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Tuesday Watch

Weekend Headlines
Bloomberg:
- PetroChina Co., the nation’s largest petroleum company, increased oil and natural gas production 5.5% last year after drilling new fields to meet higher demand in Asia’s fastest-growing market.
- Shipping rates will probably fall for a second straight year as the fleet of coal and iron-ore vessels grows faster than the world’s demand for commodities.
- Stocks worldwide may rise for a fourth straight year in 2006 because shares are still cheap given the outlook for economic growth and corporate profits, strategists at Goldman Sachs Group said. US stock returns including dividends will be 13% in 2006, Goldman said.
- The US dollar is gaining against the euro on speculation industrial production and manufacturing reports will add to evidence the world’s largest economy is expanding at a healthy pace.
- Oil is rising a little over a percent in NY after rebel attacks cut output in Nigeria and Western nations stepped up pressure on Iran to abandon its nuclear program.
- Gerald Ford, the oldest living former US president, has been hospitalized with pneumonia at Eisenhower Medical Center in Rancho Mirage, California.
- “Brokeback Mountain,” the love story of two gay cowboys, won four Golden Globe awards, including best drama and best director for Ang Lee.

Wall Street Journal:
- The FDA may change its drug-labeling rules and offer drugmakers a shield from some lawsuits.
- Royal Dutch Shell Plc will begin to explore central Arkansas for natural gas deposits, a sign that multinational oil companies are increasingly interested in US domestic deposits.
- General Motors(GM) and Ford Motor(F) will recover from their current troubles, though it might be “hard, difficult and will take time,” Renault SA CEO Ghosn said.
- Russia and China are backing the US and Europe on the need for Iran to suspend its nuclear program, but stopped short of asking the matter to be taken to the UN Security Council.
- Janus Capital Group(JNS) started the Janus Adviser Long/Short Fund that uses investment strategies generally employed by hedge funds.

NY Times:
- Business travelers are paying less to fly on the nation’s airlines compared to a year ago.
- Many Shiite Muslims in the island kingdom of Bahrain want more freedom and they’re looking to Iraq as a potential model.
- Maryland’s law, passed last week, that requires large companies, including Wal-Mart Stores, to devote 8% of payroll to employee healthcare, may be hard to replicate in other states.

USA Today:
- The number of US troops wounded in Iraq fell 26% in 2005 compared with the previous year, suggesting insurgent attacks have declined in the face of stronger local security and democratic elections.

Star-Ledger:
- New Jersey acting Governor Richard Codey signed a law yesterday banning smoking in bars, restaurants and most other public places in the state.

Denver Post:
- Denver’s murder rate in 2005 fell 34% to a three-year low.

Washington Post:
- Radical Islamic groups are seeking to unite all 1.2 billion Muslims by replacing national governments with caliphate, the theocratic institution that once ruled large parts of Africa, the Middle East and Europe.

Red Herring:
- Silicon Valley, home to 2.43 million, added jobs last year for the first time in half a decade, and the incomes of those working in the four-county northern California region rose for the second consecutive year, said a new study scheduled for release this week.

Financial Times:
- Cisco Systems(CSCO) plans to enter the consumer electronics industry.
- International Business Machines(IBM) has held talks to acquire a stake in Satyam Computer Services(SAY), India’s fourth-largest software services company.

BBC:
- British Prime Minister Tony Blair would make a “good” secretary general of the United Nations, citing former US President Bill Clinton.

Sunday Times:
- Owners of Burger King may sell shares of the second-biggest US hamburger chain in an IPO that values the company at $2.5 billion.

Iran Daily:
- Iran will continue its nuclear program even if the Islamic Republic is referred to the UN Security Council, citing Iranian President Ahmadinejad.

Spiegel:
- The German government expects the economy to grow 1.4% this year, less than the 1.8% that Economic Minister Glos had previously suggested.

Weekend Recommendations
Barron's:
- Had positive comments on (PH) and (AAPL).

Goldman Sachs:
- Reiterated Outperform on (MSFT), (STN), (LVS) and (HD).

Night Trading
Asian indices are -.50% to +.50% on average.
S&P 500 indicated +.04%.
NASDAQ 100 indicated +.09%.

