CLOSING COMMENTS 3-21-05

The Last Week in Review:

It was another tough week for the markets last week. Growing inflation fears caused by rising commodity prices put upward pressure on interest rates. All of the major stock indexes traded lower on the week. The NASDAQ took the biggest hit, falling 34 points or, 1.7% and is now off 7.7% for the year. The Dow fell 144 points, or 1.3%, and now is down 1.4% year-to-date. The S&P 500 gave back 10 points, or just under 1% and is now down 1.8% for the year, while the Russell 2000 lost 4 points on the week, and is now down 4.5% year-to-date.

During the last few weeks the market's attention has been on rising oil prices, inflation, and interest rates. All are legitimate concerns for the stock market and rightly so as traders shifted their emphasis from earnings to these macro economic factors. To be certain, the slowdown in first quarter earnings growth also is of legitimate concern to Wall Street. Current expectations are for about 7% growth in operating earnings for the S&P 500. If one looks deeper, you'll find that about 4% of that growth comes from energy and basic materials companies. Leadership from those sectors is not necessarily good for the market, as those companies benefit from commodity inflation that ultimately is bad for the economy and hurts the majority of growth companies.

Looking at specific commodity based indexes, we see that the Petroleum Index has risen 83% so far this year, the Industrial Metals Index, up 30%, and overall Energy is up 47% year-to-date. These commodity sensitive sectors have helped to push the Commodity Futures Index up 21% for the year thus far.

It's not all bad however. Employment trends have picked up with the strong February nonfarm payroll gains. Consumer spending trends have remained very strong as evidenced by retail sales data and same-store sales at retailers. Mergers and acquisitions have also picked up this year. Virtually every Monday, significant acquisitions are announced. Q4 operating earnings growth for the S&P 500 was 20%, while expectations were expected to be about 15%. The reports were, by and large, much better than expected.

What to Watch for this week:

This week will be a holiday-shortened week, as markets are closed for Good Friday. Earnings warnings for Q1 are likely begin this week and investors will be watching for any signs of a trend. Carnival Corp. (CCL) and KB Home (KBH) report results Monday. Tuesday General Mills (GIS), Lennar Corp. (LEN) and Oracle Corp. (ORCL) will posts results. Contract manufacturer Solectron (SLR) releases results on Thursday. Tech companies Nvidia (NVDA) and Applied Materials (AMAT) will each hold Analyst Meetings on Wednesday. Goldman Sachs holds a two-day Transportation Conference beginning Tuesday. Merrill Lynch holds their two-day Retailing Conference beginning Wednesday.

Economic events of interest this week include, the Federal Reserve's meeting on Tuesday, where it is widely expected that they will raise interest rates by 25 basis points and more importantly release their policy statement. Many economists believe the Fed will tone down the language with reference to the pace that the Fed expects to raise interest rates over the next few months. Tuesday, the February Producer Price Index (PPI) will be released. Expectations are for a 0.3% increase from the previous January. Wednesday, the February Consumer Price Index (CPI) will be released and estimates for a 0.3% increase is expected. February Existing Home Sales will also be reported Wednesday, as well as current Crude Oil Inventories. Thursday, February Durable Good Orders and New Home Sales will be released.

In summary, investors should continue to watch the CRB Index for any upward price pressure and listen carefully to the Federal Reserve's policy statement on Tuesday signaling the pace at which we can expect interest rates to rise.

Stay tuned!