CLOSING COMMENTS 3-14-05

The Last Week in Review:

Rising commodity prices put pressure on interest rates last week and a $58.3 billion, near-record trade deficit released Friday helped to send the stock market lower on the week. By week's end the Dow had fallen 166 points, or 1.5%, erasing all of the year's previous gains. The S&P 500 fell 22 points, or 1.8%, and is now down 1% for the year. The NASDAQ sank 29 points, or 1.4%, and is now down 6.2% for the year, while the Russell 2000 fell 18 points, or 2.8%, and is off 3.8% year-to-date. Even a bullish mid-quarter update from chip giant Intel (INTC) couldn't bring the market out of its slide.

Economic textbooks say a strong economy leads to rising inflationary pressures. Clearly the long-term chart of the CPI shows that over the past couple of years it has trended higher as the economy strengthened. The year-over-year increase presently stands at 3.0%. The core CPI is also clearly trending higher. It was at just 1% a little over a year ago. Now, it is at 2.3%.

It is not just higher commodity prices either. Prices on durable goods such as cars, washing machines, etc., were declining at a 4% annual rate a little over a year ago. Now, stronger demand has allowed companies to hold the line on pricing. That allows the pressures from other sectors such as health care and education to be more evident. Companies such as Procter & Gamble, Dean Foods, Clorox, and Caterpillar have recently announced price increases. Pricing power is back, and increasing.

Now that job growth is clearly on track, economic releases have less impact than they did when it wasn't clear if job growth was sustainable. The key factor for the stock market right now is inflation. The economic trends are clear. Real GDP has risen at an average 4.5% rate for the past six quarters. Consumer spending and business spending trends are strong. If one month's data is weak, it will be considered an aberration in a strong economy. The CRB Index, which is a measure of commodity prices, reached the highest level in 22 years, as Crude oil rose another $1.34 for the week to close at $55.12.

What to Watch for this Week:

We are now entering into the Q1 earnings-warning season and any red flags at this stage will add to the pressure already on the market. Companies reporting earnings week include brokerage houses Bear Stearns (BSC) on Wednesday, along with Goldman Sachs (GS) and Morgan Stanley (MWD) on Thursday. Other companies reporting will be Jabil Circuit (JBL) and Nike (NKE) on Thursday. The Semiconductor Book-to-Bill Ratio will be released after the market close on Thursday, and will be closely watched to see if Intel's upbeat report last week is confirmed by the sector.

The conference schedule is a full one this week. Ericsson (ERICY) holds an Analyst Conference on Monday and ADP (ADP) hosts Analysts on Tuesday. SG Cowen holds a four-day Healthcare Conference in Boston beginning Monday. CSFB hosts a Global Services Conference beginning Monday in Phoenix. AG Edwards holds an Energy Conference Tuesday in Boston. Bank of America is hosting a Consumer Conference Tuesday in New York. Piper Jaffray also holds a two-day Financial Conference on Tuesday in New York.

The economic calendar is also full this week. Tuesday both the February Retail Sales and January Business Inventories are released along with the March NY Empire State Index, which measures manufacturing activity. Wednesday the February Housing Starts and Building Permits and Industrial Production/Capacity Utilization are announced. The widely watched Weekly Crude Inventories will also be released on Wednesday. Thursday, February's Leading Indicators will be reported, and the March Michigan Sentiment Report and February Import/Export prices will both be reported on Friday.

In summary, investors should watch for any further rise in the CRB Index, and also Thursday's Semiconductor Book-to-Bill Ratio to see if the tech sector is indicating a strong demand for chips.

Stay tuned!