Stocks Finish Near Session Highs on Dovish Fed Comments, Bargain Hunting and Short-Covering

Indices
S&P 500 1,268.80 +1.64%
DJIA 10,847.41 +1.21%
NASDAQ 2,243.74 +1.74%
Russell 2000 684.05 +1.61%
DJ Wilshire 5000 n/a
S&P Barra Growth 606.65 +1.70%
S&P Barra Value 657.81 +1.58%
Morgan Stanley Consumer 595.91 +.75%
Morgan Stanley Cyclical 792.44 +.94%
Morgan Stanley Technology 531.30 +1.74%
Transports 4,199.16 +.07%
Utilities 413.55 +2.08%
Put/Call .72 -5.26%
NYSE Arms .74 -55.14%
Volatility(VIX) 11.14 -7.71%
ISE Sentiment 152.00 -6.17%
US Dollar 89.85 -1.34%
CRB 336.37 +1.37%

Futures Spot Prices
Crude Oil 62.92 -.35%
Unleaded Gasoline 174.50 -.31%
Natural Gas 10.47 -1.46%
Heating Oil 179.25 -.22%
Gold 535.10 +.49%
Base Metals 153.83 +.93%
Copper 204.65 -.10%
10-year US Treasury Yield 4.36% -.58%

Leading Sectors
Gold & Silver +6.3%
Oil Service +5.69%
Energy +4.68%

Lagging Sectors
Papers -.05%
Airlines -1.18%
Broadcasting -1.35%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on (WAG) and (MSNT).
- Reiterated Underperform on (DJ).

Afternoon/Evening Headlines
Bloomberg:
- US stocks began the year with their biggest rally since October, sparked by a signal that the Fed may soon stop raising interest rates.
- Citigroup Inc.(C), the biggest US bank, may buy Goldman Sachs Group(GS) this year, Wall Street commentator James Cramer wrote in a NY magazine column.
- CBS Corp.(CBS) plans to drive growth with its Internet sites and the sale of television shows on handheld, Chief Executive Officer Leslie Moonves said.
- US Treasury notes rose after the Federal Reserve said in the minutes of its Dec. 13 meeting that the amount of additional interest rate increases needed to control inflation “probably would not be large.”
- Shares of Google(GOOG) had their biggest gain in more than two months after Piper Jaffray analyst Safa Rashtchy said the stock may jump to $600 this year.
- Estee Lauder(EL) will replace Mercury Interactive(MERQE) in the S&P 500.

AP:
- Rhode Island legalized medical marijuana use after the legislature overrode a veto by Republican Governor Don Carcieri.
- Republican Governor George Pataki said New York state will end the fiscal year with a $2 billion surplus.

BOTTOM LINE: The Portfolio finished substantially higher today. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, almost every sector rose and volume was above average. Measures of investor anxiety were mostly lower into the close. Overall, Today's action was very good for the bulls as the major averages finished near session highs on above-average volume. As I speculated last week, it does appear many funds sold in advance of January. Today's gains are the type that will likely result in further gains into week's end as shorts scramble to stay in the ballgame.

Stocks Soaring Mid-day on Release of Fed Minutes

Indices
S&P 500 1,267.13 +1.51%
DJIA 10,835.89 +1.10%
NASDAQ 2,243.90 +1.75%
Russell 2000 683.55 +1.54%
DJ Wilshire 5000 n/a
S&P Barra Growth 606.18 +1.63%
S&P Barra Value 656.96 +1.46%
Morgan Stanley Consumer 595.74 +.71%
Morgan Stanley Cyclical 792.32 +.91%
Morgan Stanley Technology 531.98 +1.87%
Transports 4,196.21 unch.
Utilities 411.83 +1.66%
Put/Call .79 +3.95%
NYSE Arms .77 -53.51%
Volatility(VIX) 11.12 -7.87%
ISE Sentiment 152.00 -6.74%
US Dollar 89.80 -1.39%
CRB 336.33 +1.36%

Futures Spot Prices
Crude Oil 63.14 +3.44%
Unleaded Gasoline 175.05 +1.34%
Natural Gas 10.62%
Heating Oil 179.64 +1.50%
Gold 533.80 +.24%
Base Metals 153.83 +.93%
Copper 204.75 -.05%
10-year US Treasury Yield 4.36% -.58%

