Sunday, June 20, 2004

Chart of the Week

Japan's Nikkei-225 Stock Average
Last 12 months


Bottom Line: Japan's Nikkei-225 appears to be breaking out tonight after a 3-week consolidation. The Index will likely break through its recent highs of 12,195 set in April. The Nikkei has returned 27.4% over the last 12 months versus the S&P 500's gain of 16.0%.

Weekly Outlook

There are several important economic reports and a few significant corporate earnings reports scheduled for release this week. Economic reports this week include Durable Goods Orders, Initial Jobless Claims, New Home Sales, Help Wanted Index, Final 1Q GDP, Final Univ. of Mich. Consumer Confidence and Existing Home Sales. Durable Goods Orders and Home Sales both have market-moving potential.

Walgreen(WAG), Goldman Sachs(GS), Morgan Stanley(MWD), FedEx(FDX), Goodyear Tire(GT), Bed, Bath & Beyond(BBBY), Omnivision Technologies(OVTI), Apollo Group(APOL), Paychex(PAYX), Micron Technology(MU), Nike(NKE) and RiteAid(RAD) are some of the more important companies that release quarterly earnings this week. There are also a couple of other events that have market-moving potential. The Bank of America Auto Conference and a speech by the Fed's Santomero could also impact trading this week.

Bottom Line: I expect U.S. stocks to trade neutral-to-higher this week on short-covering and strong corporate earnings reports. It is good to see the AAII % Bulls fell substantially last week following the spike the preceding week. While I think U.S. stocks will move quietly higher this week, I am not ruling out an outsized move in either direction ahead of many market-moving events the following week. My short-term trading indicators are still giving mixed signals and the Portfolio is 75% net long heading into the week.

Saturday, June 19, 2004

Market Week in Review

S&P 500 1,135.02 -.13%

U.S. stocks finished mixed last week on a slight pick-up in volume as violence in the Middle East offset strong economic reports and falling interest rates. Commodity-related stocks showed relative strength and technology shares lagged throughout the week. Stocks fell on Monday as interest rates rose ahead of key inflation reports. However, bonds rallied sharply on the release of these reports as they showed core inflation remained subdued and expectations for future inflation diminished. A much higher-than-expected reading on consumer confidence and positive comments from Alan Greenspan with respect to inflation also buoyed stocks mid-week. The week ended on a mixed note as rising oil prices and fears over a technology sector slowdown pressured shares on Thursday. However, by Friday investors once again focused on falling interest rates as U.S. stocks ended the week on a positive note.

There were several notable movers last week. Microsoft(MSFT) rose 5.9% on speculation over a massive share buyback and improving fundamentals. General Electric(GE) rose 3.6% on strong economic reports and falling interest rates. Cyberonics(CYBX) rose 101.5% after the FDA recommended approval of the company's brain-stimulation device for severe depression and speculation of a Boston Scientific takeover. Red Hat(RHAT) fell 21.7% after the company reported disappointing 1Q sales and lowered its 2Q forecast. Jabil Circuit(JBL) fell 12.7% after reducing its 04 forecast. Yellow Roadway(YELL) gained 2.3% after raising 2Q estimates on broad-based economic strength. Nucor(NUE) rose 6.7% after boosting its 2Q forecast. Solectron gained 10.6% after beating 3Q estimates and raising 4Q guidance. Finally, Symantec(SYMC) fell 9.5% over concerns of increasing future competition from Microsoft.

