Mid-day Report

S&P 500 1,183.37 +.50%
NASDAQ 2,082.76 +.59%

Leading Sectors
Airlines +2.04%
Iron/Steel +2.03%
Semis +1.72%

Lagging Sectors
Biotech +.04%
Boxmakers -.07%
Telecom -.25%

Other
Crude Oil 48.30 +.54%
Natural Gas 6.38 -.93%
Gold 423.00 -.49%
Base Metals 119.14 -.17%
U.S. Dollar 83.02 +.62%
10-Yr. T-note Yield 4.21% +1.17%
VIX 12.49 -2.73%
Put/Call .70 -15.66%
NYSE Arms .87 -40.82%
ISE Sentiment 134.00 -14.10%

Market Movers
CREE -24.66% after missing 2Q estimates and lowering 3Q forecast.
EPIX -29.5% after the company and its German partner, Schering AG said US regulators demanded more data before approving its scan contrast product MS-325.
CAAS +16.4% after announcing it has signed a technology licensing agreement with Korea Delphi Automotive Systems to manufacture and export its M150/M200 model automotive steering systems.
NX +11.2% after boosting 1Q estimates.
ASKJ +9.1% on Piper Jaffray upgrade to Outperform.
AIT +12.8% after beating 2Q estimates and raising 3Q forecast.
GMTN -16.6% after cutting 4Q forecast.

Economic Data
Producer Price Index for December fell .7% versus estimates of a .1% fall and a .5% increase in November.
PPI Ex Food & Energy for December rose .1% versus estimates of a .2% increase and a .2% gain in November.
Business Inventories for November rose 1.0% versus estimates of a .6% increase and a .4% rise in October.
Industrial Production for December rose .8% versus estimates of a .4% gain and a .2% increase in November.
Capacity Utilization for December came in at 79.2% versus estimates of 78.9% and an upwardly revised 78.6% in November.

Recommendations
-Goldman Sachs: Reiterated Outperform on HD and BAX. Reiterated Underperform on BE.
-Banc of America: Upgraded NOVL to Buy, target $8.50. Rated LLY Buy, target $67. Rated WYE Buy, target $46. Rated SGP Sell, target $17.
-Citi SmithBarney: Upgraded ELOS to Buy, target $37. Upgraded RSAS to Buy.
-CSFB: Raised STX to Outperform.
-JP Morgan: Cut JTX, KSS to Underweight. Raised RA, AMB to Overweight. Rated NINE Overweight.
-UBS: Raised FLEX to Buy, target $17. Raised KNX to Buy, target $28. Rated OS Buy, target $26.
-Deutsche Bank: Rated VSEA Buy, target $39. Rated SPRT Buy, target $9. Raised ABX to Buy, target $26.50.
-Thomas Weisel: Rated CPC Outperform.
-Morgan Stanley: Raised DISH to Overweight, target $40.
-Prudential: Rated NWAC Overweight, target $16. Rated LUV Overweight, target $22. Rated JBLU Overweight, target $28. Rated DAL Underweight, target $9. Rated AMR Overweight, target $17. Rated AAI Overweight, target $15. Cut UST to Underweight, target $40.
-Legg Mason: Rated AOC Sell.
-Merrill Lynch: Raised DIS to Buy, target $35.

