Mid-day Update

S&P 500 1,135.28 -.47%
NASDAQ 2,035.91 -.67%

Leading Sectors
Biotech +3.32%
Oil Service +.96%
Energy +.82%

Lagging Sectors
Networking -1.55%
HMO's -2.25%
Semis -2.93%

Other
Crude Oil 36.92 +1.26%
Natural Gas 5.75 +3.3%
Gold 396.60 +.23%
Base Metals 107.50 +.14%
U.S. Dollar 90.76 -.35%
10-Yr. Long-Bond Yield 4.43% -.63%
VIX 14.99 +7.0%
Put/Call .64 -4.48%
NYSE Arms 1.06 +32.50%

Market Movers
OSIP +127.0% after saying their experimental Tarceva drug improved survival for lung-cancer patients.
IGT -4.8% on profit-taking and concerns over slowing growth.
ABGX +19.0% as investors anticipate positive results on its cancer drug.
TXU +13.09% after agreeing to sell its Australian unit to Sinapore Power for $3.72B.
VALU +24.4% after saying it will pay a special, one-time dividend of $17.50 a share from retained earnings.
ONXX +16.4% as investors anticipate positive results on its cancer drug.
DNA +12.2% on partnership with OSIP.
SCSC +13.2% on continued rise after strong 3Q results and 4Q guidance.
FHCC -13.5% after cutting 1Q/04 guidance.

Economic Data
New Home Sales for March 1228K versus estimates of 1173K and 1128K prior month.

Recommendations
Jim Cramer, of TheStreet.com, had a positive column on cable stocks, favorites are CMCS/A, TWX and CHTR. Goldman Sachs think AMIS will report at high end of guidance. GS reiterated Outperform on DNA, AMR, SII, ADP, WMT, ALK, PFE, HD, BBY, SPLS, PETC, EBAY, KO and UTX. GS reiterated Underperform on PGL, FHCC, FISV, CR and HUM. GS upgraded gold industry to Outperform, sees 30% upside, favorites are NEM and PDG. GS upgraded PXD and XRX to Outperform. Citi SmithBarney reiterated view of Buying homebuilders on weakness. Citi reiterated Buy on CAT, target raised to $106. NSM and AKS rated Underperform at JP Morgan. MXIM, ISG, SIR and ADI rated Overweight at JP Morgan. HLT, LHO and HOT raised to Buy 2 at UBS. WC rated Outperform at CSFB, target $49. PPS cut to Sell at Bank of America. GM raised to Overweight at Lehman. HSY raised to Buy at Merrill, target $97. MTLG raised to Strong Buy at Raymond James, target $28.

Mid-day News
U.S. stocks are lower mid-day as weakness in Semiconductors and HMO's is more than offsetting the very strong Biotechnology sector. Comcast is considering a shareholder dividend and may offer to buy back stock, the New York Post reported. Roche Holding, Genentech and OSI Pharmaceuticals said their experimental Tarceva medicine extended the lives of lung-cancer patients who no longer responded to other treatments in trials. "This is the first time that any drug in this class has shown a survival benefit," Bill Burns, head of Roche's drug division, said in an interview. U.S. sales of new homes rose to a record 1.228 million annual rate in March, exceeding forecasts, as cheap financing and an improving job market persuaded Americans to invest in real estate, Bloomberg reported. A "dangerous situation" is developing in the Iraqi city of Najaf, where insurgents are stockpiling weapons in schools and mosques, reported Bloomberg. President Bush urged Congress to pass measures that would help provide every community high-speed Internet access, give Americans online access to their medical records with 10 years and expand federal efforts to develop hydrogen as an alternative fuel source, Bloomberg reported.

BOTTOM LINE: The Portfolio is up slightly today as one of my long biotechnology positions is up substantially, offsetting losses in other longs. I rotated out of a few semiconductor long positions and into a couple of new biotech positions, leaving the Portfolio with 100% net long market exposure. While it is positive that the bond market is rising on the exceptionally strong housing report, it is negative that semis are breaking down again. I expect stocks to stabilize shortly and begin moving higher into the close. However, if the major indices weaken on the close, I will likely cut market exposure to 75% net long.

