Mid-day Report

S&P 500 1,191.84 +.32%
NASDAQ 2,111.23 +.16%

Leading Sectors
HMOs +1.55%
Telecom +.98%
Disk Drives +.87%

Lagging Sectors
Broadcasting -1.19%
Iron/Steel -1.34%
Airlines -5.68%

Other
Crude Oil 43.30 -1.39%
Natural Gas 5.83 -1.22%
Gold 427.30 -.44%
Base Metals 118.72 +1.32%
U.S. Dollar 82.43 -.12%
10-Yr. T-note Yield 4.26% -.64%
VIX 13.35 -4.58%
Put/Call 1.04 +36.84%
NYSE Arms .82 -67.07%

Market Movers
TARR +23.3% after affirming 04 and raising 05 guidance.
EDLG +22.7% after CIT Group agreed to buy it for $19.05/share.
KERX +21.2% after saying its experimental KRX-101 drug for the treatment of kidney damage in diabetics was safe in a study.
TOO +13.0% after raising 4Q guidance.
LCRD +13.2% on optimism over homeland security products.
AFFX +5.9% after pre-announcing 4Q.
JWN +4.2% on strong December same-store-sales.
ANTP -20.1% after saying its backlog of orders fell.
NGPS -10.5% on continued profit-taking.
RGS -9.2% after lowering 2Q and 05 forecasts.
BMHC -11.7% on profit-taking.
ACH -5.7% on worries over falling aluminum prices.
*Airlines down across the board on pricing concerns.

Economic Data
ISM Non-Manufacturing for December rose to 63.1 versus estimates of 61.0 and a reading of 61.3 in November.

Recommendations
-Goldman Sachs: Reiterated Outperform on KO, DO, SVU, CEN and BSX. Reiterated Underperform on LSI and FRX. Said to Buy Jan. 05 $65 calls and Sell Jan. 05 $70 calls on AAPL before next week’s earnings and MacWorld.
-Citi SmithBarney: Downgraded JBX to Sell, target $34. Reiterated Buy on MCD, target $36. Reiterated Buy on PFCB, target $68. Reiterated Buy on SBUX, target $70. Reiterated Buy on SYY, target $42. Reiterated Buy on AINV, target $18. Reiterated Buy on CIT, target $50. Reiterated Buy on F, MGA and BWA. Reiterated Buy on TXT, target $83. Reiterated Buy on INTU, target $54. Reiterated Buy on MCRL, target $13.50. Reiterated Buy on FON, target $27.
-CSFB: Raised CINF to Outperform. Rated AGP Outperform, target $90. Rated NPSP Outperform, target $28. Rated VRTX Outperform, target $16.
-Morgan Stanley: Raised CRM to Overweight, target $21. Rated ASO Overweight, target $26. Rated BEC Overweight, target $77.
-Wells Fargo: Raised AMD to Buy, target $27.
-Lazard Freres: Cut MEDI to Sell, target $21.
-Merrill Lynch: Cut ESPD, DAL, AAI to Sell.
-Banc of America: Raised PG to Buy, target $62. Cut CL to Sell, target $44.
-Raymond James: Raised CCI to Strong Buy, target $19.

