Stocks Finish Slightly Lower as Energy Prices Fall and Long-term Rates Rise

Indices
S&P 500 1,264.68 -.17%
DJIA 10,709.74 -.02%
NASDAQ 2,260.65 -.20%
Russell 2000 716.45 -.22%
S&P Barra Growth 603.04 -.35%
S&P Barra Value 657.54 +.01%
Morgan Stanley Consumer 596.54 -.03%
Morgan Stanley Cyclical 788.79 +.33%
Morgan Stanley Technology 533.41 +.15%
Transports 4,240.81 -.80%
Utilities 418.62 -1.51%
Put/Call .84 +58.49%
NYSE Arms 1.02 -9.85%
Volatility(VIX) 12.87 -3.31%
ISE Sentiment 191.00 +1.06%
US Dollar 88.43 +.02%
CRB 342.52 -.35%

Futures Spot Prices
Crude Oil 65.47 -.58%
Unleaded Gasoline 165.70 -.46%
Natural Gas 8.45 -.06%
Heating Oil 178.50 -.31%
Gold 562.50 unch.
Base Metals 169.01 +2.39%
Copper 220.10 -.11%
10-year US Treasury Yield 4.47% +1.93%

Leading Sectors
Gold & Silver +1.93%
Telecom +1.47%
Steel +1.0%

Lagging Sectors
Energy -1.95%
Disk Drives -2.41%
Oil Service -2.81%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on (QCOM) and (ADP).
- Reiterated Underperform on (MESA).

Afternoon/Evening Headlines
Bloomberg:
- Juniper Networks(JNPR) said fourth-quarter profit rose 60% as sales increased at the slowest pace in two years.
- Buyout firm General Atlantic LLC increased by 26% its bid for a stake in the NY Merc, the world’s biggest energy market.
- Kirk Kerkorian, General Motor’s(GM) fourth-largest investor, increased his stake in the automaker back to 9.9% as he pressures the company to halve its $1.1 billion dividend and reduce executive pay.
- Novellus Systems(NVLS) said fourth-quarter sales and profit beat estimates and raised its first-quarter guidance.
- Qualcomm Inc.(QCOM) said profit rose 21% as it collected more licensing fees for its technology and sales in Europe and Asia increased.
- US Treasuries fell the most since November after the government’s $22 billion two-year note sale drew the weakest demand in nine months as investors shunned yields that may be below the Fed’ benchmark interest rate in a week.
- Crude oil fell and gasoline had its largest drop in three months after an Energy Department report showed US fuel supplies increased for a fourth straight week.

Wall Street Journal:
- President Bush said the US won’t deal with the militant Islamic group Hamas, which won more than a third of the vote in elections for the Palestinian Legislative Council, unless it recognizes Israel’s right to exist.

CNBC:
- The US will announce a trade agreement with South Korea in the next week and a half which will be the largest since the North American Free Trade Agreement.

Financial Times:
- Johnson & Johnson(JNJ) may consider making an offer for Serono SA after failing to acquire Guidant Corp.(GDT).

AP:
- Richard Hatch, who won $1 million in the first season of CBS’s “Survivor” television series, was convicted of tax evasion and faces up to 13 years in prison.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Energy-related shorts and Retail longs. I added to my IWM and QQQQ shorts 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, sector performance was mostly negative and volume was heavy. Measures of investor anxiety were mostly lower into the close. Overall, today's action was slightly bearish considering all the crosswinds. However, I doubt many bulls or bears are too pleased with today's performance. The semis finished near session highs after (MXIM) raised 3Q guidance on their conference call. As well, retail, telecom, networking and financials held up throughout the day even as long-term rates moved higher.

Stocks Lower into Final Hour on Weakness in Energy and Homebuilding Shares

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Retail longs and Energy-related shorts. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is above average. Measures of investor anxiety are mixed. According to Hedge Fund Research, investors took a net $824 million out of hedge funds in the fourth quarter of last year. This is the first quarterly net withdrawal in over 10 years. Moreover, fund of funds had outflows of $2.1 billion, the second consecutive quarter of withdrawals. Fund of funds account for about 36% of total hedge fund assets. For the year, hedge fund inflows were $47 billion, down 36.1% from 2004. Fund of funds inflows were $9.5 billion for 2005, down 71.2% from the prior year. During the first three quarters of 2005, 484 or 5.7% of the total number of funds shut down, the largest number since HFR began tracking closings since 1996. Industry assets have still doubled since the stock market bubble burst in 2000 to $1.1 trillion. I expect US stocks to trade mixed into the close from current levels as rising long-term rates offsets lower energy prices.

