Weekly Wrap

Last Update: 30-Mar-07 16:45 ET

The fundamentals were almost entirely bearish this week. It is no surprise that all the major indices were lower. In fact, it is a bit surprising that the sell-off was not more severe.

Oil prices were up sharply, the Fed Chairman as much as said that rate cuts are unlikely any time soon, the economic data were mixed at best, and a key inflation measure was higher than expected. There wasn't any significant corporate news to offset the bearish macro-economic issues.

The Fed Chairman's testimony before the Joint Economic Committee of Congress on Wednesday ranked as the most important event of the week. Fed Chairman Bernanke said that inflation remains the predominant concern. He made that absolutely clear.

He did not express significant concern about economic growth, and while recognizing the risk from the housing sector, he also suggested that the impact from the problems in the subprime mortgage market would be contained.

Bernanke's testimony implied that it will take a while for the current level of interest rates to bring inflation down. That means market hopes for a rate cut by the end of the summer are overly optimistic. The S&P lost 11 points on the day of his testimony.

The economic data this week brought mixed news. New home sales for February were down 3.9% despite expectations of a bounce from a sharp drop in January. Consumer confidence in March posted the first drop in five months. February durable goods new orders were up a smaller than expected 2.5% after a 9.3% plunge in January. The housing and manufacturing sectors remain drags on the economy.

More positively, initial claims for unemployment remained at low levels, reflecting a strong labor market. Fourth quarter real GDP growth was revised modestly higher to a 2.5% annual rate from 2.2%. The March Chicago PMI index jumped sharply higher to a strong 61.7 from 47.9 in February, raising hopes of a manufacturing rebound. And February personal consumption expenditures rose a stronger than expected 0.6%, showing that consumer spending remains strong.

The most important economic release, however, was the clearly bearish 0.3% increase in the February core personal consumption expenditure (PCE) price deflator.

This is the Fed's favorite inflation measure. The gain was larger than an expected 0.2%, and follows a 0.1% increase in December and a 0.2% gain in January. It raised the year-over-year increase to 2.4% from 2.2% in January. The Fed's forecast calls for this to get below 2.0% in 2008. It is going in the wrong direction.

This is just one month of data and it shouldn't be over-emphasized. If the core PCE continues at even a 0.2% rate in upcoming months, however, it will keep the Fed in an aggressive inflation fighting mood. Higher inflation is always bad for the financial markets.

Adding to inflation concerns is the fact that oil prices rose to about $66 a barrel this week from $62 last week and $57 the week before. The Iran situation was a factor, but there are concerns that oil prices will remain higher regardless of how that plays out.

The macro economic news therefore amounts to rising inflationary pressures, a tough stance from the Fed, and continued sluggish economic indicators. There isn't a lot of good news. The market could have sold off more following the solid gains last week.

The biggest corporate news this week was that Dell is delaying its 10-K report due to an ongoing investigation into its accounting, but that news didn't hit the stock market very hard since it is a company-specific issue.

The first quarter ended with the S&P nearly flat for the year. It was an up and down quarter with excessive optimism followed by excessive fears. The market has filtered through it all and has assessed that stable interest rates and significantly slower earnings growth warrant little net change.

The market is likely to remain extremely sensitive to economic releases, but an increased focus to corporate news will develop as first quarter earnings reports in mid-April approach.

Index	Started Week	Ended Week	Change	% Change	YTD
DJIA	12481.01	12354.35	-126.66	-1.0 %	-0.9 %
Nasdaq	2456.18	2421.64	-34.54	-1.4 %	0.3 %
S&P 500	1436.11	1420.86	-15.25	-1.1 %	0.2 %
Russell 2000	808.05	800.71	-7.34	-0.9 %	1.7 %

Choppy weak. Not much going on before earning season. Stay tune for stock of the year!

Weekly recap

Briefing:

Weekly Wrap

Last Update: 23-Mar-07 16:35 ET

It was an amazing week. The broader indices were all up more than 3%. The Dow Jones Industrial average was up every day. The S&P 500 index was up every day except Thursday, when it fell 0.50 points

The tone has dramatically improved as bearish factors such as the Shanghai market plunge, the unwinding of yen-carry trades, and even subprime mortgage problems had little impact this week.

The focus remained on the macro issues. There was very little corporate news of broad impact. The underlying concern about the strength of the economy and whether factors such as housing weakness would lead to a recession remained the main concern. This week, the news was good.

The most important event was the Fed policy statement on Wednesday. The market rallied in advance of the report in anticipation of a softer, gentler stance on the part of the Fed. The market rallied even more after it got exactly that.

The Fed dropped the bias towards tightening that had been in previous policy statements. The phrase that "the extent and timing of any additional firming..." was removed and replaced with "(F)uture policy adjustments will depend on the evolution of the outlook for both inflation and economic growth."

This change in attitude can certainly be considered good news, but it has to be noted that virtually no one expected any Fed rate hike. The removal of tightening bias that no one believed in the first place hardly seems a reason for a major rally. Nevertheless, there is now a stronger expectation that the Fed is likely to lower the fed funds target by 1/4% by the end of the summer.

