Thursday Watch

Late-Night Headlines
Bloomberg:
- The US House voted to extend the USA Patriot Act until March 10, giving lawmakers more time to negotiate revisions in the anti-terrorism law.
- The US House of Representatives approved legislation today cutting the growth of government programs by $39 billion.
- Honda Motor’s(HMC) new Civic small car helped raise Honda’s US sales 21% last month, leading Asian brands to a sixth consecutive month of higher market share.
- US researchers used a common cold virus to create a vaccine that protected mice form the deadly bird flu, an approach that may help pandemic preparations, according to a report published by the medical journal Lancet.
- Pulte Corp.(PHM), the second-largest US homebuilder by stock market value, said fiscal fourth-quarter profit jumped 45% because it sold more houses at higher prices.

Wall Street Journal:
- General Motors(GM) Chairman and CEO Wagoner said he agrees with suggestions made by Tracinda Corp. adviser Jerome York, who wants the automaker to reduce its dividend by half and cut executive salaries among other reorganization efforts.
- Three former top executives of a unit of Warren Buffett’s Berkshire Hathaway(BRK/A) and a former American International Group(AIG) official were indicted by a federal grand jury in Virginia in an accounting probe of the two companies.

Financial Times:
- Sasol Ltd., the world’s biggest producer of motor fuel from coal, will speed up talks to bring its coal-to-liquids technology to the US after President Bush’s call for greater energy independence, citing CEO Pat Davies.
- Merrill Lynch(MER) is “seriously” considering a bid valued at about $6 billion for LG Card Co., South Koreas’ No. 2 credit-card issuer.

AP:
- West Virginia Governor Joe Manchin ordered all state mines closed until officials can conduct safety checks.
- Saudi Arabia and Qatar pledged to give the Palestinian Authority financial aid after Israel delayed the transfer of tax funds following the victory of the Hamas terror group in elections.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on (COF), (FORM) and (MUR).
- Reiterated Underperform on (BA), (OMI) and (BUD).

Night Trading
Asian Indices are -.25% to +1.0% on average.
S&P 500 indicated -.11%.
NASDAQ 100 indicated -.15%.

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Earnings of Note
Company/EPS Estimate
(AGN)/.89
(AMZN)/.21
(APCC)/.25
(APA)/2.37
(AVP)/.43
(CERN)/.34
(CLX)/.47
(CMCSA)/.15
(CVS)/.40
(ERTS)/.90
(EOP)/.35
(SSP)/.49
(GR)/.50
(IP)/.07
(ISRG)/.49
(LIN)/.84
(MEDI)/.05
(MYL)/.24
(PNR)/.40
(PTEN)/.73
(RTN)/.60
(RCL)/-.25
(SLE)/.29
(JOE)/.53
(STA)/.94
(SPF)/1.93
(HOT)/.65
(TXU)/.85
(TYC)/.38

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Preliminary 4Q Non-farm Productivity is estimated to rise .5% versus a 4.7% gain in 3Q.
- Preliminary 4Q Unit Labor Costs are estimated to rise 3.5% versus a 1.0% decline in 3Q.
- Initial Jobless Claims are estimated to rise to 295K versus 283K the prior week.
- Continuing Claims are estimated to rise to 2585K versus 2581K prior.

BOTTOM LINE: Asian indices are mostly higher, spurred by gains in exporters in the region after oil fell and the US dollar rose. I expect US equities to open mixed and to rally later in the afternoon, fishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish at Session Highs as Energy Prices Reverse and Shorts Cover

Indices
S&P 500 1,282.46 +.19%
DJIA 10,953.95 +.82%
NASDAQ 2,310.56 +.21%
Russell 2000 735.48 +.31%
S&P Barra Growth 610.92 +.14%
S&P Barra Value 667.45 +.23%
Morgan Stanley Consumer 595.63 +.53%
Morgan Stanley Cyclical 795.32 +.29%
Morgan Stanley Technology 541.96 +.16%
Transports 4,321.70 -1.05%
Utilities 414.46 +.15%
Put/Call .84 +9.09%
NYSE Arms .85 -43.61%
Volatility(VIX) 12.36 -4.56%
ISE Sentiment 221.00 +49.32%
US Dollar 89.50 +.61%
CRB 344.59 -1.17%

