Rosie's Housing Call August 2004

8/8/2019 Rosie's Housing Call August 2004

1/29


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The Market Economist 6 August 2004

2 Refer to important disclosures on page 29.

View From The Desk

Fed To Stay The Measured Course

Turns out that the declines registered in the Chicago PMI, ISM manufacturing and

ISM non-manufacturing employment diffusion indices were the correct indicators

to focus on for this mornings employment report. The July nonfarm payroll countof 32,000 was well below the consensus forecast of 240,000 and even lower than

the whisper numbers of below 200,000. In addition to the anemic July print, we

saw a net downward revision of 61,000 to the previous two months, introducing

further concern about the strength of the labor market. We tend to get downward

revisions when the economy is slowing and upward revisions when the economys

growth is accelerating. Despite the weakness in the headline payroll figures, we

do not believe this alters the Fed's plan to raise rates at a measured pace, whichwould include 25 bps at the next three meetings pushing the funds rate to 2.0%.The Fed has clearly communicated that they believe the Fed funds rate is just toolow and want to get back to a more neutral rate. And in doing so, are willing tolook past any so-called temporary weakness in the economy.

Not that we agree with the Feds view on the economy, but we must take them at

their word! And if the Fed does not go as advertised, they risk losing credibility.Moreover, FOMC officials can point to the household survey and implications forincome and production from the report to say that this is not a complete disasterfor the economy. Manufacturing employment was up 10,000 and themanufacturing workweek rose six minutes, resulting in a 0.4% increase inmanufacturing aggregate hours worked and likely a strong 0.7% increase inindustrial production on the month. Also, total aggregate hours worked rose 0.3%and average hourly earnings increased 0.3%, pointing to a decent 0.5% advance inpersonal income for the month. Furthermore, the household survey, while lessreliable than the payroll survey, did report a drop in the unemployment rate to5.5% from 5.6% as employment in that survey jumped 629,000, eclipsing the577,000 expansion in the labor force. And the labor participation rate rose 0.2% to66.2%.

That all said, we believe that the weak data support our call that the Fed will stoptightening much sooner and at a much lower level 2.5% by the end of Q1 than the markets have been pricing in. The Fed may be determined to raise ratesin the near-term, but today's data show that the interest-rate sensitive sectors of theeconomy, finance, construction, and retail are already feeling the pinch of higherrates. Job losses in the finance sector were 23,000, losses in the retail sector were19,000, and the construction sector only posted a meager 4,000 gain. Next week'sFOMC statement will be key in how it characterizes the economy at this point. Ifthe Fed intends to change course, they will have the opportunity and theresponsibility to communicate that to the markets at next weeks FOMC confab.However, we are expecting the Fed to stay the measured course.

Below is an excerpt from the inauguralInterest Rate Outlookpublication that

detailed our new Fed funds rate and yield curve forecasts (published on Thursday,August 5th) (see Table 1 on the following page and repeated again on page 27).These forecasts were generated by the newly-formed Interest Rate Committee1

that brings together a blend of macro economic fundamentals and quantitativeanalyses.

1 Committee members are Dave Rosenberg, Chief North American Economist, Kathleen Bostjancic,

Senior Economist, Jim Caron, Head Cross Rate Strategy and Alex Patelis, Head G10 FX Strategy.

Anemic July employment report

raises questions about the

strength of the labor market.

However, the Fed looks

determined to raise rates at a

measured pace 25 bps at

each of the next three meetings.

The underlying employment

details were not as bad

production and income should

be strong in July.

A blend of fundamental andquantitative methods were used

to formulate the rate forecast.


3/29


Refer to important disclosures on page 29. 3

Table 1: Interest Rate Forecast

Quarters Years

Percent, End of Period 2004:3 2004:4 2005:1 2005:2 2005:3 2005:4 2004 2005

Fed Funds 1.75 2.00 2.50 2.50 2.50 2.50 2.00 2.50

3-Month T-Bill 2.00 2.25 2.65 2.55 2.50 2.50 2.25 2.50

3-Month LIBOR 2.00 2.35 2.75 2.70 2.65 2.65 2.35 2.652-Year T-Note 3.00 3.25 3.45 3.00 2.90 2.85 3.25 2.85

5-Year T-Note 4.05 4.35 4.40 3.90 3.75 3.65 4.35 3.65

10-Year T-Note 4.75 5.00 4.90 4.65 4.30 4.15 5.00 4.15

30-Year T-Bond 5.40 5.55 5.65 5.40 5.10 4.95 5.55 4.95

Real GDP (annualized) 3.0 3.5 2.5 3.3 3.0 2.8 4.2* 3.0*

Core CPI (Year/Year) 2.2 2.2 2.1 1.9 1.6 1.9 1.9* 1.9*

Budget Balance ($ Bil. **) -450 -385

Current Account ($ Bil.**) -592 -595

Source: Merrill Lynch* Annual Average % Change **Cumulative Balance on a Fiscal Year Basis ***Cumulative Balance on a Annual Basis

Focusing on the Fed funds rate forecast, it now looks very clear after Fed

Chairman Greenspan's mid-year Congressional testimony two weeks ago thatpolicymakers believe that the current 'soft patch' in the economy is transitory andthat the Fed will be looking through weak economic news. However, they will betreating any above-expected core inflation data with concern and likely a moreaggressive tightening posture. While the base case is that the Fed moves in a'measured' fashion, which is still its objective, we now see three more rate hikesthis year (August 10th, September 21st and November 10th) which brings thefunds rate to 2% by year-end. And we see another 50 basis points of tighteningearly next year bringing the funds rate to 2.5%, which we view as being a neutralrate consistent with meeting the Fed's dual goals of nurturing a stable priceenvironment and achieving full employment.

We believe that with profit growth slowing and the pace of job creation likely tofollow suit with the typical 3-6 month lag, higher market rates, signals from the

equity market, and fiscal drag to replace fiscal stimulus through 2005, theeconomy is unlikely to overheat by growing above potential. Against thatbackdrop, any inflation outbreak will probably prove short-lived. We wereparticularly encouraged by the latest set of inflation data for June PPI down0.3%, core import prices flat, core CPI only up 0.1% and average hourly earningsalso rising just 0.1% on the month and a non-inflationary 2.0% year-on-year. Themoney supply data have also been quite tame, with the year-to-year pace in M2now at 3.6%, so there is no evidence of excessive monetary creation despite thecurrent low funds rate.

A natural starting point in the normalization process that the Fed is embarking onis to first estimate an equilibrium level for the Federal funds target. Such a levelwould be consistent with a variance of the so-called Taylor rule, whichessentially tries to quantify the Feds dual employment and inflation mandate in an

easy-to-understand framework. In the rule we assume potential GDP growth of3.5%, which is consistent with the Feds recent central tendency forecasts, theFeds implicit inflation target of 2% and an equilibrium real interest rate of 1.0%.The latter assumption is probably the most controversial; we feel it isappropriately low given the low starting point of inflation and the high levels ofdebt that currently characterize the U.S. economy.

Taken these figures as given, we create a matrix of the level of Fed funds forvarious real growth and inflation forecasts (see Table 2 on the next page). Thecurrent forecasts of the U.S. economics group (real GDP growth of2.9% Q4/Q4and core CPI inflation of 1.9%) for 2005 imply a nominal Federal funds rate ofaround 2.5%, which is at the lower end of our 2.5% - 3.0% forecast for the neutralFed funds rate.

We forecast Fed funds to be 2%

by year-end and peaking at

2.5% in 1Q05.

Fiscal drag to replace fiscal

stimulus in 2005 Inflationexpected to remain subdued.

Estimating equilibrium Fedfunds rate and using the

Taylor Rule forms the basis of

our fundamental approach.


4/29



Table 2: Equilibrium Fed Funds (%)

Real GDP Growth (%)

1 2 3 4 5 6

1 0.0 0.4 0.9 1.4 1.8 2.3

Core 1.5 0.7 1.2 1.6 2.1 2.6 3.1

Inflation 2 1.4 1.9 2.4 2.9 3.3 3.8(%) 2.5 2.2 2.7 3.1 3.6 4.1 4.6

3 2.9 3.4 3.9 4.4 4.8 5.3

3.5 3.7 4.2 4.6 5.1 5.6 6.1

4 4.4 4.9 5.4 5.9 6.3 6.8

4.5 5.2 5.7 6.1 6.6 7.1 7.6

5 5.9 6.4 6.9 7.4 7.8 8.3

Source: Merrill Lynch, our calculations.

We believe the Fed only reaches the lower-end of the neutral Fed funds forecastrange since the economy will still have a negative output gap by the end of 2005according to our GDP forecast, an indication of excess capacity. In terms of thetiming, with the Fed raising rates at a measured pace, and GDP growth likely to

decelerate to a 2.5% annualized rate by Q1 2005 on our forecasts, it is reasonableto expect the peak in the Federal funds rate to be around 2.5% by that date. Wefeel strongly that it is necessary to overlay a cyclical to the structural componentof our Fed funds forecast. A cyclical downturn limits the degree of thenormalization process.