Today's Headlines

Bloomberg:
- SAP AG(SAP) forecast software license sales will rise as much as 17% this year, beating analyst estimates.
- Women will now be able to determine how many eggs they have left in their ovaries, allowing them to assess whether they can wait before trying to get pregnant or should get to work immediately.
- Boston Scientific(BSX) won bidding for Guidant(GDT) with its $27 billion bid, beating out Johnson & Johnson(JNJ), which declined to raise its offer.
- Investors pulled more money out of hedge funds in the fourth quarter than they put in, the first quarterly withdrawals in more than 10 years, as returns fell below their long-term average for the second straight year, according to Hedge Fund Research.
- Crude oil is falling after an Energy Department report showed that US supplies of gasoline and distillate fuel increased for a fourth straight week.

Wall Street Journal:
- Oxford University Press and other religious textbook publishing companies have come under increasing pressure from Hindu, Jewish and other religious groups to modify passages in textbooks they produce.
- A group of US utilities is trying to persuade automakers to produce plug-in electric hybrid cars in a bid to gain more business.
- US start-up companies are finding it harder to maker IPOs because of regulatory and other stock-market changes.
- Aetna(AET), Wellpoint(WLP), Humana(HUM) and other private insurers in the US are hiring aggressively to help cope with an unexpected level of problems as new Medicare drug-benefit plans are rolled out.
- Google(GOOG), Sun Microsystems(SUNW) and Lenovo Group Ltd. have supplied at least $1 million to finance a new program to identify malicious software producers.
- The US Congress plans to prevent troubled companies from funding lavish pension payouts to executives.

NY Times:
- Ford Motor(F) plans to begin airing a television commercial today explaining the automaker’s financial difficulties and restructuring plans to consumers.

Washington Post:
- President Bush plans to propose tax breaks for individuals’ personal health spending

Gulf News:
- Iraq more than doubled the flow of oil to 500,000 barrels a day through its northern export pipeline to the Ceyhan terminal in Turkey.

Interfax:
- Iran regards “positively” a proposal to set up a joint venture on Russian soil to enrich uranium for the Iranian nuclear industry, citing Ali Larijani, the secretary of Iran’s Supreme National Security Council.

World Gas Intelligence:
- Global liquefied natural gas output capacity may rise 18% this year as four new export plants come online.

Existing Home Sales Slow

- Existing Home Sales for December fell to 6.6M versus estimates of 6.87M and 7.0M in November.

BOTTOM LINE: Sales of previously owned homes fell in December to the lowest level since March 2004, Bloomberg reported. Sales still finished 2005 at an all-time record high of 7.072 million. The median selling price rose 10.5% in December(y-o-y) to $211,000. Inventories rose to 5.1 months’ worth at the current sales pace versus 5 months’ worth in November. Home re-sales fell 11% in the West, 2.6% in the Northeast and 7.2% in the South. They were unchanged in the Northeast. I continue to believe housing is slowing to more healthy sustainable levels.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Sony Corp.(SNE) will probably revise its annual forecast to a profit from a loss on higher holiday season sales of Bravia flat-screen televisions and digital cameras.
- Crude oil is falling for a third day in NY before a report that may show US oil stockpiles rose last week as mild temperatures sapped heating demand.
- China’s economy grew 9.9% in 2005, overtaking France as the world’s fifth largest, powered by exports and investment in factories, roads and power plants.

Financial Times:
- UK companies are less willing to make acquisitions in emerging markets than companies in the US or other European countries, citing KPMG International research.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on (SYK), (PKG), (DD) and (MSFT).
- Reiterated Underperform on (LU), (EAT) and (CR).

Night Trading
Asian Indices are +.25% to +1.25% on average.
S&P 500 indicated +.14%.
NASDAQ 100 indicated +.21%.

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Earnings of Note
Company/EPS Estimate
(ABT)/.76
(ADP)/.45
(AMG)/1.29
(ATI)/.88
(ALTR)/.19
(AHC)/3.26
(ABC).40
(AMTD)/.22
(BLS)/.45
(BMY)/.28
(BR)/2.35
(CL)/.68
(COP)/2.62
(EXC)/.73
(GD)/1.97
(HSY)/.75
(JNPR)/.20
(KMG)/.161
(MXIM)/.41
(NSC)/.75
(NVLS)/.16
(QCOM)/.38
(ROW)/-.21
(STJ)/.40
(SWK)/.82
(VAR)/.33
(WLP)/1.04

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- Existing Home Sales for December are estimated to fall to 6.87M versus 6.97M in November.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude build of 1,400,000 barrels. Gasoline inventories are estimated to rise 1,400,000 barrels, and distillate supplies are expected to increase by 875,000 barrels. Finally, refinery utilization is expected to remain unchanged.

BOTTOM LINE: Asian indices are higher on falling energy prices and reports of strong economic growth in the region. I expect US equities to open mixed and to rally later in the day, finishing higher. The Portfolio is 75% net long heading into the day.