Tuesday Watch

Late-Night News
Asian indices are mixed as weakness in Hong Kong is being offset by strength in Taiwanese shares. Taiwan Semiconductor Manufacturing's factory use will exceed 80% in the second quarter because customers have eliminated excess inventory, the Commercial Times reported. US Deputy Defense Secretary Paul Wolfowitz is among the leading candidates to succeed James Wolfensohn as president of the World Banks, the Financial Times reported. Three men convicted of the 1993 bombing of the World Trade Center in NYC have sent letters out of prison praising Osama bin Laden and encouraging other terrorists, MSNBC reported. Cablevision Systems will close the Voom satellite-tv business after talks to sell the unit to company Chairman Charles Dolan failed, Bloomberg reported. Palestinians want to win support today from international leaders, including the "Quartet" of the UN, European Union, US and Russia at talks in London on building institutions in the occupied territories, Bloomberg reported. OPEC is producing enough oil to meet higher-than-expected demand in the first quarter, acting Secretary-General Adnan Shihab-Eldin said two weeks before the group meets to debate calls for increased output to stem prices that are above $50/bbl. in NY, Bloomberg reported. OPEC won't consider cutting production at the meeting, Bloomberg said. The euro weakened by the most in a week against the US dollar in Asia on expectations reports today will show German unemployment rose to a post WWII high and US manufacturing growth accelerated in February, Bloomberg said. Residents in the northeastern US were hit with another round of winter weather overnight as heavy snow and strong winds combined to create almost "white-out" conditions in parts of New England, Bloomberg reported. According to Nielsen Media Research, 2 million fewer people watched this year's Academy Awards, hosted by controversial comedian Chris Rock, compared to last year's, the Boston Globe reported. DaimlerChrysler AG's Chrysler unit and GM's Cadillac division are preparing to expand sales of their American brands in Europe, the Wall Street Journal reported. Google and Yahoo! are pursuing different strategies to attract more online advertising, the Wall Street Journal reported.

Late Recommendations
- Goldman Sachs: Reiterated Outperform on RIG, BHI and PETC.

Night Trading
Asian Indices are -.50% to +.50% on average.
S&P 500 indicated +.05%.
NASDAQ 100 indicated +.03%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Before the Bell CNBC Video(bottom right)
Asian Indices
European Indices
Top 20 Business Stories
In Play
Bond Ticker
Analyst Actions
Macro Calls
CNBC Guest Schedule

Earnings of Note
Company/Estimate
BJ/.71
CDIS/.63
FL/.54
HSIC/.85
MMC/-.60
PSUN/.53
SMTC/.16
SFD/.87
SBL/.10
WIND/.05

Splits
HSIC 2-for-1

Economic Data
- Construction Spending for January is estimated to rise .4% versus a 1.1% gain in December.
- ISM Manufacturing for February is estimated to rise to 56.9 versus a reading of 56.4 in January.
- ISM Prices Paid for February is estimated to fall to 67.0 versus a reading of 69.0 in January.
- Total Vehicle Sales for February are estimated to rise to 16.6M versus 16.2M in January.
- Domestic Vehicle Sales for February are estimated to rise to 13.4M versus 13.0M in January.

BOTTOM LINE: I expect US equities to open modestly lower on a further rise in long-term interest rates. However, stocks may gain later in the day on optimism over good earnings/economic reports and a decline in energy prices. The Portfolio is 50% net long heading into tomorrow.

Monday Close

Indices
S&P 500 1,203.60 -.64%
Dow 10,766.23 -.70%
NASDAQ 2,051.72 -.66%
Russell 2000 634.06 -.54%
DJ Wilshire 5000 11,859.80 -.61%
S&P Barra Growth 579.99 -.47%
S&P Barra Value 619.17 -.82%
Morgan Stanley Consumer 585.28 -.38%
Morgan Stanley Cyclical 771.85 -.61%
Morgan Stanley Technology 473.04 -.07%
Transports 3,726.65 +.31%
Utilities 352.89 -.89%
Put/Call .68 -18.07%
NYSE Arms 1.44 +77.78%
Volatility(VIX) 12.08 +5.13%
ISE Sentiment 202.00 +39.31%
US Dollar 82.51 -.18%
CRB 305.00 +1.59%

