Monday Watch

Weekend Headlines
Bloomberg:
- Wal-Mart(WMT) said January same-store sales rose about 4.7%, the biggest January gain in two years.
- Former President Clinton called on Hamas to renounce violence as it prepares to form a government after winning Palestinian parliamentary elections.
- President Bush called on Congress to hold a confirmation vote on US Supreme Court nominee Samuel A. Alito Jr., and lashed out at Democrats for their handling of the judge’s nomination.
- The NFL said it will show eight regular-season games on its cable-tv channel on Thursday and Saturday nights starting next season.
- Morgan Stanley’s(MWD) international chairman Jonathan Chenevix-Trench downplayed the recent departure of four senior investment bankers, saying the firm is in “great shape.”
- Israel said it will cut off contact with the Palestinian Authority unless Hamas, which won last week’s legislative elections, meets four conditions, including acceptance of prior Israeli-Palestinian peace agreements.
- Saudi Arabia’s oil minister said OPEC shouldn’t cut production when the group meets in two days.
- OPEC should leave oil production unchanged, Algeria’s energy minister said.
- Japan’s industrial production rose for a fifth month in December, the longest expansion since 1999, as robust overseas and domestic demand encourages companies to increase output of electronics and motor vehicles.
- US Secretary of State Condoleezza Rice will press US allies today in London to deprive the incoming Hamas-led Palestinian government of financial support unless it abandons terrorism and accepts the existence of Israel.
- Arcelor SA, the world’s second-largest steelmaker, said its board unanimously rejected a $22.5 billion hostile takeover bid by rival Mittal Steel Co., the largest producer of the metal.

Wall Street Journal:
- Citigroup Inc.(C) may bid for General Motors’(GM) finance unit, GMAC.

Washington Post:
- China’s Communist Party introduced economic, educational and medical reform to “help” farmers since their protests have become increasingly violent.
- Some Democrats are using blogs and mass e-mails to denounce members of their own political party for trying to appeal to a broad spectrum of US voters.
- Target Corp.(TGT) operates one of the most advanced crime labs in the US at its headquarters in Minneapolis as part of its efforts to aid local and national law-enforcement agencies.
- The White House may be reluctant to pay for 19 planned NASA shuttle flights and may delay deploying a new generation of manned spacecraft until 2014.

LA Times:
- Sales of new home rose 4.4% in 2005, the highest percentage increase since market researcher DataQuick Information Systems began taking data in 1988.

Seattle Times:
- Microsoft(MSFT) is acquiring Seadragon Software, a Seattle-based company developing technologies that could be used across several of the software giant’s businesses.

Financial Times:
- Microsoft(MSFT) may face new antitrust action from the European Commission which could force it to disclose more information about its Windows operating program.
- The SEC plans to randomly inspect hedge fund managers of businesses it regards as high risk, citing Gene Gohlke, associate director of the SEC’s compliance office.

Independent on Sunday:
- John Lasseter, the creative chief of Pixar Animation Studios(PIXR) told Walt Disney(DIS) that production on “Toy Story 3” will be scrapped.

AFP:
- Ex-Iraqi dictator Saddam Hussein walked out of his trial in Baghdad after his half-brother was thrown out by the judge.
- Kuwaiti Oil Minister al-Sabah urged OPEC to maintain oil supplies close to a 25-year high when it meets Jan. 31.

Focus:
- German authorities uncovered clues that Iran is expanding an arsenal of weapons of mass destruction, increasing concern that the country may have a secret nuclear-weapons program.

Nihon Keizai:
- Hitachi Ltd. may invest $852 million to build a new flat-screen plasma TV panel factory and expand capacity to keep up with rivals.

El Mundo:
- Mexico and the US may be close to an agreement on immigration, Mexican President Vicente Fox said.

Tehran Times:
- Iran will begin drilling for oil and gas in the Caspian Sea by June, citing an Iranian oil official.
- Iran will export 2.6 million barrels of crude oil a day in 2006, citing figures in the latest government budget plan.

Weekend Recommendations
Barron's:
- Had positive comments on (MHP).
- Had negative comments on (PCL) and (AMLN).

Goldman Sachs:
- Reiterated Outperform on (PFE).

Night Trading
Asian indices are +.50% to +1.0% on average.
S&P 500 indicated -.01%.
NASDAQ 100 indicated +.09%.

