Economic Week in Review

ECRI Weekly Leading Index 132.60 -.15%

The ISM Manufacturing index rose to 63.6 in January, a 21-year high, as factories boosted production to replace depleted inventories and meet improving demand. The pace of growth in the last 6 months of 2003 was the strongest in 2 decades, causing inventories to drop to record lows. Manufacturing may also be getting a boost from rising exports. Growth last quarter was augmented by a 19.1% jump in exports, the biggest increase in 7 years. A weaker US dollar has resulted in a dramatic increase in competitiveness for US companies overseas. The ISM Services Index rose to 65.7, its highest level since its inception in July 97. This is a very important number since services account for 85% of the US economy. Productivity came in at 2.7%, down from 9.4% last quarter. This bodes well for an increase in hiring. However, January's change in non-farm payrolls was only an increase of 112,000, below estimates of 172,000. This was the largest increase in jobs created in over 3 years, yet disappointed analysts. The headline unemployment rate dropped to 5.6%. Retail sales climbed a brisk 5.8% in January on increased sales of cold-weather clothing and increasing consumer confidence. Fed Governor Ben Bernanke said that he expects "some large employment gains fairly soon." He also stated that the Fed could be patient over the next few months because inflation will remain subdued through 05.

BOTTOM LINE: The very high readings for services, manufacturing and retail sales leads me to expect a very good 1Q GDP number. Currently, economists are projecting 4.4% GDP growth. I believe a number north of 5% is more likely. This, combined with record low inventories and decreasing productivity leads me to conclude that we are finally at the cusp of a significant pick-up in hiring. Within the next 2 months, we should finally see employment growth exceed expectations.

Weekly Scoreboard*

Indices
S&P 500 1,142.76+1.03%
Dow 10,593.03+1.00%
NASDAQ 2,064.01-.10%
Russell 2000 584.07+.57%
Wilshire 5000 11,129.42+.91%
Volatility(VIX) 16.0-3.79%
AAII Bullish % 50.91-10.5%
US Dollar 86.02-1.31%
CRB 260.5-.48%

Futures Spot Prices
Gold 404.2+.22%
Crude Oil 32.48-2.02%
Natural Gas 5.35-.76%
Lumber 363.6+8.89%
10-year US Treasury Yield 4.08%-1.21%
Average 30-year Mortgage Rate 5.72%+.7%

Sectors
Leading
Retail 128.20+4.06%
Homebuilders 239.57+3.02%
Drugs 351.41+3.21%

Lagging
Networking 295.23-2.78%
HMO's 870.28-2.47%
Computer Services 129.34-1.84%

*% Gain or loss for the week

Mid-day Update

BOTTOM LINE: A technical glitch has resulted in another day without a mid-day report. Briefly, I have taken the portfolio to a net 100% long position by covering a few shorts and adding several longs. I will look for follow-through on Mon. to maintain this level of market exposure. The economy created 112,000 jobs in January, the most in 3 years, but below expectations. The headline unemployment rate dropped to 5.6%. This resulted in a decline in interest rates, a decline in the US dollar, a rise in gold and a rotation back into cyclicals. The positive response by the US equity markets to these numbers shows the underlying strength is still there.

Friday Watch

Earnings Announcements
Company/Estimates
NTE/.26
SILI/.40
VECO/.02
VSH/.09

Economic Data
Unemployment estimated at 5.7% vs. 5.7% last month.
Change in Non-farm payrolls estimated at 175,000 vs. 1,000 last month.
Change in Manufacturing payrolls estimated at -5,000 vs. -26,000 last month.

Late-night News
Moscow Metro train was just hit by an explosion while underground. There are casualties. OPEC will likely maintain oil-production quotas next week and leave cuts for later. PIMCO's McCulley said the Fed shouldn't raise rates just to stem the dollars fall. Greenspan's testimony next Wed. may telegraph timing of rate hike. Business Week....ECLG may rise to $30 within the year according to Trace Urdan of ThinkEquity Partners. Bloomberg article says that the last 4 times the Fed made the first move in a sustained series of rate increases, the market averaged healthy gains over the ensuing 6 months. The NASDAQ averaged a 17% gain and the S&P 500 a 9% advance. The average stock mutual fund is up 40.9% over the last 12 months.
Asian indices up about 1-2% on avg.
S&P 500 indicated up .06%.
NASDAQ indicated up .14%

BOTTOM LINE: A lot depends on the employment numbers tomorrow. If they come in as expected or exceed expectations we should see a good rally. If they come in below expectations, the major indices will likely fall. It would also be negative if we meet or beat expectations, yet the market doesn't rally. Conversely, it would be positive if we come in below expectations and see a rally. The most likely scenario is that the employment numbers beat expectations and the market has a good rally. I am 20% long and will look to add more market exposure under this scenario.

Thursday Close

S&P 500 1,128.59 +.18%
NASDAQ 2,019.56 +.27%

Leading/Lagging Sectors
Gaming+2.02%
Airlines+1.78%
Retail+1.68%
Oil Service-1.45%
Hospitals-1.43%
Biotech-.97%

After-hours Movers
CAMD up after earnings exceeded expectations.
MXIM up after beating earnings expectations and raising guidance.
PGTV down significantly after Direct TV said it ended mediation over the companies' marketing relationship and will proceed to trial.
CELL down significantly on earnings and revenue miss.
APCC down after beating earnings estimates, but lowering guidance.

After-hours News
Morgan Stanley Capital Intl. may upgrade S. Korea status to developed market from emerging market. This would likely increase foreign fund flows to S. Korea. Gephardt will endorse Kerry tomorrow. President Bush named Senator John McCain to Iraq investigation panel. Australian Prime Minister John Howard and President Bush are likely to negotiate directly on a free-trade deal.

BOTTOM LINE: US equity markets rallied after Fed Governor Bernanke said the Fed can be patient with monetary policy "over the next few months" because a significant rise in inflation this year or next is unlikely. Productivity has averaged 4.6% the last 2 years, the highest since 1950-51, keeping a lid on job creation and inflation. However, Bernanke said he "expects to see big job growth numbers fairly soon." This statement led traders to the conclusion that tomorrow's employment report would exceed the 175,000 estimate for job creation. I am a little concerned that the market didn't rally more. Thus, I covered a few shorts, but kept my net long exposure to only 20%. I will monitor the markets reaction to tomorrow's number before making any further adjustments to the portfolio.

Mid-day Update

I was in the process of publishing the mid-day update and my system crashed. I don't have time for a do-over. Basically, a Fed governor made comments that led the market to believe tomorrow's jobs report will be very good, thus the market is rallying in advance of this number. I am covering some shorts and adding a couple of longs to move the portfolio to a 20% net long position.