CLOSING COMMENTS 2-22-05

The Last Week in Review:

Alan Greenspan's testimony last week on the economy along with a surprising spike in core-PPI for the month of January, left the markets feeling that the Fed will no longer be accommodative when it comes to spikes in inflation data. From now on negative surprises in inflation will no longer be dismissed as just aberrations by the Fed. Greenspan deemed the behavior of long-term interest rates a conundrum, even though Greenspan also acknowledged that inflation expectations remain well under control. Typical Greenspeak! The Treasury market reacted with a sell off in the wake of his testimony. Having done so, Greenspan was suspected by Wall Street of issuing a warning to those who think continued low rates at the long-end of the curve are here to stay. The selling intensified on Friday when the core component of the Producer Price Index registered that alarming 0.8% increase versus the market's expectation for a more modest 0.2% increase.

For the week, the Dow fell 10 points, or 0.1% and closed the week at 10,785 virtual unchanged for the year, while the S&P 500 was down 4 points or 0.34 percent at 1201, now down 0.9% year-to-date. The NASDAQ was the worst performing Index of the week, falling 18 points or 0.9% closing at 2058, down 5.5% for the year so far. The Russell 2000 Index was down 5 points, at 630 and now down 3.3% for the year. Quarterly options and futures contracts expired last Friday, but the "triple witching day" that commonly causes increased volatility failed to really stir the markets. The U.S. dollar got a small lift from the inflation data, while gold prices slipped. A rise in oil prices also helped to pressured stocks, as light sweet crude closed the week at $48.35, up 81 cents Friday.

The core rate of inflation has been stable in recent months. The year-over-year numbers are not quite as comforting. For example, the year-over-year increase in the core CPI is now 2.2% for year-end 2004. A year ago, in December 2003, it was 1.1%. A similar trend in the core PPI has raised that figure to 2.0% for December 2004.

The increase in the core rates on a year-over-year basis is not due to an uptrend on 2004. It is due to the extremely low levels in 2003. For much of that year, prices of durables such as autos, household appliances, were declining at about a 4% annual rate. Now, those prices have stabilized. That has left the core rate in 2004 higher than in 2003.

What to Watch for this week:

The holiday short week ahead has few earnings to rely on for direction. Tuesday morning, home retailer Home Depot (HD) reports results and Wednesday Lowe's Corporation (LOW) will post profits. Roth Capital Partners hosts a three-day Growth Conference beginning Tuesday. Goldman Sachs will hold a three-day Technology Symposium beginning on Wednesday in Phoenix. Companies present will include Dell Corporation (DELL), Apple Computer (AAPL), Veritas Software (VRTS), Motorola (MOT) and Broadcom (BRCM). Morgan Stanley hosts a two-day Basic Materials conference in New York beginning Wednesday. Wachovia First Union holds an Aerospace and Homeland Security Symposium on Thursday in New York.

Investors will be watching the January CPI closely, when it is released Wednesday before the open. Tuesday, February Consumer Confidence will be released. Wednesday the minutes from the January FOMC meeting will be released. Also on Wednesday, weekly energy inventories will be reported. Thursday, the initial weekly jobless claims will be reported. Friday, preliminary Q4 GDP numbers and January Existing Home Sales will be released.

In summary, the NASDAQ's technical condition continues to stall here and needs to break one way or the other, while the CPI release on Wednesday will be closely watched to see if there is confirmation of last week's PPI and set the tone for inflation and interest rates for the rest of 2005.

Stay tuned!