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Monday Watch

Weekend Headlines
Bloomberg:
- Canadian police arrested 12 men and five youths, most of them Canadian citizens, saying they were members of a terrorist ring that plotted to build bombs to set off in southern Ontario.
- Toronto Mayor David Miller said Canada’s largest city won’t be “intimidated” by terrorist threats after police arrested 17 people suspected of a plot to make bombs to set off in southern Ontario.
- GlaxoSmithKline’s(GSK) experimental pill Tykerb helped stall advanced breast cancer in a study of women not helped by Genentech’s(DNA) big-selling therapy, Herceptin.
- New drugs from Pfizer(PFE) and Wyeth(WYE), given as an initial treatment for advanced kidney cancer, may help patients live longer, two large international studies show.
- Alan Garcia defeated Ollanta Humala in a presidential run-off vote in Peru, returning to power two decades after he led the Andean country to a debt default and annual inflation of 8,000%, according to an early count of the vote.
- Secretary of State Condoleezza Rice dismissed Iran’s threats to disrupt energy supplies in a confrontation over its nuclear program, saying the Persian Gulf country is too dependent on revenue from oil.
- Investors from Goldman Sachs to Bill Gates are crowding into the ethanol market as oil prices surge, betting that this boom, unlike the last one, won’t be followed by a bust.
- Crude oil is rising to the highest in more than three weeks in NY after Iran said action against its nuclear research program risks disrupting shipments from the Persian Gulf.
- Copper is headed for a record plunge, perhaps as much as 25% in a day, said John Tumazos, the Prudential Equity Group LLP analyst who made Institutional Investor magazine’s quarterly All-America Research Team 40 times. Copper doubled in the past year on betting by speculators, the 50-year-old Tumazos said. The volatility of copper the past 10 weeks is the highest in history, according to Bloomberg.

NY Times:
- An Indiana town of 533 residents is trying to power itself entirely with renewable energy sources such as corn and pig manure.

Washington Post:
- More than 102,000 Massachusetts children will hear advertisements on an audio program during their morning rides to school later this year as part of a package offered by BusRadio.

San Francisco Chronicle:
- Sun Microsystems’(SUNW) recent elimination of its so-called “poison pill” could indicate the maker of computer servers is preparing for a sale.

Frankfurter Allgemeine Sonntagszeitung:
- DaimlerChrysler AG will sell Smart mini-cars in the US next year.

WirtschaftsWoche:
- The value of goods traded on EBay’s European auction sites will surpass US sales in the “not too distant future,” Meg Whitman, the company’s CEO, told the magazine.

Kompas:
- Indonesia’s government wants taxis operating in the capital of Jakarta to use compressed natural gas in their vehicles by the end of this year.

Kyodo News:
- Yoshiaki Murakami, who leads a $3 billion investment fund in Japan, is expected to be arrested as early as tomorrow over possible insider trading of shares in Nippon Broadcasting System.

Arab News:
- Saudi Arabia and five other Arab nations urged Iran to cooperate with the United Nations’ nuclear watchdog and called for a diplomatic solution to the standoff over the Islamic Republic’s nuclear program.
- At least 10 million people have been affected by the declines this year in Persian Gulf stock markets including Saudi Arabia. Saudi Arabia’s Tadawul All Share Index has plunged more than 40% since reaching a record on Feb. 25.

Middle East Economic Digest:
- Saudi Aramco plans to build a 25.5 mile causeway in the Persian Gulf to help boost oil output from its Manifa field by 900,000 barrels a day.
- Chevron Corp.(CVX), Angola’s largest oil producer, expects to spend $2.2 billion increasing Angolan oil production by 40% over the next two years.

Weekend Recommendations
Barron's:
- Had positive comments on (MU), (WMT), (MGA) and (NOC).

Night Trading
Asian indices are -.50% to unch. on average.
S&P 500 indicated -.07%.
NASDAQ 100 indicated -.15%.

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Earnings of Note
Company/Estimate
- (BOBE)/.37

Upcoming Splits
- (BRY) 2-for-1
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Economic Releases
10:00 am EST
- ISM Non-Manufacturing for May is estimated to fall to 60.0 versus a reading of 63.0 in April.