Monday Watch

Earnings Announcements
Company/Estimate
ABC/1.20
CNXT/.03
EDS/.01
FWHT/.13
HUM/.41
PBI/.56
VECO/.08
ZMH/.51

Splits
CALM 2-for-1

Economic Data
New Home Sales for March estimated at 1173K versus 1163K in April.

Weekend Recommendations
Forbes on Fox had guests that were positive on PD, FCX, MOT, ZBRA, CVC, COX, CMCSA, VZ, FON, WM and mixed on PTV, MRK and UNH. Bulls and Bears had guests that were positive on PVX, KKD, GM, THC, LUV, MDT, mixed on HPQ, MSFT, CC, XRX, GS and negative on TASR. Cashin' In had guests that were positive on TRB, VIA/B, VIP, MBT and mixed on LEND and GENZ. Louis Rukeyser's Wall Street had guests that were positive on MMC, RD, UNP, COH, BR, PGR, CFC, COF, CAT, CNX, BTU, MEE, ACI, NFX and negative on financials, homebuilders and metals. Wall St. Week w/Fortune had guests that were positive on AMR, ALK, UTX, GR, HON, ABXA, BA, RHAT, MWAY, SII, HL, IWM, GE, AIG, PEP, MSFT, PFE and negative on JBLU. Barron's had positive columns on HAL, LGF and negative columns on the Nikkei and China.

Weekend News
Interest rates are creating a wall of worry for the markets, Bloomberg reported. Analysts' expectations for semiconductor industry growth this year continue to edge upward, with In-Stat/MDR predicting a 29 percent rise this year. Last month the Semiconductor Industry Association forecast a 19.4 percent growth year for the industry. California, Arizona, Montana and other Western U.S. states are at above-average risk for wildfires in 04, the Washington Post reported. 71% of Chinese workers earn between $96-$300/month, Xinhua News Agency reported. Cingular and other U.S. mobile-phone operators are increasingly marketing handsets and services to teens, who are more likely than adults to use features that cost extra such as text messages, cameras and games, the Washington Post reported. GM's sales to China rose 70% in the first quarter, Xinhua News reported. Google may have a market value of as much as $25 billion by the end of its first day of trading, the New York Times said. Google has picked CSFB and Morgan Stanley to lead the IPO, the Wall Street Journal reported. Apple Computer may be developing a line of digital mobile phones that use the Internet for transmitting calls, the New York Times said. Caterpillar workers represented by the UAW rejected the company's contract proposal, Reuters reported. Libya, a day after the U.S. lifted sanctions, said it brokered its first sale to an American oil company since 1986 -- a shipment of 2 million barrels of oil worth about $73 million, Bloomberg reported. Samsung raised its forecast for 04 industry wide handset sales for the second time this month, citing rising consumer demand for new models, Bloomberg reported. Crude oil futures rose in NY and London after attacks on Iraq's offshore oil export terminals over the weekend heightened concern about possible disruptions to supplies from the Middle East's third-largest crude producer, Bloomberg reported. Shares of Asian airlines are falling after China reported 4 new suspected SARS cases in Beijing, renewing concerns the disease may crimp leisure and business travel, Bloomberg said.

Late-Night Trading
Asian indices are mostly lower, -1.75% to +.25% on average.
S&P 500 indicated -.10%.
NASDAQ indicated -.17%.

BOTTOM LINE: The Portfolio is 125% net long heading into the week. U.S. stocks may open lower Monday morning on weakness in Asia from rising oil prices, SARS concerns and U.S. interest rate worries. I expect shares to rally later in the day on strong fundamentals and improving technicals.

Weekly Outlook

There are number of economic reports scheduled for release this week. As well, another heavy week of corporate earnings reports is on tap. Scheduled economic reports include New Home Sales, Consumer Confidence, Existing Home Sales, GDP, Employment Cost Index, Initial Jobless Claims, Help Wanted Index, Personal Income/Spending and Chicago Purchasing Manager. Consumer Confidence and GDP are the most important reports scheduled for release.

Zimmer Holdings(ZMH), BP(BP), Du Pont(DD), Imclone(IMCL), U.S. Steel(X), Verizon(VZ), Flextronics(FLEX), McDonald's(MCD), Monster Worldwide(MNST), Boeing(BA), Bristol-Myers Squibb(BMY), Comcast(CMCSA), Hilton Hotels(HLT), Electronic Arts(ERTS) and Ingram Micro(IM) 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 Fed's Moskow and ECB's Issing speak at a Fed Conference Monday. Finally, on Tuesday CIBC has its Biotech Conference and Greenspan speaks at the Washington Energy Conference.