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US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Before the Bell CNBC Video(bottom right)
Global Commentary
Asian Indices
European Indices
Top 20 Business Stories
In Play
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Daily Stock Events
Macro Calls
Rasmussen Consumer/Investor Daily Indices
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Earnings of Note
Company/Estimate
(AFL)/.63
(CHKP)/.35
(CMI)/3.11
(EK)/.39
(XOM)/1.44
(GILD)/.53
(KFT)/.53
(MAT)/.48
(PCL)/.34
(SGP)/.08
(SEE)/.74
(SII)/.43
(SYY)/.35
(TSN)/.16
(ZMH)/.83

Upcoming Splits
- (MRBK) 3-for-2
- (CTHR) 5-for-4

Economic Releases
8:30 am EST
- Personal Income for December is estimated to rise .4% versus a .3% increase in November.
- Personal Spending for December is estimated to rise .7% versus a .3% increase in November.
- PCE Core(M-o-M) for December is estimated to rise .2% versus a .1% gain in November.

BOTTOM LINE: Asian Indices are higher, led by financial, material and technology shares in the region. I expect US stocks to open mixed and to rise into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the week.

Weekly Outlook

Click here for The Week Ahead by Reuters

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

Economic reports for the week include:

Mon. - Personal Income, Personal Spending, PCE Deflator
Tues. - 4Q Employment Cost Index, Consumer Confidence, Chicago Purchasing Manager, FOMC Rate Decision
Wed. - Construction Spending, Pending Home Sales, ISM Manufacturing, ISM Prices Paid, Total Vehicle Sales
Thur. - Non-farm Productivity, 4Q Unit Labor Costs, Initial Jobless Claims
Fri. - Change in Non-farm Payrolls, Unemployment Rate, Average Hourly Earnings, Univ. of Mich. Confidence, Factory Orders, ISM Non-Manufacturing

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

Mon. - Aflac Inc.(AFL), Checkpoint Software(CHKP), Cummins Inc.(CMI), Eastman Kodak(EK), Exxon Mobil(XOM), Gilead Sciences(GILD), Kraft Foods(KFT), Mattel Inc.(MAT), Schering-Plough(SGP), Sysco Corp.(SYY), Tyson Foods(TSN), Zimmer Holdings(ZMH)
Tues. - Allstate(ALL), Altria Group(MO), Archer-Daniels-Midland(ADM), Chicago Merc(CME), Chiron Corp.(CHIR), Chubb Corp.(CB), Constellation Energy(CEG), Cooper Cameron(CAM), Diebold(DBD), Flextronics(FLEX), Google Inc.(GOOG), Hilton Hotels(HLT), Illinois Tool Works(ITW), JetBlue Airlines(JBLU), Kellogg(K), Knight Ridder(KRI), L-3 Communications(LLL), Merck & Co.(MRK), Phelps Dodge(PD), Symantec(SYMC), United States Steel(X), Valero Energy(VLO), Wythe(WYE)
Wed. - Anheuser-Busch(BUD), Boeing(BA), Boston Scientific(BSX), Duke Energy(DUK), HCA Inc.(HCA), JDS Uniphase(JDSU), MBIA Inc.(MBI), MGM Mirage(MGM), Monster Worldwide(MNST), Pitney Bowes(PBI), Pulte Homes(PHM), Starbucks(SBUX), Time Warner(TWX), Tribune(TRB)
Thur. - Allergan(AGN), Amazon.com(AMZN), Avon Products(AVP), Cerner Corp.(CERN), Clorox(CLX), Comcast Corp.(CMCSA), CVS Corp.(CVS), Electronic Arts(ERTS), International Paper(IP), Intuitive Surgical(ISRG), Linens ‘n Things(LIN), Ratheon(RTN), Royal Caribbean(RCL), Sara Lee(SLE), Starwood Hotels(HOT), Tyco International(TYC), Maytag Corp.(MYG), Moody’s(MCO)
Fri. - THQ Inc.(THQI), Wendy’s International(WEN), Weyerhaeuser(WY), Whirlpool(WHR)

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

Mon. - CSFB Energy Summit
Tue. - Citigroup Financial Services Conference, CSFB Energy Summit, OPEC Meeting
Wed. - Citigroup Financial Services Conference, Merrill Lynch IT Services & Software Conference, CSFB Energy Summit
Thur. - CSFB Energy Summit, Merrill Lynch IT Services & Software Conference
Fri. - Merrill Lynch IT Services & Software Conference, CSFB Energy Summit

BOTTOM LINE: I expect US stocks to finish the week modestly higher on more dovish Fed comments, diminishing inflation worries, a healthy job market, less irrational pessimism over earnings, more general optimism, lower energy prices, short-covering and “catch-up” buying. My trading indicators are now giving bullish signals and the Portfolio is 100% net long heading into the week.

Market Week in Review

S&P 500 1,283.72 +1.76%*



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was very positive as US stocks posted meaningful gains even as worries over Iran’s nuclear program remained, oil stayed elevated, economic data was mixed, earnings were about at expectations and long-term rates increased. The advance/decline line rose, most sectors gained and volume was above average on the week. Measures of investor anxiety were mostly lower. However, the AAII % Bulls plunged to 30.77%, which is approaching depressed levels. This is a big positive for stocks. The average 30-year mortgage rate rose slightly to 6.12% which is only 91 basis points above all-time lows set in June 2003. The benchmark 10-year T-note yield increased 16 basis points on the week as fears over the previous Friday’s stock sell-off dissipated, new home sales bounced, the labor market strengthened further and signs of increased corporate spending were evident.

