Economic Week in Review

ECRI Weekly Leading Index 132.70 +.45%

Advance Retail Sales for May rose 1.2% versus expectations of a 1.2% rise and a .6% decline in April. Retail Sales Less Autos for May rose .7% versus estimates of a .6% rise and a .1% fall in April. Rising incomes and more jobs are boosting sales at retailers such as J.C. Penney, Neiman Marcus and Wal-Mart, Bloomberg reported. "The sales figures look very strong," said Steven Wieting, a senior economist at Citigroup Global Markets.

Gary Stern, president of the Federal Reserve Bank of Minneapolis, said he sees no threat of rising inflation and the central bank is ready to adjust the pace at which it raises rates should that expectation prove wrong. New York City's economy grew at a blistering 7% annual rate in the first quarter of 04, outpacing the rest of the U.S. for the first time since the heights of the stock market bubble, Bloomberg reported. "The two main factors behind the increase were jobs and incomes," City Comptroller Thompson said. Finally, 32% of U.S. employers plan to add workers in the third quarter, the most since before the economy began to plunge into recession in 2000, according to a survey released by Manpower Inc.

The Consumer Price Index for May rose .6% versus expectations of a .5% rise and a .2% rise in April. The CPI Ex Food & Energy rose .2% versus expectations of a .2% rise and a .3% rise in April. Prices minus food and energy(core) were 1.7% higher than a year earlier, compared with a 1.8% rise in the 12 months ended in April. Last year, the core index rose 1.1%, the smallest yearly gain in 44 years as global competition and excess capacity kept companies from boosting prices.

The Preliminary University of Michigan Consumer Confidence reading for June was 95.2 versus expectations of 90.8 and a reading of 90.2 in May. Confidence rebounded amid increased hiring, higher wages, falling gasoline prices and improvement in Iraq, the survey showed.

Housing Starts for May were 1967K versus expectations of 1950K and an upwardly revised 1981K in April. Building Permits for May were 2077K versus estimates of 1970K and 2006K in April. U.S. homebuilders began work on more houses than expected in May and building permits rose to the highest level in more than 30 years, suggesting that rising rates have yet to curb demand, Bloomberg reported. Year-to-date, the rate of housing starts has averaged 2.12 million, on pace to surpass last year's total of 1.85 million, the most in 25 years. "A better performing economy -- jobs, income growth -- that trumps to a certain extent rising rates," said Ken Mayland, chief economist for Clear View Economics. U.S. employers added 248,000 workers in May and have created 1.2 million jobs just since the beginning of the year, Bloomberg reported.

Industrial Production for May rose 1.1% versus estimates of a .8% rise and a .8% rise in April. This was the largest gain in six years, as utilities generated more power and companies made more business equipment. Manufacturers are "doing a little more of the heavy lifting in the economy," said Jonathan Basile, an economist at CSFB. "Businesses are investing more and hiring more, and that is a good sign for the sustainability of the expansion."

The Producer Price Index for May rose .8% versus estimates of a .6% rise and a .7% rise in April. PPI Ex Food & Energy rose .3% in May versus estimates of a .2% rise and a .2% rise in April. "We're starting to see a lot of pipeline pressures building in prices, but the key question is whether companies can pass these on to consumers," said Stephen Stanley, chief economist at RBS Greenwich Capital.

Initial Jobless Claims for last week came in at 336K versus estimates of 340K and 351K the prior week. Continuing Claims were 2895K versus a downwardly revised 2864K prior. "We're in the early stages of a long expansion," said Douglas Lee, president of Economics From Washington. "We're in the middle of a red hot labor market," said Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi.

Leading Indicators for June rose .5% versus estimates of a .4% rise and an increase of .1% in May. Production workers put in longer weeks and delivery times slowed as companies tried to replenish inventories stripped by rising demand. "The data reflect a robust economic environment this spring and point to more of the same this summer," Ken Goldstein, an economist at the Conference Board said.

The Philadelphia Fed. Index rose to 28.9 in June versus estimates of 25.3 and a reading of 23.8 in May. "The data remain consistent with a robust factory sector," said Michael Englund, chief economist at Action Economics. "Manufacturing continues to run on all cylinders." 52% of the Philly region's factories said they were operating at 80% of capacity or higher compared with 29% six months ago, Bloomberg reported. The prices paid index component of the report fell to 51.9 from 59.6, Bloomberg said. "We see a very robust recovery across all the segments we serve," said William Zollars, CEO of Yellow Roadway, the biggest U.S. trucking company. The U.S. economy is still projected to expand 4.6% this year, the most since 1984, according to the median estimate of a Bloomberg survey.

