Wednesday Watch

Late-Night Headlines
Bloomberg:
- President Bush, in his State of the Union address, asked Americans to support the war on terrorism abroad and his plans at home for improving health care and breaking an “addiction” to foreign sources of energy.
- Federal appeals courts in California and New York said today a federal law banning “partial birth” abortions is illegal.
- Oil is falling for a second day after Iran said it won’t halt exports because of a dispute over its nuclear program, reducing concerns about possible supply shortages.
- Left-wing antiwar protester Cindy Sheehan, who was invited by Democrats to the Capitol to attend President Bush’s State of the Union address this evening, was arrested after she unfurled an anti-war banner in the gallery.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on (ALL), (VLO) and (X).
- Reiterated Underperform on (ISE) and (SIE).

Night Trading
Asian Indices are -.50% to +.25% on average.
S&P 500 indicated -.35%.
NASDAQ 100 indicated -1.05%.

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Earnings of Note
Company/EPS Estimate
(ADS)/.61
(AEP)/.25
(BUD)/.27
(BA)/.44
(BOBJ)/.31
(CBG)/1.11
(DVN)/2.29
(DUK)/.36
(HCA)/.69
(JDSU).00
(LM)/1.03
(MBI)/1.38
(MGM)/.32
(MNST)/.28
(MUR)/.79
(OI)/.11
(PBI)/.74
(PHM)/1.97
(SBUX)/.20
(SUN)/2.15
(TWX)/.22
(TRB)/.56
(XEL)/.25

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- Construction Spending for December is estimated to rise .2% versus a .2% increase in November.
- Pending Home Sales for December are estimated to fall .5% versus a 3.2% decline in November.
- ISM Manufacturing for January is estimated to rise to 55.8 versus a reading of 55.6 in December.
- ISM Prices Paid for January is estimated to rise to 64.0 versus a reading of 63.0 in December.

Afternoon
- Total Vehicle Sales for January are estimated to fall to 16.4M versus 17.2M in December.
- Domestic Vehicle Sales for January are estimated to fall to 13.1M versus 13.5M in December.

BOTTOM LINE: Asian indices are mostly lower, weighed down by telecom and financial shares in the region. I expect US equities to open lower and to rally later in the afternoon, fishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Modestly Lower after Fed Rate Hike

Indices
S&P 500 1,280.08 -.40%
DJIA 10,864.86 -.32%
NASDAQ 2,305.82 -.04%
Russell 2000 733.20 +.32%
S&P Barra Growth 610.08 -.44%
S&P Barra Value 665.89 -.35%
Morgan Stanley Consumer 592.50 -.79%
Morgan Stanley Cyclical 793.05 -.73%
Morgan Stanley Technology 541.11 -.60%
Transports 4,367.54 +.30%
Utilities 413.84 +.03%
Put/Call .77 +18.46%
NYSE Arms 1.51 +79.77%
Volatility(VIX) 12.95 +4.52%
ISE Sentiment 148.00 -36.21%
US Dollar 88.92 -.56%
CRB 348.66 -.40%

Futures Spot Prices
Crude Oil 67.68 -.35%
Unleaded Gasoline 179.50 -.56%
Natural Gas 9.34 +.27%
Heating Oil 183.90 -.48%
Gold 573.10 -.42%
Base Metals 169.87 +.15%
Copper 222.20 -.29%
10-year US Treasury Yield 4.51% -.22%

Leading Sectors
Gold & Silver +3.01%
Airlines +1.95%
HMOs +1.92%

Lagging Sectors
Homebuilders -.94%
Insurance -1.0%
Semis -1.44%

Evening Review
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In Play

Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on (GOOG), expects tax rate that caused shortfall to go back to 30% for 06, 06/07 EPS estimates and $500 implied value in tact.
- Reiterated Outperform on (STN), (SEPR), (SYMC) and (BXP).
- Reiterated Underperform on (KFT), (MRK) and (PFGC).

Afternoon/Evening Headlines
Bloomberg:
- Federal Reserve policy makers, meeting for the final time under Chairman Alan Greenspan, raised the main US interest rate to 4.5% and suggested the run of increases is still not finished.
- Robert McTeer, the former president of the Federal Reserve Bank of Dallas, told CNBC that Federal Reserve policy makers should “stop right now and hold” to give the economy a chance to catch up with recent rate increases.
- Google(GOOG) posted fourth-quarter net income growth of 82% and revenue growth of 86%, but missed profit estimates due to a higher-than-expected tax rate.

BOTTOM LINE: The Portfolio finished higher today on gains in my Medical Information Systems longs, Retail longs, Internet longs, Biotech longs and Computer longs. I added to my Google(GOOG) long down 70 after-hours and took profits in an existing long, thus leaving the Portfolio 100% net long. The tone of the market was mixed today as the advance/decline line finished neutral, sector performance was mixed and volume was above average. Measures of investor anxiety were higher into the close. Overall, today’s performance was mixed. After recouping all its earlier morning losses, Gilead Sciences (GILD), one of my biotech longs, traded 5.1% higher to an all-time high. Gilead remains my favorite biotech stock.

