Today's Headlines

Bloomberg:
- Tyco International’s(TYC) board will likely vote to split into three companies today, dismantling the conglomerate built by jailed former CEO Kozlowski.
- Boston Scientific(BSX) may sweeten its buyout offer for Guidant(GDT) after Johnson & Johnson added more cash to its bid for the troubled cardiac-device maker.
- Secretary of State Condoleezza Rice said Iran’s decision to resume research on the nuclear fuel cycle shows “dangerous defiance of the international community.”
- President Bush said the federal government has “a major role to play” in rebuilding the Gulf Coast after Hurricane Katrina, and pledged to help rebuild New Orleans levees damaged by the storm.
- Natural gas prices are falling below $9, down 44% in almost a month, after the EIA reported inventories are approaching record levels for this time of the year.

Wall Street Journal:
- Viisage Technology(VISGD), a maker of identification software, plans to buy technology company Identix(IDNX) in a deal valued at about $770 million in stock.
- The FDA may release new guidelines for the early stages of drug development as early as today.
- A court may order the shutdown next month of Research In Motion’s(RIMM) BlackBerry e-mail, prompting companies that use the device to consider alternative wireless e-mail services.
- Univ. of Texas scientists are firing noise into the flue ducts of coal-fired power plants, to try to bond smaller soot particles to larger ones and make cleaning easier.
- Starbucks(SBUX) is diversifying into movies and DVDs, citing Chairman Schultz.
- Vonage Holdings and Skype Technologies SA may gain more customers as a new line of Internet calling phones goes on sale.

AP:
- Russia, China, the US and the EU will send diplomats to London next week for consultations about Iran’s nuclear plans.

NY Times:
- Goldman Sachs(GS) pulled out of an IPO by Thomas Weisel Partners, an investment bank, leaving Keefe, Bruyette & Woods as the sole underwriter.
- Martha Stewart Living Omnimedia(MSO) plans to begin publishing a magazine this year geared toward young women to be called Blueprint.
- Visa International and MasterCard International have been in talks since last year about setting credit-card data security standards that may be implemented by the middle of this year.

NY Post:
- The SEC has begun an informal investigation into allegations of inflated payments from vendors to Home Depot(HD).

Chicago Tribune:
- Apple Computer(AAPL) made four federal trademark filings last week that could be a sign the company is planning to create its own mobile phone business.

NY Daily News:
- Cingular Wireless and Verizon Wireless(VZ) are part of a group of US wireless service providers planning to bid on a contract to build and operate a network in 277 NYC subway stations.

AFP:
- At least 354 people died during a stampede at the Hajh pilgrimage in Mecca, citing the Saudi Arabian health minister.

LA Times:
- Demand for California wines dropped as consumers turned to vintages from Italy and Australia and grew frustrated with the high price charged by restaurants.

Trade Deficit Improves, Measure of Inflation Falls Again, Labor Market Healthy

- The Trade Deficit for November shrank to -$64.2 billion versus estimates of -$66.1 billion and -$68.1 billion in October.
- The Import Price Index for December fell .2% versus estimates of a .2% increase and a 1.8% decline in November.
- Initial Jobless Claims for last week rose to 309K versus estimates of 315K and 292K the prior week.
- Continuing Claims rose to 2702K versus estimates of 2681K and 2690K prior.

BOTTOM LINE: The US trade deficit narrowed in November, as the cost of imported oil dropped and exports rose to an all-time high on increased shipments of goods including Boeing(BA) jets, Bloomberg reported. The deficit with China fell for the first time in 8 months, declining 9.9%. I expect the trade deficit to remain relatively high, only improving modestly, as US growth continues to outpace that of other developed nations and commodity prices fall.

Prices of goods imported into the US unexpectedly fell for a second month in December, the first back-to-back decrease since 2004 and a sign of tame inflation, Bloomberg said. The drop in import prices was led by cheaper petroleum, computers and steel. I continue to believe measures of inflation will decelerate throughout most the year, helping to keep long-term interest rates low by historic standards.

The number of Americans filing first-time claims for jobless benefits rose less than forecast last week, suggesting strength in the labor market, Bloomberg said. Companies have now added over 4 million employees to payrolls over the last two years. The four-week moving average dropped to 311,500 from 317,000. The unemployment rate for those eligible for benefits, which tracks the US unemployment rate, held steady at 2.1%. I continue to believe the labor market will remain healthy over the intermediate-term without generating substantial unit labor cost increases, which account for two-thirds of inflation.

Links of Interest

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Thursday Watch

Late-Night Headlines
Bloomberg:
- Shares of Quanta Display, a unit of the world’s biggest notebook computer maker, are rising as much as 3% after a news report said Sharp Corp. may buy as many as 4 million flat-panel displays from the Taiwanese company this year.
- The PGA Tour agreed to six-year television contracts with CBS and NBC and a 15-year deal with cable’s Golf Channel.
- Shares of Sharp Corp., the world’s biggest liquid-crystal display television maker, are having their biggest gain in more than four years after the company said sales next fiscal year will rise to a record $26 billion on demand for its flat-panels and solar cells.

