CLOSING COMMENTS 2-28-05

The Last Week in Review:

The U.S. Dollar has frequently been an indicator of U.S. economic strength and weakness. In the 1980's the Reagan economy proved this theory wrong. Currently there are plenty of analysts suggesting that a weak U.S. dollar shows that the U.S. economy is actually weak, despite strong real GDP growth. Some of this nonsense could be related to wishful thinking by people with a market or political agenda. Some of these analysts would prefer to see a weaker U.S. economy, or would like to use the dollar to suggest that certain policies of the current administration are wrong. Such political positions are hard to substantiate with facts.

The fact is, the dollar has weakened against the euro and yen steadily over the past two years. In April of 2003, the dollar was at 1.0500 against the euro and 120 against the yen. In early 2004 it was at 1.200 against the euro and 110 against the yen. It has weakened steadily and today is at 1.326 against the euro and 105 against the yen. During this same period, the U.S. economy has grown at a substantially faster pace than the euro economies.

Last week's economic numbers show a resilient U.S. economy along with continued strong earnings growth. Rising interest rates and higher than expected inflation reports didn't seem to turn investors negative though. For the week, the Dow rose 56 points, closing into positive territory for the year, up 0.5% so far. The S&P 500 rose almost 10 points, bringing the index to unchanged year-to-date. The NASDAQ and Russell 2000 continue to lag the large cap indexes however. The NASDAQ did add 7 points on the week, and is now down 5.1% for the year, while the Russell 2000 added 1.2% on the week, still down 2.2% year-to-date.

Semiconductor Index (SOX), which we keep mentioning as the key to any NASDAQ rally climbed 10% in February, breaking through resistance at its 200-day moving average. This leading indicator surprisingly didn't help the NASDAQ however as it trades below its 50-day moving average at 2072. The Dow is currently just below its February and December highs, while the S&P 500 is near the January high of 1217.

Inflation currently seems to be the market's biggest threat. Oil closed the week at just over $51 per barrel, and the CRB index of commodities rose above 300 for the first time in 24 years on Friday. Real growth as measured by the GDP continues to grow solidly at 4% supporting the strong earnings growth we have seen in the Q4 reports. The S&P 500's Q4 profit growth was 20% and over 60% of the companies beat analyst's expectations.

What to Watch for this week:

This week's earnings calendar remains light as the last few companies report. HJ Heinz Co. (HNZ) and Tiffany & Co. (TIF) report results Monday. Ford (F) and General Motors (GM) report February sales results on Tuesday. Semi equipment maker Novellus Systems (NVLS) will give a mid-quarter update on Tuesday. Costco (COST) posts profits on Wednesday. Conferences this week include: Nesbitt Burns holds a two-day Global Resources Conference starting Monday in Tampa. CIBC World Markets hosts a conference featuring Israeli companies on Monday in New York. Bear Stearns hosts a two-day Media Conference beginning Monday in Palm Beach. Leerink Swann holds a Healthcare Conference on Tuesday in New York. CSFB holds a three-day Semiconductor and Capital Equipment Conference beginning Wednesday in Miami. DA Davidson holds a two-day Technology Conference beginning Thursday in Park City, Utah. Jefferies & Co. hosts an Internet Conference on Thursday in New York.

On the economic front, January Personal Income and Spending will be reported on Monday, as will February Chicago Purchasing Managers Index (PMI) and January New Home Sales. Tuesday, the February ISM Index is announced, along with January Construction Spending. Fed Chairman Greenspan testifies Wednesday before the House Budget Committee on the economic outlook. Thursday Q4 productivity and weekly jobless claims are released. The European Central Bank will announce their decision on interest rates also on Thursday. On Friday the much-anticipated February Unemployment Report is expected to show that over 200,000 new jobs were created in February.

In summary, the NASDAQ's still needs to break technical resistance at the 50 and 200 day moving averages. Friday's Unemployment Report will be closely watched to see if there is confirmation of strong economic job growth.

Stay tuned!