Monday Watch

Weekend Headlines
Bloomberg:
- UK Prime Minister Tony Blair warned of the need to confront the "evil ideology" behind the London bombs that killed 55 people, saying to appease Islamist terrorists would be a "misunderstanding of catastrophic proportions."
- Wal-Mart Stores said July sales at its US stores open at least a year are rising within its forecast as food sales outpaced general merchandise sales for a second straight week.
- The IMF cut its growth forecast for France this year and in 2006.
- Whirlpool said it is making a preliminary offer of $17 a share for Maytag, which has been the subject of a bidding war since May.
- The US dollar traded near a 13-month high against the yen in Asia on expectations a report will show international investors increased purchases of US assets.
- Hurricane Emily forced thousands of tourists and residents along Mexico's coastal regions to evacuate today as the storm moved in the direction of the Yucatan Peninsula and popular resorts such as Cancun.

Wall Street Journal:
- State Farm Group, MetLife and AIG are among US insurers with fast-growing banking divisions, as they find selling banking products such as certificates of deposits compatible with their own business.

New York Times:
- The SEC is investigating options trading at brokerage firms, making sure rules mandating that customers are getting the best price on option trades are being followed.
- Some Wall Street analysts say Costco Wholesale's pricing and employment polices benefit customers and employees more than shareholders.
- Many investors say growth stocks are more attractively valued than so-called value stocks, which have outperformed them in the past five years, and are set to move higher.
- Many personal-computer owners faced with virus- and spyware-ridden machines find it cheaper and easier to buy a new computer than to fix the old one.

Washington Post:
- The White House search for a successor to retiring Supreme Court Justice Sandra Day O'Connor is focusing on female and minority candidates, citing unnamed Republican strategists.

Time magazine:
- Time reporter Matthew Cooper told a grand jury that he was "certain" White House adviser Karl Rove "never used" the name of the CIA operative Valerie Plame in a 2003 phone conversation or indicated that she was a covert agent.

Financial Times:
- Cendant is close to selling its marketing services unit, which analysts estimate is worth more than $2 billion.

Reuters:
- Iraq made its first criminal charges against ousted dictator Saddam Hussein, for involvement in the murder of about 140 Shiite Muslims in 1982.

Sunday Telegraph:
- UK profit warnings jumped 52% in the second quarter to their highest level in 30 months.

Xinhua News Agency:
- China's vehicle imports dropped 34% to 64,000 units in the first half from a year earlier after the government introduced new tax policies and more customers bought models locally assembled.

South China Morning Post:
- Research in Motion aims this year to double the number of service providers in Asia.

Shanghai Securities News:
- Revenue at Chinese brokerages slumped 55% in the first half from a year ago.

Weekend Recommendations
Bulls and Bears:
- Had guests that were positive on SPN, HD, HAN, CSX and mixed on LOW, MSM, ATYT.

Forbes on Fox:
- Had guests that were positive on WLS, WM and mixed on HOV, BGC, MDC, LOW.

Cashin' In:
- Had guests that were positive on EBAY, LLY, mixed on TASR, SYMC and negative on AEOS.

Cavuto on Business:
- Had guests that were positive on LQI, TLAB, TRA and ANF.

Barron's:
- Had positive comments on BA and UVN.
- Had negative comments on GD and NOC.

Goldman Sachs:
- Reiterated Outperform on DNA and DIS.

Night Trading
Asian indices are -.25% to +.50% on average.
S&P 500 indicated -.06%.
NASDAQ 100 indicated -.19%.

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

Earnings of Note
Company/Estimate
MMM/1.09
BAC/1.00
SCH/.128
C/1.02
IBM/1.03
KRB/.49

Upcoming Splits
None of note

Economic Releases
9:00 am EST
- Net Foreign Security Purchases for May are estimated to rise to $60.0B versus $47.4B in April.

1:00 pm EST
- The NAHB Housing Market Index for July is estimated at 71 versus a reading of 71 in June.

BOTTOM LINE: Asian Indices are mostly higher on optimism over recent US economic reports. I expect US stocks to open modestly lower and rebound later in the day. The Portfolio is 100% net long heading into the week.

