Monday Watch

Earnings of Note
Company/Estimate
AA/.41
DNA/.22

Splits
LSTR 2-for-1
MTH 2-for-1

Economic Data
Wholesale Inventories for November estimated up .7% versus a 1.1% rise in October.

Weekend Recommendations
Wall Street Week w/Fortune had guests that were positive on WFMI and DF. Bulls and Bears had guests that were positive on C, PKX, CX, TWX, GS, FITB, mixed on NKE, TTF, DE and negative on PFE. Forbes on Fox had guests that were positive on JWN, WMT, DG, EL, COST and WAG. Cashin' In had guests that were positive on KO, UTSI and mixed on SIRI. Barron's had positive comments on DBD and BLK. Goldman Sachs reiterated Outperform on INTC, WLP and MUR. Goldman reiterated Underperform on DE. Business Week had a negative article on the New York Times(NYT).

Weekend News
JetBlue Airways, a low-fare carrier, may offer shuttle flights between Boston and New York, challenging Delta Air Lines and US Airways Group, the Boston Globe reported. Molson Inc. and Adolph Coors executives are planning last-minute meetings with investors next week to muster votes for the companies' proposed merger, the Globe and Mail reported. Procter & Gamble, Estee Lauder and Unilever are turning to new technology to enable their skin care products to get around the body's resistance to chemicals and foreign objects, the NY Times reported. Barclays Plc and Wells Fargo held merger talks in October and November and may resume them after a break for Christmas, Reuters said. Nissan Motor of Japan will start making gasoline-electric hybrid sedans in the US next year, the Wall Street Journal reported. The BBC's share of the UK's television audience fell 4.5% in 2004 to its lowest level in years, the Observer reported. Mittal Steel, set to become the world's largest steel maker, may buy steel mills in Turkey, India, the Czech Republic, Poland and China, South Africa's Business Times reported. Virgin Group Ltd. may make as much as $1 billion through the sale of shares in its US mobile-phone unit Virgin Mobile USA, the Sunday Telegraph said. A stock exchange for trading shares in companies of six Arab states will open in the second quarter near Cairo, said Egypt's Business Monthly. Microsoft Chairman Gates will visit Egypt on Jan. 29 to study the participation of his company in a project to offer government services on line, Al-Ahram reported. The UK will announce that it is sending 650 more troops to Iraq to provide extra security before elections scheduled for Jan. 30, the Sunday Telegraph reported. The UK government has contacted US companies Bechtel Group and Lockheed Martin about buying British Nuclear Group, the Independent reported. UN internal reviews of the program to use Iraqi oil revenue to buy food and medicine found a former aide to Secretary General Kofi Annan didn't monitor closely enough the companies hired to inspect the oil leaving and the goods going into the country, the NY Times reported. Hines Interests LP plans to build a 50-story office tower in downtown Chicago, a move that may contribute to increasing office vacancies in the city, the Chicago Tribune reported. US IPOs last year almost equaled the previous three years combined, the NY Times reported. Palestine Liberation Organization Chairman Mahmoud Abbas won 66% of the vote in today's presidential election, the AP reported. Blackstone Group LP's Columbia House unit, the biggest US distributor of home videos, will start an adult-video club at the end of this month to increase sales in the adult-video industry that has $5 billion in annual sales, the NY Post reported. Teco Electric & Machinery forecast prices for liquid-crystal display televisions will fall about 28% this year, the Commercial Times reported. High oil prices were of a temporary nature and the market's insecurity is now over, the London-based Times said, citing an interview with BP Plc CEO Browne. Marsh & McLennan may be near to agreeing a $1 billion settlement with US regulators in connection with charges that it defrauded clients, the Independent said. News Corp. Chairman Rupert Murdoch is expected to say today that he will buy out shareholders of his Fox properties for about $7 billion, the NY Times reported. United Airlines reached a tentative agreement with its flight attendants' union yesterday that keeps the employee pension plan intact, Bloomberg said. Toyota, Nissan and Honda are aiming to sell more pick-up trucks, sport-utility vehicles and so-called crossovers in the US this year to increase share, Bloomberg reported. Eastman Kodak's new EasyShare-One camera, the first that can send photos without a computer, will appeal to a small number of consumers at first because of its $800 price, Bloomberg said. China's economy will probably expand this year at its slowest pace since 2001 as the government curbs lending and raises interest rates to cool industrial expansion, Bloomberg reported. Ford Motor plans to expand its fleet of gasoline-electric hybrid vehicles as part of CEO Ford's renewed efforts to make cleaner vehicles, Bloomberg said. The price paid for ships to be scrapped and turned into recycled steel rose to a record in Bangladesh last week on expectations reconstruction following the Dec. 26 Tsunami may boost steel demand, Bloomberg said.

