Thursday Watch

Late-Night Headlines
Bloomberg:
- US prosecutors told lawyers Steven Schulman and David Bershad, partners in NY’s Milberg Weiss Bershad & Schulman, that they’ll be charged with participating in a scheme to pay kickbacks to clients.
- Saudi Arabia’s chief diplomat said an incoming Hamas-led government in the Palestinian territories should continue to be funded, putting the kingdom at odds with the US view that the Islamic group should be cut off.
- General Motors(GM) said sales growth at its Shanghai venture will slow this year as China’s auto market cools and competition increases.
- Japan had a trade deficit in January, its first in five years, after the Chinese Lunar New Year holiday curbed exports of electronics to Asia and imports surged 27%.

Wall Street Journal:
- Boeing Co.(BA) is working on a verbal agreement to sell 80 of its 737 planes to China, which agreed to buy 70 of the jetliners in November.
- China plans to change regulations to require overseas banks to incorporate operations in the mainland. Within the next few months, the commission will ask foreign banks to become China-registered companies and make accounting and management changes to conform to the way Chinese banks are structured.
- Lehman Brothers(LEH) is in talks with some mutual-fund firms about separating stock-trading and research fees.

Xinhua:
- Arab League Secretary-General Amr Moussa on Wednesday renewed the call for the recognition of Israel by Hamas.

AFP:
- Nearly all of China’s fast-rising number of skyscrapers are filled with excessive air pollutants that could cause serious harm to office workers.

Economic Daily News:
- Sony Corp.(SNE) plans to place $6 billion of orders for products such as notebook computers, liquid-crystal displays and LCD televisions from Taiwan this year.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on (S).
- Reiterated Underperform on (ELNK) and (ESRX).

Night Trading
Asian Indices are -.25% to +1.0% on average.
S&P 500 indicated -.05%.
NASDAQ 100 indicated -.09%.

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Earnings of Note
Company/EPS Estimate
- (BEAS)/.12
- (CBS/A)/.40
- (CKP)/.36
- (ESV)/.59
- (GPS)/.39
- (GSF)/.56
- (HRB)/.26
- (KSS)/1.07
- (CLI)/.32
- (MVL)/.31
- (MRVL)/.41
- (MGM)/.33
- (MHK)/1.50
- (NTES)/.88
- (JWN)/.68
- (PWR)/.07
- (TOL)/.92
- (WYNN)/.08

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Initial Jobless Claims for last week are estimated to rise to 300K versus 297K the prior week.
- Continuing Claims are estimated to fall to 2500K versus 2511K prior.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude build of 1,200,000 barrels. Gasoline inventories are estimated to rise 1,000,000 barrels, and distillate supplies are expected to decrease by 1,500,000 barrels. Refinery utilization is expected to fall .2%. Finally, Natural Gas supplies are estimated to fall 110 bcf.

BOTTOM LINE: Asian indices are mostly higher, led by technology shares in the region after oil prices fell and US interest rates declined. I expect US equities to open modestly lower and to trade higher into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Near Session Highs as Energy Prices Resume Downtrend and Long-term Rates Decline

Indices
S&P 500 1,292.67 +.75%
DJIA 11,137.17 +.62%
NASDAQ 2,283.17 +.89%
Russell 2000 733.53 +.93%
Wilshire 5000 13,005.76 +.73%
S&P Barra Growth 611.14 +.69%
S&P Barra Value 678.02 +.82%
Morgan Stanley Consumer 605.37 +.57%
Morgan Stanley Cyclical 804.14 +.66%
Morgan Stanley Technology 533.85 +1.05%
Transports 4,449.17 +1.23%
Utilities 412.47 +.32%
Put/Call .70 -22.22%
NYSE Arms 1.08 +.64%
Volatility(VIX) 11.88 -4.27%
ISE Sentiment 136.00 -6.85%
US Dollar 90.63 +.10%
CRB 326.03 -1.28%

Futures Spot Prices
Crude Oil 60.83 -.33%
Unleaded Gasoline 147.00 -.31%
Natural Gas 7.25 -.38%
Heating Oil 164.90 -.19%
Gold 558.10 +.27%
Base Metals 167.46 -.19%
Copper 226.15 -.13%
10-year US Treasury Yield 4.52% -.99%

Leading Sectors
Homebuilders +2.82%
Airlines +2.29%
Banks +2.15%

Lagging Sectors
Telecom -.74%
Energy -1.68%
Oil Service -2.35%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on (FCX).
- Reiterated Underperform on (RAI).

Afternoon/Evening Headlines
Bloomberg:
- Public-health advisers expanded the list of Americans who should get vaccinated against the flu to include healthy children ages 2 years to 5 years, an industry supported group said.
- The largest-ever lottery prize of $365 million was won by a group of eight workers from a meat processing plan in Lincoln, Nebraska, Powerball officials announced today.
- Campbell Soup(CPB) will introduce new versions of its most popular soups and beverages that contain at least 25% less sodium to appeal to health conscious consumers.
- Former Fed Chairman Greenspan told a forum organized by ABN Amro Holding NV that the US economy is in good shape, according to people present.
- US Treasuries rose after a government report on consumer prices tempered speculation that inflation is poised to accelerate.
- Merrill Lynch(MER) is paring back its bond research dept.
- UAL Corp. CEO Tilton said US airlines inevitably will find ways to merge and his company won’t sit idly by if its UAL unit would benefit.
- Crude oil fell on speculation that surging US supplies, which are 12% above the 5-year average, are sufficient to make up for any disruption in Nigerian shipments.

Pittsburgh Tribune-Review:
- The American collaborator of the South Korean scientist who faked stem cell research data used the once-vaunted results to obtain a $16 million federal science grant.