Futures Spot Prices
Crude Oil 51.81 +.12%
Unleaded Gasoline 124.56 unch.
Natural Gas 6.72 -.21%
Heating Oil 149.14 unch.
Gold 436.70 -.21%
Base Metals 128.29 +1.20%
Copper 149.30 -.37%
10-year US Treasury Yield 4.38% +2.64%

Leading Sectors
Computer Hardware +1.40%
Internet +.55%
Computer Service +.40%

Lagging Sectors
Airlines -1.56%
Homebuilders -1.59%
Biotech -4.32%

After-hours Movers
OVTI -9.45% after beating 3Q estimates, raising 4Q eps guidance and lowering 4Q revenue outlook.
LTON +11.59% after beating 4Q estimates and raising 1Q guidance.
ADIC +4.69% after reporting a director purchased an additional 250,000 shares on 2/24/05.
CAL +3.93% after reaching agreements on about $330 million in pay and other reductions with unions for pilots, attendants, mechanics and dispatchers.
INCX -35.48% after meeting 4Q estimates and lowering 1Q outlook substantially.
FNLY -5.47% on continuing worries over Federated/May merger.

Detailed Market Summary
Market Wrap CNBC Video(bottom right)
Futures Recap
NASDAQ 100 After-hours Indicator
Real-time/After-hours Stock Quote

Afternoon Recommendations
- Goldman Sachs: Reiterated Outperform on XOM and LIZ.
- Raymond James: Reiterated Strong Buy on WGR, target $45. Reiterated Strong Buy on RDC, target $42.
- Morgan Stanley: Upgraded JTX to Overweight.
- CIBC: Upgraded XMSR to Sector Outperform, target $55.

After-hours News
US stocks finished lower today on worries over higher interest rates and weakness in the biotechnology sector. The US Dept. of Homeland Security has notified state and local law enforcement about a “credible” threat of terrorist operations outside of Iraq, Bloomberg reported. Johnson & Johnson CEO Weldon told CNBC that it’s “very important” for the US to set up post-marketing drug surveillance. HJ Heinz, the world’s largest ketchup maker, said third-quarter sales rose the most in two years, led by gains in North America, Bloomberg reported. Univision Communications, the largest US Spanish-language tv and radio broadcaster, said fourth-quarter profit rose 14% as its TeleFutura network boosted audience ratings and advertising sales, Bloomberg reported. Biogen Idec’s suspension of its Tysabri multiple sclerosis drug today after a patient died represents a setback to about 5,000 others who were taking it and many more who hoped the treatment would ease their symptoms, Bloomberg reported. A federal judge in South Carolina said the US must charge or free Jose Padilla, a US citizen held as an enemy combatant since his arrest in 2002 on suspicion he plotted to explode a radioactive “dirty bomb” in the US, Bloomberg said.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my homebuilding, semi and pharmaceutical longs. I exited a homebuilder long in the afternoon and added BIIB long, thus leaving the Portfolio 50% net long. I am using a $35.75 stop-loss on this new position. The tone of the market improved modestly into the afternoon as the advance/decline line rose, several more sectors registered gains and volume remained healthy. Measures of investor anxiety were mixed on the day and technology shares outperformed. Finally, the CRB Index made another new high today, which is a negative. I am not worried about a significant correction in housing stocks at this point. The weakness in New Home Sales is likely the result of the extraordinarily wet weather most of the country is seeing this winter. However, these shares will likely remain under pressure near-term on rising long-term interest rates.