Mid-day News
U.S. stocks are modestly higher mid-day on good economic data and a technical bounce after yesterday’s sell-off. Marsh & McLennan offered to pay $600 million to settle allegations of contract bid-rigging, the Wall Street Journal said. Boeing will end production of its 717 short-haul airliner after completing outstanding orders for the 117-seat jet, the Wall Street Journal reported. Fannie Mae and Freddie Mac earned about $4 billion last year through guarantees fees, at the expense of millions of homeowners, the Wall Street Journal said. Cosmetics makers Revlon, L’Oreal SA and Unilever Plc said they no longer use phthalates in their products, because of concern that the chemicals may be harmful to health, the Wall Street Journal reported. US trade and budget deficits are unlikely to slow efforts by the Bush administration to tackle meaningful reform of the tax code and Social Security, the Wall Street Journal reported. A new US law that requires employers to destroy papers containing personal information of workers such as nannies may boost sales of shredding machines, USA Today reported. Harvard University has hired 2004 graduate Zac Corker, who helped create a Web site that posts party information, drinking-game rules and tips on how to unhook a bra, as its new social programmer to help students unwind, the Boston Herald reported. The NY Metropolitan Transportation Authority will start operating its first computer-run subways in July on the L line, the NY Times reported. Hewlett-Packard will combine its printing and personal computer units and said Executive Vice President Duane Zitzner, who ran the PC group, left the company, Bloomberg reported. Shares of Verizon Communications fell for the 13th consecutive day amid concern by some investors that cable and wireless companies will win local-calling customers, Bloomberg said. Merck and Johnson & Johnson provided an “adequate rationale” for selling the cholesterol medication Mevacor without a doctor’s prescription, Bloomberg reported. US industrial production increased more than expected in December, making last year the busiest for factories, mines and utilities since 2000, Bloomberg said. US wholesale prices fell a larger-than-expected .7% last month, the biggest decline since April 2003 and led by falling energy costs, Bloomberg reported. The US dollar is gaining against the euro after a Fed official said policy makers may drop their plan to lift interest rates at a “measured” pace “at some point,” Bloomberg said.

Bottom Line: The Portfolio is slightly higher mid-day on gains in my homebuilding longs and software shorts. I have not traded today and the Portfolio remains 25% net long. The tone of the market is better today, however volume is lighter and most measures of investor anxiety are falling. The homebuilders’ ability to add to yesterday’s gains with long-term interest rates rising today is a positive for the group. I continue to believe the Fed is trying to jawbone the dollar and do not expect an accelerated pace of rate hikes. I expect US stocks to trade mixed-to-weaker into the close.

Friday Watch

Earnings of Note
Company/Estimate
BBT/.76

Splits
None of note.

Economic Data
Producer Price Index for December estimated down .1% versus a .5% increase in November.
PPI Ex Food & Energy for December estimated to rise .2% versus a .2% increase in November.
Business Inventories for November estimated up .6% versus a .2% increase in October.
Industrial Production for December estimated up .4% versus a .2% increase in November.
Capacity Utilization for December estimated at 78.9% versus 78.7% in November.

Recommendations
Goldman Sachs reiterated Outperform on MSFT and RE. Goldman said restrictions for the American Jobs Creation Act repatriation provision include: share buybacks, dividend payments to shareholders, portfolio investments or payment of taxes. Important permitted uses include: debt repayment, research and development, employee benefit plan contributions, acquisition of intangible property including patent rights, advertising and marketing and certain acquisitions. Goldman also thinks payment of tort liabilities could be included.

Late-Night News
Asian indices are mostly higher, led by technology stocks in the region. Rio Tinto, the biggest supplier of iron ore to Japan, has asked Nippon Steel to pay 50% more for the material, the Nihon Keizai newspaper reported. International Data Group's venture capital unit in China will open a $150 million venture capital fund in February to invest in consumer Web services, digital media and software companies, Business Week reported. China's State Administration of Radio, Film and Television is keeping curbs on foreign investment in media by restricting overseas companies to one venture in film production and in television, South China Morning Post reported. St. Louis Federal Reserve Bank President William Poole said the central bank will eventually have to drop its commitment to increasing interest rates at a "measured" pace, Reuters reported. Corporate information technology budgets may show their biggest increase since 2001, rising by an average 2.5% this year, the Financial Times said. Howard Dean paid Jerome Armstrong and Markos Zuniga, who publish the political blogs MyDD and DailyKos, $12,000 each to promote his unsuccessful Democratic presidential nomination campaign on their sites last year, the Wall Street Journal reported. China's crude oil demand may expand at a rate of 6.4% this year, down from 14.2% last year, Xinhua news agency reported. President Bush said his administration has a "strong dollar policy" and is confident foreign investors will continue to find America a good place to invest, USA Today reported. Viacom's CBS unit may cancel "60 Minutes Wednesday," which aired the discredited report on President Bush's National Guard record, when the television season ends in May, the NY Times reported. Samsung Electronics, Asia's biggest electronics maker by market value, said profit in the final three months of 2004 fell for the first time in six quarters as prices of mobile phones, flat-panel displays and chips dropped, Bloomberg said. The threat of terrorist attacks in Indonesia prompted the U.S. to issue an alert to its citizens and the U.K. to close its embassy and consulate offices in the capital, Jakarta, Bloomberg reported.

