Friday Watch

Late-Night Headlines
Bloomberg:
- The US dollar is set for a third winning week against the yen on speculation a government report on US hiring will add to evidence economic strength.
- Rio Tinto Group(RIO) is studying new projects and expansion of mines that may cost as much as $9 billion.
- The US Senate voted to extend the USA Patriot Act until March 10, narrowly averting the expiration of the anti-terrorism law and giving lawmakers more time to negotiate revisions.
- Oil analysts were the least optimistic in five weeks about price gains after the US said it won’t immediately seek UN sanctions to pressure Iran to halt its nuclear program.

Wall Street Journal:
- Billionaire Lakshmi Mittal, whose Mittal Steel Co. has offered to buy Arcelor SA, will consider lending shares in Mittal Steel to hedge funds to facilitate the $23.6 billion hostile takeover bid.

Financial Times:
- Harvard University’s former money manager Jack Meyer raised over $5 billion to start his Convexity Capital Management LP hedge fund.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on (LVS), (TYC), (MYL), (ALEX) and (WCC).
- Reiterated Underperform on (DRI), (CTL), (EW), (GTW) and (EOP).

Business Week:
- The shares of Document Security Systems(DMC), a maker of anti-counterfeiting gear, may benefit from rising sales, citing Otis Bradley of Gilford Securities.
- The shares of Renovis Inc.(RNVS), a biotech company that went public in 2004, will probably rise on positive results from clinical trials of the Cerovive stroke drug.

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

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Earnings of Note
Company/EPS Estimate
(NLY)/-.91
(AES)/.20
(MYG)/-.13
(MRX)/.26
(MCO)/.46
(R)/.94
(SNDA)/.27
(THQI)/.65
(WFT)/.44
(WEN)/.47
(WY)/.74

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Change in Non-farm Payrolls for January is estimated at 250K versus 108K in December.
- The Unemployment Rate for January is estimated to remain at 4.9% versus 4.9% in December.
- The Change in Manufacturing Payrolls for January is estimated at 7K versus 18K in December.
- Average Hourly Earnings for January are estimated to rise .3% versus a .3% increase in December.

9:45 am EST
- Final Univ. of Mich. Consumer Confidence for January is estimated to fall to 93.1 versus a prior estimate of 93.4.

10:00 am EST
- Factory Orders for December are estimated to rise 1.0% versus a 2.5% gain in November.
- ISM Non-Manufacturing for January is estimated to fall to 60.0 versus a reading of 61.0 in December.

BOTTOM LINE: Asian indices are mostly lower, weighed down by exporters in the region. I expect US equities to open lower and to rally later in the afternoon, fishing modestly higher. The Portfolio is 75% net long heading into the day.

Stocks Close Near Session Lows on Weakness in Energy and Technology Shares

Indices
S&P 500 1,270.84 -.91%
DJIA 10,851.98 -.93%
NASDAQ 2,281.57 -1.25%
Russell 2000 726.25 -1.25%
S&P Barra Growth 606.07 -.79%
S&P Barra Value 660.62 -1.02%
Morgan Stanley Consumer 592.27 -.56%
Morgan Stanley Cyclical 785.78 -1.20%
Morgan Stanley Technology 532.56 -1.73%
Transports 4,281.19 -.94%
Utilities 408.27 -1.49%
Put/Call .97 +15.48%
NYSE Arms 1.39 +63.39%
Volatility(VIX) 13.23 +7.04%
ISE Sentiment 191.00 -12.79%
US Dollar 89.38 -.15%
CRB 343.14 -.42%

Futures Spot Prices
Crude Oil 64.90 +.34%
Unleaded Gasoline 167.50 +.56%
Natural Gas 8.40 +.73%
Heating Oil 178.20 +.63%
Gold 576.50 -.05%
Base Metals 175.17 +1.64%
Copper 230.70 -.09%
10-year US Treasury Yield 4.55% +.09%

Leading Sectors
Airlines +2.02%
Restaurants +1.42%
Retail +.45%

Lagging Sectors
Computer Hardware -1.74%
Homebuilders -2.05%
Tobacco -2.67%

Evening Review
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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on (SSP), (RDEN) and (CSCO).

Afternoon/Evening Headlines
Bloomberg:
- Shares of Thomas Weisel Partners Group(TWPG), the third investment bank to go public in two years, surged as much as 33% in their trading debut.
- Amazon.com(AMZN) said fourth-quarter profit fell 43% as the company increased spending to lure shoppers during the holiday season.
- The Federal Reserve wants Wall Street securities firms to keep closer tabs on hedge funds to ensure that practices in the $1.1 trillion industry aren’t putting the banking system at risk.
- Electronic Arts(ERTS) said third-quarter profit fell 31%, the fifth decline in a row, as shortages of Xbox 360 consoles slowed sales.

BOTTOM LINE: The Portfolio finished lower today on losses in my Semi longs, Medical Information Systems longs, Computer longs and Software longs. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was negative today as the advance/decline line finished lower, most sectors fell and volume was heavy. Measures of investor anxiety were higher into the close. Overall, today's market action was bearish as the major averages finished near session lows with negative breadth. Investors chose to focus on the negatives throughout the day. I will wait to see the market's reaction to tomorrow's likely strong jobs report before shifting market exposure further.