Mid-day Report

Indices
S&P 500 1,200.49 -.90%
Dow 10,750.05 -.84%
NASDAQ 2,041.83 -1.14%
Russell 2000 629.58 -1.25%
DJ Wilshire 5000 11,821.06 –.94%
S&P Barra Growth 578.96 -.64%
S&P Barra Value 616.80 -1.20%
Morgan Stanley Consumer 584.18 -.58%
Morgan Stanley Cyclical 768.45 -1.05%
Morgan Stanley Technology 471.26 -.44%
Transports 3,722.82 +.21%
Utilities 352.13 -1.11%
Put/Call .67 -19.28%
NYSE Arms 1.98 +144.44%
Volatility(VIX) 12.31 +7.31%
ISE Sentiment 213.00 +46.90%
US Dollar 82.44 -.28%
CRB 304.40 +1.38%

Futures Spot Prices
Crude Oil 51.58 +.17%
Unleaded Gasoline 121.60 -3.07%
Natural Gas 6.69 -.37%
Heating Oil 149.50 +2.81%
Gold 437.50 +.32%
Base Metals 128.29 +1.20%
Copper 149.80 +.81%
10-year US Treasury Yield 4.37% +2.60%

Leading Sectors
Computer Hardware +.07%
Foods +.07%
Computer Services -.02%

Lagging Sectors
Airlines -2.22%
Homebuilders -2.36%
Biotech -4.90%

Market Movers
BIIB -44.4% after it and Irish partner Elan Corp.(ELN) suspended sales of the MS drug Tysabri after one death was reported. ELN -65.8%.
RETK +40.33% after announcing SAP AG agreed to buy it for about $496M.
TEVA +6.56% on BIIB/ELN news.
USFC +24.0% after Yellow Roadway(YELL) agreed to buy it for about $1.37B. YELL -4.0%.
PACT +36.0% after raising 4Q revenue guidance.
SRA +18.1% on BIIB/ELN news.
JDAS +14.2% on RETK news.
XMSR +10.3% after saying it will raised the price of its basic subscription package to $12.95/month, include the Internet service XM Radio Online and SunTrust upgrade to Buy.
BBY +4.68% on JP Morgan upgrade to Overweight.
BDY -27.2% after saying the SEC started an informal inquiry into possible violations of securities laws.
VLO -6.0% on profit-taking.

Market Internals
NYSE Unusual Volume
NASDAQ Unusual Volume
NASDAQ 100 Heatmap
DJIA Quick Charts
Chart Toppers
Hot Spots
Option Dragon

Economic Data
- Personal Income for January fell 2.3% versus estimates of a 2.6% fall and a 3.7% increase in December.
- Personal Spending for January was unchanged versus estimates of a .1% increase and a .8% gain in December.
- The PCE Deflator for January rose 2.2% versus estimates of a 2.2% rise and a 2.4% increase in December.
- The PCE Core for January rose 1.6% versus estimates of a 1.5% increase and a 1.5% gain in December.
- New Home Sales for January fell to 1106K versus estimates of 1125K and an upwardly revised 1218K in December.
- Chicago Purchasing Manager for February rose to 62.7 versus estimates of 60.5 and a reading of 62.4 in January.

Recommendations
- Goldman Sachs: Reiterated Outperform on MDT, CSCO, LVS and TMK.
- Smith Barney: Said Asia Handset Tour indicated order acceleration ahead, favorite beneficiaries are NSM, MCRL, ADI and SMTC. Said soft-line retailers positioned to post the best February same store sales increases include ANF, AEOS, PLCE and TJX. Said hard-line retailers AZO and BBW experienced better-than-expected comp trends in February. Said within their coverage universe, NMGA and SKS face the most difficult comps vs. last year while MAY and WMT face the easiest. Reiterated Buy on PG and G, while reiterating Sell on CLX. Reiterated Buy on NOI, target $53. Reiterated Buy on WMT, target $65. Said BAC, WB and WFC should exceed quarterly estimates and FHN, MTB may be worse than expected.
- Banc of America: Cut F to Sell, target $10. Cut GM to Sell, target $27.
- JP Morgan: Raised BBY to Overweight. Cut MTA to Underweight. Raised HZO to Overweight.
- Morgan Stanley: Raised GP to Overweight, target $39.
- Oppenheimer: Downgraded DDS to Sell. Cut MAY to Sell.
- Legg Mason: Raised EEEE to Buy, target $16.50.
- Thomas Weisel: Raised TXN to Outperform.
- Merrill Lynch: Raised TCB to Buy, target $31.
- Bear Stearns: Cut BIIB to Underperform.
- CSFB: Downgraded DNR to Underperform, target $33. Cut POT to Underperform, target $79.
- Prudential: Raised STT to Overweight, target $49. Downgraded NOVL to Underweight, target $7.
- Deutsche Bank: Cut BIIB to Sell, target $38. Raised SLH to Buy, target $20.