Late-Night Trading
Asian indices are high, +.25% to +.50% on average.
S&P 500 indicated +.14%.
NASDAQ 100 indicated +.16%

BOTTOM LINE: I expect U.S. stocks to open modestly higher in the morning on a bounce after last week's sell-off. The Portfolio is 50% net long heading into the week.

Weekly Outlook

There are a few important economic reports and some significant corporate earnings reports scheduled for release this week. Economic reports include (Mon.)-Wholesale Inventories (Tues.)-None of note (Wed.)-Trade Balance, Monthly Budget Statement (Thur.)-Import Price Index, Advance Retail Sales, Initial Jobless Claims (Fri.)-Producer Price Index, Business Inventories, Industrial Production, Capacity Utilization. Advance Retail Sales, Industrial Production and the Producer Price Index all have market-moving potential.

Mon.-Alcoa(AA), Genentech(DNA) Tues.-Intel(INTC), Nortel Networks(NT) Wed.-Apple Computer(AAPL) Thur.-Sun Microsystems(SUNW) Fri.-Delta Air Lines(DAL), QLogic Corp.(QLGC) and Rambus Inc.(RMBS) are some of the more important companies that release quarterly earnings this week. There are also a number of other events that have market-moving potential. The Citigroup Entertainment, Media and Telecom Conference(Sun.-Wed.), the Consumer Electronics Assoc. Conference(Sun.-Wed.), the Needham Growth Conference(Tue.-Fri.), the Fed's Kohn speaking(Sun.), the Fed's Yellen speaking(Sun.), the Fed's Guynn speaking(Mon.), the JP Morgan Healthcare Conference(Mon.-Thur.), the Deutsche Bank Real Estate Conference(Thur.) and the Fed's Poole speaking(Thur.) could also impact trading this week.

Bottom Line: I expect U.S. stocks to finish the week higher on strong earnings/economic reports, lower energy prices, a stabilizing US dollar, short-covering and bargain-hunting. While weakness will probably re-surface in the near future, a decent bounce should occur next week. Technology shares should outperform on optimism from the Consumer Electronics Show. US economic growth will likely begin to decelerate modestly over the next few months on slowing growth in Asia and Europe, an end to the benefits of hurricane rebuilding, less stimuli and lingering overcapacity issues from the 90's. However, a stabilizing US dollar, lower long-term interest rates, decelerating inflation, lower energy prices and continuing job/income gains should offset most of the drags on US growth. I expect the major US indices to trade mixed-to-modestly higher through the first six months of the year before another significant rise sometime beginning in the 3rd quarter. My short-term trading indicators are still giving Sell signals and the Portfolio is 50% net long heading into the week.

Market Week in Review

S&P 500 1,186.19 -2.12%

Click here for the Weekly Wrap by Briefing.com.

Bottom Line: Market action last week was poor as the S&P 500 had its worst 5-day start to a year since 1991 on profit-taking, fears over slowing global growth and hawkish comments by the Fed. Weakness in small-caps, commodity-related stocks and tech shares was the most pronounced. Volume was relatively heavy and decliners swamped advancers on the week. Most of the major indices seemed to find support around their 50-day moving-averages. From an intermediate-term standpoint, the market still appears very healthy technically. On the positive side, the steepest declines were confined to the biggest winners of last year. As well, the CRB Index fell again, the US dollar posted a significant gain and long-term interest rates were stable. Measures of investor anxiety rose on the week, but remain below levels normally associated with solid bottoms. Walgreen(WAG+8.2%), American International Group(AIG+2.9%) and Wal-Mart(WMT+2.2%) were stand-out performers in the S&P 500.