Late-Night Trading
Asian Indices are -.25%. to +1.0% on average.
S&P 500 indicated +.07%.
NASDAQ 100 indicated +.10%.

BOTTOM LINE: I expect U.S. equities to open modestly higher on strength in Asia, lower interest rates and a bounce from today's sell-off. However, stocks may fall later in the day on worries over too many Fed rate hikes and higher energy prices. The Portfolio is 25% net long heading into tomorrow.

Thursday Close

S&P 500 1,177.45 -.86%
NASDAQ 2,070.56 -1.05%

Leading Sectors
Homebuilders +1.86%
Oil Service +1.76%
Iron/Steel +1.71%

Lagging Sectors
Biotech -1.65%
Drugs -1.69%
Airlines -2.94%

Other
Crude Oil 47.90 -.29%
Natural Gas 6.54 +1.55%
Gold 425.60 +.12%
Base Metals 119.34 -.95%
U.S. Dollar 82.51 +.41%
10-Yr. T-note Yield 4.17% -1.48%.
VIX 12.84 +2.23%
Put/Call .83 -8.79%
NYSE Arms 1.47 +77.11%
ISE Sentiment 156.00 -6.02%

After-hours Movers
CREE -22.01% after missing 2Q estimates and lowering 3Q forecast.
SUNW -4.15% after missing 2Q revenue estimates.

Recommendations
Goldman Sachs expects VRTS to beat consensus revenue and eps estimates for December quarter. Goldman thinks steel stocks are oversold, favorites are STLD, NUE and X. UBS rated AMAT, KLAC, LRCX and VSEA Buy. GenCorp Inc.(GY), a maker of aerospace components, may face more takeover bids as investors focus on assets that include undeveloped land, Business Week reported. Spectrum Pharmaceuticals may see its shares climb as it seeks to introduce a generic version of GlaxoSmithKline’s Imitrex migraine drug, Business Week reported. Bandag’s(BDG) sales growth may benefit from last year’s acquisition of Speedco, Business Week reported.

After-hours News
U.S. stocks finished lower today, spurred by a late-afternoon sell-off on increased worries over economic growth. After the close, Mahmoud Abbas, the newly elected Palestinian leader, said he will work to implement the conditions of the internationally backed “road map” peace plan and called on Israel to reciprocate, the AP reported. European online advertisement is increasing at an average of 24% a year, with the biggest increases in Sweden, France and the Netherlands, the Financial Times reported. The European Parliament has voted in favor of beginning the process that will lead to Ukraine becoming a member of the European Union, the Financial Times said. The tsunami disaster in southern Asia and eastern Africa “devastated” the fishing industry in the region, destroying docks, boats and ice plants, Bloomberg reported. The US Treasury Department said companies can’t use foreign profit returned to the US during a one-year tax holiday to repurchase shares or pay dividends to shareholders, Bloomberg said. Molson Inc. will increase its special dividend to shareholders by 67% as part of their transaction with Adolph Coors, Bloomberg reported. General Motors plans two-thirds of its future growth in emerging markets such as China, Brazil and Russia after competition from Toyota Motor and other rivals limited gains in the US and Europe, Bloomberg said. Microsoft’s control over how information is presented on the Web may be challenged by the success of Mozilla’s Firefox Web browser, Business Week said. Taiwan’s five makers of flat-panel displays may have combined losses in the fourth-quarter of more than $314 million as product prices drop, the Commercial Times reported. Taiwan’s four largest computer makers can’t get enough Intel processors for desktop computers or graphics chips from ATI Technologies and Nvidia Corp., the Commercial Times reported.