Weekly Outlook

There are a few important economic reports and a number of significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. - Net Foreign Security Purchases, NAHB Housing Market Index
Tues. - Housing Starts, Building Permits
Wed. - Greenspan Report on Economy & Policy
Thur. - Initial Jobless Claims, Leading Indicators, Philly Fed., Fed Minutes
Fri. - None of note

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

Mon. - 3M Co.(MMM), Bank of America(BAC), Citigroup(C), Charles Schwab(SCH), IBM(IBM), MBNA Corp.(KRB)
Tues. - Amgen(AMGN), Boston Scientific(BSX), Ford Motor(F), Intel Corp.(INTC), Johnson & Johnson(JNJ), Juniper Networks(JNPR), Merrill Lynch(MER), Motorola(MOT), Yahoo!(YHOO)
Wed. - Altria Group(MO), Delta Air Lines(DAL), Eastman Kodak(EK), General Motors(GM), General Dynamics(GD), JP Morgan(JPM), Linens 'N Things(LIN), Pfizer(PFE), Qualcomm(QCOM), Ryland Group(RYL), Seagate Technology(STX), United Technology(UTX), VeriSign(VRSN)
Thur. - Baxter Intl.(BAX), Broadcom(BRCM), Caterpillar(CAT), DR Horton(DHI), EMC Corp.(EMC), Eli Lilly(LLY), Google(GOOG), McDonald's(MCD), Microsoft(MSFT), Merck(MRK), Nextel Communications(NXTL), Office Depot(ODP), Sirius Satellite(SIRI), Scientific Atlanta(SFA), United Parcel Service(UPS), Xilinix(XLNX)
Fri. - Guidant(GDT), Halliburton(HAL), Schlumberger Ltd.(SLB)

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

Mon. - None of note
Tue. - Semi Book-to-Bill
Wed. - None of note
Thur. - None of note
Fri. - None of note

BOTTOM LINE: I expect US stocks to finish the week modestly higher on good economic reports and mostly positive economic data. Stocks are extended near-term and will likely go through a period of consolidation. However, I continue to believe US stocks will mount a significant rally sometime over the next several months and finish the year 10%+ higher than current levels. My trading indicators are still giving bullish signals and the Portfolio is 100% net long heading into the week.

Economic Week in Review

ECRI Weekly Leading Index 133.50 -.67%

The Trade Deficit for May shrank to -$55.3B versus estimates of -$57.0B and -$56.9B in April. The US trade deficit unexpectedly narrowed in May as imports of oil, other industrial materials and capital goods fell while exports hit an all-time record. The deficit with China widened to $15.8 billion, which is 29% of the entire US deficit. The numbers for April and May point to a narrower deficit in the second quarter, which should help add to 2Q GDP growth for the first time in 2 years. "It's good news, clearly," said Richard DeKaser, chief economist at National City.

The Import Price Index for June rose 1.0% versus estimates of a 1.0% increase and a 1.0% decline in May. Prices of imported goods other than petroleum declined .4% in June, the most in more than two years. This suggests US companies will continue to struggle to raise prices due to foreign competition. "All the inflation that we're seeing is in energy prices," said Wesley Beal, chief US economist at IDEAglobal.com. "For just the last two months, core prices in import prices and producer prices and consumer prices have been okay," Beal said. "Inflation expectations see well contained" and economic growth appears "fairly solid," the Fed's Lacker said.

The US Monthly Budget Surplus for June rose to $23.0B versus estimates of $22.4B and -$19.1B in May. White House budget officials cut their estimate for this year's deficit to $333 billion as rising tax receipts are soaring from growth in jobs, income and corporate revenue. This mid-year estimate is $94 billion less than February's forecast. The report is "a sign our tax relief plan, our pro-growth policies are working," President Bush said. The $333 billion would represent only 2.7% of GDP, the Office of Management and Budget said. Based on the current trend, the deficit would narrow to 1.1% of GDP by 2009, the OMB said. Tax payments in late April and May have been running $1 billion a day ahead of last year's pace, Bloomberg reported. "Tax revenue has turned around very quickly," said Wesley Beal. "I would expect the deficit to come in even more favorably than that. They are giving themselves an easy bar to clear," said Beal. The OMB is now predicting US tax revenue will rise 14% from last year, the largest annual gain in 25 years.

The CPI for June was unchanged versus estimates of a .2% increase and a .1% gain in May. The CPI Ex Food & Energy for June rose .1% versus estimates of a .2% increase and a .1% gain in May. US consumer prices were unchanged in June as companies discounted products such as clothing and cars to boost sales. Consumer prices were up 2.5% for the 12 months ended in June. The cost of all goods including cars, apparel and food fell .2% last month. "Even with rising energy prices, inflation remains historically low and the US should "enjoy price stability over the next few years," said Ben Bernanke, Greenspan's likely replacement.

Advance Retail Sales for June rose 1.7% versus estimates of a 1.0% gain and a .3% decline in May. Retail Sales Less Autos for June rose .7% versus estimates of a .6% increase and unchanged in May. US retail sales rose a greater-than-expected 1.7% in June, led by spending on cars, furniture and gasoline. Retail sales account for about half of all consumer spending. "Consumers are spending more than I would have imagined," said Lyle E. Gramley, a former Fed governor. "Consumer spending growth is going to continue to be as steady as it has been," said Jeffrey Lacker, president of the Federal Reserve Bank of Richmond. "Income growth is holding up pretty well."