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Earnings of Note
Company/Estimate
(ASO).50
(SCHW).14
(CBH).27
(CAL)-1.68
(FITB).63
(FISV).56
(FRX).61
(IBM)1.94
(INTC).43
(LLTC).35
(MDC)4.00
(NCC).67
(SOV).46
(TDS).29
(TER).19
(USB).62
(WFC)1.15
(YHOO).17

Upcoming Splits
(CWTR) 3-for-2
(LKQX) 2-for-1
(PZZA) 2-for-1
(TALX) 3-for-2

Economic Releases
8:30 am EST
- Empire Manufacturing for January is estimates to fall to 21.0 versus a reading of 28.7 in December.

9:15 am EST
- Industrial Production for December is estimated to rise .5% versus a .7% increase in November.
- Capacity Utilization for December is estimated to rise to 80.5% versus 80.2% in November.

BOTTOM LINE: Asian Indices are mixed as commodity producing companies in the region rise and exporters fall. I expect US stocks to open modestly higher and to fall modestly into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the week.

Weekly Outlook

Click here for The Week Ahead by Reuters

There are some important economic reports and a few significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. - US Markets Closed
Tues. - Empire Manufacturing, Industrial Production, Capacity Utilization
Wed. - Consumer Price Index, Net Foreign Security Purchases, NAHB Housing Market Index, Fed’s Beige Book
Thur. - Housing Starts, Building Permits, Initial Jobless Claims, Philly Fed.
Fri. - Univ. of Mich. Consumer Confidence

A few of the more noteworthy companies that release quarterly earnings this week are:

Mon. - US Markets Closed
Tues. - AmSouth Bancorp(ASO), Charles Schwab(SCHW), Commerce Bancorp.(CBH), Fifth Third Bancorp(FITB), Forest Labs(FRX), Freeport-McMoRan(FCX), IBM Corp.(IBM), Intel Corp.(INTC), Linear Tech(LLTC), National City Corp.(NCC), Sovereign Bancorp(SOV), US Bancorp(USB), Wells Fargo(WFC), Yahoo!(YHOO)
Wed. - Advanced Micro Devices(AMD), Ameritrade Holdings(AMTD), AMR Corp.(AMR), Apple Computer(AAPL), Bank of NY(BK), CIT Group(CIT), eBay Inc.(EBAY), JPMorgan Chase(JPM), Kinder Morgan Energy(KMP), Lam Research(LRCX), Mellon Financial(MEL), QLogic Corp.(QLGC), Seagate Technology(STX), Southwest Airlines(LUV), State Street(STT), SunTrust Banks(STI), Washington Mutual(WM)
Thur. - Amdocs(DOX), Beazer Homes(BZH), Capital One Financial(COF), Comerica(CMA), DR Horton(DHI), F5 Networks(FFIV), Freescale Semi(FSL), Harley Davidson(HDI), International Game Technology(IGT), Merrill Lynch(MER), Microchip Tech(MCHP), Motorola Inc.(MOT), Pfizer Inc.(PFE), PNC Financial(PNC), Rambus Inc.(RMBS), Rowan Cos.(RDC), Scientific-Atlanta(SFA), UnitedHealth Group(UNH), Wachovia Corp.(WB), Xilinx(XLNX)
Fri. - Alltel Corp.(AT), Bebe Stores(BEBE), Citigroup(C), Fortune Brands(FO), General Electric(GE), Johnson Controls(JCI), Keycorp(KEY), MBNA Corp.(KRB), Progressive Corp.(PGR), Schlumberger(SLB)

Other events that have market-moving potential this week include:

Mon. - US Markets Closed
Tue. - Goldman Sachs Energy Conference
Wed. - Prudential Growth Conference, Goldman Sachs Energy Conference
Thur. - None of note
Fri. - None of note

BOTTOM LINE: I expect US stocks to finish the week mixed as declining energy prices, short-covering, less hawkish Fed commentary and positive economic data offsets worries over Iran’s nuclear ambitions, some disappointment with forward earnings guidance and profit-taking. My trading indicators are still giving bullish signals and the Portfolio is 75% net long heading into the week.

Market Week in Review

S&P 500 1,287.61 +.17%*



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was modestly positive as the S&P 500 consolidating recent gains. The advance/decline line was about even, most sectors rose and volume was above average on the week. Measures of investor anxiety were mostly higher. However, the AAII % Bulls jumped to 58.96. I would become worried on sustained readings above 60.0% in this contrary indicator. The average 30-year mortgage rate fell to 6.15% which is only 94 basis points above all-time lows set in June 2003. Moreover, the benchmark 10-year T-note yield fell another 2 basis points on the week as economic data was mixed and measures of inflation decelerated further.