On a near-term basis, economic growth will probably remain below potential inour view hence our belief that the Fed can still be measured in raising interestrates. That said, we do believe that the risk is for a more hawkish Fed near-term,which will establish a floor under the yield curve and raise the chances that marketrates drift to the high end of the recent 4.35%-4.90% range on the 10-yearTreasury. Investor sentiment is already at bearish extremes so we would not besurprised to see investors use such a move as a buying opportunity in the absenceof any renewed inflation scares. If we prove correct on our monetary policy call

that the Fed intends to move to so-called neutrality by establishing a modestpositive inflation premium to the funds rate, curve dynamics suggest that 4% onthe 10-year could be re-tested by late 2005. A full description of the methodologyand analyses behind our yield curve forecasts, please see the Interest Rate Outlookpublished on August 5.

Risks to the forecast, beyond inflation surprises, would involve exogenous eventsthat could trigger a destabilizing decline in the dollar such as a Chineserevaluation or a Bank of Japan policy tightening which could affect foreigndemand for Treasuries. We are well aware of these risks, but in our view theconsumer will be soft enough to trigger a slowdown in import demand in thecoming quarters and the J-curve effect of years of dollar weakness has begun to bereflected in an improved export performance, both of which should help reducethe current account deficit and bloated foreign borrowing requirements from

current peak levels. The election and fiscal policy is another wild card, but nomatter who emerges victorious in November, budgetary restraint and lowerdeficits are likely on their way through 2005, though a Kerry win would probablybe viewed more bond positive than a Bush victory because Senator Kerry is seenmore as a fiscal hawk.

David Rosenberg, FVP, Kathleen BostjancicChief North American Economist Director, Senior Economist(1) 212 449-4937 (1) 212-449-2650

Fed to only reach the lower end

of our estimatedneutral Fedfunds level at 2.5%.

Economic growth is expected toremain below potential over the

next several quarters.

Sharp dollar weakness that

creates reduced demand forTreasuries presents a risk toour forecast.


5/29



Hot Topic

Housing: If Not a Bubble Then an Oversized Sud

In this report, we assess the likelihood that the housing market has entered into abubble phase. There are numerous shades of gray, but when we examine the

classic characteristics of a bubble (extended valuation, over-ownership,excessive leverage, a surge in supply, complacency (denial?), and speculativebehavior, it seems to fit the bill. At the very least, housing is overextended, andeven the Fed has acknowledged as much. The next question is what pricks thebubble if in fact there is one, and the answer to that boils down to two words:interest rates. While the trend in personal income is also a key determinant ofhousing demand and pricing, our research finds that the impact of mortgage rates,basis point for basis point, is three times as powerful as household earningsgrowth (for more, please see the June 4 issue ofThe Market Economist).

Reports from some contacts suggested that speculative forces might be boosting

housing demand in some parts of the country, with concomitant effect on prices,

suggesting the possibility that house prices might be moving into the high end of

the range that could be consistent with fundamentals. (FOMC Minutes March 16, 2004.)

To be sure, indexes of house prices based on repeat sales of existing homes have

outstripped increases in rents, suggesting at least the possibility of price

misalignment in some housing markets. A softening in housing markets would

likely be one of many adjustments that would occur in the wake of an increase in

interest rates. (Fed ChairmanAlan Greenspan May 6, 2004.)

The key features of a bubble are that the level of prices has been bid up beyond

what is consistent with underlying fundamentals and that buyers of the asset do so

with the expectation of future price increases. (NY Fed, July 2004.)

Are Those Bubbles Blowing From My Backyard?

Classic traits of a bubble:(i) Extended valuation

(ii) Over-ownership(iii) Excessive leverage

(iv) Supply surge(v) Complacency(vi) Speculation.

Even the Fed knows thathousing is overextended.

The P/E ratio for the housingsector, proxied by the homeprice/rental rate ratio, hassurged to record highs of

roughly 1.40x. If this metricwere to ever mean-revert, it

would imply either a 15%decline in average housing

prices over the next year orstagnant real estate values through 2011. Thats how

overvalued the market is.


6/29



Bubble #1: Extended Valuation This Is The P/E Ratio for Housing (Look Familiar?)

OFHEO Index / CPI: Imputed Rent

Ratio

00959085

1.425

1.350

1.275

1.200

1.125

1.050

1.425

1.350

1.275

1.200

1.125

1.050

Source: Bureau of Labor Statistics, Office of Federal Housing Enterprise Organization. Note: In our calculation weassumed that rent prices would edge up by 3.1% per year (the 10-year average) and the average ratio between the twoseries is 1.15 (average from 1983 to 2000).

Bubble #1: Another Sign Of An Over-Priced Market Stretched Affordability

Composite Housing Affor dability Index

Median Inc=Qualifying Inc=100

040302010099

Source: National Association of Realtors /Haver Analytics

150

145

140

135

130

125

120

150

145

140

135

130

125

120

The P/E equivalent for the

housing sector home pricesdivided by the cost of rentinghas soared to a record high. To

bring this ratio back into line

with the historical norm, andassuming that rental rates edge

up at their traditional pace,average house prices would

have to decline 15% over thenext year. Alternatively, it

would take almost seven yearsof stagnant home prices to

achieve the same mean-

reverting result.

Due to higher lending rates,

soaring home prices, andlagging wage growth, housingaffordability plunged in June,

the fourth decline in a row.Affordability is now at its lowestlevel since August 2000 and can

be expected to cut into housingdemand and perhaps even

prices in the coming months.For example, the last time

affordability fell to this level,median new home prices

decelerated to low single-digitgrowth terrain in the ensuing

year. Even with low mortgage

rates, first-time buyers havestrapped on so much mortgagedebt that roughly 1/3 now payat least 30% of their after-taxincome on shelter (and half ofthe lowest income households

spend at least 50% of theirincomes on housing).


7/29



Bubble #2: Over-Ownership/Democratization Of The Market (Heres My Card!)

Homeownership Rate: United States

SA, %

00959085

Source: Census Bureau /Haver Analytics

70

68

66

64

62

70

68

66

64

62

Bubble #2: Over-Ownership Has Translated Into Record Real Estate Exposure

Household Real Estate Assets

(% of Total Assets)

009590858075706560

30

28

26

24

22

20

30

28

26

24

22

20

Source: Federal Reserve Board, Merrill Lynch.

Democratization and/or over-ownership is a classic

characteristic of a bubble.

Housing certainly fits the billgiven that the homeownership

ratio has hit a record high of

almost 70%. Remember in thelate 1990s that investor

participation in the equitymarket surged to levels that

were last posted in the roaring1920s. Herd effectand

caveat emptortend to gohand-in-hand.

Roughly 28% of householdassets are tied up in residential

real estate, piercing the priorthree peaks in this ratio. This is

just another example of howover-ownedthis sector is.


8/29



Bubble #2: Real Estate Assets Far Outstripping Income Trends

Real Estate Assets

(% of Disposable Income)

0095908580

200

190

180

170

160

150

200

190

180

170

160

150


Bubble #3: Excessive Leverage Mortgage Market Now Over 30% Of Total Debt

Mor tgage Debt

(% of Domestic Nonfinancial Debt)

0095908580

32

30

28

26

24

22

20

32

30

28

26

24

22

20


Similarly, real estate assets onthe household balance sheet

relative to disposable incomea relatively stable ratio up until

the late 1990s has literally

exploded to the upside. Thisratio, which stood at 165%

before the last leg of thehousing boom began four years

ago, is at an all-time high of195% today.

Another defining characteristic

of a bubbleis extensiveleverage. The accompanying

chart depicts a stable seriesthroughout most of the 1990s,but has since exploded. Some

would argue that this chartmakes perfect sense given the

ultra-low interest rateenvironment and not

surprisingly, more householdshave opted to own rather than

rent. However, this line ofthinking reminds us of a similar

chart showing NASDAQvaluation circa 1999-2000 when

we were told not to worrybecause investors were making

the logical choice of shiftingout of cash and bonds into the

land of the new paradigm.


9/29



Bubble #3: Housing Market And Banking Sector Performance Joined At The Hip

Real Estate Loans

(% of Bank Credit)

0403020100

38

36

34

32

30

38

36

34

32

30


Bubble #3: LTV Ratios Near Record Highs (Did You Say 1% Down?)

Household Mortgage-to-Real Estate Value Ratio

0302010099989796959493

0.46

0.45

0.44

0.43

0.42

0.41

0.46

0.45

0.44

0.43

0.42

0.41

Source: Federal Reserve Board.

Real estate lending forcommercial banks, a key sourceof profits, is up 10% year-over-

year and now comprises arecord 37% share of total bank

credit, up from 35% a year ago,and 33% two years ago. Now

we know why RichardBernstein our Chief InvestmentStrategist has put Financials on

the watch list for a potentialdowngrade.

Another way of seeing just how

levered the consumer hasgotten is to look at the

aggregate loan-to-value ratiofor real estate. This ratio is

hovering near an all-time highof 45% on the household

balance sheet. The flip side tothat argument is that

households, in the aggregate,own only 55% of their home,

hovering near an all-time low.This, in part, reflects aggressive

lending behavior this cycle aswell as the record pace of

mortgage cash-outs. Existing

homeowners have effectively

borrowed against the risingnotional price of their house.

Much like the tech stock boomof the late 1990s, the housing

market boom has also attracted

an increasing number of marginal buyers. For example,subprime mortgage lending has

risen at an estimated 25%average annual rate over the

last decade.