Economic Week in Review

ECRI Weekly Leading Index 131.40 -1.79%

Construction Spending for November fell .4% versus estimates of a .4% rise and a .3% increase in October. "Construction of all types is still strong, particularly given that November was a month in which the weather did not cooperate," said Neal Soss, chief economist at Credit Suisse First Boston. The month was the fifth-wettest November in US history, according to records dating back to 1895. Construction spending was up 6.9% over the same month in 2003, Bloomberg reported.

ISM Manufacturing for December rose to 58.6 versus estimates of 58.5 and a reading of 57.8 in November. ISM Prices Paid for December fell to 72.0 versus estimates of 72.0 and a reading of 74.0 in November. "The economy was accelerating at the end of the year and into the new year," said Robert Mellman, an economist at JP Morgan. Falling energy prices "are raising real incomes of consumers and making business a little less cautious." The new orders component of the index surged to 67.4, the highest since January of last year, from 61.5 in November, Bloomberg said. The report showed commodity prices were the biggest concern among manufacturers. The CRB Index, the broadest measure of commodity prices, has declined 4.2% since the last week in November. The ISM index averaged 60.5 last year, the highest yearly average since 65.9 in 1973, Bloomberg reported.

Factory Orders for November rose 1.2% versus estimates of a 1.0% increase and an upwardly revised .9% increase in October. Orders would have been even stronger if it were not for the 32% slump in demand for defense equipment, a volatile part of the report, Bloomberg said. Without military hardware, bookings rose 2.3%, the most since March. Bookings waiting to be filled jumped 1.1%, the most since July, suggesting production will accelerate early this year and boost economic growth. "Business confidence about the economy is rising," said Joel Naroff, president of Naroff Economic Advisors. Naroff was the best GDP forecaster for the year ended in June, according to a Bloomberg survey. Bookings waiting to be filled for capital equipment, excluding aircraft, increased .6%. "Its unfilled orders that are the stronger piece of this report," said Neal Soss.

The Federal Reserve's Open Market Committee concluded interest rates were still too low "to keep inflation stable" and said rising prices may become a risk to growth, according to minutes of its Dec. 14 meeting, Bloomberg reported. Treasury securities and stocks declined on the news, Bloomberg said. Some members were concerned about potential signs of "excessive risk-taking" amid low rates, citing credit spreads and increasing numbers of mergers and initial public offerings, the minutes said. "With the economic expansion firmly entrenched, cost and price pressures are likely to become a clearer intermediate-term risk to sustained good economic performance absent further reduction of accommodation," the minutes said.

Total Vehicle Sales for December rose to 18.4M versus estimates of 16.9M and 16.4M in November. Domestic Vehicle Sales in December rose to 14.7M versus estimates of 13.5M and 12.9M in November. Toyota Motor, Nissan Motor and Honda Motor said December US auto sales soared more than 20%, leading the industry to its highest sales rate since no-interest loans restarted the market after the 9/11 attacks, Bloomberg said. "It was a lot stronger month than most people expected," said Sasha Kamper, who helps manage $65 billion at Principal Global Investors. "There really is a heck of a lot of pent-up demand out there," said Robert Hinchliffe, a UBS Securities analyst. "It's a good time for vehicle sales overall, but the Big Three just keep losing market share."

ISM Non-Manufacturing for December rose to 63.1 versus estimates of 61.0 and a reading of 61.3 in November. US services expanded in December at the fastest pace in five months, capping a record year for the biggest part of the economy, Bloomberg reported. Orders accelerated and more companies said they were adding to inventories to meet rising demand, according to the survey. Retailers' sales surged 4.6% in the week after Christmas. This gain amounted to the biggest increase in six months and helped retailers meet a December forecast for a gain of as much as 3.5% at stores open at least a year, Bloomberg reported. "Consumer Spending, fueled by expectations of sustained income growth, should continue to expand at something near the strong pace we have been seeing," said Jeffrey Lacker, president of the Federal Reserve Bank of Richmond.