Small-caps outperformed on optimism over increased corporate spending and lower long-term interest rates. Unleaded Gas futures resumed their downtrend, notwithstanding rising worries over Iran’s nuclear ambitions, and are 40% below September highs even as refinery utilization remains below normal as a result of the hurricanes. Natural gas supplies fell less than expected this week and are now 11.8% above the 5-year average for this time of year even as over 19% of daily Gulf of Mexico production remains shut-in. Natural gas prices have plunged around 45% in 4 weeks. Gold rose on the week, reaching a 24-year high, as the dollar declined and international diversification continued.

I still believe prices for many commodities are being driven by fear and record capital inflows into commodity funds, rather than fundamentals. I continue to expect global energy demand destruction, decelerating economic growth and a significant increase in supplies into 2006 to push oil prices substantially lower from current levels. The ECRI Weekly Leading Index made a new cycle high and is forecasting healthy US economic activity. Recent gains in the Homebuilders and Retailers are a big positive as the bears’ main arguments revolve around these two sectors. Consumer spending, while slowing, should remain healthy as long-term interest rates stay low, inflation decelerates, energy prices fall, the dollar remains stable, the job market remains healthy, consumer confidence improves and the stocks market rises. These large positives should more than offset a housing market that is slowing to more healthy sustainable levels.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,287.61 +.17%
DJIA 10,959.87 unch.
NASDAQ 2,317.04 +.50%
Russell 2000 708.44 +1.29%
DJ Wilshire 5000 n/a
S&P Equity Long/Short Index 1,146.69 +1.16%
S&P Barra Growth 616.30 +.16%
S&P Barra Value 666.82 +.18%
Morgan Stanley Consumer 600.52 +.07%
Morgan Stanley Cyclical 793.61 -1.80%
Morgan Stanley Technology 552.73 -.10%
Transports 4,147.10 -1.59%
Utilities 415.85 +.17%
S&P 500 Cum A/D Line 8,328 unch.
Bloomberg Crude Oil % Bulls 60.0 +14.0%
Put/Call .78 +20.0%
NYSE Arms 1.29 +50.0%
Volatility(VIX) 11.23 +2.09%
ISE Sentiment 172.00 +11.69%
AAII % Bulls 58.96 +100.89%
AAII % Bears 19.08 -52.56%
US Dollar 88.86 unch.
CRB 336.84 -.77%
ECRI Weekly Leading Index 136.50 +.66%

Futures Spot Prices
Crude Oil 63.92 -.59%
Unleaded Gasoline 173.11 -4.57%
Natural Gas 8.79 -8.81%
Heating Oil 171.50 -5.09%
Gold 556.90 +2.86%
Base Metals 161.87 +4.0%
Copper 211.25 +1.42%
10-year US Treasury Yield 4.35 -.46%
Average 30-year Mortgage Rate 6.15% -.97%

Leading Sectors
Disk Drives +6.0%
Computer Hardware +4.82%
Retail +2.17%
Homebuilders +2.16%
Energy +1.94%

Lagging Sectors
Papers -1.47%
Oil Tankers -2.18%
Broadcasting -2.18%
HMOs -4.14%
Airlines -8.17%

One-Week High-Volume Gainers
One-Week High-Volume Losers

*5-Day % Change

Stocks Slightly Lower into Final Hour Ahead of Three-day Weekend

BOTTOM LINE: The Portfolio is slightly lower mid-day on losses in my Software longs, Medical longs and Energy shorts. I have not traded today, thus leaving the Portfolio 50% net long. The tone of the market is slightly positive as the advance/decline line is modestly higher, sector performance is mixed and volume is average. Measures of investor anxiety are higher. The ECRI Weekly Leading Index rose to 136.50 this week from 135.60 the prior week. This is a new cycle high and up from 132.00 during the last week of May. This gauge of future economic activity is still forecasting healthy U.S. growth. I continue to believe economic growth is slowing from vigorous levels to average levels. I expect US stocks to trade mixed from current levels into the close as profit-taking and worries over Iran offsets lower long-term interest rates and short-covering.