BOTTOM LINE: The Portfolio finished unchanged today as gains in my homebuilding and wireless longs offset losses in my steel and chemical shorts. I exited a number of longs in the afternoon as they hit stop-losses and added a few new shorts, thus bringing the Portfolio’s market exposure to 25% net long. One of my new shorts is WBSN and I am using a $53 stop-loss on this position. The tone of the market weakened significantly in the final hour of trading as the advance/decline line fell to it lows for the day and volume picked up. The slide seemed to coincide with the announcement from the Treasury Department regarding profit repatriation. Measures of investor anxiety mostly rose, but are still not at levels normally associated with a durable bottom. Interest rates fell substantially today and should continue to fall modestly in the intermediate-term as measures of inflation decelerate, the US dollar stabilizes and worries over global economic growth worsen.

Mid-day Report

S&P 500 1,185.43 -.19%
NASDAQ 2,087.77 -.23%

Leading Sectors
Oil Service +2.17%
Iron/Steel +2.06%
Boxmakers +1.92%

Lagging Sectors
Drugs -.91%
Telecom -1.21%
Airlines -2.05%

Other
Crude Oil 48.00 +3.52%
Natural Gas 6.41 +7.69%
Gold 425.00 -.38%
Base Metals 119.34 -.95%
U.S. Dollar 82.44 +.33%
10-Yr. T-note Yield 4.19% -.92%
VIX 12.53 -.24%
Put/Call .75 -17.58%
NYSE Arms 1.23 +48.19%
ISE Sentiment 139.00 -16.27%

Market Movers
AAPL +8.2% after substantially beating 1Q estimates, raising 2Q outlook and multiple upgrades.
TASR +25.1% after the US Defense Department said it supports Taser’s argument its stun guns are generally safe and a study in the Pacing and Clinical Electrophysiology Journal states its guns are unlikely to cause heart problems.
VRST +55.9% after saying it agreed to be purchased by Cadence Design for $285.7 million in cash.
HLIT +20.2% after boosting 4Q sales estimates.
LCBM +26.3% after beating 2Q estimates and raising ’05 guidance.
TKR +9.2% after raising 4Q and 04 estimates.
ABMD -16.4% after lowering 3Q estimates.
KCP -8.08% after cutting 4Q estimates and re-affirming 05 guidance.

Economic Data
Import Price Index for December fell 1.3% versus estimates of a .3% decrease and a downwardly revised .2% fall in November.
Advance Retail Sales for December rose 1.2% versus estimates of a 1.1% increase and a .1% gain in November.
Retail Sales Less Autos for December rose .3% versus estimates of a .4% increase and a .4% gain in November.
Initial Jobless Claims for last week were 367K versus estimates of 340K and 357K the prior week.
Continuing Claims were 2631K versus estimates of 2775K and 2850K prior.

Recommendations
-Goldman Sachs: Reiterated Outperform on STZ, FSH, AMX, BLS, CZN, MCK and SBC. Reiterated Underperform on MKL, FHCC, CVH, T and LVLT.
-Banc of America: Upgraded AAPL to Buy, target $85. Rated CHD Sell, target $28.
-JP Morgan: Reiterated Overweight on RL, target $49. Cut KWD to Underweight. Raised FOSL to Overweight.
UBS: Rated AFR Buy, target $16.50. Rated GR Buy, target $37.
CSFB: Rated DTV Outperform, target $20. Rated FON Outperform, target $28. Rated NXTL Outperform, target $35. Rated T Underperform, target $15.
Prudential: Raised VCI to Overweight, target $42. Raised AAPL to Overweight, target $93.
Legg Mason: Rated IWA Buy, target $22.50.
Merrill Lynch: Raised AXCA to Buy, target $25.