10/29



Bubble #3: The 2001-2004 Cash-Out Craze (Poof! The House Becomes a Credit Card)

Total Home Equity Cashed Out

(Billions $)

$19.9$13.8 $11.2

$17.4 $21.4

$39.9 $37.0$26.2

$82.9

$105.4

$138.1

$71.7

$0.0

$20.0

$40.0

$60.0

$80.0

$100.0

$120.0

$140.0

$160.0

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 F

Source: Freddie Mac.Annual Cash-Outs For All Prime Conventional Loans

Bubble #4: Supply Taking Over The Builders Have Gotten Restless

Housing Starts (% o f Employment)

6 Month Moving Average

040302010099989796959493929190

1. 4

1. 2

1. 0

0. 8

0. 6

1. 4

1. 2

1. 0

0. 8

0. 6

Source: Bureau of Labor Statistics, Census Bureau, Merrill Lynch. Note reference line denotes average since 1990 =0.97. The June reading was 1.206.

According to Freddie Mac, thedollar volume of equity cash-

outs through mortgagerefinancings ballooned 27% in

2002 to $105 billion andanother 31% to $138 billion in

2003. While cash-outs are seenat $72 billion this year, this

would still be almost six timesthe level posted during the mid-

1990s (back then, of course,individuals were too focussed

on margin debt to buy stocks).

The homebuilders have sharplyramped up supply, conjuring up

memories of the late-stageproduction burst in the tech

sector in 1999-2000. Housingstarts normalized by

employment is flirting near 17-year highs and is about 24%

higher than the average of thelast 15 years (1.2).


11/29


11Refer to important disclosures on page 29. 11

Bubble #4: National Housing Vacancy RateNew HighTotal Vacant Housing Stocks as a share of Total Housing Units (ratio)

HVU / HSTK

0403020100999897969594939291

0 .135

0 .130

0 .125

0 .120

0 .115

0 .110

0 .105

0 .135

0 .130

0 .125

0 .120

0 .115

0 .110

0 .105

Source: Census Bureau.

Bubble #4: Look At What Has Happened To Rental Vacancy Rates

Rental Vacancy Rate: United States

%

030201009998979695949392

Source: Census Bureau /Haver Analytics

10.50

9.75

9.00

8.25

7.50

6.75

10.50

9.75

9.00

8.25

7.50

6.75

In fact, the national inventoryof unsold homes as a share ofthe housing stock has brokenout sharply in the past 12-24

months. The question is, with

even more supply on its way,and affordability levels waning,

will home prices becomevulnerable?

Another factor that may putdownward pressure on home

prices is the surge in rentalvacancy rates. At the margin,

renting has become a moreeconomical proposition.


12/29



Bubble #5: Denial Sets In (Complacency At The Very Least)

Current Conditions for Buying Houses: Good: Prices Going Higher

%

JJ04

MAMFJDNOSAJJ03

MAMFJDNOSAJJ02

MAMFJDNOSA

Source: University of Michigan /Haver Analytics

8

6

4

2

0

8

6

4

2

0

Bubble #5: Still A Good Investment After a Five-Year, 35% Run-up?

Current Conditions for Buying Houses: Good: Good Investment

%

0500959085

Source: University of Michigan /Haver Analytics

12

10

8

6

4

2

12

10

8

6

4

2

Talk about chasing the market.Despite lofty valuations on new

homes, households havebecome increasingly convincedthat real estate will continue to

generate solid returns. Theshare of households looking to

get into real estate due to theprice action has risen to its

highest level in roughly fouryears.

Another 10% of householdsbelieve that housing is a good

investment right now, at thehigh end of the historical range

and roughly double the long

run average of 6%. It isinteresting that in mid-1998, alow of 3% believed housing tobe a good investment and thatfollowed a five-year period in

which average new home pricesrose 20%. Fast forward to

today, and we have more thantripled the share who are of that

bullish view and this follows afive-year run of 35% home price appreciation. What would

a contrarian say?


13/29



Bubble #5: House Prices Never Go Down (A Myth of Zeus-Like Proportions)

Existing 1-Family Homes: Median Sales Pr ice

% Change - Year to Year Thous.$

05009590

Source: National Association of Realtors /Haver Analytics

12.5

10.0

7. 5

5. 0

2. 5

0. 0

-2.5

12.5

10.0

7. 5

5. 0

2. 5

0. 0

-2.5

Bubble #5: There Was Also Complacency at NASDAQ 5000 (New Era In Housing?)

Stock Pri ce Index: NASDAQ Composite [-50]Feb-5-71=100

Existing 1-Family Homes: Median Sales Pr iceThous.$

1005009590

Sources: WSJ, REALTOR /Haver

50004000

3000

2000

1000

500

200

200

180

160

140

120

100

80

Note: NASDAQ Composite moved forward by 50 months. Scales are in log terms. NASDAQ (line) on the left hand scale.Home prices (bars) on the right hand scale.

It is widely perceived that houseprices never decline, which is

really new erathinking.While this is true since the

housing boom began in themid-1990s we managed to find

no fewer than four occasionswhen median prices in the

resale market fell on a year-over-year basis usually

following interest rate cycles.Note that in the higher inflation

days of the late 1980s and early

1990s, the house price declinesin realterms was rathersubstantial (i.e. roughly -10%).

To be sure, there are limits in

comparing housing, as an assetclass, to equities. But the

similarities in the price action

between what we saw in thestock market in the late 1990s

and what we are seeing today in

residential real estate seem toshare at least some

resemblance. Everybubble

ultimately pops this is whythe interest rate outlook is so

important since aggressive Fedtightening would probably be a

trigger point.


14/29



Bubble #6: Housing Turnover Jumps To An All-Time High in Q2:2004Turnover = Total home sales/housing stock.

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

03/01/1968

03/01/1970

03/01/1972

03/01/1974

03/01/1976

03/01/1978

03/01/1980

03/01/1982

03/01/1984

03/01/1986

03/01/1988

03/01/1990

03/01/1992

03/01/1994

03/01/1996

03/01/1998

03/01/2000

03/01/2002

03/01/2004

Source: Census Bureau, National Association of Realtors, Merrill Lynch. Note: Turnover = total home sales/ housingstock.

Dave Rosenberg, FVP Ron Wexler, VPChief North America Economist VP, U.S. Economist(1) 212 449-4937 (1) 212 449-2705

Another potential sign that a

housing bubbleis brewing, isthe increase in speculative

behavior. Housing turnover

has surged since the end of2003, and now stands at an all-

time high. According toDataquick Information

Services, homes that werebought and sold by the same

owner within six months hasrisen 54% in the past year in

Chicago; 83% in Fort Worthand a near-doubling in OrangeCounty. The flippers are back.


15/29



Charts of the Week

Chart 1: 12-Month Expectations of Change in Prices: Mean Increase

0402009896949290

7

6

5

4

3

2

1

0

Expected Change in Prices

Source: University of Michigan.

Chart 2: Has the ISM Manufacturing Index Reached it Peak?

0402009896949290

65

60

55

50

45

40

35

6

4

2

0

-2

Diffusion Index Percent Change Year Ago

ISM Index vs. Real GDP

ISM Index (Left)

Real GDP (Right)

Source: Institute of Supply Management, Bureau of Economic Analysis.

Chart 3: The First Drop in Private Residential Construction in 15 Months

0403020100

3

2

1

0

-1

-2

-3

-4

-5

Percent Change from Previous Month

Value of Private Residential Construction Put in Place

Source: Census Bureau.

Inflation expectations look tohave peaked. According to the

University of Michigan survey,12-month inflation expectationsfell to 3.50, the lowest reading since February. These results

are in line with the pricingpower component of the ISM

index.

In our view, the ISM hasclearly peaked for the cycle.While still at lofty levels, theindex is off its high seen last

January and has generally beenhovering in a range over the

last five months.

Overall construction spendingin June fell 0.3% month-on-

month, but the residential

component was especially weak,dropping 0.6%. This decline

broke a 15-month streak, andwas the largest monthly decline

since 9/11.


16/29



Merrill Lynch Proprietary Weekly Indicators

Chart 1: Production Index Chart 2: Consumer Index

JULAPRJANOCTJULAPRJANOCTJUL200420032002

156

153

150

147

144

141

156

153

150

147

144

141

Index, 4 Week Average Index, 4 Week Average

Source: Merrill Lynch

Production Looks to Have Bounce d Back in July

The ML Production Indexis up 1% in July

JULAPRJANOCTJULAPRJAN20042003

0.14

0.07

0.00

-0.07

-0.14

0.14

0.07

0.00

-0.07

-0.14

Index Index

Sourc e: Mer rill Lynch

Has the Consumer Run Out of Steam?

The ML Consumer IndexFlashing Sluggish Start to Q3

The ML production index finished the month up by 1%. As we noted last week, thetrue underlying trend in production is probably weaker than the headline growth ratesuggests. The later than usual plant closures, biased our production index upwards inearly July (due to the seasonals). Over the last couple of weeks the seasonals haveworked in the opposite direction. Momentum heading into August looks weak.

The ML Consumer Index was flat for a third week in a row. The ABC/Money Magazineconsumer sentiment index inched slightly higher and both initial and continuing claimsfell on the week, but energy prices continued to rise, and chain store sales continuedto disappoint. It looks like consumer spending is off to a slow start in Q3.

Chart 3: Housing Index Chart 4: Financial Stress Index

AUGMAYFEBNOVAUGMAYFEBNOVAUGMAYFEBNOVAUG2004200320022001

1.2

0.6

0.0

-0.6

-1.2

1.2

0.6

0.0

-0.6

-1.2

Index Index


Rece nt Spike in Rates Will Cool Off Housing Market in 2H04

ML Housing Index Hovering NearLows We Havent Seen Since Nov 2001

JULJANJULJANJULJANJULJAN2004200320022001

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

2.0

1.5

1.0

0.5

0.0

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-1.0

-1.5

Index Index


Financial Stres s Ease s - But Will it Last?