Bottom Line: Retail sales continue to exceed estimates as more Americans are gaining employment and receiving higher wages which more than offsets higher interest rates and gasoline prices. Multiple Fed members reiterated their belief that inflation is not a problem and that they stand ready to increase the pace of rate hikes if this view changes. Both the CPI and PPI exceeded expectations last week, yet the yield on the 10-year T-note fell 9 basis points. Thus, signaling an intermediate-term change in investor perceptions regarding future inflation. This is a very positive and unexpected development. I believe consumer confidence bottomed last month and will take out its recent highs of 103.80 in the near future. Iraq is improving and gasoline prices are falling. These were the two main sources of consumer angst. A recent survey showing that 57% of all Americans thought the U.S. economy had lost jobs over the last 6 months, when in fact it has gained 1.4 million, also bodes well for future confidence readings. A combination of the media's under-reporting of anything positive and Americans tuning out most forms of media likely led to this staggering number. However, as the election gets closer I believe most Americans will look much more closely at what is going on in the economy and they will see a very positive picture, thus increasing consumer confidence. Housing continues to defy the skeptics and will set another record this year, however a mild slowdown will likely occur in the next few months. Manufacturing continues to improve at a very rapid rate as capacity utilization climbs. Factories are hiring more and workers are working longer hours to meet rising demand. As of now, most costs are not being passed on to the consumer due to exceptional levels of productivity and profitability. Overall, a very positive week for the U.S. economy as exceptional growth continued and inflationary expectations diminished.

Weekly Scoreboard*

Indices
S&P 500 1,135.02 -.13%
Dow 10,416.41 +.06%
NASDAQ 1,986.73 -.66%
Russell 2000 570.54 +.25%
Wilshire 5000 n/a
Volatility(VIX) 14.99 -.33%
AAII % Bulls 41.41 -25.06%
US Dollar 89.08 -.96%
CRB 269.83 -.04%

Futures Spot Prices
Gold 395.70 +2.33%
Crude Oil 39.00 +1.08%
Natural Gas 6.52 +5.34%
Base Metals 109.33 +5.56%
10-year US Treasury Yield 4.71% -1.88%
Average 30-year Mortgage Rate 6.32% +.32%

Leading Sectors
Iron/Steel +6.06%
Oil Service +5.82%
Commodity +3.49%

Lagging Sectors
Wireless -2.61%
Disk Drives -3.67%
Semis -4.87%

*% Gain or loss for the week

Mid-day Update

S&P 500 1,136.78 +.42%
NASDAQ 1,992.29 +.43%

Leading Sectors
Iron/Steel +1.44%
Airlines +1.28%
I-Banks +1.07%

Lagging Sectors
Fashion -.22%
Wireless -.46%
Oil Service -.59%

Other
Crude Oil 38.95 +.36%
Natural Gas 6.53 -.71%
Gold 396.20 +1.72%
Base Metals 108.96 +2.03%
U.S. Dollar 89.11 -.55%
10-Yr. T-note Yield 4.71% +.68%
VIX 14.75 -2.64%
Put/Call .89 +14.10%
NYSE Arms .61 -43.52%

Market Movers
CECO -10.3% after saying it had reviewed a copy of the amended class action complaint and saying the complaint is without merit.
AMHC +19.2% after beating 3Q estimates and raising 04 forecast.
ION +12.71% on Robert Baird upgrade to Outperform, target $31.
PRGS +11.24% after beating 2Q estimates, raising 04 forecast and Needham upgrade to Strong Buy, target $28.
CHTT +7.0% after beating 2Q estimates and raising 04 guidance.
GIVN +6.0% after pricing 2.5m share secondary at $32.
FMT -13.0% after saying it was being sued by California insurance commissioner who alleges company improperly used deductions.
RHAT -9.65% after missing 1Q revenue estimates, but meeting profit forecast.


Economic Data
Current Account Balance for 1Q came in at -$144.9B versus estimates of -$141.0B and -$127.0B in 4Q.