Mid-day News
U.S. stocks are mildly higher mid-day on falling interest rates and oil prices. Iraq’s national elections, scheduled for Jan. 30, will be held on time, Prime Minister Allawi said today, according to Agence France-Presse. The Consumer Electronics Show, which holds its media day today and likely will draw 130,000 to the exposition, has attracted a large audience of consumers and executives alike to Las Vegas, the NY Times reported. Morningstar Inc. is the subject of three reviews by regulators after 20 years without scrutiny, the Wall Street Journal reported. United Airlines’ creditors and some banks and unions oppose an agreement the bankrupt airline reached with pilots to terminate employee pension plans in exchange for equity in the carrier, the NY Times reported. The tsunami that struck Asian coastlines last week may cause delays in shipments of coffee, cocoa, sugar and cotton and lead to price increases, the NY Post reported. Pamela Thomas-Graham, the president of CNBC, may resign because of poor ratings, the NY Post reported. IBM and customers including Sony plan to invest $1.9 billion to build a semiconductor plant in Fishkill, NY, Reuters said. Massachusetts companies are optimistic about the economy and may hire more people in 2005, the Boston Globe reported. Sanford Wallace, know as the “Spam King,” agreed to stop sending spyware programs until a federal lawsuit against him is resolved, the AP said. EchoStar Communications will increase monthly subscription rates for satellite television packages by as much as $4 starting next month, the Rocky Mountain News reported. The Bush administration is beginning a campaign to change US laws on frivolous medical-malpractice and class-action lawsuits that raise the cost of healthcare, the Washington Post reported. A three-year rally in global commodity markets is faltering and prices may drop for the next six months or more, Barclays Capital said. Delta Air is cutting domestic air fares by as much as 50% in an effort to win back passengers from low-fare competitors and recover from more than $6 billion in accumulated losses, Bloomberg said. Nordstrom said sales rose 11.7% for the five-week period ending Jan. 1 compared with a year ago, Bloomberg said. Bonds of Halliburton may gain after reaching a $4.7 billion settlement of asbestos-damage claims, allowing two units to emerge from bankruptcy, Bloomberg reported. AIG said it will raise the company’s dividend by two-thirds after profits surged, Bloomberg reported. US services expanded at a stepped-up pace in December, capping a record year for the economy’s largest segment, Bloomberg said. RealNetworks will provide a free radio service to Comcast’s 6.5 million high-speed Internet users to gain customers, Bloomberg reported. Sirius Satellite Radio said it plans to offer a video service in automobiles with Microsoft next year and expects to create several channels with children’s programming, Bloomberg said. GlaxoSmithKline, Novartis and Johnson & Johnson may be potential buyers of Bristol-Myers Squibb’s consumer-products business, which includes the Excedrin and Bufferin headache medicines, Bloomberg reported. Oil prices dropped after a government report showed that US fuel inventories rose last week, signaling that a mild winter is helping ease demand for heating oil, Bloomberg said.

Bottom Line: The Portfolio is slightly higher mid-day as my steel and chemical shorts are declining and my internet longs are rising. I have not traded today and the Portfolio is still 25% net long. The tone of the market is weak again as the advance/decline line remains negative, volume is relatively heavy and small-caps continue to underperform. Measures of investor anxiety are mixed and not at levels normally associated with bottoms. However, an oversold rally could occur at any time. I expect US stocks to rise into the close on short-covering, falling energy prices and declining interest rates.

Wednesday Watch

Earnings of Note
Company/Estimate
LFB/.19
MON/.13
NDC/.06
RI/.30

Splits
None of note.

Economic Data
ISM Non-Manufacturing for December estimated at 61.0 versus 61.3 in November.

Recommendations
UBS raised DNA to Buy, target $67. Citi SmithBarney cut CHL to Sell.

Late-Night News
Asian indices are lower on worries over slowing global growth and comments from the US Fed. Samsung Electronics sees global semiconductor sales growing at a "stable" rate in 2005, on demand for chips that go into consumer electronics, the Korea Herald reported. The Bush administration is developing a Social Security proposal that would allow younger workers to invest almost two-thirds of their share of federal payroll taxes in private accounts, the AP reported. Motorola and four other companies yesterday submitted bids for the construction of CAT Telecom Plc's $332 million mobile-phone network expansion across Thailand, the Bangkok Post reported. China Southern Airlines plans to buy 20 Boeing 7E7 planes to be put into operation during the 2008 Olympic Games in Beijing, the Beijing News reported. Six US congressmen will head for North Korea's capital, Pyongyang, on Jan. 11, as part of visits to nations involved in trying to persuade North Korea to dismantle its nuclear weapons program, JoongAng Ilbo newspaper reported. The four major US companies providing local telephone service asked a federal appeals court to rapidly consider their challenge to rules allowing competitors to lease networks to serve businesses, Reuters said. Bristol-Myers Squibb is in talks to sell its over-the-counter medicines business for as much as $1 billion, the NY Times reported. BMW AG used a 22% rise in December sales to top Volkswagen's namesake brand in the US for the second time since Volkswagen began its US sales in 1949, Bloomberg reported. Shares of Honda Motor rose after the company's sales in the US increased 35% last month, Bloomberg said. The Australian dollar is falling the most in almost a month after a plunge in the price of metals the country exports such as aluminum and copper, Bloomberg said. Dongfeng Motor Group, China's fourth-largest automaker, may raise as little as $500 million from its first overseas share sale, half the original goal, after auto stocks slumped, Bloomberg reported. UBS AG surpassed Citigroup as the biggest underwriter of US municipal bonds last year, Bloomberg said.