Bottom Line: Overall, last week was mildly positive for the bulls. Fundamentals continued to improve and interest rates seem to have stabilized. It is also very positive that market bell-weathers General Electric and Microsoft are acting much better. However, the anxiety in the tech sector in the face of improving business conditions is somewhat concerning. This skepticism is positive for the longer-term health of the sector. I continue to believe tech stocks will outperform in the second half as valuations continue to fall and corporate tech spending accelerates. Oil appears to be headed lower in the intermediate-term as last week's attacks could not move prices up significantly. The outperformance by commodity-related stocks last week tells me that investors are not as concerned about inflation as in recent weeks. This counterintuitive logic is based on the belief that the Fed will not raise rates excessively, thus killing the economic recovery, resulting in a crash in commodity prices. Volume continues to remain light ahead of the Iraqi handover of power, end of the quarter repositioning, Russell rebalancing and Fed rate hike. More pundits and analysts are anticipating an upward move in U.S. stocks at the first of July, which means it is likely a move will begin imminently or later than I currently anticipate. I continue to believe long-term investors should use any excessive weakness over the next few weeks to accumulate shares in favorite stocks.

Economic Week in Review

ECRI Weekly Leading Index 132.70 +.45%

Advance Retail Sales for May rose 1.2% versus expectations of a 1.2% rise and a .6% decline in April. Retail Sales Less Autos for May rose .7% versus estimates of a .6% rise and a .1% fall in April. Rising incomes and more jobs are boosting sales at retailers such as J.C. Penney, Neiman Marcus and Wal-Mart, Bloomberg reported. "The sales figures look very strong," said Steven Wieting, a senior economist at Citigroup Global Markets.

Gary Stern, president of the Federal Reserve Bank of Minneapolis, said he sees no threat of rising inflation and the central bank is ready to adjust the pace at which it raises rates should that expectation prove wrong. New York City's economy grew at a blistering 7% annual rate in the first quarter of 04, outpacing the rest of the U.S. for the first time since the heights of the stock market bubble, Bloomberg reported. "The two main factors behind the increase were jobs and incomes," City Comptroller Thompson said. Finally, 32% of U.S. employers plan to add workers in the third quarter, the most since before the economy began to plunge into recession in 2000, according to a survey released by Manpower Inc.

The Consumer Price Index for May rose .6% versus expectations of a .5% rise and a .2% rise in April. The CPI Ex Food & Energy rose .2% versus expectations of a .2% rise and a .3% rise in April. Prices minus food and energy(core) were 1.7% higher than a year earlier, compared with a 1.8% rise in the 12 months ended in April. Last year, the core index rose 1.1%, the smallest yearly gain in 44 years as global competition and excess capacity kept companies from boosting prices.

The Preliminary University of Michigan Consumer Confidence reading for June was 95.2 versus expectations of 90.8 and a reading of 90.2 in May. Confidence rebounded amid increased hiring, higher wages, falling gasoline prices and improvement in Iraq, the survey showed.

Housing Starts for May were 1967K versus expectations of 1950K and an upwardly revised 1981K in April. Building Permits for May were 2077K versus estimates of 1970K and 2006K in April. U.S. homebuilders began work on more houses than expected in May and building permits rose to the highest level in more than 30 years, suggesting that rising rates have yet to curb demand, Bloomberg reported. Year-to-date, the rate of housing starts has averaged 2.12 million, on pace to surpass last year's total of 1.85 million, the most in 25 years. "A better performing economy -- jobs, income growth -- that trumps to a certain extent rising rates," said Ken Mayland, chief economist for Clear View Economics. U.S. employers added 248,000 workers in May and have created 1.2 million jobs just since the beginning of the year, Bloomberg reported.

Industrial Production for May rose 1.1% versus estimates of a .8% rise and a .8% rise in April. This was the largest gain in six years, as utilities generated more power and companies made more business equipment. Manufacturers are "doing a little more of the heavy lifting in the economy," said Jonathan Basile, an economist at CSFB. "Businesses are investing more and hiring more, and that is a good sign for the sustainability of the expansion."

The Producer Price Index for May rose .8% versus estimates of a .6% rise and a .7% rise in April. PPI Ex Food & Energy rose .3% in May versus estimates of a .2% rise and a .2% rise in April. "We're starting to see a lot of pipeline pressures building in prices, but the key question is whether companies can pass these on to consumers," said Stephen Stanley, chief economist at RBS Greenwich Capital.