BOTTOM LINE: The Portfolio finished substantially higher today on gains in my Biotech longs, Semi longs, Computer longs, Retail 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 positive today as the advance/decline line finished higher, most sectors rose and volume was above average. Measures of investor anxiety were mixed into the close. Overall, today's market performance was good for the bulls. The major averages and breadth finished near session highs, while oil and the 10-year T-note yield finished near session lows. Better performance by high-growth equities is mainly a result of lower long rates. As well, I expect oil to break back below $60 on tomorrow's inventory data. Stocks should continue to build on gains in the short run as once again too many are pessimistic and underexposed on the long side. The Value Line Geometric Index, a good measure of the broad-based market, is making another cycle high and has risen 6.21% this year.

Stocks Higher into Final Hour as Long-term Rates and Energy Prices Fall

BOTTOM LINE: The Portfolio is substantially higher into the final hour on gains in my Biotech longs, Semi longs, Computer longs, Retail longs and Energy-related shorts. I exited my (IWM)/(QQQQ) shorts, added to my (RACK) long and added to my (VLO) short today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is about average. After the bubble burst in 2000, the U.S. was swimming in overcapacity in multiple sectors and many companies lost pricing power, thus sending earnings plunging at a historical rate. Most recent inflation data show prices increasing at above-average rates vs. long-term averages. However, current readings are not high for prior expansionary periods. There is little evidence that some inflation is bad for equities. In fact, modest inflation has historically been a positive for stocks as companies regain some pricing power. I continue to believe measures of inflation are peaking for the year this quarter as commodities continue to weaken through year-end. I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower commodity prices, lower long-term rates and bargain hunting.

Today's Headlines

Bloomberg:
- US spending for health care may double to $4 trillion by 2015, propelled by an aging population using more drugs, hospital care and technology.
- Borrowing costs for European and US utilities are at their lowest this year, helping companies including E.ON AG that aim to pay for acquisitions using debt.
- The Fed gave investors evidence to back up bets for two more rate hikes in coming months.
- Bill Miller, holder of the longest streak of beating the S&P 500 Index in mutual fund history, is calling on Tyco Intl.(TYC) to buy back shares as its stock trades near a two-year low.
- US Treasuries rose after a government report on consumer prices tempered speculation that inflation is poised to accelerate.
- Fed Vice Chairman Roger Ferguson, the last governor who wasn’t placed on the board by President Bush, resigned less than a month after Ben Bernanke succeeded Alan Greenspan as chairman.
- Shares of Intel(INTC) fell below $20 for the first time in more than a year after ThinkEquity Partners LLC’s Eric Ross said the company may miss profit estimates.
- The FCC plans sanctions against television stations or affiliates for violating decency standards, signaling a renewed effort to crack down on the broadcasting of material unfit for children.
- Energy futures are falling on speculation that a government report tomorrow will show that US inventories rose for an eighth straight week, indicating that supplies are sufficient to meet demand.

Wall Street Journal:
- James Gorman, who formerly ran Merrill Lynch’s(MER) private-client operations, has been assigned to boost profit and lower costs at Morgan Stanley’s(MWD) individual-investor brokerage business.
- Sales of cheap Canadian drugs to US citizens have fallen by as much as 30%, after elderly and disabled people became eligible for drugs through Medicare, citing the Canadian International Pharmacy Agency.
- US conservation banks that allow developers to expand construction in exchange for setting aside land for endangered species are increasing nationwide.
- Internet name snatchers are building a growing business by grabbing Web addresses that have expired and reselling them at a profit.

Washington Post:
- The Bush administration said the press can be tried under espionage laws for gathering and publishing classified information that could hurt national security.

San Jose Mercury News:
- Google(GOOG) and Earthlink(ELNK) combined to submit one of six bids to provide wireless Internet service to San Francisco.

NY Times:
- The controversy over the cartoons of the Prophet Muhammad, typically defined as a struggle between Islam and the West, has an intra-Muslim side too. Eleven Muslim journalists in five countries are facing prosecution for reprinting some of the cartoons originally published in a Danish newspaper.
- The amount of mail sent by Iraqis has risen 46% since the American-led liberation in 2003, offering evidence of recovery.
- Electronic Arts(ERTS) plans to sell its video game based on the “Godfather” movies and book for $39.95, which is 20% less than it usually retails new games.
- Silvercup Studios in Queens, NY, home to such television shows as “The Sopranos,” plans to build a $1 billion complex featuring soundstages, commercial space and housing.

London-based Times:
- The SEC may approve a merger between the NYSE and Archipelago Holdings within two days.

Iran Daily:
- Iran’s oil exports fell 3.9% to 2.46 million barrels a day in 2005.

Core Consumer Prices Remain Subdued

- The Consumer Price Index for January rose .7% versus estimates of a .5% increase and a .1% decline in December.
- The CPI Ex Food & Energy for January rose .2% versus estimates of a .2% increase and a downwardly revised .1% rise in December.

BOTTOM LINE: Overall, prices paid by US consumers rose in January by the most in four months, while core prices remained subdued, Bloomberg reported. Energy prices rose 5% in January, the most since September. However, energy has fallen substantially in February. Medical costs rose .1% in January versus a .2% increase in December. A record warm January prevented retailers from discounting as sales accelerated. I expect measures of inflation to decelerate throughout most of the remainder of the year. I also continue to believe we are experiencing a cyclical bout of modest inflation within a secular period of disinflation. This will become quite apparent the next time the U.S. enters recession. Commodity prices have had a significant impact on most inflation measures. I strongly disagree with those who think these prices will remain historically elevated during a recession. Thus, in my opinion, the bond market is looking forward, not back.

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