Tuesday Watch

Late-Night Headlines
Bloomberg:
- International donors are meeting in London today to agree to a five-year plan to develop Afghanistan’s security, government and rule of law, cementing its moves toward democracy since the Taliban regime was ousted in 2001.
- Billionaire investor Carl Icahn recruited former Viacom(VIA) CEO Frank Biondi to lead a fight for control of Time Warner(TWX).
- Merck(MRK) won a lawsuit over its Vioxx painkiller, after a state judge in New Jersey said a Texas man failed to prove the drug caused his stomach pain and internal bleeding.
- The US, European Union, United Nations and Russia put Hamas on notice that once it forms a new Palestinian government there will be financial consequences unless the Islamic movement abandons violence, accepts Israel’s existence and abides by existing peace agreements.
- US Supreme Court nominee Samuel A. Alito Jr. moved closer to confirmation as the Senate agreed to end four days of debate on his selection to replace retiring Justice Sandra Day O’Connor.
- Russia and China agreed to back the referral of Iran’s nuclear program to the UN Security Council at a Feb.2 meeting of the International Atomic Energy Agency, joining the US, UK, France and Germany.
- Google(GOOG) expects “high growth” in Brazil as more people in Latin America’s largest economy gain access to computers, the company’s co-founder Sergey Brin said.

Financial Times:
- OAO Lukoil, Russia’s largest oil company, will restart talks with Iraq’s government to develop oil fields in the country, citing Lukoil Vice President Leonid Fedun.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on (EBAY), (BXP), (X), (XOM), (HEP) and (MYL).
- Reiterated Underperform on (GBL) and (UHS).

Night Trading
Asian Indices are unch. to +1.0% on average.
S&P 500 indicated +.03%.
NASDAQ 100 indicated +.06%.

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Earnings of Note
Company/EPS Estimate
(MDRX)/.09
(ALL)/1.52
(MO)/1.17
(ADM)/.42
(ASD)/.46
(AX)/.24
(AH)/1.00
(ATYT)/.04
(CME)/2.10
(CHIR)/.51
(CB)/2.14
(CIN)/.69
(CEG)/1.00
(CAM)/.45
(CFC)/1.05
(DBD)/.64
(ETR)/.54
(FLEX)/.19
(GOOG)/1.76
(HLT)/.19
(ITW)/1.39
(JBLU)/-.14
(K)/.46
(KRI)/1.22
(LLL)/1.21
(MRK).62
(MSTR)/1.34
(NAV)/3.06
(PD)/3.96
(SYMC)/.25
(VLO)/1.94
(VMC)/.82
(WYE)/.60

Upcoming Splits
(FIF) 3-for-2

Economic Releases
8:30 am EST
- 4Q Employment Cost Index is estimated to rise .9% versus a .8% gain in 3Q.

10:00 am EST
- Consumer Confidence for January is estimated to rise to 105.0 versus a reading of 103.6 in December.
- Chicago Purchasing Manager for January is estimated to fall to 59.8 versus a reading of 60.8 in December.

2:15 pm EST
- The Fed is expected to raise the benchmark interest rate by 25 basis points to 4.5%.

BOTTOM LINE: Asian indices are higher, led by technology companies and automakers in the region. The Fed will likely raise the benchmark interest rate 25 basis points, remove the word "measured" from the policy statement describing the future pace of rate hikes and make more dovish comments than most expect. I expect US equities to open modestly lower and to rally later in the afternoon, fishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Close Mixed as Rising Energy Prices Offset Positive Economic Data Ahead of Fed Meeting

Indices
S&P 500 1,285.20 +.12%
DJIA 10,899.92 -.07%
NASDAQ 2,306.78 +.11%
Russell 2000 730.87 -.18%
S&P Barra Growth 612.77 +.15%
S&P Barra Value 668.26 +.08%
Morgan Stanley Consumer 597.19 -.30%
Morgan Stanley Cyclical 798.87 +.02%
Morgan Stanley Technology 544.38 +.28%
Transports 4,354.49 +1.04%
Utilities 413.71 -.57%
Put/Call .65 -16.67%
NYSE Arms .78 -14.00%
Volatility(VIX) 12.39 +3.51%
ISE Sentiment 238.00 +20.20%
US Dollar 89.43 +.12%
CRB 350.06 +.89%

Futures Spot Prices
Crude Oil 68.54 +.28%
Unleaded Gasoline 177.49 +.01%
Natural Gas 9.38 -.10%
Heating Oil 183.38 +1.49%
Gold 568.10 +.41%
Base Metals 169.61 +.45%
Copper 222.80 -.07%
10-year US Treasury Yield 4.53% +.49%

Leading Sectors
Oil Service +2.93%
Energy +2.30%
Airlines +2.94%

Lagging Sectors
Semis -.71%
Tobacco -.90%
Hospitals -1.53%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Underperform on (SGP).