Stocks Modestly Lower into Final Hour after Fed Hikes Rates 25 Basis Points

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Medical Information Systems longs, Internet longs, Biotech 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, sector performance is mixed and volume is above average. Measures of investor anxiety are higher. The Johnson Redbook same-store sales index rose 3.5% year-over-year last week vs. a 3.3% rise the prior week. This week's gain is up from a 1.5% increase in late April 2005, and it's the 39th week in a row that the index has risen 3% or more. The long-term average is a gain of around 2.5%. Retail sales remain healthy, despite higher oil prices. I continue to believe a healthy labor market, low long-term interest rates, falling energy prices, improving sentiment and rising stock prices will cushion any weakness this year related to a slowing housing market. My two favorite retailers remain Abercrombie & Fitch (ANF) and Best Buy (BBY). I expect US stocks to trade higher into the close from current levels on lower energy prices, positive economic data, more dovish Fed comments and stable long-term rates.

Today's Headlines

Bloomberg:
- Coretta Scott King, the widow of civil rights leader the Reverend Martin Luther King Jr. who took up his fight for racial equality after his assassination, has died at the age of 78.
- Iran won’t halt oil exports because of the dispute over its nuclear program, which may be referred to the UN for sanctions, the country’s oil minister said.
- “Brokeback Mountain” led Academy Award nominations with eight nods, including best picture and best director.

Wall Street Journal:
- Huntsman Corp.(HUN), the fourth largest US chemical maker, is in talks to be acquired by an unidentified buyer.
- American Electric Power(AEP) will build a $3 billion electricity line from West Virginia to New Jersey, the first big venture to use a new US law that promotes the building of projects needed to alleviate a congested power grid.
- Liberty Media(L) and EchoStar Communications(DIS) are investing in a company with a product that lets people watch television on their computers while away from home.
- Shares of Diebold(DBD) have dropped 30% in 12 months, a period that’s seen the departure of the CEO, the finance chief and the COO, but investors who stick with the company could reap rewards.
- General Motors(GM), Anheuser-Busch(AB) and Nintendo are developing ways to attach ads to video files downloaded from the Internet.

NY Times:
- Many US states have passed laws that inch toward regulation of the drug industry.
- The number of US and other foreign troops in Iraq probably will drop to below 100,000 by the end of the year and a majority could be out in two years.

USA Today:
- Indian tribes, which can make unlimited political contributions, get that status through treaties negotiated with the US in the 1700s.
- FEMA may provide displaced New Orleans residents free apartments for as long as 18 months while they recover from last year’s hurricane.

NY Post:
- Pier 1 Imports may be looking for a successor to Chairman and CEO Girouard, and has hired an executive search firm to seek candidates.
- NY’s Metropolitan Transportation Authority plans to run a six-month program to test “smart cards” on the 4, 5 and 6 subway lines in Manhattan to speed up passenger entry.

Atlanta Business Chronicle:
- Coca-Cola has been looking into ways, over the past two years, to offer hot coffee, espresso and tea quickly in individual servings, citing patent and trademark applications.

Nihon Keizai:
- Sanyo Electric and Volkswagen AG will jointly develop rechargeable batteries for gasoline-electric hybrid vehicles.

Arab News:
- Saudi Arabia urged western countries to respect the decision of the Palestinian people to elect Hamas, classified by many as a terrorist organization.

Tehran Times:
- Iran plans to invest $14 billion to expand its refining capacity by more than 50%.

Reuters:
- Google(GOOG) denied a report in today’s NY Post that the company is in talks with Napster(NAPS) to form an alliance that may lead to Google acquiring the Internet music service.

Inflation Measures Decelerate, Consumer Confidence Rises, Chicago Manufacturing Decelerates

- The 4Q Employment Cost Index rose .8% versus estimates of a .9% increase and a .8% gain in 3Q.
- Consumer Confidence rose to 106.3 in January versus estimates of 105.0 and a reading of 103.8 in December.
- The Chicago Purchasing Manager Index for January fell to 58.5 versus estimates of 59.9 and a reading of 60.8 in December.

BOTTOM LINE: US labor costs rose less than expected in the fourth quarter, suggesting tame inflation, Bloomberg reported. Employment costs rose 3.1% for all of 2005, slowing for a second straight year. Unit labor costs account for two-thirds of inflation. Core US consumer prices gained 2.2% last year, right at the average of the last decade. I continue to believe employment costs will remain relatively low over the intermediate-term, thus helping to keep inflation in check.

US consumer confidence rose more than expected in January to the highest since June 2002 as employers accelerated hiring, Bloomberg reported. Employers added 2 million new jobs in 2005, the second best number since before the stock market bubble burst in 1999. The component of the index measuring optimism about consumer’s present situation surged to 128.4, the highest since 2001, versus 120.7 the prior month. The percentage of consumers that saw jobs as plentiful rose to 26.9%, the highest since September 2001. I expect consumer confidence readings to make new cycle highs later this year as stocks rise further, the job market remains healthy, housing stabilizes at relatively high levels, long-term interest rates remain low, inflation decelerates and energy prices fall.

Chicago-area manufacturing expanded at a slower pace this month as automakers cut capacity to reduce costs and restore profits, Bloomberg said. The prices paid component of the index fell to 75.3 from 81.1 the prior month. The new orders component of the index fell to 63.7 versus 65.7 in December. I continue to believe manufacturing nationwide will add to economic growth this quarter as inventories are rebuilt, confidence improves and hurricane rebuilding takes hold.

Links of Interest

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