BOTTOM LINE: Asian Indices are mostly lower, weighed down by exporting shares in the region. I expect US stocks to open modestly lower and to rise into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the week.

Weekly Outlook

Click here for The Week Ahead by Reuters

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

Economic reports for the week include:

Mon. - ISM Non-Manufacturing

Tues. - None of note

Wed. - Consumer Credit

Thur. - Initial Jobless Claims, Continuing Claims, Wholesale Inventories

Fri. - Trade Balance, Import Price Index

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

Mon. - Bob Evans Farms(BOBE)

Tues. - Cooper Cos.(COO), Korn/Ferry(KFY),

Wed. - BMC Software(BMC)

Thur. - H&R Block(HRB), JOS A Bank(JOS), National Semi(NSM), Quiksilver Inc.(ZQK), Smithfield Foods(SFD)

Fri. - Bausch & Lomb(BOL), UTi Worldwide(UTIW)

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

Mon. - Goldman Sachs Lodging/Gaming/Restaurant/Leisure Conference, JPMorgan Basics & Industrials Conference

Tue. - Piper Jaffray Consumer Conference, JPMorgan Basics & Industrials Conference, Goldman Sachs Lodging/Gaming/Restaurant/Leisure Confernce

Wed. - None of note

Thur. - None of note

Fri. - None of note

BOTTOM LINE: I expect US stocks to finish the week mixed as continuing worries over slower economic growth and high energy prices offset short-covering, bargain hunting and declining long-term rates. My trading indicators are still giving mostly bearish signals and the Portfolio is 75% net long heading into the week.

Market Week in Review

S&P 500 1,288.22 +1.21%*



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was modestly bullish. The advance/decline line rose, most sectors gained and volume was about average on the week. Measures of investor anxiety were mostly higher. Moreover, the AAII % Bulls fell to 30.77% and is still approaching depressed levels, which is a big positive. Most other measures of investor sentiment are also around levels associated with meaningful market bottoms.

The average 30-year mortgage rate rose to 6.67% which is 146 basis points above all-time lows set in June 2003. Pending Home Sales fell the most since August 2003. I still believe housing is in the process of slowing to more healthy sustainable levels. This will likely result in the slowing of consumer spending, and thus US GDP growth, back to around average rates over the coming months. US economic growth soared 5.3% during the first quarter.

The benchmark 10-year T-note yield fell 6 basis points on the week as economic data were mostly weaker, unit labor costs(the largest component of inflation) decelerated substantially and Fed members made mostly hawkish comments. I still believe inflation concerns have peaked for the year as investors begin to anticipate slower economic growth, unit labor costs remain subdued and the mania for commodities continues to reverse course.

The EIA reported this week that gasoline supplies rose again as refinery utilization increased. Unleaded Gasoline futures rose, but are still 24.1% below September 2005 highs even as refinery utilization remains below normal as a result of the hurricanes last year, a significant amount of Gulf of Mexico oil production remains shut-in and fears over future production disruptions persist. According to TradeSports.com, the percent chance of a US and/or Israeli strike on Iran this year has fallen to 16% from 36% late last year. I continue to believe the elevated level of gas prices related to shortage speculation and crude oil production disruption speculation should further dampen demand over the coming months, sending gas prices back to reasonable levels.

Natural gas inventories rose less than expectations this week, however supplies are still 49.5% above the 5-year average, near an all-time record high for this time of year, even as some daily Gulf of Mexico production remains shut-in. Natural gas prices have plunged 57.60% since December 2005 highs. Notwithstanding this collapse, industrial demand for natural gas has shown few signs of increasing. US oil inventories are still approaching 9-year highs. Since December 2003, global oil demand is down .24%, while global supplies have increased 4.94%. Moreover, worldwide inventories are poised to begin increasing at an accelerated rate over the next year. I continue to believe oil is priced at extremely elevated levels on fear and record speculation by investment funds, not fundamentals. As the fear premium in oil dissipates back to more reasonable levels and supplies continue to rise, crude oil should head meaningfully lower over the intermediate-term.