Afternoon/Evening Headlines
Bloomberg:
- President Bush will nominate Stanford University economist Ed Lazear to be chairman of his Council of Economic Advisers.
- OPEC agreed to keep production near a 26-year high in the second quarter after most members said prices were too high to warrant an output cut, Saudi Arabia’s oil minister said.

San Francisco Chronicle:
- California builders plan to construct tens of thousands of homes on flood-prone delta lands to meet demand for housing from Sacramento to the Bay Area.

BOTTOM LINE: The Portfolio finished higher today on gains in my Medical Information Systems longs, Semi longs and Computer longs. I exited my VLO short and took profits in a few longs in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was slightly negative today as the advance/decline line finished modestly lower, sector performance was mixed and volume was about average. Measures of investor anxiety were mostly lower into the close. Overall, today’s performance was neutral ahead of a number of market-moving catalysts. The Airline Index (XAL) was up almost 3% today, even as oil remains near $70/bbl. The recent correction in the group looks like it has run its course. (AMR) and (SKYW) are my two favorites in this despised group.

Stocks Mixed Mid-day Ahead of Fed Meeting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Medical Information Systems longs and Computer longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly negative as the advance/decline line is modestly lower, most sectors are rising and volume is around average. Measures of investor anxiety are mostly lower. The energy sector saw the most insider selling of any group in the S&P 500 last week. Insider sales totaled $144,191,838 while buys totaled $24,776. This is the largest weekly net insider selling for energy this cycle. I expect US stocks to trade mixed into the close from current levels as higher energy prices and apprehension ahead of the Fed meeting offsets positive economic data and stable long-term rates.

Today's Headlines

Bloomberg:
- Google(GOOG) is releasing a custom toolbar for Web browsers as part of efforts to attract more visitors to its sites.
- People should drink less alcohol because it contributes to several types of cancer, according to a review published in the medical journal Lancet Oncology today.
- Saudi Prince Alwaleed bin Talal and Colony Capital LLC agreed to buy Fairmont Hotels & Resorts for $3.24 billion, adding 87 luxury hotels to Colony’s Raffles chain.
- GM(GM) bonds and shares rose as a Citigroup(C) unit joined negotiations to buy a majority stake in the automaker’s auto-loan and mortgage business.

Wall Street Journal:
- Time Warner(TWX) will probably announce today that it’s teaming up with Bertelsmann AG to start an online service that will sell films and television shows in Germany.
- US Congress has boosted foreign aid to help fight diseases to $4 billion, almost triple what the US spent in 2001 in inflation-adjusted terms.
- US publishers say fact-checking books they produce has become too expensive for them to handle, prompting concern that many works, especially non-fiction, may contain inaccurate information.
- EarthLink(ELNK) plans to start offering this week high-speed Internet and online-calling services in partnership with Covad Communications(DVW).
- Warner Music and Skype Technologies SA may today announce an agreement to make ringtones available over Internet phones.
- The Federal Aviation Administration’s head of air traffic control is struggling to cope with high costs and chronic delays.
- The NY Merc’s grip on global energy and metals markets may be weakening, just as the exchange is preparing to sell a minority stake and become a public company.

NY Times:
- News Corp.’s(NWS) Fox network may overtake CBS and ABC to win the highest viewership in the 18-to-49 category this season because of the high ratings of its “American Idol” show.
- Microsoft Corp.(MSFT) is developing a mobile phone that could be connected to a television and a keyboard to function as a computer to be used in the developing world.

NY Post:
- Some Walt Disney Co.(DIS) shareholders may try to oust Chairman George Mitchell.

LA Times:
- California recreational boat sales increased about 8% last year, fueled in part by a real estate market boom.

Sabah:
- Turkey won’t back referring Iran to the UN over its nuclear program, putting the nation at odds with the EU.

Personal Incomes Remain Healthy, Spending Accelerates, Inflation Decelerates

- Personal Income for December rose .4% versus estimates of a .4% increase and a .4% gain in November.
- Personal Spending for December rose .9% versus estimates of a .7% gain and a .5% increase in November.
- PCE Core(M-o-M) for December rose .1% versus estimates of a .2% increase and a .2% gain in November.

BOTTOM LINE: US personal spending increased more than expected in December as incomes grew, suggesting a pickup in demand at the end of 2005 that may help boost first-quarter growth, Bloomberg reported. The PCE Core, the Fed’s favorite inflation gauge, rose a less-than-expected .1%. Inflation-adjusted spending on big-ticket items such as cars and furniture rose 5.0% in December, the largest gain since July. For all of 2005 the PCE Core gained 1.9% versus a 2.3% increase in 2004. Incomes rose 5.4% for all of 2005, almost double most measures of inflation. I continue to expect consumer spending to remain relatively healthy and measures of inflation to decelerate over the intermediate-term.

Links of Interest

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