Recommendations
Goldman Sachs reiterated Outperform on SRE, CSCO, AA, SLR and AL. Citi SmithBarney said to Buy CKFR on weakness, target $39. Citi reiterated Buy on PG, target $120. Citi reiterated Buy on AGMN, target $90. Citi reiterated Buy on CWST, target $20. Citi reiterated Sell on ATO, target $22. Citi reiterated Buy on OEH, target $22. SLE rated Overweight at JP Morgan. CAG rated Underweight at JP Morgan. TIVO rated Underweight at JP Morgan. GLW raised to Overweight at Morgan Stanley, target $14. IVGN raised to Outperform at Bear Stearns, target $75. EPL rated Strong Buy at Raymond James, target $20. JBL raised to Strong Buy at Raymond James, target $31.

Mid-day News
U.S. stocks are quietly higher today, led by cyclicals, as interest rates stabilize at lower levels. Russian President Putin said his country provided the U.S. with intelligence that Saddam Hussein's Iraqi regime was planning to carry out terrorist attacks on U.S. territory, Bloomberg reported. The imam of Mecca's Grand Mosque in Saudi Arabia, Islam's holiest shrine, called for an end to attacks on non-Muslims in the country, Agence France-Presse said. Comcast will test a video-dating service on its digital-cable system, the AP reported. Viacom said it will spit-off its 82% stake in Blockbuster and expects to receive $738 million in cash from the transaction. The benchmark 10-year T-note is headed for its biggest weekly gain since March, Bloomberg said. The U.S. and China agreed to increase by almost 500% the number of flights between the countries over six years, the U.S. Transportation Dept. said. President Bush's approval rating among adults in the U.S. climbed in the last month as more Americans said the military effort in Iraq was going well, according to a poll from Pew Research, Bloomberg said. The U.S. Commerce Dept. slapped tariffs of as much as 198% on imported bedroom furniture from China, a decision that could cut the $1 billion a year of those imports, Bloomberg reported.

BOTTOM LINE: The Portfolio is slightly higher today as my base metal longs are rising and Chinese ADR shorts are falling. I have not traded and the Portfolio is still 50% net long. More of the same today as U.S. stocks churn on light volume. I continue to believe the fundamentals are falling into place and will provide the catalysts for a significant breakout within the next month. Any weakness over the next 2 weeks should be used by long-term investors to accumulate more shares in favorite long positions.

Friday Watch

Earnings of Note
Company/Estimate
CAMP/.08

Splits
CTSH 2-for-1

Economic Data
Current Account Balance for 1Q estimated at -$141.0B versus -$127.5B in 4Q.

Recommendations
Goldman Sachs reaffirmed Attractive view on the Drug Wholesalers and Outperform rating on MCK. Goldman reiterated Outperform on SLR and TRB. Goldman reiterated bullish stance on aluminum stocks, favorite is AA. Goldman said JBL issues are company-specific. Goldman also said that they would increase exposure to copper stocks ahead of strong 2Q earnings reports, favorites are FCX and PD. TKO may benefit from overseas demand for its Internet-access technology, Business Week said.

Late-Night News
Asian indices are lower on rising energy prices, concerns over slowing growth in China and U.S. Fed rate hikes. Foamex Intl.(FMXI) may sell stakes of the company to two chemical makers, Business Week reported. Wal-Mart may reduce shelf space for home entertainment products, hurting producers such as HIT Entertainment, the London-based Times said. Boeing, facing discrimination lawsuits by female workers, may have engaged in a systematic campaign to hide evidence and take advantage of attorney-client privilege, Business Week reported. Vice President Cheney told CNBC that there "clearly was a relationship" between Iraq and al-Qaeda and "the evidence is overwhelming." He also said the evidence involves a whole series of high-level contacts between Osam bin Laden and Iraqi intelligence officials going back to the early 90's. Iraq's interim government may impose martial law when it takes over power on June 30 to help stabilize the country, the Financial Times reported. President Bush and Senator Kerry would have two moderated debates, beginning Sept. 30, and one town-hall style meeting, according to plans released by the Commission on Presidential Debates, Bloomberg said. Almost 90,000 Afghans are registering each day for September's presidential and national assembly elections, the UN said. Dell President Rollins plans to cut computer-printer prices in half and shave as much as 20% from the cost of printer supplies as he challenges Hewlett-Packard in its most-profitable market, Bloomberg reported.