+1 Standard Deviation

-1 Standard Deviation

Risk Aversion

Risk Taking

The ML Housing Index is beginning to stabilize, but the level of the index is consistentwith a deceleration in housing activity in 2H. Real estate loans have slowed sharplynow growing at 8.7% annual rate (13-week basis), the slowest growth rate since mid-February. In fact, real estate loan growth has been slowing for ten weeks in a row.Moreover, the MBA purchase index, while still at very high readings, seems to havepeaked.

Our Financial Stress Index has shown a decline in risk aversion over the last couple ofweeks. The main reasons for the move have been the decline in gold prices and theSwiss Franc, and the fact that the put-to-call ratio sank to the lowest reading since lateJune during the last week of July. In our view, this will most likely turn out to be atemporary blip (especially in light of the most recent spate of weak economic data).The VIX is turning higher. Corporate spreads are off their lows. Staples continue to

outperform TMT stocks. And with the market continuing to discount aggressive Fedeasing, we would expect bonds to outperform. Stay defensive.

Ron WexlerVP, U.S. Economist(1) 212 449-2705


17/29



Key Market MoversFor the financial markets, the highlight next week will be the Fed. On Tuesday,the FOMC meets and we expect them to raise the Fed funds rate 25 basis points toa 1.5%. Despite the recent weak economic data, Merrill Lynchs newly-formedInterest Rate Committee expects the Fed to continue to raise the funds rate to 2.0%

by year-end in an effort to reach a more neutral funds rate. On Thursday, August12th we will get the minutes from the June FOMC meeting, which should providesome additional color on the views of the FOMC members as they began to raiserates.

On the data front, there are two key releases next week: retail sales and the PPI.We are looking for retail sales to rebound sharply in July after the dismal 1.1%drop in June. Despite this increase in sales, the momentum going into the thirdquarter is negative and thus, consumer spending will be weaker than most expect.The PPI should be to the Feds liking. We are looking for very modest gains inproducer inflation in July. Discounting of cars and computers, along with weakerfood and energy prices should keep inflation in check in July. Another importantindicator next week will be the University of Michigans consumer sentimentindex for the month of August, which should edge slightly higher.

We will also get second quarter productivity data. We expect to see a slowing inproductivity from the first quarter, and an acceleration in labor costs, which wehave not seen since 2001.

n Monday, August 9, 2004

Wholesale Inventories, June 10:00 am

Exp. Consensus Range History

Wholesale Inventories +0.5% +0.6% +0.3% to +1.0% May = +1.2% vs. Apr. = +0.2%

Source: Merrill Lynch, Bloomberg

We expect wholesale inventories to rise 0.5% in June, after posting a large 1.2%

gain in May. Inventory accumulation was much stronger than anticipated in theQ2 NIPA accounts, implying another healthy gain in wholesale inventories inJune. Moreover, imports were probably strong in June, which is another indicatorthat suggests that wholesale inventories will rise.

n Tuesday, August 10, 2004

Productivity, 04Q2 Preliminary 8:30 am


Productivity +2.0% +2.0% +0.3% to +3.6% 04Q1 = +3.8% vs. 03Q4 = +2.5%

Unit Labor Costs +2.5% +2.0% +0.7% to +4.4% 04Q1 = +0.8% vs. 03Q4 = +1.7%


Productivity should rise at a 2.0% annual rate in the second quarter. This isweaker than the 3.8% rate we saw in the first quarter. From the annual revisionsto the NIPA data, we know that non-farm output rose at a 3.8% annual rate in thesecond quarter. With hours worked rising at roughly a 1.8% rate, it leftproductivity rising at its slowest pace since the second quarter of 2002. Weestimate that compensation per hour rose at a 4.5% rate, which is in line with the4.6% pace we saw in Q1. The end result is that unit labor costs should rise 2.5%for the quarter. This represents the third consecutive rise for unit labor costs andwould be the fastest gain in labor costs since the first quarter of 2001.

Despite the weak employmentdata for July, we expect the

FOMC to raise rates nextTuesday.

Retail sales should bounce back

in July. The PPI report shouldshow benign inflation.

Inventory accumulationcontinued through June,

especially at the wholesalelevel.

Slower economic growth,combined with a rise in hours

worked hurt productivity in Q2.


18/29



n Wednesday, August 11, 2004

Treasury Statement, July 2:00 pm


Treasury Statement -$61.0B -$60.0B -$70.6B to -$40.0B July 03 = -$54.2B


We expect the July budget balance to register a deficit of $61.0 billion, $7 billiondeterioration from the $54 billion shortfall recorded a year ago. The year-on-yeardeterioration continues to be led by growth in outlays outstripping revenuegrowth. Spending growth is running a full three percentage points ahead of thepace revenues at 6.6% year-on-year versus just 3.6% for revenues. With just twomonths remaining before fiscal year-end, we look for the budget deficit to be $450billion for the full fiscal year. Looking ahead to fiscal year 2005, we foresee amoderate narrowing in the deficit to $385 billion as revenues rebound a strong11%, in tandem with an improving labor market. Spending growth, despiteattempts to reign in non-defense discretionary outlays, is poised to slow onlygradually to a 5.9% pace.

n Thursday, August 12, 2004

Jobless Claims, week ending August 7 8:30 am


Jobless Claims 340,000 340,000 330,000 to 340,000 Week ending 7/31/04 = 336,000


We estimate that initial unemployment claims will edge up for the week endingAugust 7 to 340,000 from 336,000 in the prior week. This would nudge the four-week average down to 341,000 from 343,500. Given that the factory shutdownshave already taken place, there probably were not any major layoffs during thatweek.

Import Prices, July 8:30 am


Import Prices +0.4% +0.4% -1.3% to +0.8% June = -0.2% vs. May = +1.4%


Import prices probably rose 0.4% in July, which would leave them 5.5% abovelast Julys levels. This would represent a rebound from last months 0.2% decline,but far below the 1.4% surge we saw in May. Part of the push in import priceswas due to the higher cost of imported crude oil, which was up 8% in.Commodity prices were up more modestly in July, as the CRB raw industrialmaterials index rose only by 0.1% for the month.

The budget deficit rose in July

as outlays continued to outstriprevenue growth.

Jobless claims remain range-bound suggesting layoffs are

not accelerating.

Higher oil prices should boostimport prices.


19/29



Retail Sales, July 8:30 am


Retail Sales +0.8% +1.1% +0.3% to +2.2% June = -1.1% vs. May = +1.4%

Retail Sales Ex-Autos +0.2% +0.4% 0.0% to +0.8% June = -0.2% vs. May = +0.9%


Retail sales should rebound in July, rising 0.8%, after posting a dismal 1.1%decline in June. Excluding autos, retail sales should rise at a more tepid pace of0.2%, which would offset the 0.2% decline we saw in June.

Most of the strength in sales in July came from the vehicle sector. New vehiclesales jumped 12% in July. One problem is that a good part of the strength invehicle sales of late has been from fleet sales, which do not necessarily getcounted in retail sales. If a fleet was purchased directly from the manufacturer, itdoes not count as a retail sale. As a result, we may not see as powerful a kickfrom unit vehicle sales as many are expecting.

Sales at gasoline service stations should be weaker given that prices were downmore than 3% in July. In fact, over the last few years, when gasoline prices have

declined in a given month, service station revenues declined 70% of the time.However, the solid rebound we expect to see in retail sales in July, the level ofretail sales in July should still be 2.0% below the second quarter average level ofsales. Consumers will have to pick up the pace of purchases dramatically if theeconomy is going to get a boost from the consumer in the third quarter.

Business Inventories, June 10:00 am


Business Inventories +0.6% +0.5% +0.2% to +0.8% May = +0.4% vs. Apr. = +0.7%


Business inventories should rise 0.6% in June. Since February, business

inventories have risen at least 0.5% in each month. We know from the variousdiffusion indices that inventory accumulation probably picked up in June. TheISM inventory index rose to 51.1 in June from 49.3 in May. This was the highestpoint and the only reading above 50, since January 2000. We already know thatmanufacturing inventories rose 0.7% in June, and we are estimating that wholesaleinventories rose 0.5% in June (see write-up on page 17). The one remainingsector, the retail sector, probably posted a 0.5% gain in inventories in June. Retailsales were down 1.1% in June, which usually results in a slight buildup ininventories for the month.

n Friday, August 13, 2004

International Trade Balance, June 8:30 am

Exp. Consensus Range HistoryInternational Trade -$46.4B -$46.5B -$51.3B to -$44.0B May = -$46.0B vs. Apr. = -$48.1B


We estimate that the trade deficit widened slightly in June to $46.4 billion from$46.0 billion in May. Exports probably rose 2.5% to $99.6 billion in June, afterrising 2.9% in May. U.S. exporters continue to benefit from the strong globaleconomy and the weaker currency, as the trade-weighted U.S. dollar fell in June,making U.S. exports more competitive. We saw evidence of this in the June ISMreport. The ISM index of export orders remained quite strong in June at a level of56.7. This followed three consecutive months of above 60.0 readings, a period inwhich U.S. exports rose by more than 6%. We estimate that imports rose 2.0% in

Retail sales should rebound inJuly, but will probably remain

below the 2Q average,

suggesting weak spending inQ3.

