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. - NAHB Housing Market Index

Tues. - Housing Starts, Building Permits

Wed. - None of note

Thur. - Initial Jobless Claims, Leading Indicators

Fri. - Durable Goods Orders

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

Mon. - Carmax(KMX), Circuit City Stores(CC)

Tues. - Actuant(ATU), Apollo Group(APOL), Arrow Intl.(ARRO), Factset Research(FDS), JM Smucker(SJM)

Wed. - Bed Bath & Beyond(BBBY), FedEx Corp.(FDX), Jabil Circuit(JBL), Morgan Stanley(MS), Sonic Corp.(SONC)

Thur. - Comverse Technology(CMVT), Del Monte Foods(DLM), Family Dollar(FDO), GTECH Holdings(GTK), Oracle(ORCL), Rite Aid(RAD), Solectron(SLR), Tektronix(TEK)

Fri. - AG Edwards(AGE), Micron Technology(MU)

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

Mon. - Prudential Biotech Meetings

Tue. - Piper Jaffray Retail & Financial Services Symposium

Wed. - Morgan Stanley Business and Professional Services Conference

Thur. - Morgan Stanley Business and Professional Services Conference

Fri. - None of note

BOTTOM LINE: I expect US stocks to finish the week modestly higher on short-covering, bargain hunting, less irrational pessimism and declining long-term rates. My trading indicators are still giving mostly bearish signals and the Portfolio is 100% net long heading into the week.

Market Week in Review

S&P 500 1,251.54 -.06%*



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was mildly bullish. The advance/decline line fell, sector performance was mixed and volume was above average on the week. Measures of investor anxiety were mostly higher. Moreover, the AAII % Bulls is 26.41%, still at depressed levels, while the % Bears is now at the highest level since Feb. 2003. The S&P 500 has rallied 56.6% since that time. Most other measures of investor sentiment are also at levels associated with meaningful market bottoms.

The average 30-year mortgage rate rose to 6.63% which is 142 basis points above all-time lows set in June 2003. I still believe housing is in the process of slowing to more healthy sustainable levels. I still see little evidence of a nationwide “hard landing” for housing at this point.

The benchmark 10-year T-note yield rose 15 basis points on the week as global stock markets stabilized and US economic data were mostly positive. I still believe inflation concerns have peaked for the year as investors continue 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 substantially above expectations as refinery utilization increased. Unleaded Gasoline futures declined and are now 30.0% 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 12.8% 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 will further dampen fuel 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 37.9% above the 5-year average, not far from 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 54.9% since December 2005 highs. There are finally some signs that industrial demand is picking up for natural gas as companies substitute the commodity for petroleum products.

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, global growth slows and supplies continue to rise, crude oil should head meaningfully lower over the intermediate-term. This will likely begin to happen during the next quarter.

Gold fell for the week as the US dollar gained, speculators sold and the situations in Iraq and Iran further improved. The US dollar rose on hawkish Fed comments and more positive US economic data.

Semiconductor stocks outperformed for the week on bargain-hunting, short-covering and more positive analyst commentary. Semiconductor inventory concerns should be alleviated by next quarter. The forward p/e on the S&P 500 has contracted relentlessly over the last few years and now stands at a very reasonable 14.6. The average US stock, as measured by the Value Line Geometric Index(VGY), is up .1% this year. Moreover, the Russell 2000 Index is still up 3.4% year-to-date, notwithstanding the recent correction. 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. I continue to believe a chain reaction of events has begun that will eventually result in a substantial increase in demand for US stocks.

In my opinion, the market is still factoring in way too much bad news at current levels. Problematic inflation, substantially higher long-term rates, a significant US dollar decline, a “hard-landing” in housing, a plunge in consumer spending and ever higher oil prices appear to be mostly factored into stock prices at this point. I view any one of these as unlikely and the occurrence of all as highly unlikely. Over the coming months, a Fed pause, lower commodity prices, decelerating inflation readings, lower long-term rates, increased consumer confidence, increasing demand for US stocks and the realization that economic 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 still believe the S&P 500 will return a total of around 15% for the year. The ECRI Weekly Leading Index rose again this week and is forecasting healthy, but decelerating, US economic activity.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,251.54 -.06%
DJIA 11,014.55 +1.13%
NASDAQ 2,129.95 -.24%
Russell 2000 693.07 -1.19%
Wilshire 5000 12,564.77 -.26%
S&P Equity Long/Short Index 1,150.23 unch.
S&P Barra Growth 580.73 +.21%
S&P Barra Value 668.88 -.33%
Morgan Stanley Consumer 603.98 +.50%
Morgan Stanley Cyclical 803.11 +.39%
Morgan Stanley Technology 489.35 +.78%
Transports 4,636.23 +2.07%
Utilities 410.77 -.35%
S&P 500 Cum A/D Line 6,930.0 -3.0%
Bloomberg Oil % Bulls 40.0 +91.1%
CFTC Oil Large Speculative Longs 173,067 -4.0%
Put/Call 1.25 +23.76%
NYSE Arms 1.23 -10.14%
Volatility(VIX) 17.25 -4.80%
ISE Sentiment 76.0 -27.62%
AAII % Bulls 26.41 +.69%
AAII % Bears 54.98 +21.96%
US Dollar 85.98 +.28%
CRB 339.22 -.26%
ECRI Weekly Leading Index 137.50 +.22%

