Mid-day Report

Indices
S&P 500 1,200.81 -.19%
Dow 10,710.38 -.05%
NASDAQ 2,079.95 -.32%
Russell 2000 637.12 -.05%
DJ Wilshire 5000 11,831.03 -.19%
S&P Barra Growth 567.47 -.30%
S&P Barra Value 619.96 -.09%
Morgan Stanley Consumer 591.53 -.09%
Morgan Stanley Cyclical 764.02 -.10%
Morgan Stanley Technology 475.21 -.12%
Transports 3,604.62 +.18%
Utilities 351.44 -.39%
Put/Call .72 -1.37%
NYSE Arms 1.16 +18.37%
Volatility(VIX) 11.49 +2.50%
ISE Sentiment 207.00 +54.48%
US Dollar 85.10 +.84%
CRB 280.91 -.12%

Futures Spot Prices
Crude Oil 45.20 -2.75%
Unleaded Gasoline 121.10 -3.93%
Natural Gas 5.98 -1.90%
Heating Oil 123.10 -3.39%
Gold 415.20 -.24%
Base Metals 120.17 -.02%
Copper 138.80 +1.24%
10-year US Treasury Yield 4.05% -.62%

Leading Sectors
Airlines +1.81%
Gaming +.85%
Broadcasting +.81%

Lagging Sectors
Disk Drives -1.40%
HMOs -1.70%
Oil Service -2.45%

Market Movers
RNWK +19.8% on positive comments in Barron’s.
ORCT +15.33% on continuing optimism over recent 4Q report.
GOSHA +14.6% on a report that it put itself up for sale.
ANTP +16.11% after announcing a subsidiary was recently awarded a $3.7M contract from BAE for the production of 270 Low Band Antenna Matching Unit Assemblies.
MATK +4.2% after Citi SmithBarney reiterated Buy.
WPSC +8.99% after positive comments on Barron’s.
LZ +7.72% after beating 4Q estimates and raising 1Q guidance.
IMCL +5.53% after saying in a SEC filing that billionaire financier Icahn boosted his stake in the company to 6.1%.
DIOD +7.85% after beating 4Q estimates.
RSTI -17.03% on disappointing 1Q results.
SYNA -11.96% on comments from Bear Stearns that Apple Computer has begun using some of its own products in one of its notebook computers, replacing those made by Synaptics.
SOHU -10.8% after meeting 4Q estimates and lowering 1Q guidance.
AGN -5.94% after beating 4Q estimates and lowering 1Q/05 guidance.

Market Internals
NYSE Unusual Volume
NASDAQ Unusual Volume
NASDAQ 100 Heatmap
DJIA Quick Charts
Chart Toppers
Hot Spots
Option Dragon

Economic Data
None of note.

Recommendations
-Goldman Sachs: Reiterated Outperform on EBAY, CAT, AGN, INTC, WLP,GD and KO.
-Citi SmithBarney: Raised their WTI Oil estimate to $40/bbl. for 2005 from $36/bbl. Raised AHC to Buy, target $109. Reiterated Buy on MRO, target $47. Reiterated Buy on MCD, target $37. Reiterated Buy on MXRE, target $24. Reiterated Buy on MATK, target $90. Reiterated Buy on SCH, target $14.50. Reiterated Buy on BWA, target $61. Reiterated Buy on TWX, target $22. Reiterated Buy on WMT, target $65. Reiterated Buy on EMC, target $16.50. Reiterated Buy on UNM, target $20. Reiterated Buy on PCG, target $38.50. Reiterated Sell on SNDK, target $22. Reiterated Buy on PRU, target $60.
-UBS: Raised PAYX to Buy, target $37.
-Bear Stearns: Raised SM to Outperform, target $58. Raised CAH to Outperform, target $75.
-Thomas Weisel: Rated DNEX Outperform.
-Legg Mason: Raised SWBT to Buy, target $22.
-Prudential: Downgraded AG to Underweight, target $20.
-Oppenheimer: Raised CHUX to Buy, target $25.
-Morgan Stanley: Raised MDT to Overweight, target $60.

