "serious threats," Italian Interior Minister Pisanu told Agence France-Presse. Nascar has held preliminary talks with New York City economic development officials on building a speedway on Staten Island, the NY Times reported. The Iraqi Governing Council unanimously endorsed Iyad Allawi to become Iraq's new prime minister, the AP reported. Gillette has signed a 3-year contract with British soccer star David Beckham, the Boston Herald reported. Cable tv networks are expected to beat the seven broadcast networks during the May "sweeps" period and capture a greater share of the audience this season, Broadcasting and Cable reported. EchoStar Communications said yesterday it will add 1,000 full- and part-time jobs in Tulsa, Oklahoma, the Denver Post reported. El Paso said a reorganization in the first quarter cut annual expenses by $40 million to $50 million, helping the company to exceed expectations for cash flow and debt reduction, Bloomberg reported.

BOTTOM LINE: The Portfolio is up slightly today on strength in my semiconductor, telecom equipment and broadcasting long positions. I have not traded today and the Portfolio is still 125% net long. The Chicago Purchasing Manager report was extremely positive. The decline in consumer confidence is a function of the media's intense focus on negativity as there are many positive stories going unreported. I expect consumer confidence to improve throughout the year as employment growth continues, energy prices stabilize, Iraq improves and corporate spending accelerates. I expect U.S. stocks to move slightly higher into the close this afternoon and then resume this week's rally on Tuesday, barring any significant terrorist attack over the holiday weekend.

Friday Watch

Company/Estimate
CVNS/.12
SOL/.51
TTWO/-.14

Splits
ASD 3-for-1
ERES 3-for-2
KIND 2-for-1

Economic Data
Personal Income in April estimated +.5% versus +.4% in March.
Personal Spending in April estimated +.2% versus +.4% in March.
PCE Deflator (Y-O-Y) in April estimated +1.8% versus +1.6% in March.
University of Mich. Consumer Confidence Final May reading estimated at 94.2 versus 94.2 prior.
Chicago Purchasing Manager in May estimated at 62.0 versus 63.9 in April.

Recommendations
Goldman Sachs reiterated Outperform on BIIB, TYC and TPX. Goldman thinks FLEX will maintain upbeat tone on their mid-quarter update next Thur. TDW is undervalued at $27/share, Business Week reported. STJ shares may be poised to gain because the maker of cardiac devices could be a takeover target, Business Week reported. Napco Security's(NSSC) plan to provide a lock system to a unit of Tyco will help boost shares of the manufacturer of electronic security systems' shares, Business Week said.

Late-Night News
Asian indices are mostly higher as strength in Japanese shares boosts regional optimism. Japanese household spending rose a seasonally adjusted 9.3% from March, the largest increase since the survey began in 1975, as job growth sparked consumer spending, which makes up more than half the economy, Bloomberg reported. PETS, UTI, UOPX, MGAM and ARO topped Business Week's Hot Growth list for 2004, the magazine reported. Time Warner CEO Parsons refused to reduce stated revenue from a $400 million advertising contract with Bertelsmann AG unless outside auditors said the accounting was wrong, Business Week reported. Infineon Technologies AG may exit the computer memory-chip business to focus on making semiconductors for cars, mobile phones and other communications products, Silicon Strategies reported. Fighting in the Iraqi holy city of Najaf stopped after al-Sadr agreed with religious leaders to withdraw his militiamen, the AP reported. There have been 10 times the normal amount of tips reported to the FBI Web site since Wednesday's warning of a potential al-Qaeda attack on U.S. soil this summer, the AP reported. As many as 2,000 people may have been killed in floods and landslides caused by a week of rains in Haiti and the Dominican Republic, the AP reported. Riggs National, which was fined $25 million this month for allegedly failing to follow rules to stop money laundering, has put itself up for sale, Bloomberg reported. Exxon's purchase of Mobil and five other oil-company mergers since 1990 lifted U.S. gas prices an average of one or two cents a gallon, the U.S. General Accounting Office said. The average sale price for a home in the Hamptons rose 29% to an all-time high of $1.1 million in the first quarter as Wall Street bonuses rebound, Bloomberg reported.

Late-Night Trading
Asian Indices -.50% to +1.25% on average.
S&P 500 indicated -.02%.
NASDAQ indicated -.07%.

BOTTOM LINE: I expect U.S. stocks to open modestly higher in the morning on strength in Asia and U.S. semiconductor shares. I continue to believe that the economic news from Japan, the world's second largest economy, is very positive and underreported. The Iraq situation is getting a lot better, energy prices are dropping and interest rates are falling. These are all surprisingly positive recent developments which should provide the catalysts for the major U.S. indices to continue to rally in the near-term, barring a significant terrorist attack. The Portfolio is 125% net long heading into trading tomorrow.

Thursday, May 27, 2004

Thursday Close

S&P 500 1,121.26 +.57%
NASDAQ 1,984.50 +.42%


Leading Sectors
Iron/Steel +2.40%
Wireless +1.65%
Telecom +1.38%

Lagging Sectors
Gaming -.71%
Energy -1.40%
Oil Service -2.17%

Other
Crude Oil 39.12 -.81%
Natural Gas 6.52 -.75%
Gold 3395.50 +.15%
Base Metals 108.16 +1.36%
U.S. Dollar 88.64 -1.28%
10-Yr. T-note Yield 4.59% -1.22%
VIX 15.28 -4.32%
Put/Call .93 -7.0%
NYSE Arms .81 -27.68%

After-hours Movers
BCSI -17.9% after missing 4Q estimates and lowering 1Q forecast.
DITC +5.78% after beating 4Q estimates and raising 4Q guidance.
NVLS +4.0% after raising 2Q forecast substantially.

Recommendations
Jim Cramer, of TheStreet.com, thinks oil may sell-off hard as we are winning the war in Iraq. He says the sell-off in the Oil Service index(OSX) confirms this view.

After-hours News
U.S. stocks finished higher Thursday as declining energy prices and interest rates led to an afternoon rally. Stocks were also buoyed by a government report that showed the biggest increase in corporate profits in two decades and faster first-quarter U.S. economic growth than earlier reported. After the close, U.S. officials said they may have found two more shells armed with mustard gas in Iraq, CNN reported. National City is trying to sell its majority stake in a unit that processes credit and debit-card transactions, Bloomberg said. Bob Stansky, manager of the $65 billion Fidelity Magellan Fund, increased the fund's holdings of technology companies over the past six months, Bloomberg reported. The Fund took new positions in Apple Computer, Scientific Atlanta and SAP AG, Bloomberg said.

BOTTOM LINE: The Portfolio had a very good day today as a few of my internet and semiconductor long positions rose substantially in the afternoon. I did not trade today and the Portfolio is still 125% net long. Falling oil prices and interest rates, combined with a relatively high put/call ratio, should result in a better rally over the next few trading sessions, barring a significant terrorist attack over the weekend. The fact that U.S. corporate profits rose 31.6% in the first quarter, the best since 1984, bodes well for continued employment gains and thus corporate spending on technology. I continue to expect technology stocks to Outperform in the second half of the year.

Mid-day Update

S&P 500 1,116.67 +.16%
NASDAQ 1,972.22 -.20%


Leading Sectors
Iron/Steel +1.38%
Wireless +1.09%
Fashion +.98%

Lagging Sectors
Disk Drives -1.04%
Energy -1.44%
Oil Service -2.22%

Other
Crude Oil 39.62 -2.65%
Natural Gas 6.59 -2.11%
Gold 394.50 +1.60%
Base Metals 107.60 +.83%
U.S. Dollar 88.74 -1.17%
10-Yr. T-note Yield 4.59% -1.31%
VIX 15.77 -1.25%
Put/Call .98 -2.0%
NYSE Arms .97 -13.39%

Market Movers
SEBL +7.83% on circulation of an IDC research report that says sales of CRM software subscriptions are expected to rise 16.6% annually through 2008.
NAVR +14.1% on strong 4Q results and 05 outlook.
MIK +8.8% after beating 1Q earnings estimates, raising 04 guidance and multiple upgrades.
TECD +10.2% after beating 1Q estimates substantially, raising 2Q guidance and Raymond James upgrade to Strong Buy.
DLTR +8.78% after beating 1Q estimate and re-affirming 2Q/04 forecast.
MANT -30.3% after lowering 2Q and 04 forecast.
STAR -12.4% after cutting 2Q forecast on higher boxed beef prices.
CAI -10.3% after disclosing the U.S. government is investigating whether its interrogators broke the rules in Iraq.

Economic Data
Preliminary 1Q GDP came in at 4.4% versus expectations of 4.5% and 4.2% prior.
Preliminary 1Q Personal Consumption was 3.9%, meeting expectations and up from 3.8% prior.
Preliminary 1Q GDP Price Deflator was 2.6% versus expectations of 2.5% and 2.5% prior.
Initial Jobless Claims for last week were 344K versus expectations of 335K and 347K prior week.
Continuing Claims 2948K versus 2923K estimate and 2929K prior.