Initial Jobless Claims for last week rose to 336K versus estimates of 322K and 320K the prior week. Continuing Claims rose to 2617K versus estimates of 2600K and 2572K prior. The number of US workers filing jobless claims rose to 336,000 last week, reflecting a temporary shutdown of auto plants. The four-week moving average of claims rose to 320,750 from 320,500. The insured employment rate, which tracks the US jobless rate, rose to 2.1%. "Looking at these underlying trends, the labor market seems to be pretty healthy," said Stephen Gallagher, chief US economist at Societe Generale.

Empire Manufacturing for July rose to 23.9 versus estimates of 10.0 and a reading of 10.5 in June. Empire Manufacturing unexpectedly rose in July to its highest level this year as orders picked up and inventories shrank. The optimism component of the index for the next 6 months rose to 47 from 34 in June. The current orders index rose to 19.2, the highest since January. The measure of current shipments increased to 20.9 from 1 in June. The gauge of prices paid for materials fell to 21.6 in July, the lowest since December 2003. The index of expected prices paid six months from now fell to 28.4 from 44.4. Finally, the index of hiring expectations over the next six months rose to 23.9 this month from 14.7 in June. "Manufacturing has turned the corner and appears to have completed the inventory adjustments that needed to be made," said Wesley Beal. "Production, orders and cash flow should pick up strongly in the third quarter now that the decks are cleared. Capital spending and production will add more to GDP," said Beal.

The Producer Price Index for June was unchanged versus estimates of a .4% increase and a .6% decline in May. The PPI Ex Food & Energy for June fell .1% versus estimates of a .1% increase and a .1% gain in May. US producer prices were unchanged in June, pulled lower by discounts at GM, as well as cheaper food and computers. Excluding food & energy, core raw materials prices fell 4.3% from last year, the most since May 2004. Food prices fell 1.1%, the largest drop since July 2004. Computer prices fell .8% after declining 4.8% last month. "Inflationary pressures are coming down at all stages," said David Sloan, senior market economist at 4Cast.com. "It's not so much a question of passing on costs, you see with these figures in the pipeline, there aren't higher costs to pass on," said Sloan.

Industrial Production for June rose .9% versus estimates of a .4% gain and a .3% increase in May. Capacity Utilization for June rose to 80.0% versus estimates of 79.6% and 79.4% in May. US industrial production rose twice as much as expected last month, the most since Feb. 2004. Capacity Utilization rose to the best level since December 2000. Automakers resumed production after scaling back earlier this year to trim their inventories. "The manufacturing sector is poised to do a little better this summer than it has in the spring," said Stephen Stanley, chief economist at RBS Greenwich Capital.

Preliminary Univ. of Mich. Consumer Confidence for July rose to 96.5 versus estimates of 95.0 and a reading of 96.0 in June. US consumer sentiment unexpectedly rose in July to the highest level this year led by stable employment prospects and rising home values. Consumers have become accustomed to rising gasoline prices, which reached a record last week. The expectations index, based on optimism about the next one to five years, increased to 86.6, the highest since December. "It's a watch what I do, not what I say kind of scenario because people are spending even as they're complaining," said Glenn Haberbush, an economist at Mizuho Securities.

BOTTOM LINE: Overall, last week's economic data were very positive. The Trade Deficit will likely narrow modestly through year-end as decelerating import prices, led lower by commodities, more than offset slower global economic activity. The US budget deficit will likely come in around $250 billion, significantly lower than expectations. President Bush's goal of cutting the deficit in half by 2009 will likely be achieved next year as a healthy US economy continues to generate soaring tax revenue for the Treasury. As I predicted at the beginning of the year, inflation will likely rise this year less than the long-term average of 3.0%. The recent cyclical bout of modest inflation has likely ended and the secular trend of disinflation is in the early stages of reasserting itself. An improving job market, a rising stock market and booming housing market are helping to boost consumer sentiment and spending. Falling energy prices, low interest rates and lower inflation should also help propel Retail Sales through year-end. It is hard to gauge weekly trends in employment at this time due to seasonal factors. The worst of the pain in the manufacturing sector now appears over. I expect manufacturing to improve modestly through year-end, adding to GDP growth. However, slowing global growth will hold manufacturing gains in check. The fact that consumer sentiment rose even with the London bombings, record gas prices and hurricanes in Florida bodes well for future readings. Finally, the ECRI Weekly Leading Index fell .67% to 133.50 and is forecasting healthy but moderating growth.