Mid-day News
US stocks are modestly lower mid-day on earnings worries due to slowing US government spending and a rising US dollar. China’s central bank governor Zhou Ziaochuan said the yuan is not undervalued, state-run Xinhua News said. Webroot Software, a closely held software company, received $1008 million in venture capital to help expand its anti-spyware technology, the Wall Street Journal said. The Bush administration today will ask for a 4.8% increase in defense spending to $419.3 billion for 2006 that will little change the Army’s budget, the Wall Street Journal reported. Morningstar increased the number of mutual funds it grades on how well they govern themselves and today it will issue revised ratings, the Wall Street Journal reported. Activision and Electronic Arts are among video-game makers that may be acquisition targets of big media companies, the NY Times reported. Frontline, the world’s biggest oil-tanker company, may bid for the US-based dry-cargo shipowner Navios, the shipping weekly TradeWinds reported. Walt Disney’s ABC Television has ordered a reality-tv program called “Miracle Workers,” which will seek to provide medical care to people who can’t afford it, the NY Times reported. Nokia Oyj is working to develop advanced mobile phones with computer-like functions that are simple to use in order to boost demand for the devices, CEO Ollila said. The UN suspended the former head of its Iraq oil-for-food program and another senior official after an interim report by an independent commission criticized the conduct of both mean, the NY Times reported. Time Warner would likely control most of Los Angeles’s cable-television market if it wins the bidding for Adelphia Communications, the LA Times reported. Walt Disney has told its ABC television unit to come up with possible alternatives for the long-running “Nightline,” possibly signaling the late-night news program’s end, the LA Times reported. Internet radio, considered a commercial failure in the past several years following initial excitement by big media companies, may be making a comeback, the LA Times reported. US Secretary of State Rice praised Palestinian efforts to crack down on attacks against Israel and said the US will provide $40 million during the next three months in aid for the West Bank and Gaza Strip, Bloomberg reported. President Bush invited the leaders of Israel and the Palestinian Authority for separate meetings at the White House and appointed a US general to help Palestinians stop attacks against Israel, Bloomberg reported. Wal-Mart Stores and Target are likely to refinance $2 billion in bonds this month because the cost to borrow for US retailers is at a seven-year low, Bloomberg said. Merrill Lynch and UBS AG vaulted into the top three among merger advisers, joining perennial leader Goldman Sachs, in the hottest US takeover market since 2000, Bloomberg reported. Crude oil is falling to the lowest level in almost four weeks as mild weather reduced demand for heating fuel in the US and refineries increased gasoline stockpiles, Bloomberg said. Military contractors including Boeing, General Dynamics, United Defense Industries and Alliant TechSystems would benefit from President Bush’s proposal to spend $419.3 billion on defense next year, Bloomberg reported.

BOTTOM LINE: The Portfolio is slightly higher mid-day on gains in my alternative energy, entertainment and telecom longs and oil service shorts. I have not traded today and the Portfolio remains 125% net long. The tone of the market is mildly negative today as the advance/decline line weakens. However, volume is lighter and a number of sectors are in positive territory. As I forecasted a couple of months ago, the US dollar continues to stabilize, energy prices are weakening and long-term interest rates are falling. Today’s weakness is likely a result of worries over the impact of decelerating government spending and a rising US dollar on corporate earnings. I expect US stocks to trade mixed-to-higher into the close as falling energy prices, increasing fund flows, more speculation over merger activity and lower interest rates mostly offset worries over slowing earnings growth.