Financial Times:
- Borders Group(BGP) may be acquired by one or more private-equity firms for more than $25 a share, or almost $2 billion, and taken private.

Fortune:
- Plans to reorganize the leadership of Dow Jones(DJ), publisher of the Wall Street Journal, began in April 2005.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on (MYL), (CSCO), (QCOM) and (RIMM).

Night Trading
Asian Indices are unch. to +.50% on average.
S&P 500 indicated -.08%.
NASDAQ 100 indicated -.08%.

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Earnings of Note
Company/EPS Estimate
(CBSH).82
(SRR)-.02
(MTG)1.52
(MI).78

Upcoming Splits
(HITK) 3-for-2
(NRPH) 2-for-1

Economic Releases
8:30 am EST
- The Trade Deficit for November is estimated to shrink to -$66.1 billion versus -$68.9 in October.
- The Import Price Index for December is estimated to rise .2% versus a 1.7% decline in November.
- Initial Jobless Claims for last week are estimated to rise to 315K versus 291K the prior week.
- Continuing Claims are estimated to fall to 2681K versus 2718K prior.

2:00 pm EST
- The Monthly Budget for December is estimated at a $7.0 billion surplus versus a -$3.4 billion deficit in November.

BOTTOM LINE: Asian indices are mostly higher, led by technology companies in the region. I expect US equities to open modestly lower and to rally later in the day, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Near Session Highs Despite Headwinds

Indices
S&P 500 1,294.18 +.35%
DJIA 11,043.44 +.29
NASDAQ 2,331.36 +.48%
Russell 2000 711.19 +.03%
DJ Wilshire 5000 n/a
S&P Barra Growth 619.45 +.38%
S&P Barra Value 670.22 +.31%
Morgan Stanley Consumer 602.36 -.02%
Morgan Stanley Cyclical 806.64 -.21%
Morgan Stanley Technology 556.36 +.68%
Transports 4,199.29 -.46%
Utilities 412.51 -.31%
Put/Call .63 +5.0%
NYSE Arms .78 -32.86%
Volatility(VIX) 10.94 +.74%
ISE Sentiment 192.00 +20.0%
US Dollar 88.99 -.38%
CRB 335.71 -.22%

Futures Spot Prices
Crude Oil 64.05 +.17%
Unleaded Gasoline 173.78 +.27%
Natural Gas 9.25 +.18%
Heating Oil 173.25 +.31%
Gold 548.70 -.25%
Base Metals 158.57 +.32%
Copper 209.65 +.07%
10-year US Treasury Yield 4.45% +.58%

Leading Sectors
Computer Hardware +1.85%
Semis +1.65%
Gaming +1.21%

Lagging Sectors
Utilities -.31%
HMOs -.59%
Airlines -3.77%

Evening Review
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Afternoon Recommendations
Goldman Sachs:
- Downgraded (BUD) to Underperform.
- Rated (VIA/B) Outperform.
- Rated (CBS) Underperform.
- Reiterated Outperform on (DD) and (ALEX).

Afternoon/Evening Headlines
Bloomberg:
- Gap Inc.(GPS) will increase last-minute orders and buy more merchandise in North America to respond faster to fashion trends after sales tumbled last year.
- Best Buy(BBY) promoted Brian Dunn to president, replacing Allen Lenzmeier, who will stay on as vice chairman.
- Tribune Co.(TRB) will pull most stock-price listings from its flagship Chicago Tribune newspaper because more readers are using the Internet to track stocks.
- Howard Stern, whose talk show debuted on Sirius Satellite Radio(SIRI) this week, and his agent registerd to sell as much as $225 million in the company’s stock.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Computer longs, Semi longs, Software longs and Retail longs. I did not trade today, thus leaving the Portfolio 100% net long. The tone of the market was modestly positive today as the advance/decline line finished almost unchanged, sector performance was mostly positive and volume was heavy. Measures of investor anxiety were mostly lower into the close. Overall, today's market performance was positive. Considering the rise in oil intraday, another bounce in long rates, more rumblings about Iran and recent gains, today's rise was even more impressive. The bond market's reaction to tomorrow's likely higher-than-expected import price index will probably dictate short-term trading in stocks.

Stocks Modestly Higher Heading into Final Hour, Led by Tech and Financials

BOTTOM LINE: The Portfolio is slightly higher mid-day on gains in my Computer longs, Software longs, Retail longs and Semi longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is modestly negative as the advance/decline line is slightly lower, sector performance is mixed and volume is heavy. Measures of investor anxiety are mostly lower. Sirius Satellite (SIRI) is breaking down through its 200-day moving average on almost double its normal volume. I would not touch this stock on the long side as I believe they "top-ticked" Howard Stern. I think his pay package will weigh on the shares for years, likely leading to the company's demise as a serious threat to XM Satellite (XMSR). I expect US stocks to trade mixed-to-higher from current levels into the close on strength in the technology sector, a late-day reversal in energy prices and short-covering.