Leading Sectors
Gold & Silver +5.69%
Oil Service +5.22%
Energy +4.38%

Lagging Sectors
Papers -.10%
Broadcasting -1.0%
Airlines -1.49%

BOTTOM LINE: The Portfolio is substantially higher mid-day on gains in my Internet longs, Semi longs, Computer longs and Biotech longs. I exited the remainder of my (IWM) and (QQQQ) shorts and added (GILD), (RACK) and (ITRN) long, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are higher and volume is above average. Measures of investor anxiety are mixed. Overall, today’s market action is positive considering recent losses, the rise in oil and weaker-than expected economic data. A record $20.3 billion flowed into funds investing in emerging market equities last year, up 500% from the prior year. Argentina and Brazil were two of the largest recipients of these flows. As growth in the U.S. and China slows, emerging market economies will suffer disproportionately. I believe the mania for emerging market investments will end in 2006. I expect US stocks to trade modestly higher into the close on short-covering, bargain hunting and optimism over dovish Fed comments.

Today's Headlines

Bloomberg:
- Worldwide trade in caviar from wild sturgeon has been banned by the Convention on International Trade in Endangered Species, pending better plans to manage dwindling stocks of sturgeon.
- Iraq’s President Talabani said he won’t object if the dominant Shiite Muslim political coalition again selects Ibrahim al-Jaafari as prime minister.
- Children are just as likely to be injured in an accident riding in a sport-utility vehicle as in a passenger car, a study found.
- US Treasuries are rising after an industry report showed manufacturing in December slowed more than forecast and increases in prices paid for raw materials were less widespread.
- Crude oil is surging above $63/bbl., a two-month high, after a pricing dispute between Russia and Ukraine disrupted shipments of natural gas to Europe.

Wall Street Journal:
- The US economy should expand for the fifth year in a row in 2006 as business thrives, even as a sluggish housing market slows the rate of growth, citing its own survey of 56 economists.
- Motorola(MOT) mobile-phone sales in India are way behind those of Nokia, even thought the Illinois-based company sells a handset for about $43, compared with Nokia’s $54.
- Wyeth(WYE), which makes the Prevnar meningitis medicine, and Trubion Pharmaceuticals agreed to develop and market jointly antibody-like drugs.
- Schulte Roth & Zabel LLP, a NY City law firm, built a clientele of hedge funds and has prospered as the funds have become the movers behind billion-dollar mergers and acquisitions.
- Microsoft(MSFT), Cisco Systems(CSCO) and Intel Corp.(INTC) are leading an effort to develop systems to enable Web-based sports, music videos and news to be shown over television sets.
- Yellow Roadway(YELL) plans to operate its own trucks in China, transporting goods made by US companies to the port of Shanghai, citing CEO Zollars.
- The number of securities fraud suits filed against US companies in 2005 fell 17%, citing a study by Stanford University and Cornerstone Research.

NY Times:
- A group of investment firms is close to agreeing to buy Affiliated Computer Services(ACS), the world’s largest processor of student-loan payments, for more than $8 billion.
- Liberty Media’s(L) Starz plans to offer a monthly subscription service that will enable movie downloads from the Internet and viewing on portable devices.

LA Times:
- Google(GOOG) has been in talks with retailers including Wal-Mart Stores over a plan to sell an inexpensive personal computer.

USA Today:
- The top US general in Iraq is optimistic the US will turn a substantial part of the country over to Iraqi control this year.

Financial Times:
- Emerging market funds received record inflows in 2005, citing Emerging Portfolio Fund Research.

Construction and Manufacturing Slow, Measure of Inflation Decelerates

- Construction Spending for November rose .2% versus estimates of a .7% increase and a .8% gain in October.
- ISM Manufacturing for December fell to 54.2 versus estimates of 57.5 and a reading of 58.1 in November.
- ISM Prices Paid for December fell to 63.0 versus estimates of 68.7 and a reading of 74.0 in November.

BOTTOM LINE: US construction spending rose less than forecast in November as homebuilding declined for the first time in five months, Bloomberg reported. However, nonresidential construction spending gained .5% in November. I expect construction spending to remain healthy over the intermediate-term as commercial building and hurricane rebuilding accelerates.

US manufacturing growth slowed in December after expanding at the fastest pace of the year in the months following the Gulf Coast hurricanes, Bloomberg said. The new orders component of the index fell to 55.5 from 59.8 the prior month. The employment component of the index dropped to 52.7 from 56.6 in November. Manufacturing slowed from torrid rates in October and November to healthy rates in December. I continue to believe manufacturing will add to US growth over the intermediate-term as demand remains healthy and inventories are rebuilt.