Late-Night Trading
Asian Indices -2.25% to -1.75% on average.
S&P 500 indicated -.34%.
NASDAQ 100 indicated -.58%.

BOTTOM LINE: I expect U.S. stocks to open lower in the morning on weakness in Asia and rising oil prices. The Portfolio is 50% net long heading into tomorrow. I believe the current weakness in technology shares is unwarranted. Earnings estimates are too low for many technology stocks for the second half of the year and I expect their outperformance to begin in the third quarter. INTC, DELL, MSFT, CSCO, YHOO, MOT, QCOM, IBM, VRTS, EMC, AMAT, TXN, ACN, BRCM, IBM and ADP all having improving fundamentals and will likely beat earnings expectations for the second half. While a few of these tech market leaders have excessive valuations, many do not.

Thursday Close

S&P 500 1,132.03 -.13%
NASDAQ 1,983.67 -.73%

Leading Sectors
Homebuilders +1.68%
Commodity +1.30%
Oil Service +.89%

Lagging Sectors
Networking -1.84%
Disk Drives -1.94%
Semis -3.38%

Other
Crude Oil 38.80 -.03%
Natural Gas 6.54 -.61%
Gold 389.40 -.03%
Base Metals 106.79 +1.36%
U.S. Dollar 89.60 -.49%
10-Yr. T-note Yield 4.68% -.97%
VIX 15.15 +2.43%
Put/Call .78 +18.18%
NYSE Arms 1.08 +12.50%

After-hours Movers
AMHC +9.58% after beating 3Q estimates and raising 04 forecast.
CHTT +5.06% after beating 2Q estimates and raising 04 guidance.
SPEC +13.33% after beating 2Q estimates and raising 3Q forecast.
RHAT -8.62% after missing 1Q revenue estimates, but meeting profit forecast.

Recommendations
Goldman Sachs reiterated Underperform on TSG. Jim Cramer, of TheStreet.com, said on CNBC he thinks QLTI may be a good buy at current levels.

After-hours News
U.S. stocks finished slightly lower today as oil rose on violence in Iraq and technology shares weakened on worries over slowing growth. After the close, Vodafone Group Plc said it has signed an agreement with the UN Foundation worth $27.54 million to fund UN projects on Aids, measles and global heritage site preservation, the Financial Times said. Yanzhou Coal has bought a coke plant from German coal miner RAG AG which it plans to dismantle and take back to China, the Financial Times said. Crude oil rose for a second day on concern that unrest will reduce shipments from the Middle East as sabotage to pipelines halted Iraqi exports from two Persian Gulf terminals, Bloomberg reported. Apple Computer and BMW are developing a device that will let users listen to songs from their iPod music players through the radios of BMWs and Minis, Bloomberg said. The benchmark 10-year T-note rose today after the prices-paid component of the Philly Fed. Index fell, Bloomberg reported.

BOTTOM LINE: The Portfolio finished the day unchanged as my falling shorts offset my declining longs. I did not trade in the afternoon, thus leaving the Portfolio with 50% net long market exposure. Stocks will likely remain neutral to slightly lower ahead of the handover of power to Iraq, end of the quarter repositioning, Russell re-balancing and Fed rate hike.

Mid-day Update

S&P 500 1,132.58 -.09%
NASDAQ 1,986.83 -.57%

Leading Sectors
Homebuilders +1.90%
Commodity +1.34%
Oil Service +.83%

Lagging Sectors
Internet -1.1%%
Networking -1.53%
Semis -2.99%

Other
Crude Oil 38.42 +2.05%
Natural Gas 6.50 +.25%
Gold 388.20 +.78%
Base Metals 106.79 +1.36%
U.S. Dollar 89.62 -.47%
10-Yr. T-note Yield 4.70% -.46%
VIX 15.25 +3.11%
Put/Call .75 +13.64%
NYSE Arms .97 +1.04%

Market Movers
ACN +5.3% after saying it sees consulting pricing recovery, growth of 10-15%, considering modest dividend and 05 revenue in the bag.
JBL -15.79% after meeting 3Q estimates and lowering 4Q forecast.
CYBX +10.97% on continued optimism over FDA approval of its brain-stimulation device and rumors of BSX takeover.
WGO +13.19% after beating 3Q estimates substantially.
LEG +10.25% after boosting 2Q/04 forecast.
MBT +10.0% after strong 1Q earnings and upgrade to Buy at Aton, target $148.
SYNA +6.47% after CSFB Outperform rating, target $25.
LSS +8.2% after raising 2Q forecast substantially.
NTY -23.83% after announcing disappointing April and May sales.