Monday Watch

Weekend News
Japan's Fair Trade Commission suspects Intel's local unit violated the country's Antimonopoly Law and plans to issue the company a warning, the Asahi newspaper reported. Canada may send about 40 soldiers to a NATO force of 300 to help train Iraqi troops in Baghdad, reversing its current opposition to join a US-led coalition that ousted Saddam Hussein, the Toronto Star reported. The NYSE has set up a taskforce to explore a possible IPO and conversion into a for-profit organization, the Financial Times reported. Qwest Communications International's negotiations to acquire MCI lost momentum Friday, the NY Times reported. Iraq may reopen an oil pipeline that's been shut for 57 years to Israel's Haifa port, Maariv said. New York's restaurants and bars are experiencing increases in business amid the citywide smoking ban that many predicted would hurt the industry, the NY Times reported. More than 4,000 US pilots are allowed to carry guns, and they are flying armed on more flights each day than air marshals, Time magazine reported. Canada's health minister may adopt restrictions later this year aimed at cutting drug sales from Canadian pharmacies to US customers to ensure a sufficient supply for Canadians, the Star-Ledger reported. IBM, Toshiba and Sony may on Monday announce details of a new chip designed for consumer electronics, the Financial Times reported. EBay will lower some fees and improve customer service in response to criticism of increases planned for other fees, the Wall Street Journal reported. China's finance ministry has approved the introduction of a $6.4 billion state fund to support the country's stock markets, China Business reported. Universal Music and Apple Computer may start selling Chinese-language pop music on the Internet in North America and Europe, the Financial Times reported. Support for the insurgency among the population of Iraq is declining as a new sense of national pride develops, the Washington Post reported. Giuliani Partners, an investment company run by former NY mayor Giuliani, will invest $479 million in a Japanese wind-power company, the Nihon Keizai reported. The US attorney's office is investigating 10-20 traders on the floor of the NYSE for suspected illegal trading practices, the NY Times said. Carlyle Group is one of four bidders competing to buy Connecticut-based ship-owner Navios Corp. for about $500 million, Lloyd's List reported. The Group of Seven industrial nations said the outlook for global growth remains "robust," while promising individual steps to sustain the level of expansion, Bloomberg reported. The US is concerned with "internal developments" in Russia and would like the nation to strengthen the rule of law and other "basics of democracy," Secretary of State Rice said. Gold prices may fall for a second week on concern the International Monetary Fund, the owner of 2.1% of the world's bullion, will sell the metal to finance a reduction of poor countries' debt, a Bloomberg survey showed. The Paris Court of Appeals will hear Billionaire hedge fund investor George Soros's arguments Feb. 10 and make a decision a few weeks late on whether to uphold or overturn his original insider trading conviction, Bloomberg reported. Tom Brady threw two touchdown passes and the New England defense forced four turnovers as the Patriots beat the Eagles 24-21 for their third Super Bowl title in four years, Bloomberg reported. The US dollar is rising to a three-month high against the euro tonight on positive comments from Alan Greenspan on Friday, Bloomberg said. GM, Ford and DaimlerChrysler resumed offering 0%, five-year financing deals for sport-utility vehicles to help clear out unsold models, the Wall Street Journal said.

Weekend Recommendations
-Bulls and Bears: Had guests that were positive on EXC, MO and mixed on CIN, BSC, DRS, IRM, CI, MSO, PNC, PEP, INTU.
-Forbes on Fox: Had guests that were positive on CKP, HPQ, SY, BSC and mixed on VIAB.
-Cashin' In: Had guests that were positive on BYD, ABV, WBSN, EBAY, PFE and mixed on SFD, LZB, ARBA.
-Barron's: Had positive comments on RNWK, WPSC, NEM, PDG, GFI and KMG. Had negative comments on MSO.
-Goldman Sachs: Reiterated Outperform on AGN, EBAY and PFE. Reiterated Underperform on UIS.

Night Trading
Asian Indices are higher, +.50% to +1.50% on average.
S&P 500 indicated +.12%.
NASDAQ 100 indicated +.26%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Before the Bell Video(bottom right)
Asian Indices
European Indices
Top 20 Business Stories
In Play
Bond Ticker
Analyst Actions
Macro Calls
CNBC Guest Schedule

Earnings of Note
Company/Estimate
ATVI/.56
AGN/.83
BIIB/.36
CD/.32
CLX/.52
EDS/.22
ENER/-.28
HUM/.27
OSIP/-.71
SINA/.31
SOHU/.17
UNA/.12

Splits
FDS 3-for-2
MATR 3-for-2

Economic Data
Consumer Credit for December is estimated to rise $8.0B versus an 8.7B decline in November.

BOTTOM LINE: I expect US stocks to open higher in the morning on gains in Asia, lower energy prices, a stabilizing US dollar, short-covering and bargain hunting. The Portfolio is 125% net long heading into the week.