Unleaded Gasoline futures fell even as oil remained elevated on Iran fears and are now 40% below September highs even as refinery utilization remains below normal as a result of the hurricanes. Natural gas inventories fell slightly more than expected this week. However, supplies are now 22.0% above the 5-year average, approaching an all-time record high for this time of year, even as over 18% of daily Gulf of Mexico production remains shut-in. Natural gas prices have plunged around 46% in 6 weeks. Gold was about unchanged on the week as geopolitical concerns were offset by a rising US dollar.

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. Elevated prices related to Iran only make this outcome more likely. Any temporary spike in energy price due to an attack on Iran or Iranian halt in oil production would likely be less severe and more temporary than most expect as speculators are already factoring in a substantial OPEC production disruption. This scenario would also likely lead to a Fed rate cut.

Small-caps outperformed again as the Russell 2000 made another all-time high on Thursday and is already up 9% for the year. In my opinion, US small-caps now offer similar return potential to that of most emerging international markets with much less risk. S&P 500 earnings growth for the fourth quarter is still on pace to rise 13% year-over-year, almost double the long-term average. This would be the 15th consecutive quarter of double-digit profit growth, the best streak since record-keeping began in 1936. Moreover, companies have sufficiently lowered the bar as to allow for better-than-expected 1Q results. The ECRI Weekly Leading Index made another cycle high and is forecasting continued healthy US economic activity. While volatility will likely increase going forward, I still expect the S&P 500 to return 15% this year, notwithstanding any temporary weakness related to issues with Iran. High single-digit earnings growth, average economic growth of around 3%, an end to Fed rate hikes, low long-term interest rates, lower energy prices, a healthy labor market, a more sustainable housing market, p/e multiple expansion, a stable US dollar, decelerating inflation, increased corporate spending, rising demand for US assets and a lifting of irrational pessimism should provide the catalysts for strong gains this year.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,283.72 +1.76%
DJIA 10,907.21 +2.25%
NASDAQ 2,304.23 +2.51%
Russell 2000 732.22 +3.92%
S&P Equity Long/Short Index 1,144.75 +.82%
S&P Barra Growth 611.84 +1.30%
S&P Barra Value 667.74 +2.25%
Morgan Stanley Consumer 599.00 +.60%
Morgan Stanley Cyclical 798.74 +4.30%
Morgan Stanley Technology 542.84 +1.94%
Transports 4,309.71 +3.64%
Utilities 416.07 -1.24%
S&P 500 Cum A/D Line 8,416 +7.0%
Bloomberg Crude Oil % Bulls 58.0 -2.55%
Put/Call .78 -26.42%
NYSE Arms .91 -56.67%
Volatility(VIX) 11.97 -17.79%
ISE Sentiment 198.00 +11.86%
AAII % Bulls 30.77 -38.46%
AAII % Bears 33.33 +29.04%
US Dollar 89.32 +.43%
CRB 346.96 +.52%
ECRI Weekly Leading Index 138.30 +.36%

Futures Spot Prices
Crude Oil 67.76 -1.30%
Unleaded Gasoline 173.64 -4.67%
Natural Gas 8.51 -10.87%
Heating Oil 180.69 -3.37%
Gold 558.90 +.02%
Base Metals 168.86 +5.15%
Copper 223.20 +5.23%
10-year US Treasury Yield 4.51% +3.68%
Average 30-year Mortgage Rate 6.12% +.33%

Leading Sectors
Steel +19.56%
Semis +7.48%
I-Banks +4.92%
Gold & Silver +4.75%
Telecom +3.92%

Lagging Sectors
Foods -.05%
Disk Drives -.58%
Broadcasting -.85%
Utilities -1.24%
Networking -1.41%

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

*5-Day % Change

Stocks Higher Heading into Final Hour on Decline in Long-term Rates and Short-covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Medical longs, Software longs and Biotech longs. I added to my AAPL long and VLO short this morning, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, sector performance is mostly positive and volume is heavy. Measures of investor anxiety are mixed. As far as I can tell George Soros has been bearish on the global economy, specifically the U.S., for some time. However, according to Gurufocus.com, his two largest sector weightings at the beginning of the fourth quarter of last year were Consumer Services at 20.3% and Technology at 17.3%. Moreover, a long QQQQ position is his third largest individual long position. This doesn't seem to correspond with his very bearish statements. I expect US stocks to trade modestly higher into the close from current levels on short-covering, “catch-up buying” and lower long-term rates.

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.