Recommendations
KO raised to Buy at UBS. ATVI rated Buy at Wells Fargo. JDAS raised to Sector Outperform at CIBC, target $16. VAST cut to Sector Underperform at CIBC. AM rated Overweight at JP Morgan. PRU raised to Overweight at Morgan Stanley, target $52. CTS rated Outperform at Thomas Weisel. FRX raised to Outperform at Thomas Weisel. XPRT raised to Buy at Legg Mason, target $23. MLNM raised to Buy at Deutsche Bank. KSS raised to Buy at Bank of America, target $55. WDC rated Outperform at CSFB, target $12. BBT cut to Underperform at Bear Stearns. BCII rated Outperform at Bear Stearns. TECD raised to Strong Buy at Raymond James, target $48. Goldman reiterated Outperform on BSX, GDT, MDT, TYC, HOT, XOM and ENH. Citi SmithBarney said that managements from AV, JNPR and EXTR appeared confident about 2Q business on their West Coast Data Networking Bus Tour. Citi came away from TLAB investor day thinking the position of its core biz is not as tenuous as once believed and that its revenue and cost synergy guidance from the AFCI purchase was conservative across the board. Citi upgraded AZO to Buy, target $98. Citi reiterated Buy on MER, target $80. Citi reiterated Buy on CELG, target $75. Citi rated AMLN, target $31. Citi reiterated Buy on GTIV, target $22. Citi reiterated Buy on VIAB, target $54. Citi reiterated Buy on TLAB, target $11. Citi reiterated Sell on TECD, target $36.

Mid-day News
U.S. stocks are mixed mid-day as falling energy prices and interest rates are offset by terror concerns and weaker-than-expected economic data. Wall Street underwriters' price cuts on recent initial public share offerings reflect weakness in the IPO market, the Wall Street Journal reported. U.S. health insurance premiums may increase at a slower rate this year as few people are hospitalized or are prescribed expensive drugs, the New York Times said. An al-Qaeda leader in Saudi Arabia today called for a guerrilla war in the kingdom's cities as part of a campaign against the country's royal family, Reuters reported. Senator Kerry is being challenged by an increasing number of Democrats who are calling for the U.S. to set a deadline to withdraw troops from Iraq, the LA Times reported. California lawmakers have approved several bills this week that sanction importing drugs from Canada, the LA Times reported. Crude oil futures fell for a third day in London on expectations OPEC will raise production quotas next week to lower prices, Bloomberg said. The U.S. economy grew a brisk 4.4% in the first quarter as businesses replenished inventories, government spending rose and home construction accelerated. Corporate profits jumped 31.6% in the year ended in March, the biggest increase since the first quarter of 1984, Bloomberg reported. The personal consumption expenditures price index excluding food and energy, a favorite Greenspan inflation indicator, rose a less-than-expected 1.7%.

BOTTOM LINE: The Portfolio is down slightly today on weakness in my tech long positions. I have not traded and the Portfolio is still 125% net long. I expect stock gains to remain subdued today, as nervousness over a weekend terror attack persists. I believe the recent fall in interest rates and oil will provide the catalysts for another upward move in the major U.S. indices next week. As investors focus more on skyrocketing corporate profits and less on inflation, stocks should benefit.

Wednesday, May 26, 2004

Thursday Watch

Earnings of Note
Company/Estimate
BCSI/.23
CHS/.39
DITC/.20
DG/.20
QSII/.40
SHFL/.19

Splits
ANN 3-for-2

Economic Data
Preliminary Gross Domestic Product for 1Q estimated at 4.5% versus 4.2% prior.
Preliminary Personal Consumption for 1Q estimated at 3.9% versus 3.8% prior.
Preliminary GDP Price Deflator for 1Q estimated at 2.5% versus 2.5% prior.
Initial Jobless Claims for last week estimated at 335K versus 345K prior week.
Continuing Claims estimated at 2925K versus 2943K prior.
Help Wanted Index for April estimated at 41 versus 39 in March.

Recommendations
Goldman Sachs reiterated Outperform on CYT, TYC, HD and BBY. Goldman reiterated Outperform on Lodging sector. Goldman reiterated Underperform on PSSI.

Late-Night News
Asian indices are mostly on strength in Hong Kong and Korea. Airbus SAS forecasts the number of daily flight and aircraft in Asia-Pacific will double in the next two decades, propelling the region past the U.S. as the world's busiest, the Australian newspaper reported. Disney may abandon the sale of its European retail stores, worth $181.24 million, after talks with 2 bidders collapsed, the London-based Times said. Greece will shoot down any aircraft trying to target the Olympic Games being held in Athens in August, the BBC said. al-Sadr offered to withdraw his forces from Najaf and hand the holy city over to Iraqi police, the AP reported. Nokia may get a $250 million order from Bharti Tele-Ventures to operate and maintain some cellular phone networks, the Economic Times reported. Shanghai, China's largest city, is replacing hundreds of thousands of iron manhole covers with concrete and plastic ones after a 57% rise in scrap steel prices encouraged thieves to steal about 1,800 of the lids, Bloomberg reported.

Late-Night Trading
Asian Indices -.25% to +2.0% on average.
S&P 500 indicated -.04%.
NASDAQ indicated -.03%.

BOTTOM LINE: I expect U.S. stocks to open lower after stronger-than-expected GDP and Price Deflator reports send interest rates higher. However, stocks should firm up later in the day on weakening oil prices and short-covering. I do not expect another significant rally until after the holiday weekend. The Portfolio is 125% net long heading into tomorrow.

Wednesday Close

S&P 500 1,114.94 +.17%
NASDAQ 1,976.15 +.59%


Leading Sectors
Disk Drives +1.65%
Networking +1.47%
Biotech +1.35%

Lagging Sectors
Homebuilders -1.16%
Telecom -1.54%
Oil Service -1.73%

Other
Crude Oil 40.57 -.32%
Natural Gas 6.70 -.48%
Gold 388.40 +.03%
Base Metals 106.71 +1.09%
U.S. Dollar 89.79 -.04%
10-Yr. T-note Yield 4.65% -1.38%
VIX 15.97 +.06%
Put/Call 1.00 +16.28%
NYSE Arms 1.12 +88.67%

After-hours Movers
TECD +6.21% after beating 1Q estimates substantially and raising 2Q guidance.
DLTR +5.80% after beating 1Q estimate and re-affirming 2Q/04 forecast.

Recommendations
Goldman Sachs said day 2 of Steel Conference solidified positive outlook for the sector, favorite is NUE. Goldman reiterated Outperform on AMLN.

After-hours News
U.S. stocks finished mostly higher Wednesday as falling oil prices and interest rates offset terrorism concerns and weaker-than-expected economic reports. After the close, U.S. Senator Feinstein asked for a safety review of a malaria drug made by Roche Holding AG after six American soldiers who were given the medicine suffered brain damage, UPI reported. Softbank tentatively agreed to buy a controlling stake in Japan Telecom for $2.68 billion from Ripplewood Holdings, a NY-based investment firm, Nikkei News reported. The Sudanese government signed a series of agreements with the country's main rebel group aimed at ending more than two decades of civil war that has killed more than 1.5 million people, Bloomberg said. Fox Broadcasting may take in about $40 million in advertising sales from tonight's two-hour finale of "American Idol," Bloomberg reported. Thousands of men over age 60 who are told that they don't have prostate cancer based on blood tests may have undetected diseases, including advanced tumors, according to a study in the May 27 New England Journal of Medicine, Bloomberg reported. Senator Kerry will accept his party's nomination in July in Boston rather than wait in order to avoid federal election spending limits, Bloomberg reported.

BOTTOM LINE: The Portfolio had a good day today and I made a few changes in the afternoon. I took substantial profits in a few of my internet and Chinese ADR longs. I then added several telecom equipment and biotech longs, leaving the Portfolio with 125% net long market exposure. ARRS is one of my new longs and I am using a $5.00 stop-loss on the position. I expect stocks to continue to consolidate recent gains in the very near-term on higher-than-expected inflation data, however the rally should resume on Tuesday barring any significant terror acts over the holiday weekend.

Mid-day Update

S&P 500 1,114.11 +.10%
NASDAQ 1,969.28 +.24%


Leading Sectors
Disk Drives +1.48%
Networking +1.17%
Biotech +1.05%

Lagging Sectors
Telecom -1.24%
Oil Service -1.29%
Homebuilders -1.30%

Other
Crude Oil 41.20 +.15%
Natural Gas 6.66 -.36%
Gold 388.00 -.13%
Base Metals 106.71 +1.09%
U.S. Dollar 89.79 -.04%
10-Yr. T-note Yield 4.68% -.67%
VIX 15.92 -.25%
Put/Call .95 +10.47%
NYSE Arms 1.01 +68.33%

Market Movers
TIVO +5.42% after beating 1Q estimates and raising 2Q guidance.
BSX +5.8% after announcing more positive data from its Taxus VI clinical trial.
MAGS +20.25% on continued optimism over a Homeland Security contract.
CPRT +18.58% after beating 3Q estimates substantially.
EYET +15.57% after saying the FDA scheduled a meeting in August to discuss its Macugen treatment for age-related macular degeneration.
FNF +6.96% after saying it filed with the SEC to sell shares of its mortgage-processing and data-services unit to the public and spin it off.
SNIC +10.31% after saying that Toshiba had chosen it to bundle RecordNow! with its entire line of PCs worldwide and to include PrimeTime DVD burning in all of its Windows XP Media Center edition PCs.
APSG +9.69% after beating 2Q estimates substantially.
TSA -4.71% after missing 1Q estimates, but boosting 04 guidance.
DRIV -5.89% after announcing $175 million convertible senior note offering.

