Weekly Outlook

There are a number of important economic reports and some significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. - NAHB Housing Market Index
Tues. - Producer Price Index, Housing Starts
Wed. - Final 3Q GDP, Final 3Q Personal Consumption
Thur. - Personal Income, Personal Spending, PCE Deflator, Initial Jobless Claims, Leading Indicators
Fri. - Durable Goods Orders, Univ. of Mich. Consumer Confidence, New Home Sales

A few of the more noteworthy companies that release quarterly earnings this week are:

Mon. - Circuit City Stores(CC)
Tues. - BISYS Group(BSG), Factset Research(FDS), Flowserve(FLS), Jabil Circuit(JBL), Morgan Stanley(MWD), Nike(NKE), Palm Inc.(PALM)
Wed. - Commercial Metals(CMC), Carmax(KMX), Biomet(BMET), Bed Bath & Beyond(BBBY), Family Dollar(FDO), FedEx(FDX), Micron Technology(MU), Paychex(PAYX), Red Hat(RHAT)
Thur. - AG Edwards(AGE), American Greetings(AM), Cintas Corp.(CTAS), ConAgra Foods(CAG), General Mills(GIS), Solectron(SLR)
Fri. - 99 Cents Only(NDN)

Other events that have market-moving potential this week include:

Mon. - None of note
Tue. - Semi Book-to-Bill
Wed. - None of note
Thur. - None of note
Fri. - None of note

BOTTOM LINE: I expect US stocks to finish the week higher on more positive economic/earnings data, declining energy prices, short-covering, seasonal strength, moderating inflation fears and increasing inflows. My trading indicators are still giving bullish signals and the Portfolio is 75% net long heading into the week.

Chart of Interest

BOTTOM LINE: The Consumer Price Index fell at the greatest rate in over 50 years during November. This decline illustrates the extreme effect commodity prices have recently had on various measures of inflation. I continue to believe that the US has experienced a mild bout of cyclical inflation within a secular disinflationary environment. I expect the longer-term trend of disinflation to reassert itself in 2006.

Market Week in Review

S&P 500 1,267.32 +.63%*



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was neutral considering less hawkish Fed comments, healthy retail sales data, decelerating inflation readings, lower long-term interest rates, increasing deal activity, falling energy prices and decent news from the homebuilders. The advance/decline line rose slightly, sector performance was mixed and volume was slightly above average on the week. Measures of investor anxiety were mixed. However, the AAII % Bulls fell again to 46.15%. This reading is now back near average levels, which is a big positive considering most major averages are at least above 4-year highs. The average 30-year mortgage rate fell to 6.30% which is 109 basis points above all-time lows set in June 2003. I continue to believe mortgage rates will head modestly lower over the intermediate-term as measures of inflation decelerate and economic growth slows to average rates. Moreover, the benchmark 10-year T-note yield fell 9 basis points on the week after the Fed made less hawkish comments in their policy statement, foreign demand for US assets hit another record and measures of inflation decelerated.

Small-cap and Nasdaq shares underperformed on profit-taking, option expiration and index rebalancing. Gold fell substantially on the week and appears to have made an intermediate-term top. Unleaded Gas futures were down again and are 46% below September highs even as refinery utilization still remains below normal as a result of the hurricanes. Natural gas supplies decreased more-than-expected this week, however they are still above the 5-year average for this time of year even as over 20% of daily Gulf of Mexico production remains shut-in. It now appears very likely that natural gas has joined oil and peaked for the intermediate-term. As I said last week, prices for many commodities have been driven by fear and record capital inflows into commodity funds, rather than fundamentals. I still expect global energy demand destruction and a significant increase in supplies into 2006 to push energy prices substantially lower from current levels. The S&P 500 is still within striking distance of my mid-year prediction of a double-digit annual gain. The index is currently up 6.44% for the year with 9 trading days remaining.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,267.32 +.63%
DJIA 10,875.59 +.90%
NASDAQ 2,252.48 -.19%
Russell 2000 683.09 -.83%
DJ Wilshire 5000 12,667.59 +.41%
S&P Equity Long/Short Index 1,105.46 +.52%
S&P Barra Growth 606.51 +.73%
S&P Barra Value 656.41 +.54%
Morgan Stanley Consumer 599.30 +1.44%
Morgan Stanley Cyclical 786.81 +.78%
Morgan Stanley Technology 534.61 +.39%
Transports 4,142.49 +.98%
Utilities 417.82 +1.95%
S&P 500 Cum A/D Line 8,624.00 -.59%
Bloomberg Crude Oil % Bulls 41.0 -21.15%
Put/Call .80 unch.
NYSE Arms .96 -5.88%
Volatility(VIX) 10.68 -8.64%
ISE Sentiment 186.00 -5.10%
AAII % Bulls 46.15 -6.71%
US Dollar 89.71 -1.74%
CRB 326.36 -.44%