Mid-day News
US stocks are lower mid-day on losses in the biotechnology sector and worries over higher long-term interest rates. Charter Communications’ fourth quarter earnings might not be as bad as some have feared, the Wall Street Journal reported. German Chancellor Schroeder called on the Saudi Arabian government to allow more democracy, Financial Times Deutschland reported. The new Palestinian leadership won’t tolerate attacks like the Feb. 25 bombing in Tel Aviv that killed at least 4 people and injured dozens, Palestinian Authority President Abbas told the Independent. Lebanese anger against Syria’s occupation of the country has exploded since a bombing killed former Prime Minister Hariri two weeks ago, the Wall Street Journal reported. ABN Amro NV, JP Morgan Chase and Goldman Sachs are among about a dozen investment banks competing for a contract to advise the Australian government how to sell its majority stake next year in Telstra, the Wall Street Journal reported. Pathmark Stores, which owns 142 supermarkets in the northeastern US, will probably be acquired by C&S Wholesale Grocers, New England’s biggest food wholesaler, the NY Post reported. Time Warner’s Money Magazine will revamp the April issue to increase its appeal among women and younger readers, the NY Times reported. BellSouth wants to boost revenue through wireless and broadband services, rather than join industry merger talks, the NY Times reported. Movielink, which is owned by five movie studios, and Blinkx, a search-engine provider, are working on a way to enable Internet surfers to buy or rent movies and television shows on the Web, the LA Times reported. Lebanese Prime Minister Karami announced the resignation of his Syrian-backed government today, the AP reported. A study of HIV-infected teens in San Francisco, Los Angeles, New York and Miami showed they were twice as likely to engage in risky sexual behavior as teens in similar research a decade ago, Bloomberg reported. Copper rose to a record in London on speculation demand may pick up after Japan, the world’s third-largest user of the metal, reported a bigger-than-expected increase in industrial production, Bloomberg reported. Mylan Labs, the generic drug maker that pursued a takeover of King Pharmaceuticals for six months, abandoned the proposed $4 billion transaction yesterday, Bloomberg said. Ericsson AB had its debt rating raised one level to so-called investment grade level by Standard & Poor’s Corp, Bloomberg reported. Biogen Idec and Elan said they’ve voluntarily suspended marketing their new MS drug Tysabri after one death was reported, Bloomberg said. The CRB Index is hitting a 24-year high as demand for raw materials remains strong from the US and China, Bloomberg reported. Chicago-area business expanded at an accelerated pace in February, Bloomberg said. US new home sales unexpectedly declined in January and the median price dropped to the lowest in a year, Bloomberg reported. US Treasury notes are falling after a government index on inflation rose the most in 2 years, Bloomberg said.

BOTTOM LINE: The Portfolio is lower mid-day on losses in my homebuilding, pharmaceutical and semi longs. I exited a number of longs as they hit stop losses this morning, thus bringing the Portfolio’s market exposure to 50% net long. The tone of the market is poor as the advance/decline line is weak, almost ever sector is declining and volume is stronger. Measures of investor anxiety are mixed. The rise in long-term rates will likely continue in the near-term as economic reports continue to exceed expectations. I expect US stocks to trade mixed-to-higher from current levels into the close as optimism over economic growth and short-covering mostly offsets worries over rising rates.