Weekly Outlook

There are a few important economic reports and many significant corporate earnings reports scheduled for release this week. Economic reports include (Mon.)-Consumer Credit (Wed.)-Wholesale Inventories (Thur.)-Trade Balance, Initial Jobless Claims, Continuing Claims and Monthly Budget Statement. The Trade Balance and Monthly Budget Statement have market-moving potential.

Some of the more important companies that release quarterly earnings this week are: Mon. - Allergan(AGN), Biogen Idec(BIIB), Cendant(CD), Clorox(CLX), Electronic Data(EDS), Humana(HUM) Tues. - Cisco Systems(CSCO), Computer Sciences(CSC), Marriott International(MAR), Toll Brothers(TOL), Adolph Coors(RKY) Wed. – American International Group(AIG), Cigna Corp.(CI), Whole Foods Market(WFMI) Thur. – Aetna(AET), Caesar's Entertainment(CZR), Dell Inc.(DELL), May Department Stores(MAY), Office Depot(ODP), XM Satellite Radio(XMSR) Fri. - Marsh & McLennan(MMC). There are also a few other events that have market-moving potential. The Thomas Weisel Tech Conference(Mon.-Wed.), CSFB Financial Services Conference(Tues.-Thur.), Merrill Lynch Global Pharmaceutical/Biotech/Medical Device Conference(Tues.-Thur.), Merrill Lynch Computer Services & Software Conference(Tues.-Thur.), Fed's Stern speaking(Thur.), the Fed's Bernanke speaking(Fri.) and Fed's Yellen speaking(Fri.) could also impact trading this week.

Bottom Line: I expect US stocks to finish the week higher on declining energy prices, more optimism, rebounding tech shares, a stabilizing US dollar, low long-term interest rates, short-covering, better fund inflows, strong earnings reports and more constructive Fed comments. While a test of January's lows will likely come at some point during the first half of the year, stocks should continue working higher over the near-term. The S&P 500's p/e on '05 estimates is 16.91. This is reasonable, in my opinion, considering the current fundamentals. My short-term trading indicators are giving mixed signals and the Portfolio is 125% net long heading into the week.

Economic Week in Review

ECRI Weekly Leading Index 133.70 +.30%

Personal Income for December rose 3.7% versus estimates of a 3.4% gain and a .4% increase in November. Personal Spending for December rose .8% versus estimates of an .8% increase and a .4% rise in November. The PCE Deflator(YoY) for December rose 2.4% versus estimates of a 2.4% gain and a 2.4% increase in November. Greenspan's favorite inflation gauge, the PCE Core(YoY) for December rose 1.5% versus estimates of a 1.5% increase and a gain of 1.6% in November. US personal spending accelerated in December and incomes jumped the most since the government began record-keeping in 1959 as Microsoft made a one-time $32.6 billion dividend payout, Bloomberg said. As well, wages and salaries grew as employment improved, propelling consumer spending in the last six months of 2004 to the fastest in almost five years, Bloomberg reported.

New Home Sales for December rose to 1098K, capping a fourth consecutive all-time record year, versus estimates of 1200K and 1097K in November. "We're finally starting to see some signs of moderation in housing, which we as economists have been looking for," said Stephen Gallagher, chief US economist at Societe Generale. "It still looks like a healthy housing market going forward, but the string of consecutive records may finally be over." For all of 2004, the median price of a new home rose 12.3% to $218,900, the biggest increase since 1987, Bloomberg reported. Measured against sales, the supply of new homes rose to 4.8 months' worth in December, the highest since June 2000. "We see 2005 as being every bit as good as 2004, if not better," said Tim Eller, CEO of Centex. The backlog of ordered homes was up almost 20% in January from a year earlier and represents five to six months of production, Bloomberg said. The 30-year average mortgage rate fell to 5.63% last week, a 44-week low.

Chicago Purchasing Manager for January rose to 62.4 versus estimates of 59.0 and a reading of 61.9 in December. "Capital goods and consumer durable goods continue to be a healthy, vibrant part of the economy," said Chris Low, chief economist at FTN. The orders component of the index averaged 67 last year, the highest since 1994, Bloomberg said. The prices paid component of the index fell to 76.5 from 84.4, its lowest level since April of last year. "Some of the price pressures are abating a bit," Low said. "That's probably the most important element in the report in terms of keeping demand strong."