The economic data this week helped dispel recession fears. On Tuesday it was reported that housing starts rose 9.0% in February after a 14.3% drop in January. February starts were about equal to the average in the fourth quarter of last year. More good housing news came on Friday in the form of a 3.9% increase in February existing home sales. This followed a 2.7% increase in January. At a 6.99 million annual rate, existing home sales are well above the levels of 6.25 to 6.27 posted October through December. The housing market seems to be at least stabilizing.

The only other economic release this week was a reported drop in new claims for unemployment for the week ended March 17. Claims dropped to 316,000 from 320,000 the week before, and levels above 330,000 for a number of weeks before that. The labor market remains strong.

The earnings news was mostly good. Oracle had an outstanding report. Morgan Stanley easily beat earnings expectations. FedEx and General Mills had good reports. Motorola warned of lower than expected profits and revenue. The earnings reports and corporate news overall were of modest impact, however.

Bond yields rose slightly to 4.60% from 4.55% last week due to the good economic news. Oil prices quietly rose to $62.28 a barrel from $57.11 last week.

The market rally was very surprising in both its degree and depth. The nervousness from recent weeks has not been completely eliminated, and could arise again quickly, but was virtually absent this week.

The focus now will shift to some degree to upcoming first quarter earnings reports. Those will start in mid-April. Earnings expectations for the S&P 500 in aggregated have fallen to about 4% from 7% two months ago. Second and third quarter forecasts are close to 5%. The earnings slowdown is here.

Index	Started Week	Ended Week	Change	% Change	YTD
DJIA	12110.41	12481.01	370.60	3.1 %	0.1 %
Nasdaq	2372.66	2456.18	83.52	3.5 %	1.7 %
S&P 500	1386.95	1436.11	49.16	3.5 %	1.3 %
Russell 2000	778.77	808.05	29.28	3.8 %	2.6 %

To sum it up real quick:

Strong earnings from Oracle, a giant software company, which means businesses are spending. Fed kept rate steady, which took uncertainty out of the market for the time being. The housing number isn't as bad as it looks (existing home sales up but prices are down- buyers' market!). Stock market continues to carry a bullish sentiment- the sentiment is important! When market is bullish, they will buy on negative news! All and all, this seem to reaffirm my belief that this bull market is not yet over.

Weekly Recap

Weekly Wrap

This week the S&P 500 index lost everything it had gained the week before, leaving it down 1 point over the two-week period. The reason for the decline this week was simple. Concerns remain about the economic outlook. The focal point of these concerns is the risk that troubles in the sub-prime mortgage sector will have a broader economic impact.

The market started the week fine. The S&P gained 4 points on Monday despite a warning from Countrywide Financial that its earnings would be hurt by problems in the non-prime sector.

The problems erupted on Tuesday. The MBA said that delinquencies on sup-prime mortgage loans hit 13.3%. That is the highest since the third quarter of 2002. Countrywide's CEO used the term "liquidity crisis" in reference to the sub-prime issue. A mini-panic set in. The S&P plunged 29 points.

Stability returned through the end of the week. The S&P recovered 10 points on Wednesday and 5 on Thursday. On Friday, the index lost 5 points, but that was due more to concerns about weekend risk than any specific sub-prime issues.

It is possible that some of the fears about the risks associated with the sub-prime issue eased as the week progressed, but it is also possible that these fears could erupt again in the near future. It is also possible that other reasons for selling arise, and that sub-prime gets pulled into the fray. The sub-prime issue persists.

The negativity associated with sub-prime mortgages was evident in a Wall Street Journal survey on Friday. The headlines said "Subprime Mortgage Woes are Likely to Spread" but the specifics belied the headline. Only 19% of economists said that it was very likely that the issue would have an impact on the prime market. And economists had only lowered their first quarter real GDP forecasts to a 2.3% annual rate of growth from 2.5% a month ago. That isn't much of a reduction, and it certainly isn't a recession. Earnings forecasts have yet to be broadly lowered either, but that doesn't mean the sub-prime issue will go away.

There were only a few earnings releases this week. Goldman Sachs had another great report. Lehman Brothers and Bear Sterns posted decent numbers. General Motors disappointed, but at least posted a profit.

The economic releases were also mixed. February retail sales were up a modest 0.1% due in part to cold weather. February industrial production rose 1.0% as the key manufacturing component was up a solid 0.4%. The core PPI for February was up a stronger than expected 0.4%, but the core CPI for February was in line with expectations at +0.2%.

The mix of data did little to alter economic perceptions. Economic growth is sluggish, and there are concerns that the housing sector will become an increasing problem. The modest core CPI increase eased inflation fears that briefly arose with the PPI data. Inflation is widely expected to hold steady of ease in the months ahead due to weak economic demand.

Market risks are believed to lie more with the economy than with inflation.

That is reflected in Fed policy expectations. The fed funds rate futures currently reflect expectations of a 1/4% rate cut by August.