Futures Spot Prices
Crude Oil 66.22 -.51%
Unleaded Gasoline 171.00 -1.09%
Natural Gas 8.80 +.88%
Heating Oil 181.10 -.71%
Gold 573.60 -.07%
Base Metals 172.35 +1.46%
Copper 225.00 +.04%
10-year US Treasury Yield 4.55% +.97%

Leading Sectors
HMOs +2.06%
Networking +1.78%
Biotech +1.31%

Lagging Sectors
Airlines -1.49%
Energy -2.17%
Oil Service -3.69%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on (USB) and (MNST).
- Reiterated Underperform on (JBLU) and (BUD).

Afternoon/Evening Headlines
Bloomberg:
- The SEC said almost 800 hedge-fund advisers met today’s deadline to register with the agency under a controversial rule that subjects the industry to stricter regulation and random inspections for the first time.
- Starbucks(SBUX) said first-quarter profit rose 20% on demand for espresso drinks and seasonal offerings. The company also raised its first quarter forecast.
- Research in Motion(RIMM) won a provisional ruling against a patent at the center of a court fight over its BlackBerry e-mail device, as a judge prepares to decide whether to stop most service in the US.
- Crude oil fell more than $1 a barrel in NY and natural gas plunged 12% from session highs after an Energy Department report showed larger-than-expected gains in US oil and gas inventories.

Reuters:
- President Bush said the US will defend Israel against Iran if needed and criticized Iranian President Ahmadinejad for “menacing talk” against Israel.

Mediaweek Magazine:
- Jim Cramer, host of CNBC’s “Mad Money,” will move his one-hour daily radio show to CBS Radio from WOR Radio Network.

BOTTOM LINE: The Portfolio finished higher today on gains in my Networking, Medical Information Systems longs, Biotech longs, Computer longs and Energy-related shorts. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was modestly positive today as the advance/decline line finished slightly higher, most sectors rose and volume was heavy. Measures of investor anxiety were mostly lower into the close. Overall, today was very good for the bulls as the major averages and breadth finished near session highs on heavy volume, notwithstanding considerable headwinds. Energy prices across the board cratered, with natural gas plunging 11.2% from session highs. Even substantial weakness in energy-related market leading stocks couldn't send the major averages lower. This is a huge positive.

Stocks Higher into Final Hour on Short-covering and Oil Price Reversal

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Networking longs, Medical Information Systems longs, Biotech longs, Computer longs and Energy-related shorts. I added (COP) short and added to a few existing longs this afternoon, thus leaving the Portfolio 100% net long. The tone of the market is slightly positive as the advance/decline line is modestly higher, most sectors are higher and volume is heavy. Measures of investor anxiety are mostly lower. Earlier today we had a 40-point decline in market leader Google (GOOG), higher oil prices, higher long-term rates, more rhetoric from Iran and mixed economic data. However, the major averages are higher with slightly positive breadth this afternoon. This market is very resilient, which bodes well for further gains in stocks over the coming weeks. I expect US stocks to trade modestly higher into the close from current levels on lower energy prices and short-covering.

Today's Headlines

Bloomberg:
- General Motors(GM) and Ford Motor(F) led junk bonds to their biggest monthly gain since June on optimism that job cuts, new models and the sale of a GM unit will restore profitability.
- Burger King plans to sell shares to the public for the first time, allowing its private equity owners to cash out three years after buying the company for $1.5 billion.
- United Airlines will exit three years of bankruptcy today with 35 new international routes, a fleet that’s about a fifth smaller, and one-third fewer workers.
- Yale, Columbia, Brown and the Univ. of Penn. Received a record number of applicants for the Class of 2010 because of increased efforts to recruit low-income students with improved financial aid packages.
- US Treasury notes fell after an industry report showed the manufacturing sector may be growing fast enough to spur the Fed to raise interest rates at least one more time.
- General Motors(GM), Ford Motor(F) and DaimlerChrysler AG(DCX) reported unexpected increases in US sales in January, while Japanese rivals Toyota Motor(TM) and Honda Motor(HMC) continued to post gains.
- The US dollar is rising against the euro and reached a high versus the yen for the year as a manufacturing report added to evidence the US economy is growing more rapidly than other industrialized nations.