Late-Night Trading
Asian Indices are -1.25% to -.25% on average.
S&P 500 indicated unch.
NASDAQ 100 indicated +.06%.

BOTTOM LINE: I expect U.S. equities to open mixed in the morning and to move higher later in the day on an oversold bounce, decline in energy prices and fall in interest rates. The Portfolio is 25% net long heading into tomorrow.

Tuesday Close

S&P 500 1,188.05 -1.17%
NASDAQ 2,107.86 -2.06%

Leading Sectors
Tobacco +.11%
Restaurants -.13%
Hospitals -.23%

Lagging Sectors
Networking -3.45%
Defense -3.59%
Airlines -6.79%

Other
Crude Oil 43.68 -.52%
Natural Gas 5.95 +.73%
Gold 428.10 -.26%
Base Metals 117.17 -6.76%
U.S. Dollar 82.50 -.02%
10-Yr. T-note Yield 4.29% +.09%.
VIX 13.98 -.71%
Put/Call .76 unch.
NYSE Arms 2.49 +87.22%

After-hours Movers

Recommendations

After-hours News

BOTTOM LINE: The Portfolio finished lower today on losses in my technology, security and biotechnology longs. I did not trade in the afternoon, thus leaving the Portfolio 25% net long. The tone of the market worsened throughout the day as volume remained heavy and the advance/decline line finished at its lows. While a short-term bounce is likely near-term, measures of investor anxiety are not yet at levels normally associated with bottoms. As well, some technical damage is being done that will need time to repair.

Mid-day Report

S&P 500 1,196.23 -.49%
NASDAQ 2,121.58 -1.42%

Leading Sectors
Oil Service +.90%
Energy +.55%
Restaurants +.50%

Lagging Sectors
Defense -3.12%
Semis -3.18%
Airlines -5.03%

Other
Crude Oil 43.65 +3.63%
Natural Gas 5.94 +2.59%
Gold 428.50 -.28%
Base Metals 117.17 -6.76%
U.S. Dollar 82.36 +1.30%
10-Yr. T-note Yield 4.24% +.69%
VIX 14.01 -.50%
Put/Call .65 -14.47%
NYSE Arms 1.53 +15.04%

Market Movers
AMZN -5.7% on Citi SmithBarney downgrade to Sell.
KVHI +11.7% on Janco Buy rating.
ROV +14.0% after agreeing to buy lawn-and-garden products manufacturer United Industries for $475 million.
TONS +11% on short-squeeze.
LPNT +5.2% on Bear Stearns upgrade to Outperform.
SONC +6.68% after beating 1Q estimates and reiterating 2Q guidance.
CHIR +4.7% on Deutsche Bank upgrade to Buy.
TCNO +9.94% after agreeing to be acquired by UGS PLM Solutions for $227.7 million.
RDA +9.96% after saying it paid down approximately $200 million in debt in the Fiscal 2005 second quarter.
BCSI +7.9% on Pacific Growth upgrade to Overweight.
RFIL -18.7% on profit-taking after yesterday’s gains.
NGPS -17.57% on profit-taking.
ZOLL -13.22% after cutting 1Q and ’05 estimates.
VLTR -11.36% on profit-taking.
DRIV -8.95% on profit-taking and AMZN downgrade.

Economic Data
Factory Orders for November rose 1.2% versus estimates of 1.0% and an upwardly revised rise of .9% in October.

Recommendations
-Goldman Sachs: Reiterated Outperform on CAL and WAG.
-Citi SmithBarney: Cut AMZN to Sell, target $40.
-CSFB: Added LLY to Focus List. Removed GCI from Focus List.
-UBS: Downgraded DPH to Reduce, target $6. Rated BMCS Reduce.
-Bear Stearns: Cut UNP to Underperform, target $65. Raised LPNT to Outperform, target $43
-Deutsche Bank: Raised CHIR to Buy, target $42.
-CIBC: Downgraded KNTA to Sector Underperform.
-Morgan Stanley: Rated IM, TECD Underweight.