Construction Spending for December rose 1.1% versus estimates of a .5% increase and a .3% rise in November. Total construction spending for the year rose 9%, the biggest annual gain since 1996, Bloomberg said. The December gains were driven by projects delayed by wet weather the prior month. "I expect construction to add more to gross domestic product this year," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi. "Non-residential construction has been weak for a couple of years," said Steven Wood, chief economist at Insight Economics. "It seems to be bottoming out and I see a modest upturn in 2005." "Better levels of employment and industrial production suggests expansion in both office and warehouse construction," said James Smith, chief economist for the Society of Industrial and Office Realtors.

ISM Manufacturing for January fell to 56.4 versus estimates of 57.0 and a reading of 57.3 in December. ISM Prices Paid for January fell to 56.4 versus estimates of 57.0 and a reading of 57.3 in December. For all of last year, the ISM Manufacturing Index averaged 60.5, the highest annual average since 1973, Bloomberg reported. "The manufacturing sector continues to expand briskly though, to be sure, it is decelerating from the pace experienced in late 2004," said Richard DeKaser, chief economist at National City. The component of the index measuring new orders fell to the lowest since June 2003. However, the employment component of the index rose to the highest level since June of last year.

Total Vehicle Sales for January fell to 16.2M versus estimates of 16.2M and 18.4M in December. Domestic Vehicle Sales for January fell to 13.0M versus estimates of 13.1M and 14.7M in December. GM and Ford have both now said North American production will fall more than 8% in the first quarter as Toyota Motor and Nissan Motor steal sales with new truck models, Bloomberg said. Asian automakers' US share last year rose to a record 34.6%, from 28.2% in 2000.

The FOMC raised the benchmark US interest rate a quarter-point to 2.5% and restated a plan to make future increases at a "measured" pace to keep inflation in check, Bloomberg said. The Fed's statement after the hike was virtually identical to December's, saying monetary policy "remains accommodative" and is "providing ongoing support to economic activity." The policy statement also said inflation is "relatively low." "As long as the fundamentals remain largely as they are now, the Fed is dialed in and they are prepared to deliver another 25 basis point rate rise at the next meeting," said Michael Woolfolk, senior currency strategist at the Bank of New York.

Preliminary Non-farm Productivity for 4Q rose .8% versus estimates of a 1.5% gain and a 1.8% increase in 3Q. Preliminary Unit Labor Costs for 4Q rose 2.3% versus estimates of a 2.0% rise and a 1.6% gain in 3Q. For all of 2004, productivity rose 4.1% after a 4.4% increase during 2003, Bloomberg said. Productivity had never grown more than 4% in successive years since records began in 1947. With productivity slowing and the economy growing, employers are likely to keep hiring to generate more output, economists said.

Factory Orders for December rose .3% versus estimates of a .6% gain and a 1.4% increase in November. Some economists expected the expiration of investment incentives at the end of the year to curb orders in December because equipment had to be delivered by Dec. 31 to take advantage of the tax break, Bloomberg said. "Strong business activity rather than the tax incentives have been driving the fast pace of factory orders and manufacturing," said Tim Rogers, chief economist at Briefing.com. For all of last year, factory orders rose a record 11% to $4.39 trillion, Bloomberg reported.

ISM Non-Manufacturing for January rose to 59.2 versus estimates of 61.5 and a reading of 63.9 in December. The index which soared to an all-time record last year, remains high enough to sustain the expansion, economists said. The institute's gauge of prices that companies paid for materials and services was 66.6, the lowest since March of last year, Bloomberg reported. Gross domestic product increased 4.4% last year, the most since 1999 and above the 3.3% average for the past 10 years, Bloomberg said. Finally, a private survey of retailers found that sales rose a higher-than-expected 3.7% in January from a year earlier.