While auto sales surged in July,gas prices fell and chain store

sales were weak.

Inventories probably closed outthe second quarter on a strong

note.

The trade deficit probablywidened slightly in June.


20/29



June. Custom duties jumped 15% and were up almost 19% from the prior June.This is the fastest growth rate for customs duties since the 20% annualized surgewe saw in January 2003, when U.S. imports were up more than 14% on a year-on-year basis. Another indicator of solid import growth in June was the ISM importindex, which stayed at a very strong 57.6 level from 59.8 in May.

Producer Price Index, July 8:30 amExp. Consensus Range History

Producer Price Index +0.2% +0.3% -0.1% to +0.4% June = -0.3% vs. May = +0.8%

Core PPI +0.1% +0.1% 0.0% to +0.3% June = +0.2% vs. May = +0.3%


The PPI should rise 0.2% in July, with the core rate edging up only 0.1%. On ayear-on-year basis, the PPI should be up 4.1%, in line with Junes 4.0% rise. Weexpect the core rate to rise 1.8% from last July, which would represent a slowingin the annual rate we saw in June (+1.9%).

Energy prices should have contributed to some price moderation. Gasoline priceswere down about 2.5% in July after seasonal adjustment, and the price of finished

energy products down 0.2% on the month.We expect to see more price declines in the vehicle sector, as probably some ofthe price discounting and better incentives most likely came directly from themanufacturers. The result of these types of programs would be felt in the PPI,which we estimate would push new car prices down 0.2% in July. Moreover,given the glut of chips and other computer equipment, we would not be surprisedto see price discounting in that sector as well.

Consumer Sentiment (Univ. of Michigan), Early August 9:50 am


Consumer Sentiment 98.0 98.0 95.0 to 100.0 July = 96.7 vs. June = 95.6


Consumer sentiment should rise in the early August reading to 98.0 from 96.7 inJuly. The weekly ABC/Money Magazine survey of consumer comfort rosemeaningfully in late July/early August and stood at -6 at the end of July. This wasits highest reading since early February.

Jose RascoVice President, Senior Economist,(1) 212-449-9107

Weaker gasoline prices and

discounting in the auto and PCbusinesses should keep

producer price inflation low.

Weekly surveys suggest thatconsumer sentiment should rise

in early August.


21/29



Debt Issuance

Table 1: Treasury Financing(billions of $)

Announcement Date Auction Date Settlement Date Issue Size New Cash

Aug-5 Aug-9 Aug-12 3 & 6-Month 36.0 1.5

Aug-4 (Qtr. Refunding) Aug-9 Aug-16 3-Year Note 22.0 22.0

Aug-4 (Qtr. Refunding) Aug-11 Aug-16 5-Year Note 15.0 (0.4)

Aug-4 (Qtr. Refunding) Aug-12 Aug-16 10-Year Note 14.0 0.6

Aug-5 Aug-9 Aug-12 3 & 6-Month 36.0 1.5

Aug-9 Aug-10 Aug-12 1-Month 22.0* 0.0*

Aug-12 Aug-16 Aug-19 3 & 6 Month 36.0* 1.0*

Aug-23 Aug-25 Aug-31 2-Year Note 24.0* (2.7)*

* Estimate. ( ) = Paydown.

Table 2: Agency Financing(billions of $)

Announcement Date Auction Date Settlement Dates Issue Size

Aug-5 Aug-9 Aug-10 FRE 1-Month 3.0



Aug-9 Aug-11 Aug-12 FNM 3-Month

Aug-9 Aug-11 Aug-12 FNM 6-Month

Aug-9 Aug-11 Aug-12 FNM 1-Year

Aug-9 Aug-12 TBA FNM Callable TBA

Aug-12 Aug-16 Aug-17 FRE 1-Month

Aug-12 Aug-16 Aug-17 FRE 3-Month

Aug-12 Aug-17* Aug-18 FRE 6-Month

Aug-13 Aug-18* Aug-20 FRE 2 or 3-Year

Aug-13 TBA TBA FRE 5 or 10 Year**

FRE = Freddie Mac, FNM = Fannie Mae * Pricing Date. **In 2004, Freddie Macs 5 or 10-year sales are optional.TBA = To Be Announced.

Policy Speakers

Speaking Engagements & News Events

Mon N.A. President Bush will host Polish Prime Minister Marek Belka at theWhite House.

N.A. Bank of Japan holds monetary policy meeting.

Tues 9:00 am Federal Open Market Committee will meet to decide key interestrates, in Washington. Announcement expected around 2:15 p.m.EDT.

Wed Sun N.A. Japanese Financial Services Minister Heizo Takenaka will visit the

United States and will meet New York Fed President TimothyGeithner in New York.

Thurs 1:15 pm Federal Reserve Governor Edward Gramlich will speak on Rulesfor Assessing Social Security Reform to the Retirement ResearchConsortium Conference at the National Press Club in Washington.Q&A expected.

2:00 pm Federal Reserve will release minutes of June 29-30FOMC meeting, in Washington.


22/29



Q2 Earnings UpdateThe Q2 earnings season is nearly 85% done and by and large the results areimpressive. It looks like operating EPS will come in at about $16.80 (assumingthe remaining 85 companies surprise to the upside by the same margin), 30%higher than year ago levels2 (note that S&P is actually looking for earnings to

come in at $16.90, up 31% year-over-year). All sectors are coming in ahead ofexpectations, with the largest upside surprises in materials (beating estimates by11 percentage points), utilities and consumer discretionary (beating estimates by 7percentage points) (see Table 1). In the aggregate, earnings are coming in about4.5% ahead of expectations, which is larger than the historical average (3%surprise factor) but lower than the surprise factors of the prior five quarters.

In terms of guidance, earnings estimates for Q3 came down this week, largely dueto some downgrades in IT and consumer discretionary. The bottom up consensusis now looking for 14.7% EPS growth, down from 15% last week. In our view,this is not the start of a new trend. We believe earnings estimates will continue toget ratcheted higher in the coming weeks. The revision ratios have been prettylow by historical standards and according to First Call preannouncments are alsocoming in below historical trends (Table 2). Q4 earnings expectations were left

unchanged. By the looks of things, 20% EPS growth in the second half of the yearis not out of the question.

Earnings estimates for 2005, on the other hand, continue to get ratcheted lower(downgraded for an eighth week in a row). Consensus is now looking for 10.1%EPS growth, which would represent a pretty sharp deceleration from the current30% growth rates weve recently been enjoying (see Table 4 on the next page).By our estimates, we think earnings estimates will most likely get ratcheted evenlower, especially in the consumer related sectors (for more please see MarketEconomist July 16). In our view, operating earnings will rise only 3% next year.

Next week the market will have fewer Q2 earnings releases to digest. We haveoutlined the key market movers in Table 5 on page 24.

Table 1: S&P 500 Q2 Earnings Results

SectorConsensus

EPS EstimateResults to

Date

If Rest ofForecasts

Materialize

Percent ofCos

ReportingPositive

Earnings

Percent ofCos

ReportingPositive YoY

Comparisons

Percent ofCos

ReportingAbove

Consensus

Median NetIncomeGrowth

# ofCompanies

Reporting

S&P 500 20.6% 26.0% 25.3% 96.9% 83.4% 68.2% 20.3% 421

Consumer Discretionary 28.0% 39.3% 35.0% 98.5% 90.8% 72.3% 22.4% 65

Consumer Staples 8.0% 8.8% 8.9% 100.0% 84.6% 65.4% 11.0% 26

Energy 51.7% 53.3% 58.5% 95.5% 95.5% 81.8% 46.2% 22

Financials 10.7% 18.9% 15.3% 100.0% 85.3% 65.3% 14.8% 75

Health Care 11.8% 15.1% 14.0% 97.7% 74.4% 65.1% 21.6% 43

Industrials 21.5% 26.3% 27.1% 96.3% 83.3% 79.6% 23.9% 54

IT 57.7% 66.6% 62.8% 92.5% 89.6% 58.2% 71.8% 67

Materials 74.7% 85.8% 85.8% 93.9% 97.0% 66.7% 32.0% 33Telecom -17.2% -7.8% -11.1% 90.0% 40.0% 90.0% -4.1% 10

Utilities 6.6% 7.3% 13.7% 100.0% 46.2% 57.7% -0.9% 26

Source: Merrill Lynch, First Call

2 Note that the S&P calculates earnings growth differently than First Call. S&P uses last years

constituents as its base, while First Call uses this years constituents. As a result, the S&P growthrate tends to be larger than the First Calls estimate.

With Q2 earnings season 85%done, operating EPS should

come in 30% higher than a year

ago.

20% EPS growth in the secondhalf of the year looks

reasonable.

However, earnings estimates for2005 are coming down... and it

looks like theres furtherdownside risk.


