Chart of the Week

2004 Presidential Race - RealClearPolitics Poll Average
RCP Poll Average (10/13 - 10/16): Bush 49.0%, Kerry 45.0%, Nader 1.7% | Bush +4.0



Bottom Line: The above graph is an average of all the major Presidential polls from RealClearPolitics.com. It is my contention that the Presidential election is having a much more profound effect on the economy than is generally believed. Historically bitter and divisive rhetoric, 24-7 negative media coverage, domestic terrorism fears and uncertainty over the very different directions the candidates plan to lead the country are having a significant impact on the psychology of consumers and corporate decision-makers.

Weekly Outlook

There are a number of important economic reports and significant corporate earnings reports scheduled for release this week. Economic reports include Net Foreign Security Purchases(Mon.), Housing Market Index(Mon.), Consumer Price Index(Tues.), CPI Ex Food & Energy(Tues.), Housing Starts(Tues.), Building Permits(Tues.), Initial Jobless Claims(Thur.), Continuing Claims(Thur.), Leading Indicators(Thur.) and Philly Fed.(Thur.). The CPI, Housing Starts, Jobless Claims, Leading Indicators and Philly Fed. all have market-moving potential.

Intl. Business Machines(IBM-Mon.), Lexmark Intl.(LXK-Mon.), Texas Instruments(TXN-Mon.), 3M(MMM-Mon.), Altria(MO-Tues.), Electronic Arts(ERTS-Tues.), Motorola(MOT-Tues.), Taser Intl.(TASR-Tues.), Boston Scientific(BSX-Tue.), McDonald's(MCD-Tues.), JP Morgan(JPM-Wed.), EBay(EBAY-Wed.), Harrah's Entertainment(HET-Wed.), Honeywell(HON-Wed.), United Technologies(UTX-Wed.), Microsoft(MSFT-Thur.), SBC Communications(SBC-Thur.), Caterpillar(CAT-Thur.), Merck(MRK-Thur.), American Intl. Group(AIG-Thur.), Coca Kola(KO-Thur.) and Amazon(AMZN-Fri.) are some of the more important companies that release quarterly earnings this week. There are also some other events that have market-moving potential. The Semi Book-to-Bill report(Mon.), Fed's Poole speaking(Tues.), Fed's Greenspan speaking(Tues.), Fed's Poole speaking(Thur.) could also impact trading this week.

Bottom Line: I expect U.S. stocks to finish the week mixed-to-weaker as worries over earnings, energy prices, lawsuits and politics offset diminishing domestic terrorism fears, optimism over future economic growth and an improvement of the big picture in Iraq. I continue to believe the major indices are consolidating recent gains before another more significant move higher, beginning within the next 10 days. Oil above $60/bbl., a major terrorist attack or a delay in the outcome of the Presidential election would change my positive view for this quarter. My short-term trading indicators are giving mixed signals and the Portfolio is 75% net long heading into the week.

Market Week in Review

S&P 500 1,108.20 -1.24%

Click here for the Weekly Wrap by Briefing.com

Bottom Line: Market action last week was mostly negative as insurance and base metal stocks led the major indices lower. Considering energy's continuing rise, a tightening of the Presidential polls, the debacle in the insurance sector and mixed economic data, the major indices relatively muted declines likely disappointed the Bears. NY Attorney General Spitzer's attacks on the insurance industry, while warranted, unfortunately resulted in major losses for investors and will likely cause future job losses in the industry. It is becoming harder and harder to find sectors to investment in that are not under major legal duress, which is a significant burden on the U.S. economy. In my opinion, executives need to be held more personally liable for their illegal actions and the companies themselves less liable, to minimized job losses and investor pain. The carnage in the base metal stocks, as a result of reports that China's economy is slowing, appears overdone to me. Barring a recession brought on by higher energy prices, which I do not currently anticipate, these stocks shouldn't head substantially lower from current levels. On the positive side, most measures of investor anxiety rose, interest rates fell, the CRB Index declined, technology stocks outperformed and the advance/decline line only fell modestly.

Economic Week in Review

ECRI Weekly Leading Index 131.00 -.61%

The Import Price Index for September rose .2% versus estimates of a .5% increase and a 1.4% increase in August. The Trade Balance for August was -$54.0B versus estimates of -$51.4B and -$50.5B in July. The increase in the trade deficit came on higher spending for imported oil, relatively strong U.S. economic growth and a decline in goods purchased by foreign countries. Inflation may be less of a concern for Federal Reserve officials after economic reports suggested pressure from high oil prices is not filtering through to other costs, Bloomberg reported. "Once demand picks up, it's possible you'll see some price moves but there seems to be a lot of restraint by U.S. businesses," said Michael Gregory, a senior economist at BMO Nesbitt Burns. "Much of the movement in core import prices is behind us," said Joshua Shapiro, chief U.S. economist at MFR Inc. "The dollar hasn't had any really big movements recently. U.S. growth is clearly better than most places."

