Today's Headlines

Bloomberg:
- OPEC may maintain output near a 25-year high as attacks against Nigeria’s oil industry and concern about a dispute with Iran keep prices high.
- Google(GOOG) co-founder Sergey Brin said his Internet company will fight the US government for as long as it takes to avoid handing over information on user searches.
- Iran said the UN was being “manipulated for political purposes” in its first official observance today of the memory of the Holocaust.
- The US dollar is rising against the euro ad yen after new home sales exceeded expectations.
- Crude oil is rising for a second day on fears that a standoff over Iran’s nuclear research may cause disruptions to supply.

CNBC:
- The FDA has approved Pfizer’s(PFE) Exubera inhaled insulin drug for sale, Pfizer CEO McKinnell said.

Wall Street Journal:
- Television networks are mixing advertising with entertainment in children’s shows in a way that it’s hard to distinguish one from the other.
- US companies may soon be moving to restate earnings to avoid problems with accounting for financial instruments that they use to minimize risk.
- Intel Corp.(INTC), Hewlett-Packard(HPQ) and seven other computer makers said they pledged to keep investing in the Itanium computer chip, which is far outsold by x86-design chips.
- The potentially deadly “blackworm” computer virus may activate Feb.3 and start destroying data on computers it has reached.
- President Bush plans to nominate Kevin Warsh, an adviser on domestic finance and capital markets, and may name Randall Kroszner, of the Univeristy of Chicago’s Graduate School of Business, to the board of the Federal Reserve.

NY Times:
- US banks, credit unions and money management firms are seeking to benefit by offering health savings accounts, the centerpiece of President Bush’s plans for healthcare.
- Atlantic Sea Island Group proposed building a $1 billion liquefied natural gas terminal on a 53-acre man-made island between Long Island and New Jersey.
- Most US airlines may begin to see a return to profitability during the next two years as a smaller number of available seats has enabled them to raise ticket prices and fly more full planes.
- NYC taxes on co-op and condo buildings with four to 10 apartments fell by an average of $1,800 per unit.

AFP:
- Iran promised to allow UN nuclear inspectors access to the former Lavizan military site in the capital Tehran, citing unidentified diplomats. The pledge, a key concession to investigators studying Iran’s nuclear program, was made in a letter faxed to Ollie Heinonen, deputy director for safeguards at the UN’s IAEA in Vienna.

Reuters:
- Mittal Steel is poised to bid for Arcelor SA.

Middle East Economic Survey:
- Kuwait said the emirate’s crude production capacity will climb 67% by 2020, citing unidentified senior Kuwaiti oil officials.

GDP Slows on Hurricane Effects, Inflation Decelerates, New Home Sales Improve

- Advance 4Q GDP rose 1.1% versus estimates of a 2.8% increase and a 4.1% rise in 3Q.
- Advance 4Q Personal Consumption rose 1.1% versus estimates of a .4% increase and a 4.1% rise in 3Q.
- Advance 4Q GDP Price Index rose 3.0% versus estimates of a 2.7% gain and a 3.3% rise in 3Q.
- New Home Sales for December rose to 1269K versus estimates of 1225K and 1233K in November.

BOTTOM LINE: The US economy grew at a slower-than-expected 1.1% pace in the fourth quarter as consumers spent less and corporations limited equipment purchases, Bloomberg reported. This snapped the string of 10 straight quarters exceeding 3% growth, the best stretch since 1986. A drop in October car sales weighed on consumer spending during the quarter. The US economy expanded 3.5% for all of 2005, above the long-term average of 3.1% growth. Government spending declined last quarter at a 2.4% annual rate, the biggest drop in 5 years. The core pce, the Fed’s favorite inflation measure, rose 2.2% during the quarter. GDP was weighed down in the fourth quarter by the effects of the hurricanes. I expect GDP to bounce back above 3% this quarter as hurricane rebuilding takes hold, corporate spending accelerates, the job market remains healthy, housing improves, consumer spending bounces back and the Fed stops raising interest rates.

Sales of new US homes unexpectedly increased in December, capping a fifth straight record year for the industry and suggesting job and income growth are keeping the housing market from withering, Bloomberg reported. The median selling price was $221,800, down 3.4% from a year earlier. The supply of new homes on the market remained at 4.9 months’ worth. For the year, the median price of a new home rose 7.4% to $237,300. I expect home sales to continue to improve in January as overall growth slows to more healthy sustainable levels.

Links of Interest

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Friday Watch

Late-Night Headlines
Bloomberg:
- Sony Corp.(SNE) shares headed for their biggest gain in 15 years, raising the company’s market value by $5 billion, as higher sales of Bravia TVs and Playstation game players helped generate record profit in its third quarter.
- US Senate Republican leaders said they have enough support to end debate on Supreme Court nominee Samuel A. Alito Jr. and confirm him next week as some Democrats staged a last-ditch filibuster to try to derail his confirmation.

Financial Times:
- EMC Corp.(EMC) may raise its full-year growth targets and plans acquisitions in 2006, citing an interview with Chairman and CEO Tucci.

Wall Street Journal:
- North Korea has become one of the leading international producers of counterfeit cigarettes, providing a source of financing for its nuclear weapons program.

Business Week:
- Microsoft(MSFT) is working on plans to develop its own portable digital media device that will challenge the iPod.

London-based Times:
- The “long-term chances of survival of the euro should be questioned,” citing Frits Bolkestein, the former EU Internal Market Commissioner.