Economic Data
Durable Goods Orders for April -2.9% versus expectations of -.9% and +5.7% in March.
Durable Goods Less Transportation for April -2.1% versus expectations of -1.0% and +6.3% in March.
New Home Sales in April were 1093K versus expectations of 1200K and 1239K in March.

Recommendations
BOW raised to Buy at UBS, target $52. AMSG raised to Buy at UBS, target $30. USPI rated Buy at UBS. QLTY raised to Buy at Legg Mason, target $14. UHS rated Outperform at Bear Stearns. Goldman Sachs reiterated Outperform on CLX, IP, WFC, AIG, GDT and EMC. Goldman said cell-tower stocks should continue to move higher as it is becoming increasingly clear that carriers are going to move more aggressively to 3G. Goldman still positive on Gold, target $445/oz next 12 months. Goldman reiterated Underperform on F and VTS. Citi SmithBarney said to Buy YHOO, target $33, ahead of quarterly reported. Citi upgraded LLY to Buy, target $82. Citi reiterated Buy on LXK, target $110. Citi reiterated Buy on CSCO, target $34. Citi reiterated Buy on BEAS, target $13. Citi reiterated Buy on TGT, target $50. Jim Cramer, of TheStreet.com, has a positive column on cable stocks, saying VOIP will make them huge winners.

Mid-day News
U.S. stocks are mixed mid-day as falling interest rates and stabilizing energy prices boost some shares, offsetting fears over holiday terrorism and weaker-than-expected economic reports. Optimism among German exporters rose to the highest since January 2001 in May as growth in the U.S., Asia and Europe boosts foreign demand and a weaker euro makes their goods cheaper abroad, according to a survey by the Ifo economic institute. The U.S. will outline anti-terrorism measures the government is planning after intelligence reports said al-Qaeda may attack on U.S. soil in coming months, Bloomberg reported. GM has added Caterpillar to the list of companies that may buy its locomotive-manufacturing division, the Detroit Free Press reported. Harvey Pitt, former chairman of the SEC, told CNBC that New York Attorney General Eliot Spitzer's lawsuit against Grasso isn't an "effective use of anyone's time," Bloomberg reported. A unit of PetroChina, China's biggest oil producer, found more than 400 million metric tons of crude oil in a deposit in the country's northwestern province of Gansu, China Central TV reported. U.K. Prime Minister Tony Blair said he and U.S. President Bush are "absolutely agreed" that sovereignty in Iraq will be transferred to a new government and coalition troops will remain under U.S. Command, Bloomberg said. U.S. sales of new houses fell 11.8% in April, the biggest monthly drop in more than a decade, as mortgage rates rose and prices soared to a record, Bloomberg reported. Comcast plans to offer digital phone service to almost all its customers by the end of 2006, CEO Brian Roberts said.

BOTTOM LINE: The Portfolio is having a good day today and I have not traded, leaving market exposure at 125% net long. I expect stocks to rise slightly after Ashcroft's speech at 2 est. However, some profit-taking could occur later on before the holiday weekend on terrorism fears. The market is holding up very well today considering the news and yesterday's large gain. I would not want to be short on Tue., barring any significant terror act. Biotechs look like they could outperform over the next week as a major cancer meeting(ASCO) begins June 4th and lasts through June 8th. Positive news should benefit DNA, OSIP, AMGN and ABGX. BBH is a conservative way to play the sector.

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Wednesday Watch

Earnings of Note
Company/Estimate
CPRT/.20
MIK/.37
RL/.78
TECD/.49
TOL/.87
VTS/.22

Splits
HNP 2-for-1
TLM 3-for-1

Economic Data
Durable Goods Orders for April estimated -1.0% versus +5.4% in March.
New Home Sales for April estimated at 1200K versus 1228K in March.

Recommendations
Goldman Sachs reiterated Underperform on VRTS. Goldman reiterated Outperform on BSX, CSCO and MDT.

Late-Night News
Asian indices are higher after a strong showing by U.S. stocks and optimism over economic growth in Japan. Members of al-Qaeda or other terrorists are in the U.S. and preparing for a major attack later this year, the AP reported, citing a senior U.S. counter-terrorism official. China doesn't need to take harsher measures to rein in the overall economy because only some industries are overheated, the Shanghai Securities News said. Wellington Management, which advises more than a dozen funds offered by Vanguard Group, is being investigated by the SEC, the NY Times said.

Late-Night Trading
Asian Indices +.50% to +1.75% on average.
S&P 500 indicated -.16%.
NASDAQ indicated -.14%.

BOTTOM LINE: I expect U.S. stocks to open modestly lower in the morning on terrorism-related concerns and a likely weaker-than-expected Durable Goods report. However, a rally may surface later in the day on falling interest rates and short-covering. I do not expect a significant move up or down tomorrow. The Portfolio is 125% net long.

Tuesday, May 25, 2004

Tuesday Close

S&P 500 1,113.05 +1.61%
NASDAQ 1,964.65 +2.17%


Leading Sectors
Homebuilders +4.88%
Nanotechnology +4.02%
Disk Drives +3.53%

Lagging Sectors
Broadcasting +.87%
Telecom +.04%
Fashion -.81%

Other
Crude Oil 41.01 -.32%
Natural Gas 6.63 -.58%
Gold 388.50 +.03%
Base Metals 105.56 -.68%
U.S. Dollar 89.84 -.78%
10-Yr. T-note Yield 4.72% -.25%
VIX 15.96 -11.73%
Put/Call .86 +13.16%
NYSE Arms .60 -49.19%

After-hours Movers
APSG +8.48% after beating 2Q estimates substantially.
SEAC +6.58 after beating 1Q estimates and raising 2Q forecast.
CA -3.11% after missing 4Q estimates and lowering 1Q guidance.

Recommendations
Goldman Sachs reiterated Underperform on DO. Goldman reiterated Outperform on PPL. TheStreet.com has a positive column on IVII. TheStreet.com also has a positive column on the tech sector, saying it should outperform the rest of the year.

After-hours News
U.S. stocks finished sharply higher Tuesday as oil and interest rates declined and most sectors rose. After the close, the U.S. and the UN are close to an agreement on selecting Shiite Hussain Shahristani, a nuclear scientist imprisoned by Saddam Hussein, to serve as prime minister in the new Iraqi government, the Washington Post reported. An aspirin a day may cut a woman's risk of developing breast cancer by more than 20%, according to a study in tomorrow's Journal of the AMA. Computer Associates said 4th quarter sales rose 10%, below estimates, and lowered 1st quarter guidance. Defense Secretary Rumsfeld has decided to defer until at least November a decision on signing a contract with Boeing for aerial refueling tankers worth as much as $23 billion.

BOTTOM LINE: The Portfolio had a very good day today as a few of my biotech, semiconductor and internet longs rose substantially. I took profits in one of my basic materials longs and added CHINA. I am using a stop-loss of $6.75 on this position. The Portfolio is still 125% net long. Very good day for the Bulls as volume swelled into the afternoon rally. Breadth was good and almost all sectors participated. As well, all major U.S. indices are now above their 200-day moving-averages and small-caps continue to outperform. Finally, the news wasn't even that good today, however the market's reaction was significant. A positive shift in investor psychology seems to finally be at hand. This has been the market's main problem lately as the underlying fundamentals are excellent.

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Mid-day Update

S&P 500 1,100.56 +.48%
NASDAQ 1,934.78 +.63%


Leading Sectors
Homebuilders +3.26%
Airlines +2.10%
Nanotechnology +1.84%

Lagging Sectors
Telecom -.79%
Fashion -.80%
I-Banks -1.08%

Other
Crude Oil 41.04 -1.61%
Natural Gas 6.58 -1.86%
Gold 388.30 +.67%
Base Metals 105.56 -.68%
U.S. Dollar 89.89 -.73%
10-Yr. T-note Yield 4.72% -.38%
VIX 16.73 -7.47%
Put/Call 1.13 +48.68%
NYSE Arms 1.00 -15.25%

Market Movers
IPIX +20.7% after announcing a new patent and reseller agreement with JCS Digital.
BSX +4.7% after announcing positive results from it Taxus VI stent clinical trial.
DYAX -34.7% after reporting that the FDA has advised the company that INDs for its recombinant protein DX-88 have been placed on clinical hold.
SWFT +16.0% after raising 2Q guidance substantially, announcing $40M stock buyback and Legg Mason upgrade to Buy.
TEN +16.85% after withdrawing secondary offering.
OCR +6.0% after multiple positive comments from analysts on NeighborCare acquisition.
BOBE -10.0% after lowering 1Q/05 guidance and downgrade to Underperform by Whitaker Securities.
IPMT -7.9% after multiple analyst downgrades.