23/29



Table 2: S&P 500 Q3 Earnings Expectations

01-Oct-03 01-Jan-04 01-Feb-04 01-Mar-04 01-Apr-04 01-May-04 01-Jun-04 01-Jul-04 30-Jul-04Downgrades/

Upgrades

Consumer Discretionary 17% 16% 18% 19% 23% 25% 25% 25% 22% 1.3

Consumer Staples 10% 8% 8% 8% 9% 10% 9% 9% 8% 2.3

Energy -11% -14% -13% -12% -7% -5% 7% 16% 22% 0.6Financial 9% 5% 6% 7% 8% 8% 8% 11% 11% 1.1

Health Care 16% 12% 11% 11% 11% 10% 9% 9% 9% 1.1

Industrials 15% 14% 16% 15% 15% 16% 16% 16% 16% 0.4

Materials 57% 40% 46% 49% 51% 55% 57% 61% 67% 0.8

Technology 33% 28% 32% 33% 33% 35% 36% 38% 35% 0.8

Telecom 3% 1% 0% -6% -7% -10% -10% -13% -13% 0.7

Utilities 11% 7% 5% 5% 5% 3% 3% 4% 4% 0.0

S&P 500 12.8% 14.0% 10.7% 11.1% 12.0% 12.0% 13.0% 14.8% 14.7% 0.9

Source: Merrill Lynch, First Call, I/B/E/S. Downgrades/Upgrades ratio based on a trailing four-week basis aggregated from the bottom up.

Table 3: S&P 500 Q4 Earnings Expectations

01-Jan-04 01-Feb-04 01-Mar-04 01-Apr-04 01-May-04 01-Jun-04 01-Jul-04 30-Jul-04 Downgrades/Upgrades

Consumer Discretionary 17% 16% 14% 16% 17% 17% 17% 17% 1.1

Consumer Staples 12% 10% 11% 10% 12% 12% 12% 11% 1.1

Energy -7% -11% -12% -5% -3% 7% 14% 20% 0.6

Financial 11% 11% 11% 13% 13% 13% 14% 13% 1.3

Health Care 18% 17% 17% 17% 17% 16% 16% 15% 1.1

Industrials 11% 13% 13% 13% 14% 15% 14% 15% 0.5

Materials 49% 47% 50% 51% 52% 53% 58% 68% 0.6

Technology 26% 18% 18% 18% 21% 22% 23% 20% 0.9

Telecom 13% 9% 7% 5% 0% 0% -3% -3% 0.9

Utilities 14% 8% 12% 14% 12% 9% 10% 11% 0.0

S&P 500 14.0% 12.5% 12.3% 13.0% 14.0% 15.0% 15.7% 15.6% 0.9

Source: Merrill Lynch, First Call.

Table 4: 2005 Operating EPS Estimates

17-May-04 24-May-04 01-Jun-04 07-Jun-04 14-Jun-04 21-Jun-04 28-Jun-04 06-Jul-04 12-Jul-04 19-Jul-04 30-Jul-04Downgrades/

Upgrades

ConsumerDiscretionary

15% 15% 15% 15% 15% 15% 15% 15% 15% 15% 14% 0.6

Consumer Staples 11% 11% 11% 11% 11% 11% 11% 11% 11% 11% 11% 0.8

Energy -10% -11% -12% -13% -14% -14% -14% -15% -16% -16% -16% 0.3

Financials 10% 10% 10% 10% 10% 10% 9% 10% 10% 10% 9% 0.7

Health Care 14% 13% 13% 13% 13% 13% 13% 13% 13% 13% 13% 0.8

Industrials 17% 16% 16% 16% 16% 17% 17% 17% 17% 17% 17% 0.2

Materials 25% 25% 25% 25% 25% 24% 24% 24% 24% 24% 24% 0.4

IT 19% 19% 19% 20% 20% 20% 20% 20% 19% 19% 17% 0.8

Telecom 2% 2% 2% 2% 3% 3% 2% 2% 2% 1% 1% 0.8Utilities 7% 8% 8% 8% 8% 8% 8% 8% 8% 8% 9% N.M

S&P 500 11.2% 11.2% 11.0% 11.0% 10.9% 10.8% 10.7% 10.6% 10.5% 10.4% 10.1% 0.6



24/29



Table 5: Next Weeks Key Q2 Earnings Releases

Estimate Range

Company TickerReporting

Date ML EPS Consensus High Low 2Q03 Y/Y Sector Industry ML Analyst

Hewlett-Packard Co HPQ 08/09/2004 $0.30 $0.31 $0.33 $0.29 $0.29 6.9% Electronic

Technology

Computer

ProcessingHardware

S. Milunovich

Cisco Systems Inc CSCO 08/10/2004 $0.20 $0.20 $0.21 $0.19 $0.15 33.3% ElectronicTechnology

ComputerCommunications

T. Liani

Disney (Walt) Co DIS 08/10/2004 $0.27 $0.27 $0.30 $0.21 $0.11 140.9% ConsumerServices

MediaConglomerates

J. Cohen

Abercrombie & Fitch -Cl A ANF 08/10/2004 $0.41 $0.40 $0.43 $0.38 $0.26 55.0% Retail Trade Apparel/FootwearRetail

M. Friedman

Federated Dept Stores FD 08/11/2004 $0.66 $0.61 $0.72 $0.38 $0.24 153.8% Retail Trade Department Stores S. Turnof

Wal-Mart Stores WMT 08/12/2004 $0.61 $0.61 $0.62 $0.59 $0.41 47.6% Retail Trade Discount Stores D. Barry

Dell Inc DELL 08/12/2004 $0.31 $0.31 $0.31 $0.29 $0.23 34.3% ElectronicTechnology

ComputerProcessingHardware

S. Milunovich

Target Corp TGT 08/12/2004 $0.46 $0.47 $0.47 $0.45 $0.38 22.9% Retail Trade Discount Stores D. Barry

Penney (J C) Co JCP 08/12/2004 $0.23 $0.22 $0.24 $0.13 $0.20 10.5% Retail Trade Department Stores D. Barry

May Department Stores Co MAY 08/12/2004 $0.36 $0.35 $0.40 $0.32 $0.13 172.3% Retail Trade Department Stores S. TurnofTiffany & Co TIF 08/13/2004 $0.30 $0.29 $0.31 $0.28 $0.24 22.1% Retail Trade Specialty Stores M. Friedman

Ann Taylor Stores Corp ANN 08/13/2004 $0.41 $0.40 $0.44 $0.39 $0.26 55.0% Retail Trade Apparel/FootwearRetail

M. Friedman



25/29



Historical Economic Data

2004 2003

Jul Jun May Apr Mar Feb Jan Dec Nov Oct Sept Aug Jul

Payroll Employment (000) 32 78 208 324 353 83 159 8 83 88 67 -25 -45

% Change, Year Ago 1.1 1.1 1.0 0.8 0.5 0.2 0.0 0.0 -0.2 -0.3 -0.3 -0.4 -0.4

Unemployment Rate (%) 5.5 5.6 5.6 5.6 5.7 5.6 5.6 5.7 5.9 6.0 6.1 6.1 6.2Avg. Hourly Earnings(% Chg.)

0.3 0.1 0.3 0.3 0.2 0.2 0.3 -0.1 0.2 0.1 0.0 0.1 0.4

% Change, Year Ago 1.9 2.0 2.1 2.2 1.8 1.6 2.0 1.8 2.2 2.2 2.4 2.7 2.9

PPI (% Chg.) -0.3 0.8 0.7 0.5 0.1 0.6 0.2 -0.1 0.6 0.2 0.5 0.1

% Change, Year Ago 4.0 4.9 3.6 1.4 2.1 3.3 3.9 3.4 3.4 3.5 3.5 3.0

CPI (% Chg.) 0.3 0.6 0.2 0.5 0.3 0.5 0.2 -0.2 -0.1 0.3 0.4 0.2

% Change, Year Ago 3.2 3.0 2.3 1.7 1.7 2.0 1.8 1.8 2.0 2.3 2.2 2.1

ISM Diffusion Index (%) 62.0 61.1 62.8 62.4 62.5 61.4 63.6 63.4 61.3 57.1 54.7 55.0 52.6

Industrial Production(% Chg.)

-0.3 0.9 0.8 -0.1 0.8 0.6 0.2 1.0 0.3 0.6 0.0 0.8

% Change, Year Ago 5.6 5.9 4.9 3.5 2.8 2.4 2.3 1.5 0.7 0.1 -0.6 -0.6

Capacity Utilization, (%) 77.2 77.6 77.0 76.6 76.7 76.2 75.8 75.7 75.0 74.9 74.5 74.5

Durable Goods Orders

(% Chg.)

0.7 -0.9 -2.7 5.9 3.9 -2.6 1.7 -2.4 3.9 2.2 -0.1 1.6

% Change, Year Ago 11.3 13.2 14.3 15.9 10.3 5.7 10.7 7.4 8.9 7.7 -1.0 -1.4

Factory Orders (% Chg.) 0.7 0.4 -1.1 5.0 1.1 -0.9 1.8 -0.9 2.4 1.4 -0.3 2.0

% Change, Year Ago 12.1 13.3 13.3 11.5 7.8 6.1 8.8 6.6 6.8 6.4 1.7 1.9

Retail Sales (% Chg.) -1.1 1.4 -0.8 2.1 1.0 0.5 0.2 1.2 0.2 -0.5 1.1 1.0

% Change, Year Ago 6.3 9.2 7.5 8.6 8.5 6.3 6.4 7.3 6.6 7.0 6.1 5.3

Personal Consumption(% Chg.)

-0.7 1.0 0.1 0.4 0.6 0.6 0.6 0.8 0.2 -0.2 1.0 0.6

% Change, Year Ago 5.3 6.6 5.7 5.8 6.1 5.9 5.2 5.8 5.6 5.8 5.6 4.5

Personal Income (% Chg.) 0.2 0.6 0.6 0.5 0.5 0.5 0.4 0.7 0.4 0.4 0.4 0.3

% Change, Year Ago 5.4 5.7 5.7 5.2 5.2 5.1 4.9 4.7 4.2 3.9 3.5 3.1

New Home Sales(SAAR, Thous.)