Mid-day News
U.S. stocks are modestly lower mid-day as energy prices rise and worries continue over slowing growth persist. Charles Schwab lowered the asset requirement for avoiding service fees on some accounts, in hopes of attracting more clients, the Wall Street Journal said. Ubisoft Entertainment SA, make of “Tom Clancy’s Splinter Cell” video game, is considering several defenses against a possible takeover by Electronic Arts, the Wall Street Journal reported. US company directors have become nervous that agreements by former directors of WorldCom and Enron to pay $31 million to settle suits over accountability for corporate frauds may increase their own liabilities, the Wall Street Journal reported. GM’s finance unit is altering its borrowing plans in case its credit rating falls below investment grade, the Financial Times reported. Cendant Corp. is speeding up plans to sell its marketing services unit for about $3 billion, the NY Post reported. China’s steel exports more than doubled to a record 14.23 million metric tons in 2004 from a year earlier, the Tex Report said. EBay plans to increase some of the prices it charges on its EBay and EBay Motors Web sites on Feb. 18 as it experiences higher demand, the Wall Street Journal reported. Georgia’s Cobb County school system was ordered to remove stickers place inside science textbooks that say evolution is a “theory, not a fact,” the Atlanta Journal Constitution reported. Wal-Mart Stores will begin an advertising campaign to counter criticism that it pays workers too little, Bloomberg reported. Owens Corning, driven into bankruptcy by personal injury lawsuits, is set to find out what it will cost to settle hundreds of thousands of claims, Bloomberg reported. Bayer AG, Germany’s second-largest drug company, will pare its research and development budget for a third straight year to the lowest since 1997, Bloomberg said. The euro fell against the dollar and yen after European Central Bank President Trichet said inflation pressures in the 12-nation region have diminished, Bloomberg said. Merk’s Mevacor cholesterol drug should require a doctor’s prescription to ensure an effective dose and prevent kidney damage, physicians said before a US government meeting today on the company’s request to sell the medication over the counter, Bloomberg reported. RadioShack Corp. said Leonard Roberts will step aside as CEO in May when President and COO Edmondson takes over, Bloomberg said. US Homeland Security Chief Ridge said the country will begin a pilot program using eye scans to expedite travelers through NY’s John F. Kennedy airport as it looks to limit security checks on low-risk flyers, Bloomberg reported. Newly elected Palestinian Authority President Abbas said he’s serious about implementing the US-backed “road map” to peace with Israel, Bloomberg said. US Treasury notes rose after government reports showed the prices of goods imported to the US fell and first-time jobless claims rose, Bloomberg reported. Nine vendors for a US unit of Netherlands-based Royal Ahold NV, the world’s fourth largest retailer, were charged with helping company executives inflate earnings by more than $800 million, Bloomberg said. Crude oil is rising to a six-week high on forecasts that colder weather will move into the eastern US next week, bolstering demand for heating fuel, Bloomberg said. Sales at US retailers rose 1.2% in December, the most in three months, as incentives boosted auto purchases and lower gasoline prices left shoppers with more to spend on furniture and holiday gifts, Bloomberg reported.

Bottom Line: The Portfolio is higher mid-day on gains in my homebuilding and wireless longs. I have not traded and the Portfolio is still 75% net long. The tone of the market is improved today, notwithstanding small losses in the major indices. The advance/decline line is negative, however much improved from recent sell-offs and a number of sectors are gaining. Small-caps and commodity-related stocks are outperforming. I expect crude prices to top over the next few days and begin heading to around $35/bbl. sometime in the first half of 05 on ample supply, decelerating demand and a stabilizing US dollar. I look for US stocks to trade modestly higher into the close.

Thursday Watch

Earnings of Note
Company/Estimate
CBH/.87
CREE/.32
MTG/1.34
SUNW/.01

Splits
CMN 3-for-2

Economic Data
Import Price Index for December estimated to fall .3% versus a .2% increase in November.
Advance Retail Sales for December estimated to rise 1.0% versus a .1% increase in November.
Retail Sales Less Autos for December estimated to rise .4% versus a .5% increase in November.
Initial Jobless Claims for last week estimated at 340K versus 364K last week.
Continuing Claims estimated at 2773K versus 2840K prior.

Recommendations
Goldman Sachs reiterated Outperform on CAT, MCK and EBAY. Goldman reiterated Underperform on HRB.

Late-Night News
Asian indices are mixed as strength in India is being offset by weakness in Japan. The US Department of Justice filed court papers supporting a whistle-blower's lawsuit that accuses Apollo Group's University of Phoenix of paying counselors commissions to enroll students, the Wall Street Journal reported. Tourists from China who went abroad rose 55.4% to 23 million in 2004 from a year earlier, state-run Xinhua News Agency reported. News Corp. is interested in entering the video games industry, the Financial Times said. John R. Alkire, CIO at Morgan Stanley Asset & Investment Trust in Tokyo, expects the Nikkei 225 to rise as much as 23% this year, Bloomberg reported. The US SEC is preparing to charge the NYSE with not sufficiently monitoring its specialist floor-trading firms, the Wall Street Journal reported.