Mid-day News
U.S. stocks are lower mid-day on higher energy prices/interest rates, profit-taking and weakness in technology shares. Morgan Stanley will lease space in lower Manhattan, returning to the area for the first time since 2001, the NY Times reported. Motorola is installing phone headsets into motorcycle helmets and ski apparel, enabling people to ski or drive while talking, the Wall Street Journal reported. Walt Disney, GE’s NBC and News Corp.’s Fox plan to roll racier and more complex television serials in the next few weeks to replace programs that flopped in the fall, the Wall Street Journal reported. The number of US companies increasing dividends rose 7.2% last year, buoyed by cash flows and a change in tax law, the NY Times reported. Job prospects for graduating college seniors are improving as the US economy improves, the Wall Street Journal reported. The US Department of Homeland Security has met a congressional deadline to establish a new fingerprint identification system at the nation’s 50 busiest land ports of entry, the Washington Times said. O’Hare International Airport handled a record 992,471 flights in 2004 as traffic from smaller jets continues to increase, the Chicago Tribune said. New Jersey Acting Governor Codey will propose using $500 million in state funds to invest in stem cell research, the Star-Ledger reported. A shareholder lawsuit accused Krispy Kreme Doughnuts of doubling shipments to wholesalers at the end of quarters to boost its sales, the AP reported. The pharmaceutical industry is starting a program that will help poor New Jersey residents get prescription drugs at discount prices or for free, the Star-Ledger reported. DaimlerChrysler AG and competitors claim steel companies including ThyssenKrupp AG are charging too much for the metal they supply to Germany’s car industry, Capital reported. Priceline.com could be the target of a takeover, an Internet analyst at S&P told CNBC. The Mexican government is distributing a book with safety tips to people planning to cross illegally into the US, the LA Times reported. Krispey Kreme Doughnuts will restate its 2004 earnings amid a federal investigation into its accounting and may default of a $150 million credit line, Bloomberg said. China cut its money supply growth target for 2005 to curb inflation and slow expansion in the world’s fastest-growing major economy, the People’s Bank of China said. The US dollar rose the most since August against the euro after an acceleration in manufacturing growth spurred optimism the US economy will outpace the 12-nation euro region for the fourth straight year, Bloomberg reported. Ford Motor said US vehicle sales rose 1% in December from a year earlier on sales of new cars, while Nissan Motor said sales rose 38%, Bloomberg reported. Crude oil in New York rose on speculation that declining production will make it harder for refiners to meet rising fuel demand, Bloomberg said. Aluminum prices in London plunged the most in more than 17 years and copper fell on speculation that investors are reducing holdings as Chinese demand for metals slows, Bloomberg said. Orders placed with US factories rose in November by the most in four months, paced by improving demand for commercial aircraft and business equipment, Bloomberg said. Sales surged 4.6% in the week after Christmas at US retailers as shoppers bought discounted items and redeemed gift cards, Bloomberg said.

Bottom Line: The Portfolio is lower mid-day on losses in my technology, biotech and security longs. I exited a number of longs this morning, thus leaving the Portfolio 25% net long. The tone of the market is very weak again today as volume is strong and decliners swamp advancers. Rather than just temporary profit-taking, it appears the major indices are in a correction. Investors are worried about a lack of stimuli with slowing global growth. Overcapacity and deflation are still more of a concern than inflation in my opinion. However, Fed comments seem to suggest otherwise, further pressuring shares. Measures of investor anxiety are not yet at levels associated with a trading bottom. My short-term trading indicators are now giving sell signals. I expect US shares to trade mixed into the close.

Tuesday Watch

Earnings of Note
Company/Estimate
DLP/-.15
FINL/.05
OXM/.51

Splits
None of note.

Economic Data
Factory Orders for November estimated to rise 1.0% versus a .5% increase in October.
Total Vehicle Sales for December estimated at 16.9M versus 16.4M in November.
Domestic Vehicle Sales for December estimated at 13.5M versus 12.9M in November.
Minutes of Dec. 14 FOMC Meeting.

Recommendations
Goldman Sachs reiterated Outperform on STZ, KO, BAX, BSX, DNA, AMLN, MDT AMGN and Underperform on HRB. Goldman said to buy the common shares and sell short the bonds of companies where the equity yield is higher than the inflation-adjusted (real) bond yield, provided the dividend is secure.