The Unemployment Rate for January fell to 5.2%, a three-year low, versus estimates of 5.4% and 5.4% in December. Average Hourly Earnings for January rose .2% versus estimates of a .2% increase and a .1% rise in December. The Change in Non-farm Payrolls for January was 146K versus estimates of 200K and a downwardly revised 133K in December. The Change in Manufacturing Payrolls for January was -25K versus estimates of 5K and a downwardly revised -7K in December. Average Weekly Hours for January was 33.7 versus estimates of 33.8 and 33.8 in December. "It's not a sign of weakness, the economy continues to create jobs," said Richard Yamarone, chief economist for Argus Research. The US economy is forecast to grow 3.6% this year versus an average rate of growth of 3% for the past 30 years, Bloomberg reported.

The Final Univ. of Mich. Consumer Confidence reading for January was 95.5 versus estimates of 96.0 and a reading of 95.8 in December. The Michigan numbers are sensitive to the financial markets, said Jashua Shapiro, chief US economist at Maria Fiorini Ramirez. Stock prices fell last month, trimming more than $400 billion from investment portfolios, according to Bloomberg data. As well, higher energy prices and colder weather likely dampened sentiment, Bloomberg said. January's reading of 95.5 still compares favorably to the average of 88.1 since a monthly version of the index began in 1978, Bloomberg reported. Finally, the current conditions component of the index, which reflects Americans' perception of their financial situation and whether it's a good time to buy big-ticket items, surged to 110.9 from 106.7 in December.

Bottom Line: Overall, last week's economic data were mixed. Personal Incomes are improving, even excluding the one-time Microsoft dividend, which should continue to bolster Personal Spending as long-term interest rates remain near historic lows. Measures of inflation continue to decelerate. This trend should continue throughout the year as commodity prices remain stable-to-weaker and unit labor costs stay in check. I continue to believe home sales will remain strong, falling from historically high levels to a more sustainable pace as mortgage rates remain low, the consumer stays relatively healthy and supply holds steady. Measures of manufacturing activity are decelerating from very high levels, but should remain healthy. As well, construction activity will likely slow to more sustainable levels this year. Increased non-residential construction should offset any deceleration in homebuilding. Slowing US auto production, as a result of increased market share losses to foreign competition, will pressure economic growth in the near-term. While the Fed hiked rates and maintained their "measured pace" language as expected, there was more dovish language in their statements afterwards. I continue to believe the Fed will slow their pace of hikes in the next few months as economic growth slows, inflation decelerates and the US dollar stabilizes. While productivity is slowing, it will remain higher than historical norms of around 2.0%. A modestly improving labor market and decent productivity should prevent unit labor costs from rising enough to spur an acceleration of inflation. The Unemployment rate will probably fall to around 5% by year-end, a low level by historic standards, as job growth rises modestly, more parents stay home to raise children and an increasing number of kids attend college. The US services sector, which accounts for more than two-thirds of the economy, is slowing from very high levels to more sustainable rates, as well. Retail sales continue to surprise on the upside as interest rates remain low, confidence stays healthy, the labor market improves and Americans' net worth is at all-time high levels. Consumer Confidence should rebound over the coming weeks on more optimism after the Iraqi elections, on weakening energy prices and a rising stock market. The ECRI Weekly Leading Index rose slightly again and has now recouped almost all of its losses from a few weeks ago.

Market Week in Review

S&P 500 1,203.03+2.70%

Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: The technical condition of the broad market improved markedly this week as the advance/decline line strengthened and volume improved. Moreover, almost every sector rose for the week. The major US indices, with the exception of the NASDAQ, appear poised to make an assault on last year's highs. Long-term interest rates fell on mixed economic data, diminishing inflation concerns and a stronger US dollar. This also spurred further deterioration in Gold and continuing outperformance by Utility stocks. Greenspan's comments after the Fed rate hike were also viewed as less hawkish, further boosting demand for stocks and bonds. Small-caps significantly outperformed for the week and have now recouped almost all of their early year losses. As well, the homebuilding sector continues to defy the bears as rates remain near historic lows, the health of the US consumer continues to improve and supply remains relatively tight. The gaming sector outperformed on strong earnings reports and merger activity. Finally, declines in energy prices and union agreements led to outperformance by the airline stocks. Measures of investor anxiety were mostly lower on the week.