Market Week in Review

S&P 500 1,227.92 +1.32%*



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was positive as the S&P 500 closed at a four-year high on Friday. The advance/decline line rose, almost every sector gained and volume was average on the week. Measures of investor anxiety were mixed. However, the AAII % Bulls rose substantially for the week and is now at above-average levels. Mortgage rates rose, but are still only 45 basis points away from all-time lows set in June 2003. The benchmark 10-year T-note yield continued to rise as economic reports again painted a healthy picture of the state of the US economy. As well, investors are likely shifting some assets from bonds to stocks. Small-caps, which have outperformed substantially this year, underperformed this week as the US Dollar also took a breather from its recent advance. Technology stocks outperformed, led by semiconductors, on further signs of increasing demand. Oil fell on the week as a report from the IEA showed China's demand growth for the commodity turned negative during the second quarter and hurricane Emily lost steam.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,227.92 +1.32%
DJIA 10,640.83 +1.83%
NASDAQ 2,156.78 +2.08%
Russell 2000 663.74 +.24%
DJ Wilshire 5000 12,230.85 +1.15%
S&P Equity Long/Short Index 1,041.60 +1.0%
S&P Barra Growth 587.36 +1.51%
S&P Barra Value 636.26 +1.15%
Morgan Stanley Consumer 585.71 +2.01%
Morgan Stanley Cyclical 741.49 +1.55%
Morgan Stanley Technology 500.30 +3.23%
Transports 3,646.03 +1.56%
Utilities 392.73 +.59%
S&P 500 Cum A/D Line 8,295.00 +10.38%
Bloomberg Crude Oil % Bulls 31.0 -46.45%
Put/Call .68 -13.92%
NYSE Arms 1.07 +37.18%
Volatility(VIX) 10.33 -9.78%
ISE Sentiment 169.00 -12.44%
AAII % Bulls 57.89 +34.60%
US Dollar 89.72 -.51%
CRB 309.57 -.11%

Futures Spot Prices
Crude Oil 58.09 -2.70%
Unleaded Gasoline 168.83 -4.54%
Natural Gas 7.85 +5.05%
Heating Oil 166.21 -3.39%
Gold 421.30 -1.20%
Base Metals 123.65 +.16%
Copper 156.20 +.06%
10-year US Treasury Yield 4.17% +1.76%
Average 30-year Mortgage Rate 5.66% +.71%

Leading Sectors
Airlines +5.95%
Semis +4.72%
Restaurants +3.53%

Lagging Sectors
Gold & Silver -2.26%
HMOs -2.38%
Hospitals -3.26%

*5-Day % Change

Stocks Modestly Lower Mid-day, Consolidating Recent Gains

Indices
S&P 500 1,225.42 -.09%
DJIA 10,617.66 -.11%
NASDAQ 2,150.30 -.12%
Russell 2000 661.27 -.26%
DJ Wilshire 5000 12,204.00 -.08%
S&P Barra Growth 586.36 -.11%
S&P Barra Value 634.75 -.07%
Morgan Stanley Consumer 584.56 +.36%
Morgan Stanley Cyclical 740.22 -.15%
Morgan Stanley Technology 498.73 -.35%
Transports 3,631.56 -.83%
Utilities 391.62 -.27%
Put/Call .68 -2.86%
NYSE Arms 1.13 +59.92%
Volatility(VIX) 10.26 -5.09%
ISE Sentiment 167.00 +20.14%
US Dollar 89.64 +.18%
CRB 310.10 +.32%

Futures Spot Prices
Crude Oil 58.30 +.87%
Unleaded Gasoline 168.70 +.12%
Natural Gas 7.98 +1.73%
Heating Oil 166.50 +.49%
Gold 421.50 +.31%
Base Metals 123.65 +.08%
Copper 156.20 +.97%
10-year US Treasury Yield 4.17% +.05%

Leading Sectors
Restaurants +2.34%
Homebuilders +.99%
Biotech +.91%

Lagging Sectors
Papers -1.22%
Gold & Silver -1.31%
Airlines -1.82%

BOTTOM LINE: The Portfolio is unchanged mid-day as gains in my Tech and Retail longs are offsetting losses in my Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly negative as the advance/decline line is modestly lower, sector performance is mixed and volume is below average. Measures of investor anxiety are mostly lower. Today’s overall market action is neutral considering recent gains and positive economic reports. According to a report I received today from Citigroup, the spread between the 55-week and 200-week moving averages for crude is the widest ever. They are calling for a decline to at least $47 a barrel and possibly $35 a barrel. I expect US stocks to trade mixed-to-higher into the close on short-covering and more optimism.