Economic Data
Existing Home Sales for May came in at 6.64M versus expectations of 6.46M and 6.48M in April.
Consumer Confidence for May 93.2 versus expectations of 94.0 and 93.0 in April.

Recommendations
PFG cut to Underperform at JP Morgan. CVX raised to Buy at Deutsche Bank, target $99. ADP raised to Overweight at Morgan Stanley, target $61. EFX cut to Underweight at Morgan Stanley. MANH rated Outperform at CSFB, target $33. OCR raised to Outperform at Schwab SoundView, target $50. LMT rated Buy at Legg Mason, target $64. RTN rated Buy at Legg Mason, target $42. Goldman Sachs reiterated Outperform on MDT. Goldman downgraded CVH to Underperform. Citi SmithBarney said it favors GE over 3M. Citi said to Buy MO and RJR on weakness. Citi reiterated Buy on MAR, target $58. Citi said recent US semiconductor purchasing manager's survey is positive for LLTC, ADI, TXN and MXIM. Citi also likes INTC and CY at current levels. Citi reiterated Buy on UNM, target $20. Citi reiterated Buy on MDT, target $59. Goldman reiterated Outperform on DELL, target $42.

Mid-day News
U.S. stocks are higher mid-day led by homebuilders and airlines as energy prices and interest rates fall. Russia will enter the World Trade Organization in 2007, the Itar-Tass news service reported. Linux users are adopting a way to track contributions to the operating system, a process that may head off future disputes about who added what, the Wall Street Journal reported. Ford may cut production of sport-utility vehicles during the third quarter because of slow sales, Dow Jones Newswires reported. Cisco introduced a faster router to help retake market share from Juniper, Reuters reported. Trump Hotels & Casino Resorts is expected to make a $73.1M interest payment that was due May 1 to avoid default, the Star-Ledger reported. Harvard University's student-run sex magazine, H Bomb, made its debut this morning to students and newsstands around the Cambridge, Mass. campus, the Boston Globe reported. Russia will seek to increase oil exports amid higher prices, Interfax news service reported. TV political ads in the 2004 presidential election campaign have been filled with exaggerations, leaving voters with distorted impressions of both President Bush and Senator Kerry, the NY Times reported. The world's seven most industrialized nations and Russia expect the world economy to growth at a strong pace next year, the Financial Times reported. A multinational force will be needed in Iraq "for months, rather than years," as the country develops its own military to maintain security, Iraqi Defense Minister Allawi said today. SBC Communications and the Communications Workers of America agreed on a five-year contract that guarantees the jobs of 100,000 employees, Bloomberg reported.

BOTTOM LINE: The Portfolio is having another good day today as a few of my biotech, basic material and semi-equipment longs post solid gains. I took profits this morning in one of my basic material longs and bought PETS. I am using a $6.50 stop-loss on the position. The Portfolio is still 125% net long. A high put/call ratio, falling interest rates/energy prices and significant outperformance by small-caps leads me to believe today's rally is sustainable and may improve this afternoon.

Tuesday Watch

Earnings of Note
Company/Estimate
KKD/.23
HNZ/.58
CA/.17
SEAC/.08
SMTC/.18
TSA/.34
WSM/.16

Splits
RCI 3-for-2

Economic Data
Existing Home Sales for April estimated at 6.45M versus 6.48M in March.
Consumer Confidence for May estimates at 94.0 versus 92.9 in April.

Recommendations
Goldman Sachs reiterated Outperform on AA. Goldman reiterated Underperform on VRSN.

Late-Night News
Asian indices are mostly lower tonight on weakness related to rising crude oil prices. Wal-Mart wants stores in every European country via its Asda Group, the Financial Times said. Microsoft is working on a new version of its Windows operating system that will allow multiple personal computers to be linked together to mimic a high-powered supercomputer, according to News.com. Deutshe Telekom bought Cingular's California and Nevada mobile networks, Bloomberg reported. The yen erased losses against the dollar in Asia after S&P said it may raise the credit ratings of major Japanese banks because of progress in cutting bad loans and improving earnings, Bloomberg reported. President Bush said Iraq's interim government will be named this week as a prelude to a five-step process that begins with the June 30 transfer of sovereignty and ends with elections next year, Bloomberg reported.

Late-Night Trading
Asian Indices -2.0% to unch. on average.
S&P 500 indicated -.20%.
NASDAQ indicated -.18%.

BOTTOM LINE: I expect U.S. stocks to open modestly lower in the morning on weakness in Asia and a likely weaker-than-expected Consumer Confidence number. However, this should result in falling interest rates which could bolster shares later in the day. The Portfolio is 125% net long heading into tomorrow.

Monday, May 24, 2004

Monday Close

S&P 500 1,095.34 +.16%
NASDAQ 1,922.98 +.57%


Leading Sectors
Oil Service +4.38%
Homebuilders +3.08%
Disk Drives +2.27%

Lagging Sectors
Drugs -.78%
Telecom -.90%
Tobacco -3.60%

Other
Crude Oil 41.68 -.10%
Natural Gas 6.69 -.07%
Gold 385.60 -.03%
Base Metals 106.28 +1.23%
U.S. Dollar 90.50 +.01%
10-Yr. T-note Yield 4.73 -.46%
VIX 18.08 -2.22%
Put/Call .76 -37.70%
NYSE Arms 1.18 +22.92%

After-hours Movers
NOVL -7.72% on profit-taking after meeting 2Q estimates.
CHTR +5.2% after S&P revised outlook to positive.

Recommendations
Doug Kass, hedge fund manager and writer for TheStreet.com, says the market looks headed for a pretty good year.

After-hours News
U.S. stocks finished mostly higher today led by homebuilders and energy-related stocks as oil rose and interest rates fell. After the close, Virgin USA said it expects to choose between San Francisco and New York when selecting a U.S. location to house the national headquarters for the company's low-cost domestic carrier, CNN reported. Medtronic, the world's largest maker of devices that regulate heartbeats, said 4th quarter revenue rose 24%, beating expectations. Crude oil and gasoline futures in New York surged today on concern Saudi Arabia's promised production rise and any increase in OPEC quotas at a meeting next week won't satisfy expanding demand, Bloomberg reported. New York City had a 5.18% drop in crime in 2003, making it the safest of the nation's 10 largest cities, according to FBI statistics.

BOTTOM LINE: The Portfolio had a very good day today as my internet and basic materials longs rose substantially. I took profits in a couple of airline longs and added a couple of internet longs, leaving the Portfolio with 125% net long market exposure. I added AMZN in the afternoon and will use a $40.50 stop-loss on the position. The advance/decline line continues to improve and small-caps are outperforming again. The fact that most stocks rose today with oil rising substantially is a very good sign for the Bulls. As well, the stabilization of interest rates is a big positive.

Mid-day Update

There will not be a mid-day update today as I have a scheduling conflict. However, I will publish the Monday Close at its regular time. This is an interesting article titled "The Comprehensive Impact of Offshore IT Software and Services Outsourcing on the U.S. Economy and the IT Industry" from GlobalInsight. There is a conclusion on page 10 if you are short on time.

Monday Watch

Earnings of Note
Company/Estimate
CHP/.08
CPB/.31
DY/.23
MDT/.46
NOVL/.03

Splits
SONC 3-for-2

Economic Data
None of note.

Weekend Recommendations
Forbes on Fox had guests that were positive on GE, AA and mixed on BBBY, TIF, VRTSE and HOV. Bulls and Bears had guests that were positive on GRMN, KKD, ADP and mixed on NEM, SLR, PNRA, NSM, MSO, TWX, INTC and DNA. Cashin' In had guests that were positive on LDG and mixed on ZNT, TOL and NOVL. Louis Rukeyser's Wall Street had guests that were positive on FCX, GPC, FLR, HAR, RL, BIIB, JPM, ABT, RDA, CCH, SNN and CAT. Wall St. Week w/Fortune had guests that were positive on C, MER, ATVI, ERTS, ZIXI and negative on TTWO, LF, NLS and SFP. Barron's had positive columns on BZH, CMCSA, ATK, ABMD and a negative column on SYMC. Goldman Sachs reiterated Outperform on ACN, EBAY. Business Week has a positive article on JNPR.