Monday Watch

Weekend News
US and European Union officials reacted with dismay to Saudi Arabia's forecast that oil prices will remain at between $40 and $50 a barrel for the rest of this year, the Financial Times reported. Egyptian President Mubarak will allow parliament to amend the constitution to allow direct presidential polls, AFP reported. European regulators oppose Microsoft's proposed changes to its Windows operating system, Intl. Herald Tribune reported. The "BTK" serial killer suspect arrested by Wichita, Kansas, police confessed to at least six murders, the AP reported. Iran's ability to enrich uranium is "non negotiable," Hassan Rohani, the country's chief negotiator told European officials on a trip last week, Agence France-Presse reported. Sabawi Ibrahim al-Hassan, a half-brother of ousted Iraqi dictator Saddam Hussein, has been arrested, Fox News reported. Electronic Data Systems is likely to win a $7.6 billion contract for the UK's Ministry of Defense, the Sunday Telegraph reported. Billionaire investor George Soros plans to invest $3.8 billion in the commercial property market in London, the Observer reported. Reuters Group Plc, which owns 62% of Instinet Group, may receive $1.3 billion from the sale of its stake in the US-based electronic brokerage and trading business, the Telegraph said. CIA officers are increasingly fearful of punishment in connection with their interrogations of suspected terrorists, the NY Times reported. Martha Stewart is expected to return to work at the company she founded on March 7 after her release from prison, the NY Times reported. Medical malpractice lawyers will be the next target in President Bush's efforts to curb litigation, the NY Times reported. At least 13 states have agreed to raise graduation requirements at US high schools to better prepare students for college and the workforce, the AP reported. China announced measures for capital flows across its boarders designed to stem gains in the yuan, the Financial Times reported. PepsiCo, maker of food brands Pepsi-Cola and Doritos chips, is setting voluntary limits to advertising aimed at children due to obesity levels in the US and western Europe, the Financial Times said. Shanghai Baosteel Group, China's largest steel producer, expect national growth in production of the metal to slow by half this year as mills focus on high-quality steel for shipbuilding and trim output of steel for construction, the Asian Wall Street Journal reported. Universal Music and Sony BMG are among music labels that may be in talks with online retailers to raise wholesale prices for digital music downloads in the wake of the success of Apple Computer's iTunes service, the Financial Times said. Wal-Mart Stores said February sales at US stores open at least a year rose about 4%, at the high end of estimates, as shoppers purchased more groceries, Bloomberg reported. President Bush said he will intensify his campaign to win public support for his plan to restructure Social Security, and he called on lawmakers to share ideas on improving the system, Bloomberg said. OPEC isn't likely to raise output when it meets in Iran next month, the Qatari oil minister said, even though crude in NY has pushed through $50/bbl. and demand forecasts for 2005 have been revised upwards, Bloomberg reported. The US National Weather Service expects a "significant nor-easter" to begin showering snow and sleet on the mid-Atlantic region tomorrow morning, Bloomberg said. Royal Dutch/Shell Group, Europe's second-largest oil company, signed a contract to build a $7 billion liquefied natural gas plant in Qatar as it seeks to profit from surging global demand for the fuel, Bloomberg said. European pharmaceutical stocks, the region's worst performers last quarter, are poised to rise on reduced speculation about an increase in acquisitions, Bloomberg reported. North Korea's government told South Korean officials the communist country is willing to return to international disarmament talks in June, the Sankei newspaper reported. Yellow Roadway, the biggest US trucker, agreed to buy No. 2 regional carrier USF Corp. for about $1.37 billion to add next-day regional transportation services, Bloomberg reported. Federated Department Stores agreed to buy May Department Stores for about $36/share and may announce the deal tomorrow morning, Bloomberg reported. Wynn Resorts Ltd. and MGM Mirage submitted bids to develop a resort in Singapore that may include the city-state's first casino, Bloomberg said. France's Areva SA, US-based Westinghouse Electric and Russia's AtomStroyExport will bid for contracts to build nuclear reactors in China, Bloomberg reported. Templeton Asset Management's Mark Mobius is betting corporate governance improvements in South Korea and political stability in Taiwan will help drive stock prices in those markets higher, Bloomberg reported. Qwest Communications would amend its latest offer for MCI if necessary, the Wall Street Journal reported. China should widen the yuan's trading band against the US dollar to 5% before shifting to a peg against a basket of currencies, China Business Post reported.

Weekend Recommendations
-Bulls and Bears: Had guests that were positive on MO, MON, UN, NVS, TMX, RIO, SYY, TWX, RL, CAG, mixed on MCD and negative on RGC, MSO.
-Cashin' In: Had guests that were mixed on GLG, DUK and negative on RHAT.
-Cavuto on Business: Had guests that were positive on FDX, HOC, TOL, RYL, WPPGY and negative on FNM.
-Barron's: Had positive comments on GYI, CVCO, GM bonds and energy stocks. Had negative comments on tech and banks.
-Goldman Sachs: Reiterated Outperform on AVP, PAYX, BSX, WAG, AMGN, DNA, CL and EBAY.