Oil prices ended the week at $57.11 a barrel, down a bit for the week but hardly a focus. The 10-year note yield dipped slightly to 4.55%.

Market sentiment remains dicey. Reaction to any signs of economic weakness could be exagerrated. Any negative news from the sub-prime mortgage market will undoubtedly be the top talking point that day. But the fundamentals have been steady in terms of the economic, earnings, inflation, and interest rate outlooks.

Index	Started Week	Ended Week	Change	% Change	YTD
DJIA	12276.32	12110.41	-165.91	-1.4 %	-2.8 %
Nasdaq	2387.55	2372.66	-14.89	-0.6 %	-1.8 %
S&P 500	1402.85	1386.95	-15.90	-1.1 %	-2.2 %
Russell 2000	785.12	778.77	-6.35	-0.8 %	-1.1 %

Weekly Recap

Briefing:
"Weekly Wrap

The stock market rebounded 1.1% and stabilized this week. The presumed catalyst for much of the gains was an improvement in Asian stock markets. To a large extent, however, the market was buffeted by rapidly shifting sentiment that settled down over time.

The S&P is down a net 3.3% over the past two weeks. That represents a reasonable consolidation from the point where many analysts have said the market had gotten ahead of itself. The S&P is down 1.1% for the year to date.

The week opened poorly. On Monday, the S&P lost 13 points. Strangely, it was widely attributed to a decline in Asian markets. In fact, those markets were simply catching up to the losses on Friday in US markets. Regardless, sentiment was poor and the Asian weakness was for many a good excuse to sell.

The markets rocketed higher on Tuesday. The S&P gained 21 points. Again, the presumed catalyst was the Asian financial markets. It is hard to rationalize such a huge swing in the market value of US corporations based on a move in Asian stock prices, particularly Shaghai stocks, but the market was running on emotion more than reason.

The S&P eased back 3 points on Wednesday. That was not surprising given the huge gain the day before. On Thursday, however, the S&P gained a surprising 10 points even though February same store sales were fairly weak. The gain that day seemed to provide underlying support to the market and to stabilize sentiment.

Friday brought some truly relevant news. February nonfarm payrolls were reported up 97,000. This was close to an expected 100,000 increase. More importantly, it was not below 50,000, as many had feared. A weak number on that magnitude could have rekindled recession fears.

The good news was bolstered by the fact that the January and December payroll gains were revised a net 55,000 higher. Furthermore, construction employment fell a sharp 71,000 in February due in part to cold weather. It may bounce back next month. Finally, hourly earnings were up a stronger than expected 0.4%, leaving the year-over-year gain at 4.1%. With CPI up just 2.1% the past year, real wage gains are picking up.

The data were solid overall and very much consistent with expectations of real GDP growth at 2% to 2.5% for the first half of this year. There was nothing to suggest even a hint of recession. The S&P held its gains for the week and was up 1 point on Friday.

There was very little news of significance this past week other than the employment release. The February ISM services index was a bit weaker than expected at 54.3, but that still reflects growth. Factory orders for January were weaker than expected as well. Neither release had a large impact. The February same store sales noted above were weaker than expected overall but cold weather was undoubtedly a factor.

The earnings calendar was very light. Costco reported profits in line with expectations, and there were a handful of other retailers that reported, but all were quickly dismissed.

Instead, it was all about sorting through sentiment this week. Factors such as the recently noted increase in delinquencies on sub-prime mortgages continued to provide fodder for recession talk even though there is no evidence that overall mortgage demand is weak.

Also persisting as a bearish talk point through the week (on days when stocks were down) was the perceived threat of further unwinding of hedge fund positions as the yen strengthened against the dollar. And the swings in the Asian stock markets were closely followed.

Yet, none of these presumably bearish factors have altered economic or earnings projects. The interest rate outlook still calls for little, if any, change in rates. The bearish issues reflected the prevailing sentiment swings and provided a rationale for selling.

Now, with the market up 1.1% this week, there is a good argument that sentiment is settling down. The S&P is down a net 5.0% from its highs. The excessive optimism from a month ago is gone.

The recent pessimism about a possible recession has now also faded. Perhaps the recent volatility will ease.

If so, investors may look at the market with some optimism, but plenty of caution as well. Earnings growth is slowing. Economic growth is sluggish. There are plenty or risks. Valuation provides some support, however, as the S&P is trading at just 17.1 times trailing earnings.

There certainly will be more volatility ahead, and there remain risks on the downside; but the market may soon return to normalcy with a reasonably priced market and only a moderately favorable outlook.

Index	Started Week	Ended Week	Change	% Change	YTD
DJIA	12114.10	12276.32	162.22	1.3 %	-1.5 %
Nasdaq	2368.00	2387.55	19.55	0.8 %	-1.1 %
S&P 500	1387.17	1402.85	15.68	1.1 %	-1.1 %
Russell 2000	775.44	785.12	9.68	1.2 %	-0.3 %

"

Looks like the Friday's employment report helps to keep the market gain through the week. We will see if the market continues to stabilize here. Coming up...Barron's bullish picks.