Gold fell for the week as inflation fears subsided and speculators continued to take profits. The US dollar fell on further speculation of a Fed “pause.”

The Healthcare and Utility sectors outperformed for the week on increasing worries over slower US growth. I expect both sectors to continue to outperform over the intermediate-term. The forward p/e on the S&P 500 has contracted relentlessly over the last few years and now stands at a very reasonable 15.0. The average US stock, as measured by the Value Line Geometric Index(VGY), is still up 5.3% so far this year, notwithstanding the recent correction. Moreover, the Russell 2000 Index is up 10.0% year-to-date. In my opinion, the current pullback has provided longer-term investors very attractive opportunities in many stocks that have been punished indiscriminately. However, the most overvalued economically sensitive and emerging market stocks should continue to underperform over the intermediate-term as the manias for those shares subside. A chain reaction of events has likely begun that will eventually result to increased demand for US stocks.

While the major averages have likely bottomed for the year, a test of recent lows could occur over the coming weeks as economic data continue to disappoint. An ensuing Fed pause, lower commodity prices, decelerating inflation readings, lower long-term rates, increased consumer confidence and the realization that growth is only slowing should provide the catalysts for another substantial push higher in the major averages through year-end as p/e multiples begin to expand. I continue to believe the S&P 500 will return a total of around 15% for the year. The ECRI Weekly Leading Index fell again this week and is forecasting healthy, but decelerating, US economic activity.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,288.22 +1.21%
DJIA 11,247.87 +.33%
NASDAQ 2,219.41 +.96%
Russell 2000 737.45 +1.64%
Wilshire 5000 13,000.38 +1.42%
S&P Equity Long/Short Index 1,152.42 -.10%
S&P Barra Growth 594.91 +.64%
S&P Barra Value 691.71 +1.76%
Morgan Stanley Consumer 609.56 +.43%
Morgan Stanley Cyclical 848.00 +1.65%
Morgan Stanley Technology 510.12 +.58%
Transports 4,762.08 +2.47%
Utilities 415.90 +4.14%
S&P 500 Cum A/D Line 7,729.0 +2.0%
Bloomberg Crude Oil % Bulls 25.0 -36.11%
Put/Call 1.21 +42.35%
NYSE Arms 1.28 +118.97%
Volatility(VIX) 14.32 -7.61%
ISE Sentiment 109.00 -32.12%
AAII % Bulls 30.77 -6.87%
AAII % Bears 50.0 +9.79%
US Dollar 84.04 -.81%
CRB 350.05 +1.07%
ECRI Weekly Leading Index 136.40 -.44%

Futures Spot Prices
Crude Oil 72.75 +1.75%
Unleaded Gasoline 220.45 +4.51%
Natural Gas 6.69 +8.40%
Heating Oil 203.20 +1.45%
Gold 643.00 -2.37%
Base Metals 228.18 -5.40%
Copper 358.50 -6.38%
10-year US Treasury Yield 4.99% -1.19%
Average 30-year Mortgage Rate 6.67% +.76%

Leading Sectors
HMOs +4.16%
Utilities +4.14%
Steel +3.92%
Biotech +3.62%
Oil Service +3.60%

Lagging Sectors
Restaurants -.02%
Disk Drives -.97%
Software -1.11%
Homebuilders -1.27%
Internet -1.59%

One-Week High-Volume Gainers
One-Week High-Volume Losers

*5-Day % Change

Stocks Slightly Lower into Final Hour on Rise in Oil and Economic Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Retail longs, Internet longs and Energy-related shorts. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is mixed as the advance/decline line is about even, sector performance is mixed and volume is above average. The yield on the 10-year Treasury note is at session lows, falling 11 basis points to 4.98%. I expect lower long-term rates will eventually result in P/E multiple expansion for the broad market, especially those companies that can generate above-average growth in a slower economy. I expect US stocks to trade modestly higher into the close from current levels on short-covering and lower long-term rates.