BOTTOM LINE: It was good to see investor complacency drop last week with the AAII Bullish % falling 21.57% to 50.0%. The CRB breaking down through its 6-month uptrend line was positive as well. I would like to see the NASDAQ move through 2,060 on good volume to confirm last week's move. This should strengthen the broad market and set the indices up for a test of the recent highs. The stock market will once again key off the bond market. I expect both Consumer Confidence reports to exceed expectations and a blow-out GDP report on Thursday. I expect U.S. GDP growth for the first quarter to come in around 6.0%. This is significantly higher than the recently upwardly revised 5.0% estimate. The bond market's reaction to these very positive data points will likely direct stock prices throughout the week. It is probable the major indices will rise through mid-week, then decline as interest rates rise on the blow-out GDP report.

Chart of the Week

CRB Index 6-month Chart



Bottom Line: The CRB Index, a measure of commodity prices, broke its 6-month uptrend last week. Commodity prices have been the main source of investor concern regarding inflation. Higher U.S. interest rates, the Chinese government's attempts to slow its scorching economy and a rising U.S. dollar should continue to pressure commodity prices in the short-term.

Market Week in Review

S&P 500 1,140.60 +.53% for the week.

U.S. stocks finished higher on the week led by technology shares as numerous quarterly reports exceeded investor expectations. General Motors(GM), Motorola(MOT), Ford(F), Qualcomm(QCOM), Juniper(JNPR), eBay(EBAY), American International Group(AIG), United Parcel Service(UPS), Caterpillar(CAT), American Express(AXP), Microsoft(MSFT), Broadcom(BRCM), 3M(MMM), Altria(MO), Eli Lilly(LLY), Wells Fargo(WFC), Coca-Cola(KO), Amgen(AMGN), Cummins(CMI), Honeywell(HON) and Corning(GLW) are some of the major U.S. companies that reported stellar results. Bloomberg reported that with more than half of the S&P 500 having reported quarterly results, 78% have exceeded expectations and only 11% have missed estimates. The average earnings increase so far is 26% versus estimates of 13% when the period began, Thomson Financial reported. Doug Cote, who helps manage $40 billion at ING Investment Management, said, "Earnings will continue to surprise on the upside and that will trump inflation scares every time."

Last week was characterized by a tug-of-war between strong corporate/economic reports and rising interest rates. The Wireless and Software sectors, led by Motorola and Microsoft respectively, were the stand-outs for the week. Interest rates rose again last week on the strongest Durable Goods report since the early 80's, great corporate earnings reports and continued inflation worries. Commodity-related sectors continued their recent downtrends as the U.S. dollar rose and China talked of slowing its scorching economy. The CRB Index, a measure of commodity prices, broke down through its six-month uptrend line last week.

BOTTOM LINE: I believe the major U.S. indices are preparing for an assault on their recent highs. I would like to see the NASDAQ break 2,060 on good volume to confirm last week's move. I can't emphasize enough how important Microsoft's report is to the overall market. This company has been a drag on the performance of the major indices during this entire bull-run. I think its performance will only improve throughout the year as corporate hiring and spending accelerate. The fall in the CRB Index is a very positive development as well. Commodity prices have been the main source of investor concerns over inflation. The S&P 500 current P/E of 22.1 is below where it was in 1992 and 1987 before major bull moves. However, most pundits and analysts harp on excessive valuations. The P/E on 04 estimates is 18 and falling as numerous companies are significantly beating expectations. While I do not view the market as cheap, I hardly find its valuation excessive given corporate profits are at all-time highs, American's net worth is at all-time highs, inflation and interest rates are relatively low, U.S. and world economic growth is the strongest since the early 80's, job growth is accelerating and productivity is near record levels. U.S. stocks deserve a premium multiple based on these characteristics.