Futures Spot Prices
Crude Oil 69.83 -.64%
Unleaded Gasoline 203.00 -5.09%
Natural Gas 7.12 +14.95%
Heating Oil 193.24 -5.69%
Gold 582.70 -4.56%
Base Metals 208.10 -1.88%
Copper 321.20 +1.16%
10-year US Treasury Yield 5.12% +3.01%
Average 30-year Mortgage Rate 6.63% +.15%

Leading Sectors
Airlines +4.12%
Telecom +2.32%
Semis +2.11%
Steel +1.38%
Software +.93%

Lagging Sectors
Banks -2.53%
Networking -2.61%
HMOs -2.77%
I-Banks -3.03%
Alternative Energy -3.72%

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

*5-Day % Change

Stocks Mostly Lower into Final Hour on Healthy Consolidation of Yesterday's Gains

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Computer longs, Networking longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, almost every sector is lower and volume is very heavy. The Fed's Kroszner just finished speaking. He said that U.S. second-half growth is unlikely to be as robust and that the core CPI is just a bit higher than historical norms. Finally, he said the current U.S. inflation range is manageable. As you can see from this chart, inflation as measured by the CPI, is currently around levels seen in most of the 90s, lower than the 80s and much lower than the 70s. Investors' current obsession with inflation is just another by-product of the negativity bubble we are currently in. I continue to believe we are currently experiencing a modest bout of cyclical inflation within the secular trend of disinflation. The U.S. is nowhere near experiencing stagflation. In fact, the U.S. economy is much closer to a "Goldilocks" type of environment(not too hot or cold), yet the overwhelming majority of stories focus on the negative possibilities rather than the most likely scenarios. I expect US stocks to trade mixed-to-higher into the close from current levels on more short-covering and bargain hunting.

Today's Headlines

Bloomberg:
- NBC cut its advertising rates for this season by as much as 5%, reflecting the fourth-ranked network’s decline in ratings.
- The Univ. of California-San Francisco is gutting a lab originally financed with US government grants and rebuilding it for stem-cell research with $6 million in privately donated money.
- Eli Lilly(LLY) and Amylin(AMLN) said they may not have enough manufacturing capacity for their new Byetta diabetes drug to keep up with sales that increased by 40% this quarter.
- JPMorgan Chase(JPM) said investors should cut holdings in BHP Billiton(BHP) and Australian mining companies as rising interest rates reduce demand for commodities.
- Fed Bank of St. Louis President Poole said US inflation is too high and that the Fed may need to act should price gains quicken.
- China’s central bank ordered banks to set aside more money as reserves to curb an investment boom that’s creating excess manufacturing capacity in the world’s fastest-growing major economy.
- T. Boone Pickens, the Dallas-based hedge fund manager who has made billions of dollars speculating on higher oil prices, reiterated his call that crude will rise to $80/bbl.
- Hedge funds, designed to profit whether financial markets rise or fall have lost 2.3% in June after a 1.3% decline in May amid a sudden sell-off in emerging market stocks and commodities, according to Hedge Fund Research.
- The US House of Representatives voted to expel Louisiana Democrat William Jefferson from the tax-writing Ways and Means Committee after federal investigators last month videotaped him taking $100,000 from a government witness in a bribery probe.
- Bonds sold by US airlines that avoided bankruptcy are rallying more than any other high-yield debt as the carriers profit from rising demand for travel.
- Gasoline futures are falling to a four-week low as ramped-up refinery production signals sufficient supplies for the summer months.
- The number of active oil and natural-gas drilling rigs in the US rose by 11 to 1,672 in the week ending June 16, a 20-year high, according to Baker Hughes.

Wall Street Journal:
- Venezuelan President Hugo Chavez has become the new hero of some politically left-wing Americans despite serious concerns by human rights groups, venerated almost as much as Fidel Castro and Che Guevara.
- Intel Corp.(INTC) may now be cheap because possible bad news is already priced in, citing Goldman Sachs analyst James Covello.

Women’s Wear Daily:
- Polo Ralph Lauren(RL), which designs Chaps women’s clothing sold only at Kohl’s(KSS), may make an exclusive line for Kohl’s rival JC Penney(JCP).

AP:
- The son of billionaire T. Boone Pickens was arrested last weekend after police found him hiding under a table in a Connecticut fly fishing store near a stash of items. Micahel Pickens, 51, spent three days in jail following a burglary arraignment in Bantam Superior Court June 12. He was unable to post a $15,000 bond. He was also arrested last year on charges of fraudulently boosting stock prices by faxing fake tips to thousands of recipients.

Current Account Deficit Improves, Consumer Confidence Rises

- The Current Account Deficit for 1Q shrank to -$208.7B versus estimates of -$222.0B and -$223.1B in 4Q.
- Preliminary Univ. of Mich. Consumer Confidence for June rose to 82.4 versus estimates of 79.0 and a reading of 79.1 in May.

BOTTOM LINE: The US current-account deficit shrank more than forecast in the first quarter as the trade balance improved, Bloomberg reported. The gap shrank to 6.4% of GDP from 7% in 4Q. The current account gap will likely widen this quarter on lower overseas investment gains.

Preliminary Univ. of Mich. Consumer Confidence for June rose to 82.4 versus estimates of 79.0 and a reading of 79.1 in May. The expectations component of the index rose to 69.2 from 68.2 the prior month. The current conditions component of the index, which measures Americans’ perceptions of their financial situation and whether it’s a good time to buy big-ticket items like cares, surged to 103.1 from 96.1. I expect sentiment to make new cycle highs over the intermediate-term as stocks rise, gas prices fall, the job market remains relatively healthy, the situation in Iraq improves, inflation decelerates and long-term interest rates remain low.