Initial Jobless Claims for last week were 352K versus estimates of 340K and 337K the prior week. Continuing Claims were 2845K versus estimates of 2859K and 2856K prior. "This level is still consistent with solid job creation," said Wesley Beal, an economist at IDEAglobal. "This election seems to be causing more angst about the economy among business leaders than previous ones," said Chris Rupkey, senior economist at Bank of Tokyo-Mitsubishi. "Managers are concerned and they may be waiting until the dust settles before they bring in new hires." "We continue to have a labor market recovery for job seekers," said Steve Pogorzelski, President of Monster.com North America, the operator of the world's largest job-posting Web site. "We are still seeing strong online posting demand."

The Monthly Budget Statement for September was $24.4B versus estimates of $22.0B and $23.4B in August. The U.S. budget deficit rose to $412.6 billion, below mid-year estimates of $445 billion, in the year ended Sept. 30, as government tax receipts rose more than expected on faster U.S. economic growth, Bloomberg said. The budget deficit is now 3.75% of U.S. GDP, 36.2% lower than the all-time record set in 1983, Bloomberg reported. "If the financial markets felt that the government as a major borrower was not going to be a responsible manager of the fiscal affairs of this country, the market would already exact a price," said Treasury Secretary Snow. "The fact that interest rates are as low as they are is a vote of confidence that we will deal with the deficit."

The Producer Price Index for September rose .1% versus estimates of a .1% increase and a .1% decline in August. PPI Ex Food & Energy rose .3% in September versus estimates of a .2% gain and a .1% decline in August. The PPI averaged a .4% gain from January through June. So far this year, producer prices are rising at a 3.4% annual rate compared with a 4.3% increase at the same time last year, Bloomberg said. "Increased competition is making it tougher for companies to pass through cost increases to consumers," said William Zadrozny, CEO of Siemens Financial Services.

Advanced Retail Sales for September rose 1.5%, the most in 6 months, versus estimates of a .7% gain and a .2% fall in August. Retail Sales Less Autos for September rose .6% versus estimates of a .3% rise and a .2% gain in August. The biggest rise in auto sales in 3 years paced the increase in all retail spending last month, Bloomberg reported. Sales of cars and light trucks jumped to 17.5 million vehicles at an annual rate in September, a 5.4% increase from August. The average retail price for all grades of gasoline, while high at $2.04/gallon, is still lower than six months ago, Bloomberg reported. As well, sales at general merchandise stores, which include department stores, rose 1.1% last month, the most in 8 months. Retail sales account for almost half of all consumer spending, which in turn accounts for about two-thirds of the U.S. economy, Bloomberg said.

Empire Manufacturing for October came in at 17.43 versus estimates of 25.0 and a reading of 27.26 in September. Readings above zero indicate expansion and the survey has now shown growth since April 2003. In February, it reached an all-time record of 42.1, Bloomberg reported. The survey is a "confidence" measure as participants are asked to score a variety of indicators as "better" or "worse" than the prior month. As a result, it is likely affected by the negative political environment and concerns over the direction of the U.S. government, Bloomberg said. Moreover, the survey's hiring index for the next six months rose to 33.7 in October from 27.2 the previous month.

Industrial Production for September rose .1% versus estimates of a .3% increase and a .1% decline in August. Capacity Utilization for September was 77.2% versus estimates of 77.5% and 77.2% in August. Four hurricanes that swept across the southeast U.S. over a six week period in August and September reduced industrial production by about .3 percentage points last month, the Fed said. "These numbers are not as weak as the headline number suggests and that's good news because there will be a bounce-back," said Ken Mayland, president of ClearView Economics. "Retail sales say consumer demand is there," which is good for factory production," Mayland said.

The preliminary University of Michigan Consumer Confidence reading for October was 87.5 versus estimates of 94.0 and a reading of 94.2 in September. "Whatever consumers are saying, household spending remains strong and pretty sustained," said Michael Englund, chief economist at Action Economics. Sales of homes and autos remain very high, Bloomberg reported. Apple Computer's sales of its iPod digital music players surged 500% in the three months ended Sept. 25, Bloomberg said. As well, McDonald's said U.S. sales rose 11% in September. Finally, Wal-Mart Stores CEO Scott said, "We expect a strong finish to the year." Historically bitter political rhetoric filling the airwaves is likely depressing sentiment temporarily, Bloomberg reported.