Weekend News
New York City has spent about $100 million to reinforce security at its reservoirs elsewhere in New York state to prevent terrorists from poisoning drinking water, the New York Post reported. Ford Motor Co.'s Escape, a sport-utility vehicle that gets about 23 miles to the gallon, and similar rivals are being snapped up as gas prices rise, the New York Times reported. International inspectors have found evidence that North Korea sold Libya two tons of weapons-grade uranium in 2001, the NY Times said. HSBC may bid for New York Community Bancorp, the Independent newspaper reported. Saudi Arabia is ready to increase oil production by more than 15% if needed to help lower prices, Oil Minister Ali al-Naimi said. Amec has agreed to help Korea National Oil Co. develop oil projects in Iraq, the Observer reported. U.S. military commanders said Iraqi militants loyal to al-Sadr seem to have abandoned their effort to control Karbala, the New York Times reported. Lloyds TSB Group Plc, the UK's no.5 bank, is in talks with IBM over a $1.8 billion technology contract, the Mail on Sunday said. Spending on Internet advertising reached $7.3 billion in 2003, a 21% increase, the San Francisco Chronicle reported. Halliburton's CEO said his company has never overcharged the U.S. Army for work in Iraq, the NY Times reported. Pakistan's President and India's new Prime Minister discussed peace moves between the countries and pledged to continue the process, Agence France-Presse reported. Starwood Hotels & Resorts Worldwide Chairman Sternlicht said he is "seeing group bookings making a significant comeback" and that the U.S. economy is "definitely getting legs under it," Bloomberg reported. Hewlett-Packard will offer its first mobile phone that combines the functions of a hand-held computer during the second half of this year, the Commercial Times reported. Vodafone may raise its dividend 20% this week, Bloomberg reported. Wells Fargo may buy Strong Capital Management, which settle lawsuits last week over allegations of engaging in improper mutual fund trading, Bloomberg reported.

Late-Night Trading
Asian indices are mostly higher, -.25% to +2.0% on average.
S&P 500 indicated +.38%.
NASDAQ indicated +.39%.

BOTTOM LINE: I expect U.S. stocks to open modestly higher in the morning on strength in Asia and falling oil prices. I have had some huge winners in the last couple of weeks and may rotate out of a few of these tomorrow. The Portfolio is 125% net long.

Sunday, May 23, 2004

Weekly Outlook

There are a number of important economic reports and a few significant corporate earnings reports scheduled for release this week. Economic reports this week include Consumer Confidence, Existing Home Sales, Durable Goods Orders, New Home sales, Preliminary GDP, Initial Jobless Claims, Personal Income, Personal Spending, PCE Deflator, Univ. of Mich. Consumer Confidence and the Chicago Purchasing Manager report. Consumer Confidence readings, Durable Goods Orders, PCE Deflator and the Chicago Purchasing Manager report all have market-moving potential.

Novell(NOVL), Medtronic(MDT), Computer Associates(CA), Williams-Sonoma(WSM), Sports Authority(TSA), Toll Brothers(TOL), Vodafone(VOD), Krispy Kreme(KKD), Autozone(AZ), Costco(COST) and Vivendi Universal(V) are some of the more important companies that release quarterly earnings this week. There are also a few other events that have market-moving potential. The CSFB Semiconductor & Equipment Conference, UBS Software and Services Conference and the CSFB Small-cap Conference could all impact trading this week.

Bottom Line: I expect U.S. stocks to rise modestly throughout the week as oil and interest rates decline. As well, continued positive news on the earnings front and from several conferences should push stocks higher. While the major indices were mostly flat last week, breadth improved as many stocks posted significant gains. Recent Put/Call and Arms Index readings are also consistent with a rise this week. I expect basic materials stocks will continue their outperformance, while energy-related stocks should remain laggards. I took a long position in NKTR on Friday afternoon and I am using a $17 stop-loss on the position. The Portfolio is 125% net long heading into the week.

Chart of the Week



Bottom Line: The Index of Leading Economic Indicators, released last week, rose .1% in April. However, the March number was revised to show a .8% increase, the largest since May of 2003, right before US economic growth exploded upwards. Moreover, the Index rose 4.9% year-over-year in April, the largest 12-month gain since March 1984. "It's hard to see a second-half slowdown here. The increase in the Index of Leading Indicators during the past year is consistent with GDP growth of about 6.75%," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

Market Week in Review

S&P 500 1,093.56 -.19%

U.S. stocks were mixed last week as more violence in Iraq and high oil prices once again dominated headlines, drowning out continuing strength in the economy and better-than-expected corporate reports. Stocks rose from their lows on Monday morning after the President of the Iraqi governing council was assassinated. As well, a continued rise in energy prices and political instability in India and Taiwan could not take stocks meaningfully lower early in the week. However, as the week progressed, strong corporate earnings, several mergers, constructive comments from OPEC and stabilizing interest rates could not push stocks higher.

There were a number of very positive stories during the week. Applied Materials, Hewlett Packard, Home Depot, Lowe's, Synopsys, Nordstrom and STMicroelectronics all reported strong quarterly earnings. In merger news, Cardinal Health paid an 18% premium for Alaris Medical, Tellabs paid a 13% premium for Advanced Fiber and Marsh & McLennan agreed to purchase Kroll for a 32% premium. Delta Air had its biggest weekly advance in 14 months after a Lehman analyst said shares may double if the company reaches an agreement with its pilots. Shares of Internet jewelry retailer Blue Nile rose 31% following its IPO. Finally, shares in Millennium Pharmaceuticals rose after the company said its Velcade medicine helped people with a blood cancer called multiple myeloma live longer.

Bottom Line: Overall, last week was characterized by trend-less choppy trading. However, if positioned properly, profits were attainable. Basic material, airline, gaming, retail, foreign and some tech stocks registered good gains. Energy-related stocks fell as crude oil had its worst weekly performance in 7 weeks in anticipation of an OPEC production increase. Again, I believe investor psychology is being affected by the mainstream media's obsession with negativity. Very little attention was paid last week to the many strong earnings and economic reports, mergers, falling oil prices and positive biotechnology news. Instead, negative stories on Iraq and inflation made headlines once again. The CPI, a measure of consumer inflation, is projected to rise 2.2% this year, below its 84-year average of 3.0%. Oil accounts for less than 5% of inflation. Even if oil stayed unexpectedly high at $40/bbl., it would only shave .3% off of U.S. GDP growth each of the next two years. Oil, currently $39.93/bbl., has barely risen over the last 23 years. It would have to rise to $78/bbl. to reach the inflation-adjusted levels it hit during the height of the Iran hostage crisis during the early 80's. Oil-related stocks are breaking down in anticipation of lower prices in the near future. Mild inflation is historically good for stocks, yet 90% of the financial stories last week seemed to revolve around inflation worries. There are many positive stories relating to the current state of the U.S. economy that are not being told or are spun in a negative light in the media's quest for negativity. With the S&P's 04 P/E at 16.95 and falling almost daily and economic growth the best in two decades, fundamentals should win out over the longer-term. However, it is still possible that investor psychology is so greatly damaged from the constant barrage of negative stories that it results in a self-fulfilling prophecy of slower economic growth.

Saturday, May 22, 2004

Economic Week in Review

ECRI Weekly Leading Index 133.80 -1.33%

Empire Manufacturing for May came in at 30.21 versus an estimate of 34.0 and 34.03 in April. This was the 13th consecutive monthly increase as more companies added workers to meet increased demand and shipments rose to a record. The index of prices paid rose to 17.5 from 13.1 the prior month. "U.S. industrial production is picking up and economic slack is being absorbed at a steady pace," said Sherry Cooper, chief economist at BMO Nesbitt Burns. "Prices received rose faster than prices paid for the first time in a while," implying that companies are starting to re-gain pricing power, said Elisabeth Denison, an economist at Dresdner Kleinwort Wasserstein.

Japan's economy grew at a much greater-than-expected 5.6% annual pace in the first three months of the year, expanding for an eighth straight quarter, as an export-led recovery spread to consumer spending, Bloomberg reported. Rising demand for Japanese cellular phones, digital cameras and other electronic equipment has fueled capital spending. Consumer spending, the strongest in years, accounted for more than a third of the expansion, Bloomberg reported.

U.S. Housing Starts in April were 1969K versus expectations of 1985K and 2011K in March. Building Permits for April were 1999K versus estimates of 1960K and 1975K in March. Increased job growth and other signs of economic expansion are keeping housing demand strong, even as mortgage rates rise, Bloomberg reported. "The housing economy is incredibly strong," said Joel Rassman, Chief Financial Officer of Toll Brothers.

President Bush nominated Alan Greenspan to a fifth term as chairman of the Federal Reserve, saying the central banker has done a "superb job" in guiding the U.S. economy to the fastest growth in two decades. Greenspan said he was "honored" by the nomination and would serve if confirmed again by the U.S. Senate.

Initial Jobless Claims last week rose to 345k versus a 328K estimate and 333K the prior week. Continuing Claims were 2943K versus expectations of 2956K and 2966K prior. The four-week moving average for continuing claims fell to the lowest level since 2001, Bloomberg reported. "When you look at some of the jobs data, when you look at some of the indexes around industrial production and confidence levels among businesses, I think all those things point up," Ron Sargent, CEO of Staples Inc. said.