Initial Jobless Claims for last week came in at 336K versus estimates of 340K and 351K the prior week. Continuing Claims were 2895K versus a downwardly revised 2864K prior. "We're in the early stages of a long expansion," said Douglas Lee, president of Economics From Washington. "We're in the middle of a red hot labor market," said Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi.

Leading Indicators for June rose .5% versus estimates of a .4% rise and an increase of .1% in May. Production workers put in longer weeks and delivery times slowed as companies tried to replenish inventories stripped by rising demand. "The data reflect a robust economic environment this spring and point to more of the same this summer," Ken Goldstein, an economist at the Conference Board said.

The Philadelphia Fed. Index rose to 28.9 in June versus estimates of 25.3 and a reading of 23.8 in May. "The data remain consistent with a robust factory sector," said Michael Englund, chief economist at Action Economics. "Manufacturing continues to run on all cylinders." 52% of the Philly region's factories said they were operating at 80% of capacity or higher compared with 29% six months ago, Bloomberg reported. The prices paid index component of the report fell to 51.9 from 59.6, Bloomberg said. "We see a very robust recovery across all the segments we serve," said William Zollars, CEO of Yellow Roadway, the biggest U.S. trucking company. The U.S. economy is still projected to expand 4.6% this year, the most since 1984, according to the median estimate of a Bloomberg survey.

Bottom Line: Retail sales continue to exceed estimates as more Americans are gaining employment and receiving higher wages which more than offsets higher interest rates and gasoline prices. Multiple Fed members reiterated their belief that inflation is not a problem and that they stand ready to increase the pace of rate hikes if this view changes. Both the CPI and PPI exceeded expectations last week, yet the yield on the 10-year T-note fell 9 basis points. Thus, signaling an intermediate-term change in investor perceptions regarding future inflation. This is a very positive and unexpected development. I believe consumer confidence bottomed last month and will take out its recent highs of 103.80 in the near future. Iraq is improving and gasoline prices are falling. These were the two main sources of consumer angst. A recent survey showing that 57% of all Americans thought the U.S. economy had lost jobs over the last 6 months, when in fact it has gained 1.4 million, also bodes well for future confidence readings. A combination of the media's under-reporting of anything positive and Americans tuning out most forms of media likely led to this staggering number. However, as the election gets closer I believe most Americans will look much more closely at what is going on in the economy and they will see a very positive picture, thus increasing consumer confidence. Housing continues to defy the skeptics and will set another record this year, however a mild slowdown will likely occur in the next few months. Manufacturing continues to improve at a very rapid rate as capacity utilization climbs. Factories are hiring more and workers are working longer hours to meet rising demand. As of now, most costs are not being passed on to the consumer due to exceptional levels of productivity and profitability. Overall, a very positive week for the U.S. economy as exceptional growth continued and inflationary expectations diminished.

Weekly Scoreboard*

Indices
S&P 500 1,135.02 -.13%
Dow 10,416.41 +.06%
NASDAQ 1,986.73 -.66%
Russell 2000 570.54 +.25%
Wilshire 5000 n/a
Volatility(VIX) 14.99 -.33%
AAII % Bulls 41.41 -25.06%
US Dollar 89.08 -.96%
CRB 269.83 -.04%

Futures Spot Prices
Gold 395.70 +2.33%
Crude Oil 39.00 +1.08%
Natural Gas 6.52 +5.34%
Base Metals 109.33 +5.56%
10-year US Treasury Yield 4.71% -1.88%
Average 30-year Mortgage Rate 6.32% +.32%