Late-Night News
Asian indices are mostly lower on losses in China and Taiwan. China is close to injecting $30 billion into Industrial and Commercial Bank of China to pave the way for the overseas listing of the country’s largest lender, the Financial Times said. Ford Motor’s Jaguar Cars unit is negotiating with its parent company over additional funds after taking a charge of $1.03 billion to cover the cost of abandoning its growth strategy, the Financial Times said. Tatung, Taiwan's fourth-largest electronics maker, is selling laptop computers under its band name for the first time in US outlets run by Wal-Mart Stores, the Commercial Times reported. Sonus Networks CEO Ahmed told CNBC that the company's accounting problems are behind it, Bloomberg reported. Lazard LLC may be near completing plans for a $3.2 billion listing on the NYSE, the London-based Times said. Defense projects headed by Lockheed Martin and Northrop Grumman represent much of the $30 billion in proposed program cuts in the US within six years, Reuters reported. Prices for uranium, used to generate 16% of the world's electricity, may rise a quarter this year as stockpiles of the nuclear fuel dwindle and reactors being built in China, India and Russia seek supplies, Bloomberg reported.

Late-Night Trading
Asian Indices are -1.25% to unch. on average.
S&P 500 indicated -.02%.
NASDAQ 100 indicated +.03%.

BOTTOM LINE: I expect U.S. equities to open modestly lower in the morning on a continuation of today's profit-taking. However, stocks will likely begin to rally later in the afternoon ahead of Friday's employment data. The Shanghai Index is breaking down through technical support tonight. I continue to believe decelerating demand from Asia and Europe, increased supply and a stabilizing US dollar will lead to underperformance in commodity-related stocks in the intermediate-term. I also expect the yield on the benchmark 10-yr. T-note to test its lows during the first half of the year on decelerating inflation readings, a stabilizing US dollar and worries over global growth. The Portfolio is 75% net long heading into tomorrow.

Monday Close

S&P 500 1,202.08 -.81%
NASDAQ 2,152.15 -1.07%

Leading Sectors
Airlines +.27%
Insurance -.27%
Telecom -.38%

Lagging Sectors
Iron/Steel -3.04%
Energy -3.48%
Oil Service -3.68%

Other
Crude Oil 42.26 +.33%
Natural Gas 5.79 unch.
Gold 430.60 +.21%
Base Metals 125.66 +.55%
U.S. Dollar 81.30 +.56%
10-Yr. T-note Yield 4.21% -.19%.
VIX 14.08 +5.94%
Put/Call .76 +22.58%
NYSE Arms 1.33 +10.83%

After-hours Movers
VLCCF -4.2% on continuing pessimism for oil-tanker stocks.
PRFT +4.95% on continuing optimism over 4Q raised guidance.
ADLR +4.6% after the drugmaker said it agreed to promote GlaxoSmithKiline's Arixtra medication to treat vein thrombosis and pulmonary embolism in the US.

Recommendations
Goldman Sachs reiterated Outperform on WAG. Goldman thinks defense spending cuts are not being factored into stocks, negative for LMT, NOC and BA.

After-hours News
U.S. stocks finished lower today on profit-taking in small-caps and commodity-related stocks. After the close, Iraqi Defense Minister al-Shaalan told Agence France-Presse the Jan. 30 elections could be moved to another date if Sunni Muslims agreed to vote. Rayovac Corp., the No. 3 US battery maker, is near a $1.5 billion agreement to buy closely held United Industries, which makes lawn and garden products, Reuters said. The average US retail price for regular-grade gasoline fell 1.3 cents the past week to $1.778 a gallon, the lowest in 9 months, the Energy Department said. Delta Air may expand to its entire network some of the lower fares and fees adopted four months ago in Cincinnati, a step an Internet travel analyst said would force rivals to follow suit, Bloomberg said.

BOTTOM LINE: The Portfolio finished lower today on losses in my small-cap technology longs. I exited a number of positions in the afternoon as they hit stop-losses, thus leaving the Portfolio 75% net long. The overall market weakened throughout the day as volume swelled and decliners swamped advancers. While today’s action was disheartening for the bulls, I am not reading too much into it at this point. Significant declines were mainly confined to stocks that have risen substantially over the last year. I will become more concerned if losses continue throughout the week, which I do not expect. On the positive side, energy prices fell, interest rates declined and measures of investor anxiety rose.