1326 1337 1197 1270 1165 1155 1120 1086 1141 1127 1189 1156

% Change, Year Ago 11.1 22.3 16.6 26.2 25.0 15.4 6.9 6.1 13.4 8.0 17.3 20.9

Existing Home Sales(SAAR, Thous.) 6950 6810 6630 6480 6130 6000 6370 6130 6390 6680 6390 6190

% Change, Year Ago 17.4 15.0 13.3 17.2 4.6 -1.6 7.8 8.9 10.6 22.8 19.2 14.6

Housing Starts (SAAR, Thous) 1802 1970 1963 2000 1895 1934 2067 2054 1983 1922 1835 1893

% Change, Year Ago -2.6 12.7 19.9 15.7 14.4 4.2 15.6 17.2 20.3 6.5 12.4 14.4

International Trade (Bil $) -46.0 -48.1 -46.6 -45.2 -45.2 -44.0 -40.0 -41.5 -41.3 -40.2 -40.8

Consumer Conf. Conf. Board 106.1 102.8 93.1 93.0 88.5 88.5 97.7 94.8 92.5 81.7 77.0 81.7 77.0

Consumer Conf. U. of Mich. 96.7 95.6 90.2 94.2 95.8 94.4 103.8 92.6 93.7 89.6 87.7 89.3 90.9

04Q2 04Q1 03Q4 03Q3 03Q2 03Q1 02Q4 02Q3 02Q2 02Q1 01Q4 01Q3 01Q2

Real GDP, Chain-Weighted,SAAR

3.0 4.5 4.2 7.4 4.1 1.9 0.7 2.6 2.4 3.4 1.6 0.2 -0.6

% Change, Year Ago 4.8 5.0 4.4 3.5 2.3 1.9 2.3 2.5 1.9 1.1 0.2 0.4 0.2

Chain-Weighted Price Index,SAAR

3.2 2.7 1.4 1.3 1.1 2.9 2.0 1.3 1.8 1.0 2.0 1.7 3.1

% Change, Year Ago 2.2 1.7 1.7 1.8 1.8 2.0 1.5 1.5 1.6 1.9 2.5 2.4 2.5

Nominal GDP, SAAR 6.3 7.4 5.7 8.8 5.3 4.9 2.7 3.9 4.2 4.4 3.6 0.2 4.4

% Change, Year Ago 7.0 6.8 6.2 5.4 4.2 3.9 3.8 4.1 3.1 3.2 2.7 2.8 3.1

Employment Cost Index, % 0.9 1.1 0.8 1.0 0.9 1.2 0.9 0.8 1.0 0.9 1.0 1.0 1.0

% Change, Year Ago 3.9 3.8 3.9 4.0 3.8 3.9 3.6 3.7 4.0 3.9 4.1 4.0 4.0

Productivity, Nonfarm, SAAR 3.8 2.5 9.5 6.2 3.4 2.3 4.5 0.7 9.8 7.0 1.6 3.1

% Change, Year Ago 5.4 5.4 5.3 4.2 2.8 4.3 5.4 4.7 5.3 2.9 2.0 1.5

Unit Labor Costs, Nonfarm,SAAR

0.8 1.7 -4.3 -1.3 0.6 -0.1 -3.1 1.6 -7.8 -2.8 1.3 -0.7

% Change, Year Ago -0.8 -0.9 -1.2 -1.0 -0.3 -2.5 -3.1 -2.0 -2.5 0.9 1.2 3.1


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Merrill Lynch Economic Forecast Summary(As of August 6, 2004)

2004.1A 2004.2A 2004.3F 2004.4F 2005.1F 2005.2F 2005.3F 2005.4F 2003A 2004F 2005F

Real Economic Activity, % SAAR

Real GDP 4.5 3.0 3.0 3.5 2.5 3.3 3.0 2.8 3.0 4.2 3.0

% Change, Year Ago 5.0 4.8 3.7 3.5 3.0 3.1 3.1 2.9Final Sales 3.3 2.8 3.0 3.9 2.6 3.7 3.2 3.0 3.1 3.8 3.2Domestic Demand 3.9 2.7 2.9 3.6 2.4 3.5 2.9 2.7 3.4 3.9 3.0

Consumer Spending 4.1 1.0 2.3 2.8 2.5 3.3 2.5 2.4 3.3 3.2 2.6Durables 2.2 -2.5 4.5 3.0 2.5 4.0 2.5 2.2 7.4 4.6 2.8Nondurables 6.7 -0.1 2.0 3.0 3.0 3.5 2.4 2.3 3.7 4.0 2.7

Services 3.3 2.3 2.0 2.6 2.3 3.0 2.6 2.5 2.2 2.6 2.5Residential Investment 5.0 15.4 4.0 2.5 1.0 4.0 3.5 3.0 8.7 9.7 3.5Nonresidential Investment 4.2 8.8 7.0 11.7 3.5 7.1 6.0 6.0 3.3 9.0 6.9

Structures -7.6 5.2 5.0 4.0 2.0 4.0 2.5 2.5 -5.6 1.9 3.4Equipment and Software 8.0 10.0 7.5 14.0 4.0 8.0 7.0 7.0 6.4 11.2 7.9

Government 2.5 2.3 2.5 2.5 1.5 2.5 2.4 2.0 2.8 2.3 2.2Exports 7.3 13.2 5.0 6.0 7.0 7.0 8.0 7.0 1.9 9.7 7.1Imports 10.6 9.3 3.5 3.3 3.9 4.9 4.7 3.9 4.4 8.6 4.3Net Exports (billions of $) -550.1 -552.8 -553.5 -550.6 -547.1 -547.6 -544.4 -540.4 -518.5 -551.8 -544.9

Inventory Accumulation(billions of $) 40.0 47.5 46.0 38.0 35.0 25.0 22.0 18.0 -0.7 42.9 25.0

Nominal GDP (billions of $) 11,473 11,649 11,814 11,989 12,120 12,279 12,427 12,576 11,004 11,731 12,350

% SAAR 7.4 6.3 5.8 6.1 4.4 5.3 4.9 4.9 4.9 6.6 5.3% Change, Year Ago 6.8 7.0 6.3 6.4 5.6 5.4 5.2 4.9

Key IndicatorsIndustrial Production, FRB, % SAAR 6.6 6.0 4.3 4.8 2.3 4.0 3.8 4.0 0.3 4.9 3.9

Capacity Utilization (percent) 76.5 77.3 77.7 78.2 78.4 78.8 79.1 79.3 74.8 77.4 78.9Civilian Unemployment Rate (%) 5.6 5.6 5.6 5.5 5.7 5.6 5.6 5.6 6.0 5.6 5.6

Productivity, % SAAR 3.8 2.0 2.6 3.0 1.9 2.8 2.6 2.2 4.4 3.8 2.4% Change, Year Ago 5.4 4.4 2.7 2.8 2.3 2.5 2.5 2.3

Real Disp. Personal Inc. % SAAR 3.2 2.9 3.4 4.0 2.2 3.2 3.2 2.8 2.3 3.6 3.1

% Change, Year Ago 4.2 3.9 2.7 3.4 3.1 3.2 3.1 2.8Personal Savings Rate (%) 1.2 1.7 2.0 2.2 2.4 2.5 2.6 2.7 1.3 1.8 2.6Light Vehicle Sales (Millions SAAR) 16.5 16.5 16.8 16.4 15.8 16.2 15.8 15.4 16.6 16.6 15.8Housing Starts (Millions SAAR) 1.94 1.91 1.88 1.85 1.83 1.88 1.83 1.80 1.85 1.90 1.84

U.S. Budget Balance (billions of $ FY) -374 -450 -385

Corporate Profits and Earnings

Operating Corp. Profits After Tax (Bil $) 909.2 983.8 957.5 1034.6 953.0 1042.5 1010.1 1081.6 786.2 971.3 1021.8% Change, Year Ago 32.1 29.2 17.0 18.0 4.8 6.0 5.5 4.5 13.8 23.5 5.2

S&P 500 Earnings Per Share ($)* 15.18 16.14 15.75 16.00 14.95 15.80 15.80 16.20 48.73 63.07 62.75

% Change, Year Ago 27.5 45.4 25.4 21.6 -1.5 -2.1 0.3 1.3 76.6 29.4 -0.5S&P 500 Operating EPS ($) 15.87 16.88 16.50 17.50 16.20 17.30 17.30 18.20 54.69 66.75 69.00% Change, Year Ago 27.2 30.7 14.5 17.6 2.1 2.5 4.8 4.0 18.8 22.1 3.4

Inflation

GDP Price Index, % SAAR 2.8 3.2 2.4 2.4 1.9 2.0 1.8 2.0 1.8 2.3 2.2

% Change, Year Ago 1.7 2.3 2.5 2.7 2.5 2.2 2.0 1.9CPI, Consumer Prices, % SAAR 3.6 4.7 3.0 2.9 2.0 2.0 1.8 1.7 2.3 2.8 2.4

% Change, Year Ago 1.8 2.8 3.0 3.6 3.2 2.5 2.2 1.9CPI Ex Food & Energy, % SAAR 1.8 3.0 3.3 1.2 1.3 2.2 1.7 1.7 1.6 1.9 1.9% Change, Year Ago 1.3 1.8 2.3 2.3 2.2 2.0 1.6 1.7

International Trade and the Dollar

Current Account (billions of $) -144.9 -148.4 -150.9 -149.9 -149.0 -149.3 -147.9 -146.0 -530.8 -594.0 -592.0

Shaded regions represent Merrill Lynch forecasts * 2005 reported EPS includes the impact of stock options expensing.