Night Trading
Asian Indices are higher, +.50% to +1.0% on average.
S&P 500 indicated unch.
NASDAQ 100 indicated +.03%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Before the Bell Video(bottom right)
Asian Indices
European Indices
Top 20 Business Stories
In Play
Bond Ticker
Analyst Actions
Macro Calls
CNBC Guest Schedule

Earnings of Note
Company/Estimate
CTIC/-.53
DY/.18
HNZ/.59
MVSN/.26
OVTI/.27
TIF/.79
UVN/.20

Splits
- AAPL 2-for-1

Economic Data
- Personal Income for January is estimated to fall 2.6% versus a 3.7% increase in December.
- Personal Spending for January is estimated to rise .1% versus a .8% increase in December.
- The PCE Deflator for January is estimated to rise 2.2% versus a 2.4% gain in December.
- The PCE Core for January is estimated to rise 1.5% versus a 1.5% increase in December.
- New Home Sales for January are estimated to rise to 1125K versus 1098K in December.
- The Chicago Purchasing Manager for February is estimated at 60.2 versus a reading of 62.4 in January.

BOTTOM LINE: I expect US stocks to open modestly higher in the morning on optimism over merger activity, strong economic reports and gains in Asia. The Portfolio is 100% net long heading into the week.

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. - Personal Income, Personal Spending, PCE Deflator, New Home Sales, Chicago Purchasing Manager
Tues. – Construction Spending, ISM Manufacturing/Prices Paid, Total Vehicle Sales
Thur. - Non-farm Productivity, Unit Labor Costs, Initial Jobless Claims, ISM Non-Manufacturing
Fri. - Unemployment Rate, Average Hourly Earnings, Change in Non-farm Payrolls, Average Weekly Hours, Univ. of Mich. Consumer Confidence, Factory Orders

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

Mon. -HJ Heinz(HNZ), Tiffany & Co.(TIF), Univision Communications(UVN)
Tues. - Marsh & McLennan(MMC), Pacific Sunwear(PSUN)
Wed. - American Eagle Outfitters(AEOS), Michaels Stores(MIK), Autozone(AZO), Chico's FAS(CHS), Costco Wholesale(COST), Hovnanian Enterprises(HOV), Liz Claiborne(LIZ), Petsmart(PETM)
Thur. - Neiman-Marcus Group(NMG/A), Saks Inc.(SKS)
Fri. - Mandalay Resort Group(MBG)

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

Mon. - CIBC Israeli Tech Conference, Bear Stearns Media Conference, Merrill Lynch Global Automotive Conference
Tue. - Banc of America Energy & Utilities Forum, Bear Stearns Media Conference, Prudential Semi/Equip. Conference, Fed's Lacker speaks, Fed's Moscow speaks, Fed's Santomero speaks, Wells Fargo HealthCare Conference
Wed. - CSFB Semi/Equip. Conference, Fed's Greenspan testifies before House Budget Committee
Thur. - CSFB Semi/Equip. Conference, CIBC Gaming/Lodging/Leisure/Travel Forum
Fri. - CSFB Semi/Equipment Conference, Fed's Moscow speaks

Bottom Line: I expect US stocks to finish the week modestly higher as strong earnings/economic reports and rebounding technology shares offset slightly higher long-term interest rates. The conferences this week and technical improvement should further spur interest in semiconductor/equipment shares. As well, I expect Retailers to outperform on robust earnings reports, stabilizing energy prices and a strong employment report. Homebuilders may take a breather as long-term rates rise. Moreover, the US dollar should gain modestly this week as rates increase, sentiment improves and US economic growth continues to outshine other industrialized nations. My short-term trading indicators are still giving mixed signals and the Portfolio is 100% net long heading into the week.