Economic Data
Producer Price Index for May +.8% versus expectations of +.6% and +.7% in April.
PPI Ex Food & Energy +.3% versus expectations of +.2% and +.2% in April.
Initial Jobless Claims for last week fell to 336K versus estimates of 340K and 351K prior week.
Continuing Claims were 2895K versus a downwardly revised 2864K prior.
Leading Indicators for May +.5% versus estimates of +.4% and +.1% in April.
Philly Fed for June came in at 28.9 versus estimates of 25.3 and 23.8 in May.

Recommendations
Bank of America thinks yen will drop to 115/dollar in 4th quarter on slowing Chinese growth. NTLI rated Overweight at Morgan Stanley, target $80. CZN raised to Overweight at Lehman, target $14.50. Goldman reiterated Outperform on BBY, CAN, KR, GCI, FS, HOT, RE, PFE, AMGN, BIIB and SYMC. Goldman reiterated Underperform on DJ and F. Goldman upgraded CYTC to Outperform, target $30. Citi SmithBarney reiterated Buy on HIG, target $81. Citi reiterated Buy on JBL, target $32. Citi reiterated Buy on UNH, ATH and WLP. Citi reiterated Buy on FON, target $22.

Mid-day News
U.S. stocks are slightly lower today on worries over violence in Iraq and rising oil prices. Accenture plans to hire 8,000 people in the U.S. this year, Bloomberg reported. U.S. Senator McCain will introduce President Bush at a campaign rally tomorrow in Nevada, which may represent a rebuilding of relations strained by the bitter 2000 Republican primary, the Washington Post reported. SpectraSite is considering share buybacks and paying recurring dividends as it moves to buy more of the land under its wireless towers, said CEO Clark. MGM Mirage plans to build a casino in Atlantic City next to the new $1.1 billion Borgata, the Star-Ledger reported. Marriott Intl. plans to spin off a publicly traded REIT, the Washington Post reported. Marvel Enterprises told CNBC it may pay a dividend or offer to buy back stock. A Queens, NY man was arrested by FBI agents over allegations he helped a group of eight men who U.K. authorities believe were planning to blow up train stations, pubs and restaurants in England, the NY Times reported. Iraq will resume exporting oil tomorrow after repairing most of the damage to southern pipelines sabotaged on Monday and Tuesday, Al Arabiya reported. At least 35 Iraqis were killed and 138 injured when a car bomb exploded near an Iraqi army recruitment building in Baghdad, Bloomberg reported. Saudi Arabia yesterday reopened its border with Iraq to commercial traffic for the first time in 14 years, Bloomberg reported. Cisco will probably generate $1 billion in annual sales from VoIP equipment, CEO Chambers told Bloomberg. Intel today will unveil a set of chips it hopes will spur sales by wooing computer buyers with advanced graphics and theater-quality sound, Bloomberg reported. Over half of the Philadelphia region's factories said they were operating at 80% of capacity or higher compared with 29% six months ago, Bloomberg said.

BOTTOM LINE: The Portfolio is slightly higher today as my Chinese ADR and financial shorts are falling more than my technology longs. I took profits in a few homebuilding shorts and added a couple of Russian ADRs this morning, leaving the Portfolio with 50% net long market exposure. One of my new longs is MICC and I am using a stop-loss of $21 on this new position. While the PPI came in higher-than-expected, the Philly Fed Prices Paid Index fell and investors seem to be anticipating an intermediate-term peak in inflation. This is a very positive change in investor psychology with respect to inflation expectations. Just a couple of weeks ago worries that the Fed was behind the curve were rampant. Greenspan has reiterated forcefully numerous times that inflation was not a problem for the foreseeable future, but just recently have investors listened. This has been the market's chief source of anxiety. With the bond market rallying in the face of such strong economic numbers, I am now leaning more towards believing the Fed will raise rates by 25 basis points on June 30th, notwithstanding my belief that 50 would be more appropriate. I continue to believe any market weakness over the next couple of weeks should be used by long-term investors to accumulate shares in favorite long positions.