The Unemployment Rate for December was 5.4% versus estimates of 5.4% and 5.4% in November. Average Hourly Earnings in December rose .1% versus estimates of a .2% increase and a .1% gain in November. The Change in Non-farm Payrolls for December was 157K versus estimates of 175K and an upwardly revised 137K in November. The Change in Manufacturing Payrolls for December was 3K versus estimates of 0K and a downwardly revised –9K in November. Average Weekly Hours for December were 33.8 versus estimates of 33.8 and 33.7 in November. Job gains for October and November were revised higher by a combined 34,000, bringing the total for 2004 to 2.23 million, the best showing since before the stock market bubble burst and the economy began to plunge into recession in 2000, Bloomberg reported. Moreover, manufacturers added 76,000 jobs for the year, the best since 1997. "We have enough job growth to continue to give us income creation, which will help support consumer spending," said Joseph LaVorgna, chief US fixed income economist at Deutsche Bank. "The economy is in good shape and it's really steady as she goes."

Bottom Line: Overall, last week's economic data were positive. Construction will likely slow in 2005, but remain at healthy levels as long-term interest rates remain low by historic standards. Measures of manufacturing accelerated into year-end and should help boost US growth during the first quarter of '05. Prices Paid should fall through most of the first-half of the year as commodity prices weaken further and pricing power remains limited. The Fed's hawkish comments had a substantial negative effect on US financial markets. However, I believe these comments were a reflection of their desire to stem the rate of decline in the US dollar. I do not believe the Fed will raise rates in '05 at the rate the market currently expects. Weaker global growth, a stabilizing US dollar and decelerating inflation readings will prompt the Fed to slow their pace of increases. The very strong gain in vehicle sales in December and good holiday retail sales once again proves the bears incorrect in their obsessive worries over the demise of the US consumer. As long-term interest rates remain low, inflation readings decelerate, income gains continue and increasing employment is sustained, the US consumer should remain relatively healthy in the intermediate-term. In my opinion, the 157,000 jobs created in December is a perfect level for the health of the US economy. Gains consistently under 100,000 would hurt consumer spending and sustained increases above 200,000 would boost unit labor costs. Since unit labor costs are by far the greatest component of inflation, this would result in substantially higher interest rates. The only real negative from last week's data was the abrupt decline in the ECRI Weekly Leading Index. I would become concerned if this index continued to decline at this rate.

Weekly Scoreboard*

Indices
S&P 500 1,186.19 -2.12%
Dow 10,603.96 -1.66%
NASDAQ 2,088.61 -3.99%
Russell 2000 613.21 -5.89%
DJ Wilshire 5000 11,629.17 -2.70%
S&P Equity Long/Short Index 1,007.81 -.79%
Morgan Stanley Consumer 583.13 -1.30%
MS Cyclical 762.97 -2.70%
MS Technology 484.65 -4.53%
Transports 171.42 -3.49%
Utilities 324.68 -3.07%
Put/Call .95 +53.23%
NYSE Arms 1.26 +5.0%
Volatility(VIX) 13.49 +1.51%
ISE Sentiment 160.00 -24.88%
AAII % Bulls 38.10 -33.92%
US Dollar 83.60 +3.39%
CRB 278.86 -1.79%

Futures Spot Prices
Gold 419.60 -4.29%
Crude Oil 45.43 +4.80%
Unleaded Gasoline 121.42 +7.83%
Natural Gas 6.00 -2.26%
Heating Oil 127.33 +1.70%
Base Metals 119.05 -5.26%
10-year US Treasury Yield 4.27% +1.18%
Average 30-year Mortgage Rate 5.77% -.69%

Leading Sectors
Insurance -.46%
HMOs -1.32%
Wireless -1.51%

Lagging Sectors
Networking -6.45%
Iron/Steel -7.06%
Airlines -13.98%

*% Gain or loss for the year

Mid-day Report

S&P 500 1,189.81 +.16%
NASDAQ 2,097.30 +.35%

Leading Sectors
Semis +1.90%
Boxmakers +1.19%
Internet +.73%

Lagging Sectors
Energy -.31%
Gaming -.63%
Oil Service -1.26%

Other
Crude Oil 45.75 +.42%
Natural Gas 6.02 -.48%
Gold 417.90 -.90%
Base Metals 119.05 +1.59%
U.S. Dollar 83.78 +.76%
10-Yr. T-note Yield 4.27% +.14%
VIX 13.27 -2.28%
Put/Call .67 -14.10%
NYSE Arms 1.02 +22.89%
ISE Sentiment 150.0 -32.43%