Late-Night Trading
Asian Indices are -.50%. to +.75% on average.
S&P 500 indicated +.09%.
NASDAQ 100 indicated +.22%.

BOTTOM LINE: I expect U.S. equities to open modestly higher in the morning on good economic reports and strength in technology shares. The Portfolio is 75% net long heading into tomorrow.

Wednesday Close

S&P 500 1,187.70 +.40%
NASDAQ 2,092.53 +.62%

Leading Sectors
Hospitals +3.37%
Oil Service +2.40%
Energy +1.79%

Lagging Sectors
Airlines -.67%
Broadcasting -1.04%
Transports -2.12%

Other
Crude Oil 46.54 +.37%
Natural Gas 5.92 -.30%
Gold 426.60 unch.
Base Metals 120.48 -.01%
U.S. Dollar 82.17 -1.08%
10-Yr. T-note Yield 4.23% -.05%.
VIX 12.56 -4.78%
Put/Call .91 +3.41%
NYSE Arms .83 -53.11%
ISE Sentiment 166.00 -23.85%

After-hours Movers
AAPL +10.2% after substantially beating 1Q estimates and raising 2Q outlook.
CREAF +4.62% on AAPL report.
SYNA +6.0% on AAPL report.
PLAY +10.07% on AAPL report.
RRGB -6.02% after cutting 4Q estimates.
LCBM +13.4% after beating 2Q estimates and raising ’05 guidance.
TSCM +15.0% after hiring investment-banking firm Allen & Co. to help explore a possible sale of the company.
TASR -3.7% after rival Stinger Systems CEO Gruder said the company would introduce a stun gun in February to compete with those made by Taser.

Recommendations
Goldman Sachs reiterated Outperform on FSH.

After-hours News
U.S. stocks finished higher today on a surge in the late afternoon. After the close, Infosys Technologies CEO Nilekani told CNBC that the company projects 50% fiscal fourth-quarter growth, Bloomberg reported. NASA today sent its $267 million Deep Impact spacecraft on a mission to blow a crater as big as a football stadium in a comet orbiting between Earth and Mars, Bloomberg reported. McKesson Corp. said it agreed to pay $960 million to settle a class action suit brought by shareholders after the company restated earnings in 1999, Bloomberg said. Crude oil rose to a six-week high of $46.37/bbl. after an Energy Department report today showed a greater-than-expected US inventory decline, Bloomberg said. Pfizer’s advertisements on the Celebrex and Bextra painkillers violated regulations because they overstated the drugs’ benefits and omitted risks, Bloomberg reported. Apple Computer’s first-quarter profit more than quadrupled as sales of iPod digital music players and iMac personal computers surged in the holiday gift-buying season, Bloomberg said. SunTrust Banks said the SEC issued subpoenas seeking documents related to the bank’s loan loss reserve accounting as part of a formal investigation, Bloomberg reported. The US Environmental Protection Agency said a chemical used to make DuPont’s Teflon nonstick coatings has the potential to cause caner in humans, Bloomberg said. Prostate cancer hormone treatment may increase a man’s risk of bone fractures, according to researchers who say the medicine may be responsible for 3,000 US cases a year, Bloomberg said.

BOTTOM LINE: The Portfolio finished unchanged today as gains in my telecom equipment and alternative energy longs offset losses in my steel shorts. I added a few new longs in the afternoon, bringing the Portfolio’s market exposure to 75% net long. One of my new longs is MOT and I am using a $16 stop-loss on this position. It appears a short-term rally has begun as the late-day sell-off trend ended today and Apple’s report is boosting tech after-hours. While a bounce is well overdue, weakness will likely resurface over the next couple of weeks as investor complacency remains too high for a solid bottom. I will remain nimble and view any near-term purchases as trading opportunities.