Leading Sectors
Iron/Steel +6.06%
Oil Service +5.82%
Commodity +3.49%

Lagging Sectors
Wireless -2.61%
Disk Drives -3.67%
Semis -4.87%

*% Gain or loss for the week

Friday, June 18, 2004

Mid-day Update

S&P 500 1,136.78 +.42%
NASDAQ 1,992.29 +.43%


Leading Sectors
Iron/Steel +1.44%
Airlines +1.28%
I-Banks +1.07%

Lagging Sectors
Fashion -.22%
Wireless -.46%
Oil Service -.59%

Other
Crude Oil 38.95 +.36%
Natural Gas 6.53 -.71%
Gold 396.20 +1.72%
Base Metals 108.96 +2.03%
U.S. Dollar 89.11 -.55%
10-Yr. T-note Yield 4.71% +.68%
VIX 14.75 -2.64%
Put/Call .89 +14.10%
NYSE Arms .61 -43.52%

Market Movers
CECO -10.3% after saying it had reviewed a copy of the amended class action complaint and saying the complaint is without merit.
AMHC +19.2% after beating 3Q estimates and raising 04 forecast.
ION +12.71% on Robert Baird upgrade to Outperform, target $31.
PRGS +11.24% after beating 2Q estimates, raising 04 forecast and Needham upgrade to Strong Buy, target $28.
CHTT +7.0% after beating 2Q estimates and raising 04 guidance.
GIVN +6.0% after pricing 2.5m share secondary at $32.
FMT -13.0% after saying it was being sued by California insurance commissioner who alleges company improperly used deductions.
RHAT -9.65% after missing 1Q revenue estimates, but meeting profit forecast.


Economic Data
Current Account Balance for 1Q came in at -$144.9B versus estimates of -$141.0B and -$127.0B in 4Q.

Recommendations
Goldman Sachs reiterated Outperform on SRE, CSCO, AA, SLR and AL. Citi SmithBarney said to Buy CKFR on weakness, target $39. Citi reiterated Buy on PG, target $120. Citi reiterated Buy on AGMN, target $90. Citi reiterated Buy on CWST, target $20. Citi reiterated Sell on ATO, target $22. Citi reiterated Buy on OEH, target $22. SLE rated Overweight at JP Morgan. CAG rated Underweight at JP Morgan. TIVO rated Underweight at JP Morgan. GLW raised to Overweight at Morgan Stanley, target $14. IVGN raised to Outperform at Bear Stearns, target $75. EPL rated Strong Buy at Raymond James, target $20. JBL raised to Strong Buy at Raymond James, target $31.

Mid-day News
U.S. stocks are quietly higher today, led by cyclicals, as interest rates stabilize at lower levels. Russian President Putin said his country provided the U.S. with intelligence that Saddam Hussein's Iraqi regime was planning to carry out terrorist attacks on U.S. territory, Bloomberg reported. The imam of Mecca's Grand Mosque in Saudi Arabia, Islam's holiest shrine, called for an end to attacks on non-Muslims in the country, Agence France-Presse said. Comcast will test a video-dating service on its digital-cable system, the AP reported. Viacom said it will spit-off its 82% stake in Blockbuster and expects to receive $738 million in cash from the transaction. The benchmark 10-year T-note is headed for its biggest weekly gain since March, Bloomberg said. The U.S. and China agreed to increase by almost 500% the number of flights between the countries over six years, the U.S. Transportation Dept. said. President Bush's approval rating among adults in the U.S. climbed in the last month as more Americans said the military effort in Iraq was going well, according to a poll from Pew Research, Bloomberg said. The U.S. Commerce Dept. slapped tariffs of as much as 198% on imported bedroom furniture from China, a decision that could cut the $1 billion a year of those imports, Bloomberg reported.

BOTTOM LINE: The Portfolio is slightly higher today as my base metal longs are rising and Chinese ADR shorts are falling. I have not traded and the Portfolio is still 50% net long. More of the same today as U.S. stocks churn on light volume. I continue to believe the fundamentals are falling into place and will provide the catalysts for a significant breakout within the next month. Any weakness over the next 2 weeks should be used by long-term investors to accumulate more shares in favorite long positions.