Market Movers

Economic Data
Unemployment Rate for December remained at 5.4% versus estimates of 5.4% and a prior reading of 5.4%.
Average Hourly Earnings for December rose .1% versus estimates of a .2% increase and a .1% rise in November.
Change in Non-farm Payrolls for December was 157K versus estimates of 175K and an upwardly revised 137K in November.
Change in Manufacturing Payrolls for December was 3K versus estimates of 0K and a downwardly revised -9K in November.
Average Weekly Hours for December was 33.8 versus estimates of 33.8 and 33.7 in November.

Recommendations
-Goldman Sachs: Reiterated Outperform on RIG, DO, SII, BHI, SLB, ROH, INTC, MRVL and LIZ. Downgraded BMC to Underperform.
-Citi SmithBarney: Said to Buy Chemicals on pullback, favorites are DOW, NCX and LYO. Remains bearish on commercial aerospace sector. Reiterated Sell on BA, target $40. Reiterated Buy on MSFT, target $32.
-CSFB: Rated AGU Outperform, target $18.
-JP Morgan: Rated LABS, PDLI and MEDX Overweight. Raised SHPGY, SYMC to Overeweight. Cut SUN to Underweight.
-Legg Mason: Rated WEN Buy, target $46.
-Banc of America: Rated HRB Sell, target $42.
-Bear Stearns: Downgraded DE to Underperform.
-Morgan Stanley: Downgraded OVNT, CNF to Underweight. Raised FDX, UPS to Overweight.
-Oppenheimer: Rated CAO Buy, target $18.50.

Mid-day News
U.S. stocks are modestly higher mid-day on strength in the semiconductor sector and a jobs report that met most expectations. US office vacancy rates dropped to 16.2% from 16.6% in the fourth quarter as more companies snapped up space, the Wall Street Journal reported. Rents were unchanged for the second quarter in a row at an annual $20.11 a square foot, the paper said. Scientists at Pfizer said they may have found a simple test to diagnose for Parkinson’s disease, the Wall Street Journal reported. A “sharp” increase in US government spending on military research programs is expected to boost total funding for research and development in the country this year, the Wall Street Journal reported. Burlington Resources CFO Shapiro told CNBC the price of crude oil may be $30-$40/bbl. by the end of the year, Bloomberg said. MedImmune has sold only about 1 million doses of its FluMist nasal spray after it increased the number of doses to 3 million amid reports of a shortage of flu vaccine, the AP reported. Crude oil prices may fall next week as warmer-than-normal weather in the eastern US cuts demand for heating fuel and refineries boost supplies, according to a survey by Bloomberg. Shares of Taser International are dropping after the company said the SEC is looking into its products’ safety and a recent order, Bloomberg reported. A growing number of Krispy Kreme shareholders are seeking the ouster of CEO Livengood, Bloomberg reported. President Bush picked former Senators Mack and Breaux to head a nine-member panel of former lawmakers, business owners and tax experts that will recommend ways to overhaul the US tax code, Bloomberg said. Tiffany & Co., the largest US luxury jewelry retailer, said holiday sales increased 12% as demand for diamond jewelry and watches rose, Bloomberg reported. The US dollar rose against the euro for a sixth straight day after Treasury Secretary Snow said members of the Bush administration “want to do things to sustain the strength” of the US currency, Bloomberg reported. US employers added 157,000 workers in December, capping the best year for job growth since before the stock market bubble burst and the economy began plunging into recession in 2000, Bloomberg reported.

Bottom Line: The Portfolio is slightly lower mid-day as losses in my security and homebuilding longs more than offset gains in my internet and networking longs. I added a few new technology longs this morning, thus bringing the Portfolio to 25% net long. One of my new longs is JNPR and I am keeping a tight stop-loss of $25.10 on this position. The tone of the market remains weak today as more stocks are declining than advancing as small-caps fall and a number of sectors are lower. However, it is a positive to see semiconductors outperform substantially. While the US dollar likely has further to go on the upside, I do not expect such a rally as to substantially damage multi-national corporate profits. I expect US stocks to rise modestly into the close on short-covering and bargain-hunting in the tech sector.