Mid-day Update

S&P 500 1,116.21 -.40%
NASDAQ 1,977.02 -.51%

Leading Sectors
Hospitals +1.38%
Energy +1.02%
HMO's +.84%

Lagging Sectors
I- Banks -1.50%
Disk Drives -2.56%
Airlines -2.58%

Other
Crude Oil 41.91 +5.09%
Natural Gas 6.68 +3.69%
Gold 395.50 +.15%
Base Metals 110.42 +1.48%
U.S. Dollar 88.81 -.10%
10-Yr. T-note Yield 4.71% +1.36%
VIX 16.80 +8.39%
Put/Call 1.05 +.96%
NYSE Arms 1.39 +21.93%

Market Movers
BHAG +15.53% after saying GE Energy will acquire it for $260 million.
NILE +8.65% on continued strength from IPO.
OSG +7.34% after JP Moran upgrade to Overweight on increased tanker rates and business from Saudi Arabia.
SRX +8.53% on speculation that it won part of the $10 billion homeland security IT contract.
CME -5.2% after Merrill downgrade to Neutral on potential share sales when limits on selling by members end on Friday.

Economic Data
Construction Spending for April rose 1.3% versus estimates of a .4% increase and a revised 2.4% rise in March.
ISM Manufacturing for May came in at 62.8 versus estimates of 61.5 and 62.4 in April.
ISM Prices Paid for May fell to 86.0 versus estimates of 89.3 and 88.0 in April.

Recommendations
Goldman Sachs reiterated Outperform on AMGN, ENH, VIA/B and MDT. Citi SmithBarney reiterated Buy on MTB, target $102. Citi reiterated Buy on NSM, target $24. Citi thinks TLAB won a sizable contract from Verizon and will announce it at Supercomm in late June, reiterated Buy, target $11. OSG raised to Overweight at JP Morgan. SJH cut to Underweight at JP Morgan. MDP raised to Buy at UBS, target $63. GMTN rated new Buy at Bank of America, target $28. USFC raised to Outperform at Bear Stearns, target $38. BE rated Overweight at JP Morgan.

Mid-day News
U.S. stocks are modestly lower mid-day as another strong economic report and violence in Saudi Arabia over the weekend push energy prices and interest rates higher. Merrill Lynch lowered its second-quarter earnings forecast for Intel to .26 and its revenue forecast to less than $8 billion, CNBC reported. The Chinese government's efforts to slow investment in industries such as steel, aluminum and cement are working, state-owned CCTV said. California Governor Schwarzenegger and four Indian tribes reached a tentative agreement on a plan to share casino revenue with the state, LA Daily News reported. Boston Scientific agreed to buy closely held Advanced Bionics for about $740 million in cash to add products that treat neurological disorders, Bloomberg reported. U.S. construction spending rose 1.3% in April to a record annual pace of $970.4 billion, led by work on housing and highways, Bloomberg said. Drugmakers including Eli Lilly, Merck and Novartis are competing to offer the elderly discounts of 12% to 50% on prescriptions under a U.S. government-sponsored Medicare plan that began today, Bloomberg reported. A group led by Accenture won a contract worth up to $10 billion over 10 years to develop a system for tracking visitors to the U.S., the Dept. of Homeland Security said. Crude oil futures surges to a record in New York after the killing of 22 people in a key Saudi Arabian oil-producing region Saturday raised concern that attacks might disrupt shipments, Bloomberg reported. A gauge of U.S. manufacturing unexpectedly rose last month to the highest in almost two decades as increased demand prompted more factories to hire than at any time in 31 years, Bloomberg reported.

BOTTOM LINE: The Portfolio is up slightly today and I have not traded. Thus, market exposure is still 125% net long. It is disappointing that oil is having such an adverse reaction to the weekend's violence. However, stocks are relatively strong considering the rise in oil and interest rates. Small-caps are actually up on the day. As well, the continued significant improvement in manufacturing and creation of jobs are very positive developments. I expect U.S. shares to strengthen into the close on afternoon short-covering, leaving the major indices down modestly on the day.

Tuesday Watch

Earnings of Note
Company/Estimate
CDT/.06
PLL/.39
UNFI/.20

Splits
AVP 2-for-1
BCR 2-for-1
CNQ 2-for-1
IEX 3-for-2

Economic Data
Construction Spending for April estimated +.4% versus +1.5% in March.
ISM Manufacturing for May estimated at 61.5 versus 62.4 in April.
ISM Prices Paid for May estimated at 89.3 versus 88.0 in April.

Weekend Recommendations
Forbes on Fox had guests that were positive on DVN, UNFI, BBY, mixed on SIL, AVTI and NKE. Bulls and Bears had guests that were positive on CME, EBAY, AUO, EON, SNP, mixed on SI and negative on NT, AMD and NOK. Cashin' In had guests that were positive on CLX and mixed on GE, MSFT and HOV. Louis Rukeyser's Wall Street had guests that were positive on CMCSA, BSX, PRU, JNJ, MKL, STA, NTRS, XOM, MSFT, AA, IR, DOW and negative on energy and semis. Wall St. Week w/Fortune had guests that were positive on HKF, ACAI, SUP, OCA, NTZ, ET, WLP, OHP, HUM, MEAS and OLGC. Barron's had a negative column on CYBX.

Weekend News
The U.S. market for wind and solar power is expected to increase 20% annually for the next five to 10 years, Barron's said. U.S. demand for second, or vacation, homes is likely to rise due to low mortgage rates and an aging, affluent baby-boomer population, Barron's said. Radio-frequency identification, which tracks goods from production to consumers' shopping carts, has the potential to lift economies worldwide, Barron's reported. Nokia may cut its sales forecast for this quarter because it hasn't been able to start selling enough new products, Kauppalehti reported. Hewlett-Packard will increase its backing of so-called open source software by offering programs made by MySQL and JBoss, the Wall Street Journal reported. Many U.S. public schools are focusing more on reading, writing and math in an effort to raise low test scores to comply with new federal educational standards, the Washington Post reported. China won't raise interest rates anytime soon because declining aluminum and steel prices signal the government's efforts to curb inflation are working, the Asian Wall Street Journal reported. The U.S. military in Iraq is moving its focus from combating insurgents to protecting a new Iraqi government and helping to rebuild the country, the NY Times said. Goldman Sachs, UBS and Lehman Brothers said this week that the dollar will fall against the euro and yen in coming months after a 3-month rally. A statement purportedly issued by the al-Qaeda terrorist network said it carried out a hostage-taking incident in Saudi Arabia over the weekend that resulted in the deaths of 22 people, Agence France-Presse reported. Intel and other personal computer and electronics makers will tout home entertainment features at Taiwan's Computex 2004 trade show, Bloomberg reported. JP Morgan has joined Citigroup in eclipsing Merrill Lynch in the $80 billion market for underwriting U.S. stock sales. Morgan Stanley has an interesting analysis of the energy market.

Late-Night Trading
Asian indices are higher, +.25% to +1.75% on average.
S&P 500 indicated unch.
NASDAQ indicated -.14%.

BOTTOM LINE: I expect U.S. stocks to open higher in the morning as there were no significant terrorist attacks over the weekend. Moreover, Asian strength, U.S put/call and arms readings, and a low AAII % Bulls should provide the catalysts to push shares higher. The Portfolio is 125% net long heading into the week.

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.

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.