Economic Week in Review

ECRI Weekly Leading Index 134.60 +.30%

The Index of Leading Economic Indicators rose .3% in March, meeting expectations and up from an unchanged reading last month. This was the largest year-over-year gain since 1984 and shows the U.S. economy is gaining momentum. Companies taking longer to fill orders on increasing demand, falling jobless claims, rising building permits and tax refunds putting more money in the hands of consumers, all contributed to the rise, Bloomberg reported. Taxpayers received $142.5 billion in refunds through April 2, compared with $131.4 billion at the same time last year. Finally, the increase suggests that economists may need to reconsider their projections of 4.3% growth for the second quarter.

The Producer Price Index for March rose .5% versus expectations of a .4% rise and a .1% increase in February. The PPI Ex Food and Energy rose .2% versus expectations of a .1% increase and a .1% gain the prior month. Exceptional economic growth in the U.S. and China is increasing demand for commodities, thus leading to price increases. "These are not alarming increases, but they are higher than they have been in a few years," said Christopher Low, chief economist at FTN Financial.

U.S. Federal Reserve Chairman Alan Greenspan said most U.S. banks are well positioned to adjust their balance sheets to higher interest rates. "Many banks indicate that they now either are interest rate neutral or are positioned to benefit from rising rates," Greenspan said. Bank asset quality is improving as U.S. banks charged off .75% of total loans as non-performing assets in the final quarter of 03, the lowest rate since the stock market bubble burst in 2000, Bloomberg reported. Alan Greenspan also said, "The threat of deflation is no longer an issue for the U.S. and companies appear to have a greater ability to raise prices." Greenspan dismissed rising commodity prices as an inflation threat, saying that they're a small part of total costs for companies. Moreover, Greenspan said, "Inflation pressures are reasonably contained as labor productivity helps hold down prices because firms can produce more goods in an hour." Labor costs, which account for 70% of inflation, are still declining. Non-farm unit labor costs fell .4% in the 4th quarter after a 5.6% decline in the prior three months, Bloomberg reported. Greenspan proceeded to say, "The U.S. economy is in a vigorous expansion that has not produced broad-based inflation pressures." "A rapid pace of growth is leading companies to add to payrolls, and once signs of accelerating inflation appear, the central bank will raise interest rates," Greenspan told the Joint Economic Committee of Congress.

Initial Jobless Claims fell to 353K last week versus expectations of 340K and 362K the prior week. Continuing Claims rose to 3019K versus expectations of 2988K and 2967K the prior week. "Job creation is still going at a healthy clip, but not at a rate that's appreciably stronger than what we say in the first quarter," said Richard DeKaser, chief economist at National City. DeKaser expects 170,000 jobs were added in April, a month after the biggest gain in almost 4 years, Bloomberg reported.

Durable Good Orders for March rose 3.4% versus expectations of a .7% rise and a 3.8% rise in February. "The manufacturing sector is on fire," said Anthony Chan, chief economist at Banc One Investment Advisors. The jump in orders makes it more likely companies will boost work hours and hiring, Lehman Brothers economist Drew Matus said. The report also suggests business investment exceeded 10% for a third straight quarter, said Steven Wieting, an economist at Citigroup Global Markets. Kenneth Goldstein, chief economist of the Conference Board, said "We're seeing the beginning of a turnaround for the national labor market with the volume of help-wanted ads rising after 3 years of declines." Gannett Co., the biggest U.S. newspaper publisher, said last week its help-wanted ads soared 23% in March. Help-wanted ads are a tremendous indicator because companies don't advertise for employees unless they intend to hire in the next month or two. The fact that it's gotten a lot better in February and March suggests that the pace of economic activity is really improving, Bloomberg reported.

BOTTOM LINE: There are several key takeaways for the week. I now believe that the U.S. economy grew nearly 6% in the first quarter versus economist's estimates of 4.6% growth. I also think second quarter economic growth will be stronger than current expectations of 4.3%. While inflation is not currently a problem, the Fed is preparing the markets for a rate hike in the near future. Unit labor costs, which are 70% of inflation, remain subdued. As well, a stronger dollar and slowing Chinese economy are already contributing to lower commodity prices. The Fed Funds rate, however, is at emergency levels and these levels are unwarranted in the current economic environment. I continue to expect the first rate hike to occur at the June 29-30 meeting, while market expectations are for a raise at the August 10 meeting. Finally, while job creation will temporarily slow from last month's strong pace, the large increase in help-wanted ads and exceptionally strong durable goods report bodes well for another large jobs number in the near future.