Economic Week in Review

ECRI Weekly Leading Index 133.90 -.30%

Consumer Confidence for February fell to 104.0 versus estimates of 103.0 and an upwardly revised reading of 105.1 in January. However, Americans were the most optimistic about their current conditions than at any time since September 2001 and the fewest number in almost three years described jobs as hard to get, Bloomberg said. Consumers were less optimistic going forward. "Perhaps all the discussion in the media concerning potential shortfalls in Social Security has made individuals apprehensive about the future," said Michael Moran, chief economist at Daiwa Securities. US consumers spent at the fastest pace in more than four years during the last six months of 2004. Retail sales excluding autos rose twice as much in January as they did a month earlier, evidence shoppers are keeping their wallets open, Bloomberg reported. "Sales trends have improved in 2005, and I believe sales momentum will accelerate as the year progresses," Wal-Mart CEO Scott said.

The Consumer Price Index for January rose .1% versus estimates of a .2% increase and no change in December. The CPI Ex Food & Energy rose .2% versus estimates of a .2% increase and a .2% rise in December. "The inflation numbers today were quite tranquil," former Fed Governor Gramley, now an economic adviser at Stanford Washington Research Group, said in an interview. "We're in great shape," he said. Companies keep offering discounts to lure customers amid competition, excess capacity and rising costs, Bloomberg said. Consumer prices rose 3.0% the past 12 months, right at the historical long-term average. Fed Chairman Greenspan last week told lawmakers "the economy seems to have entered 2005 expanding at a reasonably good pace, with inflation and inflation expectations well anchored." John Shin, an economist at Lehman Brothers said, "One thing we haven't seen is wage pressure, so we're more sanguine about inflation." Finally, David Resler, chief economist at Nomura Securities said, "There is very little reason for the Fed to do anything different than they've been doing: raise rates a little at a time until they get to a neutral rate."

Durable Goods Orders for January fell .9% versus estimates of no change and an upwardly revised 1.4% gain in December. Durables Ex Transportation for January rose .8% versus estimates of a .3% increase and an upwardly revised 2.8% gain in December. The .8% rise in orders excluding transportation equipment prompted economists at Morgan Stanley and JP Morgan to boost first-quarter economic growth forecasts, Bloomberg reported. Except for transportation, "strength predominated" in today's report, said Stephen Stanley, chief economist at RBS Greenwich Capital. Concern that business spending would slow after tax incentives expired at the end of 2004 "can now be officially put to bed," Stanley said. Orders for electrical equipment, appliances and components rose 13% last month, the largest jump ever, Bloomberg reported. As well, orders for non-defense capital goods excluding aircraft, a sign of business investment, increased 2.9% and are up 20% from January 2004. "Almost everything we have got for January so far is coming in at the high side of expectations," said Robert Mellman, an economist at JP Morgan. Economist Bill Mulvihill at Griffin, Kubik, Stephens & Thompson in Chicago said US GDP growth may be about 4.5% during this quarter, Bloomberg reported.

Initial Jobless Claims for last week rose to 312K versus estimates of 309K and 303K the prior week. Continuing Claims fell to 2650K versus estimates of 2693K and 2712K prior. The four-week moving-average of claims, a less volatile measure, fell to 309K, the lowest since the week of Nov. 4, 2000, Bloomberg reported. "The low level of initial claims and the drop in continuing claims point to a pickup in hiring in February," said Wesley Beal, chief US economist at IDEAglobal. The economy probably added 225,000 jobs in February, the most in four months, according to the median forecast in a recent Bloomberg survey. "There are lots of jobs out there, but employers can't find the qualified employees they need," said Gina Martin, an economist at Wachovia Corp. "There is a disconnect between the education of the people that are unemployed and the skills that employers are looking for," Martin said.

The Help Wanted Index for January rose to 41, the highest level in almost 2 years, versus estimates of 38 and a reading of 38 in December. "There is now clear evidence that the labor market has shifted up a gear over the past couple of months," said Ian Shepherdson, chief US economist at High Frequency Economics. "Both jobless claims and the help wanted index improved materially in February," said Jay Feldman, an economist at CSFB. "We are revising up our payroll forecast to 275,000 from an earlier forecast of 190,000." Finally, Conference Board economist Ken Goldstein said, "If new jobs continue to open up, consumer expectations could turn even more positive this spring."