Leading Indicators for April rose .1% versus estimates of a .2% rise and a revised .8% rise in March. The March increase was the strongest since May of 03, right before GDP growth exploded upwards to the fastest pace in two decades, Bloomberg said. "It's hard to see a second-half slowdown here," said Ian Shepherdson, chief U.S. economist at High Frequency Economics. The increase in the index of leading indicators during the past year is "consistent with GDP growth of 6.75%." "The outlook for the economy is strong. It's almost absurd to be arguing anything else," said Tim Rogers, chief economist at Briefing.com.

Philadelphia Fed. for May was 23.8 versus estimates of 30.5 and 32.5 in April. The index, which reached a 10-yr high in January, has been in positive territory since June 2003, signaling continued economic expansion in the region. U.S. factories boosted production and added more workers to their payrolls than at any time in almost 4 years. Rising demand has kept inventories lean and will probably encourage manufacturers to keep employment growing and assembly lines humming, Bloomberg reported.

The Fed's pledge to raise interest rates at a "measured" pace is "not an unconditional commitment," Fed Governor Ben Bernanke said. "The pace of tightening will of necessity respond to evolving economic conditions." The Fed's preferred inflation measure, the personal consumption expenditures price index minus food and energy, rose at a 1.4% annual rate in March, up from 1.2% in February. Bernanke also said he still expects economic developments to be consistent "with a gradual adjustment of policy," with core inflation "likely to remain in the zone of price stability during the remainder of 2004 and into 2005."

China plans to raise interest rates for the first time in nine years unless steps taken so far to cool an investment boom produce a more pronounced slowdown in the economy, Vice Minister of Finance Lou Jiwei said. "The measures that have been taken have shown some effectiveness but the overheating problem hasn't been fully solved," Lou said. China's foreign trade is expected to grow at a slower pace this year as higher raw material prices curb exports and a government clampdown on investment slows imports, the country's commerce ministry said.

Bottom Line: There are several key takeaways for the week. First, U.S. factories are continuing to increase production to meet rising demand. Profits are soaring as companies regain pricing power, allowing them to hire more workers. Japan, the world's second largest economy, is contributing meaningfully to world growth for the first time in close to 15 years. The Japanese consumer which has not participated in past recoveries is finally gaining confidence. This very positive development is almost completely ignored by the financial media. Pent-up demand for housing remains robust. As more Americans gain employment demand will remain relatively strong, notwithstanding higher interest rates. Job growth should stay at high levels as executive confidence is high, corporate profits are soaring, inventories are low and demand remains strong. The revised March Leading Indicators number points to another spurt in economic growth in the near future. At a minimum, U.S. economic growth should stabilize at current high levels throughout the remainder of the year. Statements by multiple Fed members last week were very important. They said that they expect to raise rates at a moderate pace in the near future, however they WILL NOT allow inflation to become a problem. This should quell fears that the Fed was falling behind the curve with respect to inflation. Finally, China seems committed to slowing growth to a more sustainable level. While a hard-landing for the Chinese economy is still possible, the much more likely outcome is a soft-landing which would be very positive for the long-term economic health of the region and the world. I continue to expect a 50 basis point increase at the June 29-30 Fed meeting. However, a continuing rise in energy prices or a significant fall in stock prices could result in a 25 basis point increase or a delay in any rate hike. It is also very possible that the Fed decides to make an inter-meeting move of 25 basis points before the June meeting and another 25 at the meeting. This scenario is likely in the case of a significant fall in oil prices or much higher-than-expected inflation readings.

Friday, May 21, 2004

Weekly Scoreboard

Indices
S&P 500 1,093.56 -.19%
Dow 9,966.74 -.46%
NASDAQ 1,912.09 +.41%
Russell 2000 545.81 +.38%
Total Market 258.08 -.11%
Volatility(VIX) 18.49 +.11%
AAII % Bulls 36.67 +11.49%
US Dollar 90.49 -1.23%
CRB 269.78 +.22%

Futures Spot Prices
Gold 384.90 +2.04%
Crude Oil 39.93 -3.32%
Natural Gas 6.35 -.81%
Base Metals 104.99 +2.91%
10-year US Treasury Yield 4.76% -.25%
Average 30-year Mortgage Rate 6.30% -.63%

Leading Sectors
Airlines +7.34%
Iron/Steel +5.62%
Gaming +1.90%

Lagging Sectors
Biotech -2.12%
Oil Service -2.68%
Energy -2.72%

*% Gain or loss for the week

Mid-day Update

S&P 500 1,096.20 +.64%
NASDAQ 1,909.55 +.68%


Leading Sectors
Airlines +2.31%
Homebuilders +2.0%
Iron/Steel +1.99%

Lagging Sectors
Energy -.15%
Oil Service -.64%
Fashion -.70%

Other
Crude Oil 39.82 -2.40%
Natural Gas 6.31 -.22%
Gold 385.70 +1.90%
Base Metals 104.99 +2.39%
U.S. Dollar 90.50 +.58%
10-Yr. T-note Yield 4.75% +1.09%
VIX 18.20 -2.52%
Put/Call 1.19 -.83%
NYSE Arms .78 -55.93%

Market Movers
MRVL +8.5% after beating 1Q estimates.
WM +6.81% on rumors of acquisition by HSBC or Citigroup.
SRNA +15.6% after beating 1Q estimates and raising 2Q guidance.
IHI +12.29% after confirming rumors that it is evaluating strategic alternatives to increase shareholder value, including a possible sale or recapitalization of the company.
PD +4.8% after copper futures rose to a 2-week high on concern about possible disruptions at a Quebec refinery run by Noranda, Canada's largest mining co.
UTEK -11.2% after lowering 2Q guidance and widening 04 forecast.
CSGS -5.83% after announcing that its COO and President of Global Software Services are leaving.

Economic Data
None of note.

Recommendations
CIEN cut to Reduce at UBS, target $2.50. MWD raised to Sector Outperform at CIBC. KFT raised to Outperform at CSFB, target $34. QSFT rated Buy at Bank of America, target $16. ESV raised to Outperform at CSFB, target $35. GS rated Outperform at CSFB, target $36. RSE rated Overweight at Prudential. ENR cut to Underweight at Prudential. CNXT rated Overweight at Morgan Stanley. Goldman reiterated Outperform on AFL and MRVL. Goldman boosted Lodging sector to Attractive, favorites are MAR and HLT. Goldman raised HOT to Outperform. Goldman reiterated Underperform on CIEN, RKY and TLAB. Goldman still likes Gold sector, favorites are NEM and PDG. Citi SmithBarney raised TLAB to Buy, target $11. Citi reiterated Buy on AAP, target $50. Citi reiterated Buy on EEFT, target $26. Citi reiterated Sell on TSS, target $20.

Mid-day News
U.S. stocks are higher mid-day on falling energy prices and strength in cyclical shares. Pakistan would consider sending troops to aid Iraq once it is free from U.S. control, the Washington Times reported. Video footage of beatings, forced amputations and beheadings during the rein of Saddam Hussein were released this week to contrast the images with abuses by the American military, Bloomberg reported. U.S. Marines and Navy Seabees want to hire Iraqis to repair and renovate mosques, as a means of proving the war in Iraq isn't targeting the Islamic religion, the LA Times reported. Pimco's Robert Arnott said on CNBC that he is investing in REITs and short-term bonds. SBC Communications enlisted managers and hired retirees to field customer calls, fix broken lines and handle other vacant jobs as 100,00 workers began a four-day strike, Bloomberg reported. Saudi Arabia said it will propose that OPEC increase its oil-production quota by more than 2 million barrels a day, Bloomberg said. Florida, Michigan and Ohio, states that may have the closest contests in the presidential election, gained 52,600 jobs last month, Bloomberg reported. The benchmark 10-yr. T-note is headed for its biggest weekly gain since March after comments by Fed policy makers raised optimism the central bank will be able to contain inflation, Bloomberg said.

BOTTOM LINE: The Portfolio is having another good day today as a couple of my airline and Chinese ADRs are rising substantially. I have not traded today and the Portfolio is still 100% net long. I think U.S. stocks will trade neutral to higher into the afternoon on a continuing drop in oil prices. An unexpected rally in bonds this afternoon could lead to a more significant stock rally.

Thursday, May 20, 2004

Friday Watch

Earnings of Note
Company/Estimate
CPRT/.20
HLR/.09
QSII/.40

Splits
DHR 2-for-1

Economic Data
None of note.

Recommendations
Goldman Sachs reiterated Outperform on WAG, NKE, USB and DOW. Goldman reiterated Outperform on NUE, target $105. Goldman reiterated Underperform on NAV and PVH. CL may rise to $65 this year helped by renewed growth in North America, Business Week reported. Shares of SEPR are worth buying because the drug-maker may soon be a takeover target after the FDA approved its medication for sleep disorders, Business Week reported.