Electronic Times:
- Research in Motion Ltd. may start offering its BlackBerry e-mail in South Korea in May through KT Powertel.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on (MSFT), (DHR), (T), (MEH), (MCK), (KLAC), (GNW) and (PFE).
- Reiterated Underperform on (FLWS), (UST), (BOW) and (MRO).

Night Trading
Asian Indices are +1.0% to +2.0% on average.
S&P 500 indicated +.27%.
NASDAQ 100 indicated +.74%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
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Earnings of Note
Company/EPS Estimate
(BOL)/1.20
(BDK)/1.90
(CVX)/1.89
(GCI)/1.41
(GDT)/.34
(ITT)/1.41
(MSTR)/1.34
(NUE)/1.88
(OSTK)/-.05
(PG)/.69
(RBK)/.58
(TROW)/.83

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Advance 4Q GDP is estimated to rise 2.8% versus a 4.1% increase in 3Q.
- Advance 4Q Personal Consumption is estimated to rise .4% versus a 4.1% gain in 3Q.
- Advance 4Q GDP Price Index is estimated to rise 2.7% versus a 3.3% gain in 3Q.

10:000 am EST
- New Home Sales for December are estimated to fall to 1225K versus 1245K in November.

BOTTOM LINE: Asian indices are sharply higher on gains in US shares and reports of strong economic growth in the region. I expect US equities to open higher and build on gains throughout the day. The Portfolio is 100% net long heading into the day.

Stocks Finish Sharply Higher on Strong Economic Data, Falling Natural Gas Prices and Less Irrational Earnings Pessimism

Indices
S&P 500 1,273.83 +.72%
DJIA 10,809.47 +.93%
NASDAQ 2,283.00 +.99%
Russell 2000 728.48 +1.68%
S&P Barra Growth 605.99 +.49%
S&P Barra Value 663.88 +.96%
Morgan Stanley Consumer 596.35 -.03%
Morgan Stanley Cyclical 790.90 +.65%
Morgan Stanley Technology 536.70 +.62%
Transports 4,306.53 +1.55%
Utilities 414.77 -.92%
Put/Call .69 -17.86%
NYSE Arms .82 -19.13%
Volatility(VIX) 12.42 -3.50%
ISE Sentiment 194.00 +1.57%
US Dollar 88.63 +.34%
CRB 343.46 +.27%

Futures Spot Prices
Crude Oil 66.45 +.29%
Unleaded Gasoline 169.00 +.31%
Natural Gas 8.25 +.32%
Heating Oil 178.40 +.34%
Gold 560.70 +.14%
Base Metals 167.35 -.98%
Copper 220.05 -.05%
10-year US Treasury Yield 4.50% +.67%

Leading Sectors
Semis +2.88%
Defense +2.28%
I-Banks +2.45%

Lagging Sectors
Computer Hardware -.82%
Utilities -.92%
Networking -1.26%

Evening Review
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In Play

Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on (ALK), (EL) and (HD).
- Reiterated Underperform on (UIS) and (MKL).

Afternoon/Evening Headlines
Bloomberg:
- Hamas, the radical Islamic movement that has attacked Israelis thousands of times with suicide bombers, wrested control of the Palestinian legislature from Fatah, winning 76 seats in yesterday’s voting, election officials said.
- Broadcom Corp.(BRCM) said fourth-quarter profit almost tripled as sales grew for consumer gadgets such as wireless headsets and Apple Computer’s video iPod.
- Microsoft(MSFT) said second-quarter profit rose 5.5%, buoyed by new server software. Revenue missed forecasts after shortages of its Xbox 360 console.

Wall Street Journal:
- Goldman Sachs(GS) will pay $2.58 billion for a stake in Industrial & Commercial Bank of China.

BOTTOM LINE: The Portfolio finished higher today on gains in my Medical longs, Semi long, Semi-equip. longs and Biotech longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was very positive today as the advance/decline line finished substantially higher, most sectors gained and volume was heavy. Measures of investor anxiety were mostly lower into the close. Overall, today's performance was very bullish as the major averages and breadth finished near session highs on heavy volume, notwithstanding higher long-term rates, rising oil prices, a big political win for Hamas, jitters over tomorrow's GDP report and earnings worries. I have the feeling that tomorrow's GDP report will be viewed positively by the market. We have heard for weeks how "bad" it is going to be. I expect it to exceed estimates of a 2.8% increase, which should calm fears that the economy is slowing too much. However, if I am wrong and GDP comes in below estimates, the recent rise in long-term rates should cease and traders will factor in an even greater chance that the Fed will "pause." Either way, I suspect stocks will build on today's gains tomorrow.

Stocks Sharply Higher as Natural Gas Plunges, Economic Data Exceeds Expectations and Earnings Remain Strong

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Semi Equipment longs, Medical longs and Biotech longs. I exited my IWM and QQQQ shorts and added to my AAPL and RACK longs, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, almost every sector is rising and volume is heavy. Measures of investor anxiety are mostly lower. As pundits continue to bash the best earnings streak since record keeping began in 1936, I am becoming more bullish. Earnings so far for this quarter are rising about 13%, almost double the long-term average. The S&P 500 will be even cheaper relative to earnings after all the reports are in. Moreover, the bar has been sufficiently lowered for next quarter without too much damage to the major averages. The S&P 500 is still up 2.0% this month and the Russell 2000 is up 7.5%. These are very good performances to start the year and come amid a decline in bullish sentiment, escalating fears over Iran, perceived "poor" earnings, weaker housing data, elevated oil prices, talk of an impending recession and rising long-term rates. This bodes very well for another push higher in U.S. stocks over the coming weeks. I expect US stocks to trade modestly higher into the close from current levels on short-covering, more optimism over US economic growth and collapsing natural gas prices.