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ML Financial Market Forecast

Table 1: Interest Rate Forecast

Quarters Years

Percent, End of Period 2004:3 2004:4 2005:1 2005:2 2005:3 2005:4 2004 2005

Fed Funds 1.75 2.00 2.50 2.50 2.50 2.50 2.00 2.503-Month T-Bill 2.00 2.25 2.65 2.55 2.50 2.50 2.25 2.50

3-Month LIBOR 2.00 2.35 2.75 2.70 2.65 2.65 2.35 2.65

2-Year T-Note 3.00 3.25 3.45 3.00 2.90 2.85 3.25 2.85

5-Year T-Note 4.05 4.35 4.40 3.90 3.75 3.65 4.35 3.65

10-Year T-Note 4.75 5.00 4.90 4.65 4.30 4.15 5.00 4.15

30-Year T-Bond 5.40 5.55 5.65 5.40 5.10 4.95 5.55 4.95

Real GDP (annualized) 3.0 3.5 2.5 3.3 3.0 2.8 4.2* 3.0*

Core CPI (Year/Year) 2.2 2.2 2.1 1.9 1.6 1.9 1.9* 1.9*

Budget Balance ($ Bil. **) -450 -385

Current Account ($ Bil.***) -592 -595

Source: Merrill Lynch* Annual Average % Change **Cumulative Balance on a Fiscal Year Basis ***Cumulative Balance on a Annual Basis

Table 2: Global Exchange Rate Forecasts(Last Month of the Quarter) (Forecast as of August 4, 2004. Current Spot as of Thursdays close)

CurrentSpot Sept-2004 Dec-2004 Mar-05 Jun-05 Sep-05 Dec-05

Euroland Euro US$/Euro 1.21 1.25 1.29 1.33 1.37 1.36 1.34

Japanese Yen /US$ 111.79 110.00 107.00 100.00 95.00 92.00 95.00

/Euro 134.77 138.00 138.00 133.00 130.00 125.00 127.00

British Pound US$/ 1.82 1.87 1.84 1.82 1.85 1.79 1.72

/Euro 0.66 0.67 0.70 0.73 0.74 0.76 0.78

Swiss Franc SF/US$ 1.28 1.23 1.19 1.14 1.09 1.13 1.15

SF/Euro 1.54 1.54 1.53 1.51 1.50 1.53 1.54Canadian $ C$/US$ 1.32 1.29 1.26 1.24 1.20 1.22 1.23

/C$ 84.83 79.72 85.27 85.07 80.90 79.17 75.41

Australian $ US$/A$ 0.70 0.73 0.68 0.66 0.66 0.66 0.66

/A$ 78.63 81.00 79.94 72.65 66.01 62.70 60.72`

Chinese Renminbi RMB/US$ 8.28 8.28 7.50 7.45 7.23 7.31 7.38

Hong Kong $ HK$/US$ 7.80 7.79 7.74 7.74 7.75 7.77 7.78

Korean Won KRW/US$ 1164 1170 1080 1050 1030 1020 1050

Singapore $ SGD/US$ 1.72 1.71 1.67 1.65 1.64 1.58 1.58

Taiwan $ TWD/US$ 34.16 35.00 33.00 32.00 31.00 30.00 31.00

Thai Baht THB/US$ 41.46 42.00 40.00 40.00 39.00 38.00 39.00

Brazilian Real BRL/US$ 3.07 3.15 3.20 3.25 3.30 3.40 3.40

Mexican Peso MXN/US$ 11.43 11.40 11.10 11.00 11.30 11.50 11.20

Source: Merrill Lynch FX Strategy Team.

Table 3: West Texas Intermediate Forecasts ($/BBL) (As of June 30, 2004)

AQ1-04 AQ2-04 Q3-04 Q4-04 FY04 FY05 FY06 FY07 FY08

WTI * $35.33 $38.33 $32.00 $32.00 $34.40 $28.00 $28.00 $28.00 $28.00

*Prices shown for 3Q 04 and beyond are the values incorporated into earnings/cash flow models by the Energy TeamSource: Merrill Lynch Energy Team


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Rolling Calendar of Business Indicators

MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY

Aug 9Wholesale Inventories

Apr............................................0.2%May ..........................................1.2%June .........................................0.5%*

3-Year Note Auction$22.0B

Aug 10Productivity

03Q4 ........................................2.5%04Q1 ........................................3.8%04Q2 (Prel.).............................2 .0%*

Unit Labor Costs

03Q4 ........................................1.7%04Q1 ........................................0.8%04Q2 (Prel.).............................2 .5%*

Richmond FRB IndexJuly

LJR Redbook(week ending8/07/04)

ABC/Money Magazine ConsumerSurvey(week ending 8/08/04)

FOMC Meeting

Aug 11Mortgage Bankers

Survey

(week ending 8/06/04)Treasury Statement

July 03 ...............................-$54.2BJuly 04 ...............................-$61.0B*


Aug 12Initial Unemployment

Claims

(week ending 8/07/04)340,000*

Retail Sales

May ..........................................1.4%Jun ..........................................-1.1%Jul ............................................ 0.8%*

Retail Sales Ex. Autos

May ..........................................0.9%Jun ..........................................-0.2%Jul ............................................ 0.2%*

Import Prices

May ..........................................1.4%Jun ..........................................-0.2%Jul ............................................ 0.4%*

Export PricesJuly

May ..........................................0.4%Jun ..........................................-0.6%

Business Inventories

Apr ........................................... 0.7%May ..........................................0.4%June .........................................0.6%*

FOMC Minutes6/29-30/04


Aug 13Producer Price Index

May...........................................0.8%Jun.......................................... -0.3%Jul.............................................0.2%*

Core PPI

May...........................................0.3%Jun............................................0.2%Jul.............................................0.1%*

International Trade

Apr......................................-$48.1BMay..................................... -$46.0BJune....................................- $46.4B*

Consumer Sentiment (Univ. ofMich.)

Jun..........................................95.6Jul...........................................96.7Aug (Prel.)..............................98.0*

Aug 16NY Fed Empire State Mfg.Index)August

Jun .........................................29.93July.........................................36.54

NAHB (Housing Index)August

July.........................................67

Treasury Intl CapitalSystemJune

Aug 17CPI

May ..........................................0.6%June .........................................0.3%July...........................................0.2%

Core CPI

May ..........................................0.2%June .........................................0.1%July...........................................0.1%

Housing StartsJuly

May ..........................................1.97MJune .........................................1.80M

Housing Permits

JulyMay ..........................................2.10MJune .........................................1.94M

Industrial Production

May ..........................................0.9%June ........................................-0.3%July...........................................0.7%

Capacity Utilization

May ........................................77.6%June .......................................77.2%July.........................................77.6%

Real EarningsJuly



Aug 18Mortgage BankersSurvey(week ending 8/13/04)

Aug 19Initial UnemploymentClaims(week ending 8/14/04)

Leading IndicatorsJuly

May ..........................................0.4%June........................................-0.2%

Philadelphia Fed Mfg.SurveyAugust

June .......................................28.9%July ........................................36.10

Aug 20Retail E-Commerce04Q2

Aug 232-Year NoteAnnouncement$24.0B*

Aug 24Existing Home Sales

July

May ..........................................6.81MJune .........................................6.95M



Aug 25Durable Goods Orders

July

May .........................................-1.0%June .........................................0.9%

New Home SalesJuly

May ..........................................1.34MJune .........................................1.33M

Mortgage BankersSurvey(week ending 8/20/04)

2-Year Note Auction$24.0B*

Aug 26Initial UnemploymentClaims(week ending 8/21/04)

Help Wanted IndexJuly

May ........................................39June .......................................38

Aug 27Gross Domestic Product04Q2 (Preliminary)

03Q4.........................................4.5%04Q1.........................................3.0%

Univ. of Michigan (ConsumerSentimentAugust

Jun..........................................95.6Jul...........................................96.7

*Projectionssubject to revision as additional data become available during the month


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Important Disclosures

Copyright 2004 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). All rights reserved. Any unauthorized use or d isclosure is prohibited. This report has beenprepared and issued by MLPF&S and/or one of its affiliates and has been approved for publication in the United Kingdom by Merrill Lynch Pierce, Fenner & Smith Limited,which is regulated by the FSA; has been considered and distributed in Australia by Merrill Lynch Equities (Australia) Limited (ABN 65 006 276 795), licensed under theAustralian Corporations Act, AFSL No 235132; has been considered and distributed in Japan by Merrill Lynch Japan Securities Co, Ltd, a registered securities dealer underthe Securities and Exchange Law in Japan; is distributed in Hong Kong by Merrill Lynch (Asia Pacific) Ltd, which is regulated by the Hong Kong SFC; and is distributed inSingapore by Merrill Lynch International Bank Ltd (Merchant Bank) and Merrill Lynch (Singapore) Pte Ltd, which are regulated by the Monetary Authority of Singapore. Theinformation herein was obtained from various sources; we do not guarantee its accuracy or completeness.

This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives,financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness ofinvesting in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not berealized. Investors should note that income from such securities, if any, may fluctuate and that each securitys price or value may rise or fall. Accordingly, investors may

Rosie's Housing Call August 2004

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