Friday Watch

Late-Night Headlines
Bloomberg:
- Thomas Suozzi, a former mayor of Glen Cover, NY, and the first Democrat in 40 years to be elected head of Long Island’s Nassau County, filed papers to challenge NY Attorney General Eliot Spitzer for the party’s gubernatorial nomination.
- Pfizer agreed to pay Sanofi-Aventis SA $1.3 billion to obtain worldwide marketing rights to the Exubera inhaled insulin treatment, ending their partnership on the medicine.
ABC News:
- FBI officials are investigating an increase in purchases of large batches of disposable mobile phones by Iraqis and Pakistanis in California and Texas to find a possible link to terror networks. Terrorists used such phones to explode bombs in the 2004 Madrid train attacks.

Shanghai Securities Journal:
- China has no plans to sell dollar assets, citing central bank Governor Zhou Xiaochuan.

South China Morning Post:
- North Korean dictator Kim Jong Il is in China’s southern city of Guangzhou and will visit Shenzhen on the border of Hong Kong today.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on (CSCO), (GOOG), (YHOO), (EBAY), (BSX), (FD) and (RE).
- Upgraded (STX) and (HPQ) to Outperform.
- Reiterated Underperform on (ZLC).

Business Week:
- Roy Disney’s investment company Shamrock Capital Advisors bought an 11% stake in IPass Inc.(IPAS).
- Outback Steakhouse(OSI) may rise about 50% within the next year because of an increase in assets from acquisitions of small, start-up units, citing Friedman Billings Ramsey’s Howard Penney.
- Perficient Inc.(PRFT) may be worth $12 a share in a year, Collins Gills of Canaccord Adams said.

Night Trading
Asian Indices are -.25% to unch. on average.
S&P 500 indicated +.05%.
NASDAQ 100 indicated unch.

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Earnings of Note
Company/EPS Estimate
- None of note

Upcoming Splits
(NRPH) 2-for-1

Economic Releases
8:30 am EST
- The Producer Price Index for December is estimated to rise .4% versus a .7% fall in November.
- The PPI Ex Food & Energy for December is estimated to rise .2% versus a .1% gain in November.
- Advance Retail Sales for December are estimated to rise .9% versus a .4% increase in November.
- Retail Sales Less Autos for December are estimated to rise .4% versus a .3% decline in November.

10:00 am EST
- Business Inventories for November are estimated to rise .4% versus a .3% increase in October.

BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity producing companies in the region. I expect US equities to open lower and to rally later in the day, finishing modestly lower. The Portfolio is 50% net long heading into the day.

Stocks Close Near Session Lows on Profit-taking, Energy Stock Reversal and Iran Worries

Indices
S&P 500 1,286.06 -.63%
DJIA 10,962.36 -.73%
NASDAQ 2,316.69 -.63%
Russell 2000 706.79 -.62%
DJ Wilshire 5000 n/a
S&P Barra Growth 615.60 -.62%
S&P Barra Value 665.97 -.63%
Morgan Stanley Consumer 600.14 -.37%
Morgan Stanley Cyclical 794.06 -1.56%
Morgan Stanley Technology 553.57 -.50%
Transports 4,148.38 -1.21%
Utilities 412.81 +.07%
Put/Call .72 +14.29%
NYSE Arms 1.25 +60.33%
Volatility(VIX) 11.20 +2.38%
ISE Sentiment 144.00 -25.0%
US Dollar 89.47 +.54%
CRB 334.71 -.30%

Futures Spot Prices
Crude Oil 63.90 -.06%
Unleaded Gasoline 171.85 -.84%
Natural Gas 8.98 +.50%
Heating Oil 171.45 +.19%
Gold 547.50 -.33%
Base Metals 158.96 +.24%
Copper 208.95 +.10%
10-year US Treasury Yield 4.40% -1.06%

Leading Sectors
Disk Drives +.32%
Hospitals +.31%
Foods +.29%

Lagging Sectors
Oil Service -1.85%
Airlines -1.92%
Homebuilders -2.24%

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Afternoon Recommendations
Goldman Sachs:
- None of note

Afternoon/Evening Headlines
Bloomberg:
- The euro fell the most against the dollar in three weeks after European Central Bank President Jean-Claude Trichet said there are risks to economic growth in Europe.
- Ted Koppel, former host of ABC’s “Nightline,” will begin writing for the NY Times as a contributing columnist this month and will join the NPR radio network as a senior news analyst in June.
- Federated Dept. Stores(FD) plans to sell the Lord & Taylor division it acquired in its $11 billion purchase of May Dept. Stores(MAY) as it focuses on the Macy’s chain.
- California regulators approved a $2.5 billion solar-power subsidy, the largest ever in the US, offering more business to solar-panel makers such as SunPower and Evergreen Solar(ESLR) that are already struggling to meet demand.
- The US reported an $11 billion budget surplus in December as tax receipts soared 12.1% to $241.9 billion, an all-time record.
- Toyota Motor(TM) said it expects a US sales increase this year of as much as 10%, doubling a forecast it made last week.
- International Business Machines(IBM) said the SEC escalated a probe into the company’s first-quarter earnings report.
- Natural gas fell below $9, plunging 44% in about a month, as US supplies are set to reach records.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Internet longs, Semi longs, Medical Information longs and Biotech longs. I did not trade in the final hour, thus leaving the Portfolio 50% net long. The tone of the market was negative today as the advance/decline line finished lower, most sectors fell and volume was above-average. Measures of investor anxiety were higher into the close. Overall, today's market performance was negative considering the fall in long-term rates/natural gas, positive economic data and comments from Iran. The major averages and breadth finished near session lows, led by a sharp reversal in energy-related equities. However, breadth wasn't too bad and volume was only slightly above average. The 10-year T-note yield also finished near session lows, down 5 basis points. Today's action looked like healthy profit-taking to me. However, I would expect to see stocks trade mixed-to-lower in the near-term after an exceptional start to the year.

Stocks Lower Heading into Final Hour on Profit-taking and Iran Worries

BOTTOM LINE: The Portfolio is slightly lower mid-day on losses in my Internet longs, Software longs, Biotech longs and Semi longs. I took profits in some existing longs and added IWM and QQQQ shorts, thus leaving the Portfolio 50% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are lower and volume is above average. Measures of investor anxiety are higher. The average 30-year mortgage rate fell to 6.15% this week from 6.21% the prior week. This is the fifth consecutive weekly decline. Mortgage rates are now only 94 basis points away from record lows set in June 2003. The yield on the 10-year Treasury note has fallen 22 basis points in about nine weeks. I continue to expect mortgage rates to remain relatively low by historic standards this year as U.S. growth slows to average levels, demand for U.S. assets increases, inflation readings decelerate and the dollar remains stable. I expect US stocks to trade mixed-to-lower from current levels into the close on profit-taking and worries over Iran.

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.

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