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.