Late-Night News
Asian indices are higher on strength in technology shares after an industry report showed semiconductor-equipment orders more than doubled from a year ago. Fluor Corp., Parsons Corp., Washington Group International, Perini Corp. and Halliburton's KBR unit are being probed to ensure they are following U.S. laws and codes of ethics in Iraq, Business Week reported. The U.S. is investigating suspicious activity along the New York-Philadelphia-Washington rail link after people were seen carrying out suspected surveillance of commuter lines, ABC reported. Taiwan President Chen Shui-bian's inaugural speech was a "separatist roadmap" that showed his determination to press ahead with pro-independence policies, the government-owned China Daily said. Nextel lost the FCC's support for a plan to spend $1.36B to ensure that its cell-phone towers stop interfering with emergency signals, the Washington Post said. The U.S. CBO is reviewing the possible withdrawal of 75% of U.S. soldiers stationed in South Korea to reduce costs, as part of its efforts to narrow the budget deficit further, Bloomberg reported. The FBI warned law enforcement agencies to be on the watch for suicide bombers who may strike within the U.S., Time magazine reported in its on-line edition. Pay for investment bankers on average will increase 22% this year, the most since the stock market bubble burst in 2000, Bloomberg reported.

Late-Night Trading
Asian Indices unch. to +2.0% on average.
S&P 500 indicated -.08%.
NASDAQ indicated +.07%.

BOTTOM LINE: I expect U.S. stocks to open higher tomorrow morning on stabilizing energy prices, falling interest rates and strength in Asian technology shares. I will likely add market exposure on any significant early morning weakness. The Portfolio is 100% net long heading into tomorrow.

Thursday Close

S&P 500 1,089.19 +.05%
NASDAQ 1,896.59 -.08%


Leading Sectors
Airlines +2.78%
Broadcasting +.77%
Defense +.66%

Lagging Sectors
Restaurants -1.08%
Networking -1.22%
Disk Drives -1.64%

Other
Crude Oil 40.61 -.47%
Natural Gas 6.31 -.22%
Gold 379.50 +.26%
Base Metals 102.54 -.13%
U.S. Dollar 90.93 +.44%
10-Yr. T-note Yield 4.70% -1.49%
VIX 18.67 -1.37%
Put/Call 1.20 +50.00%
NYSE Arms 1.77 +63.89%

After-hours Movers
MRVL +2.94% after beating 1Q estimates.
SRNA +14.72% after beating 1Q estimates and raising 2Q guidance.
JWN +4.08% after beating 1Q estimates and raising 2Q guidance.

Recommendations
BEC and GPRO rated new Buys by UBS.

After-hours News
U.S. stocks finished nearly unchanged Thursday after economic reports gave conflicting messages and interest rates dropped. After the close, the Financial Times said the U.S. may have to import an average of 10.4 million barrels of oil a day throughout the summer to avoid dipping into its reserves. Federal Reserve Bank of Dallas President McTeer told CNBC that a "bad inflation report" is the only thing that could "legitimately" prompt a Fed meeting before June 29. Bonds rallied today after Fed Governor Bernanke said inflation "appears likely to remain in the zone of price stability" this year and into 05, Bloomberg reported. Draining the U.S. Strategic Petroleum Reserve to lower energy prices in the short-term would encourage terrorists who might be trying to disrupt energy supplies and the economy, President Bush told CNBC. The contest between President Bush and Senator Kerry may push spending for the presidential and congressional election campaigns to a record $3 billion this year, Bloomberg reported. Nordstrom said profits soared 140% and sales at stores open more than a year rose 13%, the most in more than a decade, Bloomberg reported.

BOTTOM LINE: The Portfolio had a good day today and I took profits in a couple of tech longs and homebuilding shorts and added a few airline and paper longs, leaving the Portfolio with 100% net long market exposure. One of my new longs is GP and I am keeping a $32.50 stop-loss on the position. With interest rates falling, oil stabilizing and the Put/Call ratio and ARMs index soaring, I expect U.S. stocks to make another rally attempt in the next couple of days.

Mid-day Update

S&P 500 1,090.41 +.15%
NASDAQ 1,900.66 +.12%


Leading Sectors
Airlines +1.55%
Broadcasting +.94%
Banks +.67%

Lagging Sectors
Restaurants -1.04%
Networking -1.05%
Disk Drives -1.33%

Other
Crude Oil 41.12 -.92%
Natural Gas 6.36 -1.39%
Gold 378.70 -1.12%
Base Metals 102.54 -.13%
U.S. Dollar 91.13 +.66%
10-Yr. T-note Yield 4.73% -.96%
VIX 18.81 -.53%
Put/Call 1.27 +58.75%
NYSE Arms 1.60 +48.15%

Market Movers
AFCI +11.40% after announcing TLAB would acquire it for $1.9B.
INTU -8.11% after beating 3Q estimates and lowering 4Q and 05 forecast.
NAV -16.17% after missing 2Q and lowering 3Q guidance.
PHRM +49.2% after the FDA approved its Vidaza drug for treating a cancer-like bone-marrow illness.
NILE +32.2% on strong demand for its IPO.
SNPS +8.1% after beating 2Q estimates and raising 3Q guidance.
PETM +5.98% after beating 1Q estimates and raising 2Q/04 forecast.
CUNO +6.83% after beating 2Q estimates and raising 04 forecast.
BBOX -14.04% after missing 4Q estimates.
SFCC -12.62% after Jeffries downgrade to Hold.

Economic Data
Initial Jobless Claims for May came in at 345K versus expectations of 328K and 333K prior week.
Continuing Claims came in at 2943K versus 2956K estimate and 2966K prior.
Leading Indicators for April rose .1% versus expectations of .2% and .8% in March.
Philadelphia Fed. for May came in at 23.8 versus a 30.5 estimate and 32.5 in April.

Recommendations
THC rated Buy at Oppenheimer, target $17. JCP raised to Overweight at Morgan Stanley, target $42. PX raised to Buy at Bank of America, target $42. WMI rated Outperform at CSFB, target $36. DAL raised to Overweight at Lehman, target $10. QCOM raised to Overweight by Prudential, target $75. Goldman Sachs said AVP is top pick in household products/personal care universe. Goldman reiterated Outperform on SYMC. Citi SmithBarney said to Buy SSCC, GP and WY. Citi also said to Buy MAS, target $36. Citi reiterated Sell on BA, target $36. Citi said to Buy UNH ahead of conference next week, target $86. Citi reiterated Buy on GE, target $36.

Mid-day News
U.S. stocks are hovering near the flat-line today on conflicting signals from recent economic reports. Best Buy, Sears and CompUSA are offering consumers in-home installation and repair services in an effort to boost loyalty, the Wall Street Journal reported. The company overseeing aid for the United Nations' scandal-plagued oil-for-food program in Iraq failed to staff important checkpoints and couldn't account for "massive discrepancies" between reported and actual aid shipments, the Washington Times reported, citing an internal UN audit. Verizon said it will install its fiber-optic network in only 7 towns in Bergen County, NJ, instead of 34, after a state ruling limited the amount it could charge competitors that lease its local phone lines, the Star-Ledger of Newark, NJ, reported. U.S. TV executives are curtailing reruns and scheduling more reality shows to compete with cable and win young adult viewers, the LA Times reported. The median sale price of a home in LA county rose 28% in April, to $387,000, the LA Times reported. Verizon, privacy advocates and some members of Congress fear that the new Cellular Telecommunications and Internet Association's directory could make users vulnerable to telemarketers and e-mail spammers, the LA Times reported. Manmohan Singh, India's prime minister designate, promised a business-friendly government, Bloomberg reported. Above normal heat will prevail from the U.S. plains to the Pacific Coast and along much of the Eastern Seaboard during the summer, a government forecaster said. Comcast agreed to offer Microsoft's video-on-demand software to its customers, Bloomberg said. The Department of Homeland Security ordered Amtrak and operators of commuter trains to boost security against terrorism by increasing inspections and the use of bomb-sniffing dogs, Bloomberg reported. The Philadelphia Fed index of factory employment surged to a 31-year high and prices paid by manufacturers rose, fueling speculation the Fed will hike rates next month, Bloomberg said.

BOTTOM LINE: The Portfolio is having a good day today as my tech and Chinese ADR longs are rising and retail shorts are falling. I have not traded today and the Portfolio is still 75% net long. I expect U.S. stocks to rise modestly into the afternoon as the Put/Call ratio and ARMs index are soaring, interest rates are dropping and oil is lower.

***Special Report***

Please read this recent report by GlobalInsight entitled "What if Oil Prices Stay at $40?", by Nigel Gault.

Thursday Watch

Earnings of Note
Company/Estimate
ARO/.09
CIEN/-.07
ELBO/.09
GPS/.32
MRVL/.32
JWN/.43
PETM/.21

Splits
SFCC 3-for-2

Economic Data
Initial Jobless Claims for last week estimated at 325K versus 331K the prior week.
Continuing Claims estimated at 2950K versus 2974K prior.
Leading Indicators for April estimated +.2% versus +.3% in March.
Philadelphia Fed. for May estimated at 31.0 versus 32.5 in April.