Preliminary 4Q GDP rose 3.8% versus estimates of a 3.7% increase and a prior estimate of a 3.1% gain. The Preliminary 4Q GDP Price Deflator rose 2.1% versus estimates of a 2.0% increase and a prior estimate of a 2.0% gain. Preliminary 4Q Personal Consumption rose 4.2% versus estimates of a 4.6% increase and a prior estimate of a 4.6% gain. The better-than-expected GDP number was a result of a smaller trade deficit and increased business spending on equipment and software, Bloomberg reported. "Capital expenditures are developing a head of steam," said former Fed Governor Gramley. "First-quarter GDP is going to be well above 4%, maybe 4.5%," he said. Ted Wieseman, an economist at Morgan Stanley said, "There is good reason to believe that not only capital spending but hiring is picking up, and that is going to be a key driver for the economy." "The strength of the recovery in the face of a 25% run-up in oil prices is a testament to the recovery's resilience," said Robert DiClemente, chief US economist at Citigroup. Spending on equipment and software grew at an 18% annual rate in the fourth quarter, following a 17.5% increase in the prior quarter. The back-to-back gains are the strongest since the six months that ended in September 1997, Bloomberg reported. Finally, the core personal consumption expenditures price index, Greenpan's favorite measure of inflation, rose 1.6% during the fourth quarter, within the Fed's preferred range of 1-2%, Bloomberg said.

One-Family Home Re-sales for January fell to 5.94M versus estimates of 6.7M and a downwardly revised 5.97M in December. Sales were strongest in the South, rising 3.5% for the month. The median price of a previously owned home fell to $189,000 last month from $191,000 in December, Bloomberg said. However, the median price was up 10.5% from January 2004. "We do have characteristics of bubbles in certain areas, but not, as best as I can judge, nationwide," Greenspan said during Congressional testimony Feb. 17. "I don't expect that we will run into anything resembling a collapsing bubble," he said. Moreover, the supply of homes available for sale, another gauge of housing demand, declined to a record-low 3.7 months' worth in January, Bloomberg reported. The 30-year fixed mortgage rate in January averaged 5.66%, near its 40-year low reached in June of 2003 and down from 5.81% in December, Bloomberg said. "We're seeing a lot of first-time home-buyers on the market," said Scott Jones, a loan officer at Weichert Realtors in Oakton, Virginia.

Bottom Line: Overall, last week's economic data were positive. Consumer Confidence is definitely being dampened by the negative political rhetoric surrounding Social Security and talk of nuclear proliferation, even as consumer spending remains strong. However, as time passes the effects of this should subside. In the near-term, I expect confidence to rise modestly as increasing gas prices mostly offset better job prospects, low long-term interest rates and improvements in Iraq. The modest rises in the CPI and the Core PCE show that inflation is well in check. Companies are finding other ways to absorb rising costs, as evidenced by their very strong profit growth, without passing these increases on to the consumer. As well, the overcapacity generated during the 90's and global competition still makes it incredibly hard for companies in many sectors to raise prices. The airline, telecom, auto, technology and retail sectors are some of the main areas still facing immense pressure to keep prices low. Rising home values do not have the same negative effect on consumer psyche as increases in goods and services due to the fact that homes are an investment. I am still keeping a close eye on unit labor costs, which comprise two-thirds of inflation, as the job market appears to be accelerating. Any substantial increases in labor costs for a sustained period would prompt the Fed to accelerate their pace of rate hikes. I currently do not anticipate this to be a problem. The fact that Durable Goods Orders are as strong as they are so far this year is remarkable considering the many forms of stimulus that hit the US economy during the fourth quarter of 2004. I had expected that 4Q/04 growth stole from 1Q/05 growth, but this does not appear to be the case. This bodes very well for another strong year for the US economy. I now expect US GDP growth of a healthy 3.5% for the year. While the housing market in some areas of the country is exhibiting bubble-type characteristics, many other areas are not. Considering this winter has been one of the wettest on record, the housing market remains quite robust. I continue to expect a slowing from record levels to more sustainable healthy levels. Finally, the ECRI Weekly Leading Index fell .30% for the week, staying near its highest level since May of 2004.