Wall Street Journal:
- Jobs created by Nissan Motor, Toyota Motor and other Asian and European carmakers in the US South have helped stabilize employment in the industry after the big three cut back in older US industrial strongholds.
- Investors in mutual funds that focus on Japanese stocks withdrew $360.7 million between Jan. 18 and Jan. 25, citing Emerging Portfolio Fund Research.
- Boeing(BA) is likely to win this year only about half of 2005’s 1,002 aircraft orders, but investors shouldn’t necessarily bail out of the stock.
- The SEC wants to require companies to disclose the amount of stock cited as collateral for any loans take by a firm’s directors and its five highest-paid executives.
- US television stations are demanding that affiliated networks include them as partners in online media ventures.
- Angiotech Pharmaceuticals(ANPI) may announce today that it will acquire American Medical Instruments Holdings, a Lake Forest, Illinois-based maker of medical devices, for $785 million.
- Deloitte & Touche is developing an employee-profiling service that companies can use to screen for wrongdoers.
- US auto-safety regulators may propose as early as this summer a rule that would require every new vehicle to have equipment to reduce rollover accidents.

CNBC:
- Morgan Stanley’s(MWD) talks to buy all or part of money manager BlackRock Inc.(BLK) have broken down because the transaction would be too costly.

Washington Post:
- General Motors(GM) CEO Wagoner may announce plans today to invest in a transmission plant in White Marsh, Maryland, so the facility can produce parts for hybrid vehicles.

AP:
- Egyptian officials today called on Hamas to recognize Israel, renounce violence, and honor past peace deals.

NY Times:
- Persian Gulf countries are joining the US and its allies in criticizing Iran’s nuclear program after years of hesitating to do so.

Construction Spending Strong, Home Sales Slowing, Manufacturing Healthy, Prices Paid Stable

- Construction Spending for December rose 1.0% versus estimates of a .2% increase and an upwardly revised .5% gain in November.
- Pending Home Sales for December fell 3.0% versus estimates of a .5% decline and a 3.0% fall in November.
- ISM Manufacturing for January fell to 54.8 versus estimates of 55.5 and a reading of 55.6 in December.
- ISM Prices Paid for January rose to 65.0 versus estimates of 64.0 and a reading of 63.0 in December.

BOTTOM LINE: US construction spending rose more than forecast in December as homebuilding rebounded and office3 and commercial investment increased, Bloomberg reported. Construction spending rose 8.9% for all of 2005 to an all-time record. Construction Spending should remain healthy as hurricane rebuilding continues and commercial construction rises.

Contracts to buy previously owned US homes declined for a fourth consecutive month in December as high home prices proved too rich for some buyers, Bloomberg reported. The pending re-sales index rose 2.3% in the South and 1.5% in the Northeast. Signing fell 8.1% in the West and 9.3% in the Midwest. I continue to believe home sales are slowing to more healthy and sustainable levels.

US manufacturing expanded in January at about the same pace as a month earlier, propelled by orders for business equipment that will drive the economy, Bloomberg said. The order backlogs component of the index rose to 53.5 from 49.5 in December. As well, the new exporter orders component of the index rose to 58.5 from 54.3 in December. According to Chief Executive magazine, a recent monthly survey showed the most confidence by CEOs in the US economy since the survey was started in 2002. This likely means increased corporate spending and hiring. I continue to believe manufacturing will add to US economic growth over the intermediate-term.

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