Bottom Line: Overall, last week's economic data were mixed. Measures continue to show that inflation is contained. While commodity prices remain elevated, their rate of increase has slowed substantially from earlier months. The CRB Index, a broad-based measure of commodity prices, is trading at the same level it was 8 months ago. Energy remains the main area of concern and I continue to believe prices will begin heading lower once the effects of the record-setting hurricanes diminish and more supply reaches U.S. shores. This should occur at the end of this month or the first part of November. The labor market will improve upon the conclusion of the election. Small-business owners, the main job creators in the U.S., are extremely concerned about the outcome of the election and are likely holding off on new hiring to an extent. The increase in GDP growth I foresee during this quarter will also spur hiring.

The budget deficit remains an over-hyped problem by the bears and the media. As a % of GDP, the deficit is much smaller than in 1983, at the very beginning of a multi-decade secular bull move in U.S. stocks. As well, tax receipts have risen 5.5% over the last 12 months, notwithstanding the tax cuts. The increase in the deficit is a result of government spending outpacing receipts. However, considering the massive overcapacity generated during the latter part of the 90's in most sectors, it is highly probably the U.S. needed the dramatic increase in government spending and tax cuts to boost demand and burn off some of the excess capacity. Instead of one of the mildest recessions on record, massive job losses and bankruptcies would have likely resulted in a multi-year deep recession.

The much-better-than-expected retail sales report is a big positive. While auto incentives did spur demand, an auto is still a very large purchase and shows the consumer has confidence in their financial condition. As well, home sales remain near very high levels. I expect this holiday shopping season to beat expectations, notwithstanding higher energy prices. Once again, the bears and media are painting a more negative picture of the U.S. consumer than is actually the case. I continue to believe that investors are underestimating the negative impact the current election is having on economic activity. It is highly unusual to turn on the news and hear anything positive. Negative stories on Iraq, oil or jobs dominate reporting, while very few positives are reported. This is definitely affecting psychology and will likely subside to an extent in November. Moreover, fears of domestic terrorism, higher taxes and more regulations are also affecting decision-makers.

Weekly Scoreboard*

Indices
S&P 500 1,108.20 -1.24%
Dow 9,933.38 -1.21%
NASDAQ 1,911.50 -.44%
Russell 2000 569.42 -1.08%
S&P Equity Long/Short Index 970.91 -.98%
Put/Call .88 -12.0%
NYSE Arms 1.40 +17.65%
Volatility(VIX) 15.04 +3.72%
AAII % Bulls 44.71 -21.46%
US Dollar 87.09 -.41%
CRB 285.59 -.70%

Futures Spot Prices
Gold 420.10 -1.08%
Crude Oil 54.93 +2.88%
Unleaded Gasoline 140.94 -.11%
Natural Gas 6.71 -6.56%
Base Metals 114.53 -8.67%
10-year US Treasury Yield 4.05% -1.94%
Average 30-year Mortgage Rate 5.74% -1.37%

Leading Sectors
Restaurants +2.99%
Airlines +2.59%
Wireless +1.40%

Lagging Sectors
Iron/Steel -7.03%
Disk Drives -7.30%
Insurance -9.23%

*% Gain or loss for the week

Mid-day Update

S&P 500 1,111.62 +.75%
NASDAQ 1,919.50 +.87%

Leading Sectors
I-Banks +1.82%
Banks +1.57%
Gaming +1.49%

Lagging Sectors
HMOs -.54%
Disk Drives -1.48%
Insurance -2.85%

Other
Crude Oil 54.56 -.37%
Natural Gas 6.70 -1.51%
Gold 420.20 +.17%
Base Metals 114.53 +1.45%
U.S. Dollar 87.18 -.42%
10-Yr. T-note Yield 4.07% +1.24%
VIX 14.98 -8.64%
Put/Call .93 -13.08%
NYSE Arms 1.39 -15.24%

Market Movers
MMC -14.4% on continuing worries over Spitzer probe and saying it will immediately suspend its practice of market services agreements with insurance carriers.
HIG -4.4% on continuing worries over Spitzer probe.
JNPR -6.3% on profit-taking after beating 3Q estimates and raising 4Q guidance.
PFE -4.2% after saying its Bextra painkiller can cause a fatal skin reaction and heart problems.
AIG -4.3% on continuing worries over Spitzer probe.
FARO +11.87% after boosting 3Q and 04 forecasts.
GPC +7.44% after meeting 3Q estimates and reiterating 04 guidance.
PENN +5.7% after agreeing to sell its Pocono Downs racetrack to the Mohegan Tribal Gaming Authority for $280 million.
FLYR -21.5% after cutting 3Q, 4Q and 04 forecasts and multiple downgrades.
GIVN -15.2% after missing 3Q estimates.
NFP -16.4% on continuing worries over Spitzer probe.
MGAM -13.7% after lowering 4Q and 04 guidance.
NFLX -38.2% after missing 3Q estimates substantially, saying AMZN will start competing video service and multiple downgrades.
POSS -33.3% after cutting 1Q and 05 forecast and Frist Albany downgrade to Underperform.
ACE -7.2% on continuing worries over Spitzer probe.