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Tuesday Watch

Weekend Headlines
Bloomberg:
- Bill Miller, manager of the Legg Mason Value Trust, beat the S&P 500 for a record 15th straight year.
- The US dollar gained against the euro and yen in 2005, rising about 15% versus both currencies as the US economy continued outperforming Europe and Japan.
- Wal-Mart Stores(WMT) said December US same-store sales rose about 2.2%.
- Antidepressants such as Wyeth’s(WYE) Effexor and Eli Lilly’s(LLY) Prozac don’t appear to post a higher risk of suicide in the six months after they’re prescribed, a study says.
- Bank of America(BAC) became the No.1 US credit-card issuer today as it completed its $34.2 billion acquisition of MBNA Corp(KRB).
- US employers added another 200,000 jobs last month as companies remained optimistic that the new year will bring more corporate investment and solid economic growth, according to a survey of economists.
- Viacom(CBS/A), the entertainment company controlled by Sumner Redstone, completed a plan to split itself into two companies, CBS Corp.(CBS) and Viacom, its said in a statement.
- Owens Corning, the largest US insulation maker, filed a new bankruptcy reorganization plan aimed at wiping out the company’s estimated $10.2 billion in asbestos liabilities.
- HBOS Plc, Britain’s fourth-largest lender and one of the foreign-exchange market’s biggest dollar bulls in 2005, expects the US currency to extend its gain.
- Samsung and its nearest rival LG.Philips LCD began production at their newest plants ahead of schedule to meet demand for televisions.
- Overweight people are nearly twice as likely as thinner folk to develop kidney disease and the risk for the morbidly obese is 700% higher, a study says.

MarketWatch:
- Don Hays, of Hays Advisory, expects the S&P 500 to rise 30% during the next 12 months, the price of oil to fall to $42 and interest rates to remain at low levels.

NY Times:
- Crime in NYC has declined for the 17th straight year, with the number of murders at their lowest point since 1963, citing NYPD stats.
- Smaller US schools such as Allegheny College are luring bright students to their campuses offering merit scholarships to keep them from going to more sought-after institutions.
- Home prices in many areas of New Orleans are the same as or higher than they were before Hurricane Katrina struck the city in August.
- People are likely to start using their mobile phones for shopping this year.
- Suburban homeowners in cities such as NY, Chicago and San Francisco are spending more money renovating their houses than previous generations of homeowners.
- Technological convergence, whereby people can have electronic devices such as computers, televisions and telephones communicate with each other, may become a reality this year.
- Advertisements placed in movies and television programs with computer graphics allow companies to show products to customers who have learned to block commercials.

San Francisco Chronicle:
- Yahoo!(YHOO) will broadcast a reality television show on the most-visited Web site in coming months as the company expands into video offered on line.

Washington Post:
- US government contractors, such as CGI-AMS Inc. and Northrop Grumman(NOC), are moving jobs to rural Virginia instead of overseas to cut costs.
- The Bush administration will seek no new funds for rebuilding Iraq when it submits its budget request to Congress in February.

AP:
- US consumers may get more tax credits in 2006 for purchasing cars and pickup trucks that run on gasoline and electricity, for which there are already waiting lists.

Telegraph:
- Reinsurance rates are set to rise following a series of natural disasters in 2005.

AFP:
- The US has written off $280 million of debt owed by Zambia after the African country completed economic reforms recommended by the International Monetary Fund.

La Gaceta de Los Negocios:
- Germany and France have natural gas stockpiles of 75 days and 45 days respectively should a possible Russian cut off of supplies to Ukraine disrupt flows of the gas to western Europe.

Xinhua News Agency:
- China’s State Administration of Foreign Exchange approved a first group of 13 banks to be market-makers in yuan trading.

Economic Daily:
- Benq and AU Optronics(AUO) will double their sales of flat-panel televisions and television displays this year boosted by US demand, citing KY Lee, chairman of both.

Weekend Recommendations
Barron's:
- Had positive comments on (K) and (PBI).

Goldman Sachs:
- Reiterated Outperform on (ACN) and (EBAY).
- Reiterated Underperform on (TFX).

Night Trading
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S&P 500 indicated +.15%.
NASDAQ 100 indicated +.12%.

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Economic Releases
10:00 am EST
- Construction Spending for November is estimated to rise .7% versus a .7% increase in October.
- ISM Manufacturing for December is estimated to fall to 57.5 versus a reading of 58.1 in November.
- ISM Prices Paid for December is estimated to fall to 68.7 versus a reading of 74.0 in November.

2:00 pm EST
- Minutes of Dec. 13 FOMC Meeting.

BOTTOM LINE: Asian Indices are mostly higher, boosted by commodity producing companies in the region. I expect US stocks to open modestly higher and to fall later in the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the week.