CLOSING COMMENTS 10-10-05

The Last Week in Review:

Last week was a tough week for the market and seeing the S&P 500 lose 2.7% was hard for the bulls to swallow. The main reason was the concern that inflation was in fact picking up. There were bullish inflation developments during week and the market simply used it as a catalyst to sell positions. Keep in mind that the market's decline last week occurred after seven straight days of advance and it reflected a burst of selling pressure related to nervousness on the overall outlook. The inflation scare talk still appears to have been exaggerated and it is not unusual for the stock market to decline in the weeks ahead of earnings reports.

The outlook for inflation has actually improved with the decline in energy prices. The fed funds futures had already priced in at least two more rate hikes even before the Fed comments last week. The hype about the inflation outlook was simply another fashionable pessimistic view that took hold as the latent selling pressures burst through. The fundamentals for the stock market remain moderately favorable. It is now clear that economic growth will remain above long-term trends, even with the impact from the hurricanes. Earnings growth remains very strong and will be near 15% for the upcoming third quarter reports. Year-over-year inflation rates are increasing due to energy prices, and core rates will probably firm due to the strong economy. But rates will start to level off as energy prices level off and the Fed cools economic growth with higher interest rates.

The Dow continued to be the worst performing index, losing 276 points on the week an now is down 4.6% so far this year. The S&P 500 dropped 33 points, or 2.7%, and is off 1.3% this year. The Nasdaq lost 61 points, or 2.9% for the week, and is down 3.9% year-to-date. The Russell 2000 was the biggest loser, as investors unloaded small-cap stocks causing the Index to decline 23 points, or 3.5%, and is now down 1.1% for the year.

What to Watch for this week:

Earnings Season will begin to be the focus this week, and expectations are for the S&P 500 to generate a 15% increase in year-over-year earnings. Monday, Alcoa (AA) and Genentech (DNA) will release their results. Tuesday, Advanced Micro (AMD) and Apple Computer (AAPL) report earnings. Both companies have seen shares rise about 20% since the end of July, so expectations are for strong reports and guidance from both. Wednesday, Apollo Group (APOL), Harley-Davidson (HDI), and Lam Research (LRCX) all posts profits. Thursday, Fairchild Semiconductor (FCS) will release results. Friday, General Electric (GE) and UnitedHealth Group (UNH) both issue results. Red Hat (RHAT) and Medtronic (MDT) will hold Analyst Days on Tuesday.

The economic calendar this week will have a lot of market-moving data in it. Tuesday, the Fed will release the minutes from the September meeting and is likely to be viewed closely by investors. Wednesday, the weekly crude inventories will be reported. Thursday, the September Import/Export prices, the August Trade Balance and the September Treasury Budget will all be released. The most widely anticipated report will be Friday's September CPI. It is expected to show an increase of 0.2%. Anything exceeding that could rattle the market, increasing the fear of further inflation. The October Michigan Sentiment Report, along with September Industrial Production and Capacity Utilization will be released on Friday. Fed Chairman Greenspan will speak in Washington on Wednesday.

In summary, Investors will focus on Friday's CPI report and listen closely to the Fed speeches as key to this week's trading.

Stay tuned!