Recommendations
Goldman Sachs reiterated Outperform on TPX, BIIB, IP, DTC, ABK, PETC and SPP.

Late-Night News
Asian indices are lower on concerns over the political situation in Taiwan and rising energy prices. Hynix Semiconductor of South Korea plans to double shipments of so-called NAND flash memory chips to 2 million units a month by the end of June, Digitimes reported. China's coal shortages have left some power plants with sufficient inventories to keep them running for a day and forced others to shut down, the China Daily reported. HSBC Holdings, Europe's largest bank by market value, may consider buying a U.S. deposit and savings bank to boost its presence in the U.S., the Financial Times said. President Bush reiterated that the U.S.-led coalition would complete a full transfer of sovereignty in Iraq by June 30, Bloomberg reported. OPEC may as soon as this weekend approve Saudi Arabia's plan to boost oil output quotas because of concerns that near record-high prices will slow economic growth, Bloomberg said. Taiwan President Chen Shui-bian said he will press ahead with constitutional revisions without mentioning his plan to put the changes to a public vote, a referendum China has denounced as a ruse to declare independence, Bloomberg reported.

Late-Night Trading
Asian Indices -1.75% to -.25% on average.
S&P 500 indicated -.15%.
NASDAQ indicated -.36%.

BOTTOM LINE: U.S. stocks will likely fall tomorrow morning on weakness in Asia and higher energy prices. Oil would have to reach $78/bbl. on an inflation-adjusted basis to equal levels seen during the Iran hostage crisis in the early 80's. The price of oil has barely risen over the last 23 years while other goods and services have risen continuously. The U.S. CPI is expected to rise just 2.2% this year, below its 84-year average of 3.0%. Worldwide inflation is projected to rise at its slowest pace ever this year. According to GlobalInsight.com, a well-repected economic consultant, $40/bbl. oil for the next 2 years would only shave .3% off of GDP growth each year. Under this scenario, the U.S. CPI would rise 2.1% next year and 1.9% in 06, still well below the 84-year average.


Wednesday, May 19, 2004

Wednesday Close

S&P 500 1,088.68 -.26%
NASDAQ 1,898.17 +.02%


Leading Sectors
Nanotechnology +2.20%
Fashion +1.87%
Networking +1.78%

Lagging Sectors
Hospitals -1.51%
Biotech -1.58%
Homebuilders -2.59%

Other
Crude Oil 41.59 +.22%
Natural Gas 6.48 +.42%
Gold 382.50 -.13%
Base Metals 102.67 +1.97%
U.S. Dollar 90.53 -.79%
10-Yr. T-note Yield 4.78% +1.05%
VIX 18.93 -2.07%
Put/Call .80 -13.98%
NYSE Arms 1.08 +33.33%

After-hours Movers
INTU -9.0% after beating 3Q estimates and lowering 4Q and 05 forecast.
SNPS +6.2% after beating 2Q estimates and raising 3Q guidance.
BBOX -11.86% after missing 4Q estimates.
CMOS +5.28% after significantly beating 2Q estimates and raising 3Q forecast substantially.

Recommendations
Goldman Sachs said key takeaway from day one of Steel Conference is that the very strong steel cycle is sustainable on strong demand, no signs of a slowing Chinese economy, stability in scrap prices, tight supply for carbon steel sheet, no price weakness and stainless demand/pricing improving. Goldman reiterated Outperform on GDT, FDC and ARG. Goldman said IBM has 22% upside from here.

After-hours News
U.S. stocks finished mildly lower Wednesday as climbing interest rates and energy prices led to afternoon profit-taking. After the close, Taiwan President Chen Shui-bian said his inaugural speech today will outline a positive approach to improving relations with China and will seek to repair U.S. ties strained by his pro-independence politics, the South China Morning Post reported. The U.S. government should continue filling the strategic petroleum reserve instead of releasing oil from it to lower prices temporarily, T. Boone Pickens told CNBC. American Airlines, United Airlines and Northwest Airlines raised fares in some markets after Continental Airlines boosted prices as much as $20 one way on higher jet fuel costs, Bloomberg reported. SBC Communications is facing the largest U.S. strike since 1997 after the union negotiating labor contract for 100,000 workers rebuffed the telephone company's latest offer and called a four-day walkout, Bloomberg said. Crude oil rose and gasoline futures surged today after the Energy Department said U.S. stockpiles of the motor fuel increased less than expected, Bloomberg reported.

BOTTOM LINE: The Portfolio had a good day today as a few of my tech and Chinese ADR longs rose substantially. However, performance was better earlier in the day. I took profits in a few longs and put on a few new shorts in the homebuilding and retail sectors in the afternoon. The Portfolio is now 75% net long. It was a very disappointing day for the Bulls as investors seem completed fixated on oil prices to the detriment of all other fundamentals. While I think a short-term bottom was made in most stocks last week, it appears that the market will need a few more weeks of consolidation before a real intermediate-term advance begins.

Mid-day Update

S&P 500 1,102.54 +1.01%
NASDAQ 1,929.61 +1.68%


Leading Sectors
Nanotechnology +3.74%
Networking +3.63%
Semis +3.46%

Lagging Sectors
Homebuilders -.17%
Hospitals -.19%
HMO's -.43%

Other
Crude Oil 41.15 +1.50%
Natural Gas 6.34 +2.94%
Gold 382.80 +1.84%
Base Metals 102.67 +1.97%
U.S. Dollar 90.56 -.76%
10-Yr. Long-Bond Yield 4.78% +.96%
VIX 17.86 -7.5%
Put/Call .66 -29.03%
NYSE Arms .44 -44.44%

Market Movers
HPQ +5.6% after beating 2Q revenue estimates and boosting 2nd half revenue forecast by $1B.
KROL +29.9% after announcing that MMC would acquire it for $1.9B in cash.
RIMM +6.59% on Legg Mason upgrade.
AMD +7.16% after announcing it established AMD China, enabling it to conduct an increased scope of business in the country.
SKYE +22.35% after winning U.S. FDA approval for their DepoDur pain treatment.
AMI +17.74% after it agreed to be acquired by CAH for about $1.62B. in cash.
DRIV +9.91% after positive comments at Piper Jaffray conference.
CCDC -19.71% after lowering 04 forecast.
ADSK -5.0% after beating 1Q estimates and lowering 2Q forecast.

Economic Data
None of note.

Recommendations
PHRM raised to Overweight at JP Morgan. PETM rated Buy at Deutsche Bank, target $32. UVN raised to Overweight at Moran Stanley, target $36. HPQ raised to Sector Outperform at CIBC, target $30. ERICY rated Buy at Legg Mason, target $31. RIMM rated Buy at Legg Mason, target $124. CNO rated Overweight at Morgan Stanley, target $24. Goldman Sachs reiterated Outperform on MERQ, UST and PEP. Goldman thinks EMS names are attractive at 18x CY05 estimates, favorites are SLR and CLS. Citi SmithBarney upgraded DNET to Buy, target $28. Citi rated MDT Buy, target $57. Citi rated GDT Sell, target $57. Citi reiterated Buy on BJ, target $30. Citi reiterated Buy on JCP, target $46. Citi reiterated Buy on DIS, target $32.

Mid-day News
U.S. stocks are higher mid-day on strong earnings reports and strength in Asia. PIMCO's Mohamed El-Erian, who manages more emerging-market debt than any other fund manager, told CNBC that credit fundamentals are improving in emerging markets. OPEC recognizes that near-record crude oil prices may hurt importing nations and can increase supply if needed, Bloomberg reported. The U.S. Department of Health and Human Services plans to speed up investigations of marketing practices by medical-device makers and may bring more charges of fraud and abuse, the Boston Globe reported. More than 100 companies are planning to submit offers for a five-year contract to provide phone and Internet connections for New York City agencies, in the first open-bid process, the New York Daily News reported. Pharmaceutical companies, seeking to cut costs and find new medicines as patents expire, are merging at a record pace this year, making the $430 billion global drug industry the most active acquisition market behind banking, Bloomberg said. Merrill Lynch picked Morningstar and BNY Jaywalk to provide research to its clients as part of the company's settlement with regulators over biased stock advice, Bloomberg reported. Manmohan Singh will form a Congress-led government to run India for the next five years after Sonia Gandhi, who led the party to a surprise election victory, said she wouldn't become prime minister, Bloomberg said. An index of U.S. mortgage applications fell 12% last week as home purchases slowed for the first time in more than a month and loan refinancing dropped to the lowest level since early January, Bloomberg reported.

BOTTOM LINE: The Portfolio is having a very good day today as my Chinese cyclical and tech longs are rising substantially. Rising interest rates and energy prices are keeping U.S. stocks from rising even more. Volume and breadth are pretty good today and I would like to see stocks rally into the close as shorts cover and investors sense they have missed the bottom. I have not traded today and the Portfolio is still 125% net long.