Economic Data
Producer Price Index for September rose .1% versus estimates of a .1% increase and a .1% decline in August.
PPI Ex Food & Energy for September rose .3% versus estimates of a .2% gain and a .1% decrease in August.
Advance Retail Sales for September rose 1.5% versus estimates of a .7% increase and a .2% decline in August.
Retail Sales Less Autos for September rose .6% versus estimates of a .3% increase and a .2% decline in August.
Empire Manufacturing for October fell to 17.43 versus estimates of 25.00 and a reading of 27.26 in September.
Industrial Production for September rose .1% versus estimates of a .3% increase and a .1% decline in August.
Capacity Utilization for September was 77.2% versus estimates of 77.5% and 77.2% in August.
Preliminary Univ. of Mich. Consumer Confidence for October fell to 87.5 versus estimates of 94.0 and a reading of 94.2 in September.
Business Inventories for August rose .7% versus estimates of a .6% rise and a 1.0% increase in July.

Recommendations
Goldman Sachs reiterated Outperform on RE, ENH, JNPR, STZ, PFE, IP, ALL and AIG. Goldman downgraded MMC to Underperform. Citi upgraded EIX to Buy, target $32. Citi downgraded MMC to Sell, target $31. Citi upgraded MPG to Buy, target $26. Citi reiterated Buy on MTG, target $90. Citi reiterated Buy on JNPR, target $32.50. Citi reiterated Buy on TCB, target $34. Lehman downgrade Auto and Auto Parts industries to Negative. APA raised to Buy at UBS, target $61. MRVL cut to Reduce at UBS. WERN raised to Buy at Legg Mason, target $23. AMMD cut to Underweight at JP Morgan. WMS rated Overweight at Morgan Stanley, target $33. NFLX downgraded to Underweight at JP Morgan. PHTN cut to Sector Underperform at CIBC.

Mid-day News
U.S. stocks are modestly higher mid-day on optimism over Greenspan's comments, strong retail sales and short-covering. The SEC's inquiry into Fannie Mae's accounting has become a formal probe, the Washington Post said. European election observers will monitor the U.S. presidential election Nov. 2 in closely contested states, the Washington Times said. The tax bill passed by Congress this week should spur U.S. companies to buy back shares which should boost earnings, the NY Times reported. Alcoa and Alcan may spend $1 billion to build a new alumina refinery in Guinea, Reuters said. The median price of a home in the San Francisco Bay area rose to $544,000 in September, up 17% from $465,000 the same month a year ago, the San Francisco Chronicle reported. A ban on snowmobiles in Yellowstone National Park and Grand Teton National Park was ruled invalid by a federal judge, the AP reported. Russia is ready to increase oil exports by 5.4%, the nation's pipeline monopoly said. Sales at U.S. retailers rose 1.5% in September, the most in six months, led by spending on automobiles and general merchandise, Bloomberg reported. U.S. consumer confidence fell more than forecast this month, as job growth slowed and negative political ads filled the airways, Bloomberg said. Antidepressants must carry the strictest black-box warning on increased suicidal behavior in children who take the medicines, U.S. regulators said. A Chicago Board of Trade sold for a record $1 million, at least the 14th membership to change hands this week as investors bet the futures market will sell shares to the public or be bought by the Chicago Mercantile Exchange, Bloomberg reported. Fidelity Investments, State Street and Barclays Plc may have suffered investment losses of as much as $5 billion from the plunge in insurance stocks over the past two days, Bloomberg said. Oil prices aren't high enough to trigger inflation and slow growth like the U.S. experienced in prior oil shocks, Fed Reserve Chairman Greenspan said. Billionaire hedge fund manager George Soros increased his donations to anti-Bush political groups to around $16 million, Bloomberg reported.

BOTTOM LINE: The Portfolio is unchanged mid-day as gains in my steel and alternative energy longs are being offset by losses in my wireless and internet longs. I added a few new longs in various sectors this morning, bringing the Portfolio's market exposure to 100% net long. One of my new longs is BRCM and I am using a $28 stop-loss on this position. The tone of the market has improved significantly from this morning on positive comments by Greenspan, short-covering and strong retail sales. Interest rates are rising as investors are beginning to anticipate stronger economic growth. I continue to expect U.S. GDP growth for the 3rd quarter will come in above 4% and the 4th quarter near 5%. U.S. stocks should rise modestly into the close on more short-covering.