Stocks Sharply Lower into Final Hour, Notwithstanding Lower Energy Prices and Strong Retail Data

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Semiconductor longs, Medical Information Systems longs, Computer longs and Software longs. I added (IWM) and (QQQQ) shorts this afternoon, thus leaving the Portfolio 75% net long. The tone of the market is very negative as the advance/decline line is substantially lower, most sectors are declining and volume is heavy. Measures of investor anxiety are higher. The market's inability to mount any sort of rally today is a negative. Strong retail data, lower energy prices, stable interest rates and no escalation in the Iran situation could not spur gains today. I expect US stocks to trade modestly higher into the close from current levels on lower energy prices, bargain hunting and short-covering.

Today's Headlines

Bloomberg:
- Exchange-traded funds are among the fastest-growing investments today, attracting one of every four new dollars going into stock funds last year.
- Matsushita Electric Industrial Co., the world’s biggest plasma television maker, raised its profit forecast 18% after sales of larger, more expensive sets increased fiscal third-quarter net income.
- The US said it won’t seek to impose economic sanctions on Iran if the UN nuclear watchdog sends the Islamic Republic before the Security Council over its atomic plans.
- General Motors(GM) handed out technology contracts to six companies including Electronic Data Systems(EDS), Hewlett-Packard(HPQ) and Cap Gemini SA in the largest award ever offered by a company.
- US retailers including Wal-Mart Stores(WMT) reported strong sales gains in January as gift cards, warm weather and a rebound in consumer confidence bolstered spending.
- The NASD is expanding a probe of the world’s biggest brokerage firms for possible improper sales of hedge funds to individual investors.
- Crude oil is falling after the US said it won’t immediately seek UN sanctions against Iran, easing concern that the world’s fourth-biggest oil producer will retaliate with an export cut. As well, US natural gas supplies are now 28.2% above the 5-year average.

Wall Street Journal:
- Shopping cart races, a symbol of urban anarchy, are becoming more popular in US citites.
- IBM(IBM), Google(GOOG), Oracle(ORCL) and other technology companies are supporting an open-source project designed to promote Ajax, a Web-development technology.
- US power industry executives are backing President Bush’s goal for developing cleaner-coal technologies to use the country’s enormous domestic coal reserves.

AP:
- Wal-Mart Stores(WMT) was sued by three Massachusetts women who claim the company broke state law by not stocking the “morning-after” pill.

NY Times:
- US dependence on oil can be reduced by changing the way cars are made, citing the Rocky Mountain Institute, an energy researcher.
- NYC, the largest US school district, plans to stop serving whole milk, a part of school lunches since 1946, in a bid to reduce risks of obesity, diabetes and other health problems.
- Some US Internet companies are selling tickets to sporting events using futures-like contracts.
- The FCC may tighten rules that have allowed mobile phone companies large discounts when buying government licenses to operate so-called third-generation wireless phone services.
- The US hotel industry will spend a record $5 billion this year on upgrades and renovations, adding improvements such as wireless Internet operations.
- Amazon.com(AMZN) said it has started a new program called Amazon Connect that allows writers to communicate in blogs, or Web logs, on the Seattle-based Internet retailer’s site.
- Alternative fuels have become the latest hot investment craze at venture capital companies.
- Palm Inc.(PALM) investor Mark Nelson, who owns 6.6% of the Treo mobile phone and handheld computer maker, wrote to the board urging them to consider selling the company.

LA Times:
- Sirius Satellite Radio(SIRI) plans to prosecute anyone who attempts to pirate copies of Howard Stern’s radio show or any of its other programming.
- “Survivor” fans will be able to download tonight’s episode of the reality television show from broadcaster CBS Corp.(CBS) for $1.99, a bid to rival Apple Computer’s iTunes service.

San Francisco Chronicle:
- PG&E Corp.(PCG) predicts natural gas bills for heat and hot water will be lower this month than in January.

Capital:
- United Internet AG plans to introduce its own version of the BlackBerry e-mail service in cooperation with Vodafone Group Plc(VOD).

Boersen-Zeitung:
- DaimlerChrysler AG expects a new trend toward diesel sales in the US as the country tries to reduce its dependency on Middle Eastern oil imports, citing CEO Dieter Zetsche.

Productivity Disappoints, Labor Costs Rise, Job Market Healthy

- Preliminary 4Q Non-farm Productivity fell .6% versus estimates of unchanged and a 4.5% increase in 3Q.
- Preliminary 4Q Unit Labor Costs rose 3.5% versus estimates of a 3.5% increase and a .5% decline in 3Q.
- Initial Jobless Claims fell to 273K last week versus estimates of 295K and 284K the prior week.
- Continuing Claims fell to 2509K versus estimates of 2585K and 2573K prior.

BOTTOM LINE: The productivity of US workers during the fourth quarter declined by the most since the third quarter of 2000 and labor costs rose, Bloomberg reported. These disappointing numbers will likely be revised to more positive levels after an expected upward revision to 4Q GDP. Moreover, the average of the last 2 quarters was still pretty good. I continue to believe unit labor costs will remain muted over the intermediate-term.

Initial Jobless Claims unexpectedly declined last week and the number of Americans on unemployment benefit rolls dropped to the lowest level in almost five years, Bloomberg reported. According to a Bloomberg survey of economists, employers added a quarter of a million workers to payrolls last month. The four-week moving average of claims declined to 284,250 from 289,000 the prior week. The unemployment rate among those able to receive benefits, which tracks the US unemployment rate, fell to 1.9% from 2% the prior week. The US economy created 2 million jobs last year. During the last two and a half years, the US has added 4.6 million new jobs, more than the European Union and Japan combined. I continue to believe the labor market will remain healthy over the intermediate-term as corporations increasing spending and consumer spending remains relatively strong.

Links of Interest

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