Futures Spot Prices
Crude Oil 58.06 -2.42%
Unleaded Gasoline 156.89 -2.37%
Natural Gas 13.63 -4.66%
Heating Oil 173.20 -.06%
Gold 506.20 -4.72%
Base Metals 153.29 -.54%
Copper 202.55 +1.83%
10-year US Treasury Yield 4.43% -1.99%
Average 30-year Mortgage Rate 6.30% -.32%

Leading Sectors
Airlines +7.01%
Drugs +3.11%
Homebuilders +2.98%

Lagging Sectors
Oil Service -2.11%
Steel -2.26%
Oil Tankers -2.87%

One-Week High-Volume Gainers
One-Week High-Volume Losers

*5-Day % Change

Stocks Slightly Lower Mid-day on Expiration and Rebalancing

Indices
S&P 500 1,269.17 -.14%
DJIA 10,885.11 +.04%
NASDAQ 2,254.86 -.26%
Russell 2000 682.71 -.30%
DJ Wilshire 5000 12,682.16 -.17%
S&P Barra Growth 607.43 -.16%
S&P Barra Value 657.27 -.13%
Morgan Stanley Consumer 599.59 +.41%
Morgan Stanley Cyclical 787.83 +.07%
Morgan Stanley Technology 535.17 -.09%
Transports 4,147.04 +.03%
Utilities 418.90 +.24%
Put/Call .83 +38.33%
NYSE Arms .96 +15.83%
Volatility(VIX) 10.54 -1.77%
ISE Sentiment 195.00 -10.55%
US Dollar 89.79 -.26%
CRB 326.20 -.73%

Futures Spot Prices
Crude Oil 58.30 -2.82%
Unleaded Gasoline 156.25 -3.36%
Natural Gas 13.68 -.73%
Heating Oil 173.50 -3.15%
Gold 505.90 -.14%
Base Metals 153.29 +1.97%
Copper 202.90 +1.40%
10-year US Treasury Yield 4.44% -.40%

Leading Sectors
Airlines +3.27%
Drugs +.78%
Software +.55%

Lagging Sectors
Coal -1.30%
Oil Service -1.49%
Energy -1.87%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Internet longs, Airline longs and Energy shorts. I covered some of my IWM and QQQQ shorts this morning, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are lower and volume is heavy. Measures of investor anxiety are mostly higher. Overall, today’s market action is negative considering the decline in long-term rates and energy prices. A partnership with Google (GOOG) would be ideal for AOL, in my opinion. Google would provide the "out-of-the-box" type of thinking that AOL is lacking. I don't believe Microsoft (MSFT) could do that. I am convinced that there is tremendous value that can be unlocked in AOL under the right circumstances. This deal would be very big for both parties. I expect US stocks to trade mixed into the close from current levels as rebalancing offsets lower energy prices.

Today's Headlines

Bloomberg:
- S&P will introduce a series of “growth” and “value” indices today that are tied to its US market benchmarks, including the S&P 500.
- GM CEO Wagoner said there’s been “ample interest” in his finance unit and he is confident the automaker can find a buyer after some of the nation’s biggest banks declined to bid.
- US 10-year Treasuries are rising, heading for the biggest weekly gain since November, on speculation the Fed is almost done raising interest rates.
- United Nations Deputy Secretary-General Louise Frechette, who was criticized by former US Fed Chairman Volcker for failing to properly manage the scandal-plagued Iraq oil-for-food program, announced her resignation today.
- Crude oil, heating oil and natural gas are falling on forecasts showing that warmer weather will move across the northern US, reducing demand.
- Google is discussing a 5% stake in AOL for $1 billion that would exclude Microsoft.

Wall Street Journal:
- Yahoo! has signed an agreement with Marketing Management Analytics research firm to offer advertisers the chance to buy detailed research on the effectiveness of their Web advertisement.
- Google is struggling to reconcile its goal of making information “universally accessible and useful” with its aim of expanding in China as it wrestles with Chinese censors.
- A group including Cerberus Capital Management, Kimco Realty and supermarket chain SuperValu may win the auction to buy Albertson’s for about $9.6 billion, or $26 a share.
- Iraq’s struggle toward democracy will require patience and sacrifice, which necessitates the support of the international community, four Eastern European ambassadors to the US wrote.

NY Post:
- Apollo Management’s $1.3 billion takeover of Linens ‘n Things may fall apart in the next two weeks if the retailer fails to meet the earnings goal set for the acquisition.

Washington Post:
- Saudi Arabia’s new ambassador to the US rejected the Iranian president’s description of the Nazi Holocaust during WW II as a myth, saying the “horrific genocide” isn’t in dispute.

NY Times:
- Sid Richardson Energy Services, a gas pipeline company owned by the Bass family of Fort Worth, Texas, yesterday agreed to be acquired by Southern Union for $1.6 billion in cash.
- The participation of Sunni Arabs, a minority, in Iraq’s national election yesterday will raise hopes of a reconciliation with the ruling Shiite parties that came to power in Janurary.

TheDeal.com:
- Fresh Del Monte Produce is looking for a buyer and could be sold for about $1.8 billion.