Today's Headlines

Bloomberg:
- Russian President Vladimir Putin’s “increasingly authoritarian rule” is hurting relations with the US and fostering doubt about whether Russia will play a constructive role in the world.
- Alabama job opportunities are surging as Toyota, Hyundai and Daimler expand their plants in the state.
- Blackstone Group agreed to acquire CarrAmerica Realty for $5.6 billion, adding an office developer to real estate holdings that include hotels and resorts.
- Oil is falling more than $1/bbl. as ministers from OPEC signal that they intend to keep production close to the highest in two decades.

Wall Street Journal:
- Infinity Pharmaceuticals, a closely held Cambridge, Massachusetts-based biotechnology firm, will get up to $400 million from Switzerland’s Novartis AG to develop drugs to fight a protein that helps many kinds of cancer cells survive.
- Education Management Corp.(EMNC), which runs 72 primary campuses across the US and Canada, is likely to be acquired for $3.4 billion by Providence Equity Partners and Goldman Sachs’(GS) investment unit.
- Two Portland, Oregon-based private-equity firms are offering about $1.3 billion for Longview Fibre(LFB).
- The French town of Saint-Genis-Pouilly near the Swiss border rejected a request by Muslims to cancel a play by Voltaire because it used the prophet Muhammad to lampoon religious intolerance.
- AT&T’s(T) agreement to purchase BellSouth(BLS) for about $67 billion is gambling on the assumption that the Bush administration’s pro-business position will allay regulatory concerns.
- Public Storage(PSA) is close to buying rival self-storage company Shurgard Storage Centers(SHU) for about $3.2 billion.
- AT&T’s(T) agreement to buy BellSouth(BLS) will help the combined company push ahead with plans to offer customers the ability to make Internet calls using cellphones.

NY Times:
- US Democrats haven’t agreed on a common theme to use against Republicans ahead of the mid-term elections scheduled for later this year.

Financial Times:
- Verizon Communications(VZ) Chairman and CEO Seidenberg will fell pressure to take full control of Verizon Wireless mobile-phone service now that AT&T is buying BellSouth(BLS).
- A French and US move toward protectionism is not being resisted by investors, a move that they may regret in the long-run.

AFP:
- OPEC should leave production quotas unchanged to lower crude oil prices, Kuwaiti Energy Minister Fahd al-Sabah said.

Factory Orders Decline, Pending Homes Sales Fall Slightly

- Factory Orders for January fell 4.5% versus estimates of a 5.4% decline and an upwardly revised 1.6% increase in December.
- Pending Home Sales for January fell 1.1% versus estimates of a .3% increase and an upwardly revised 2.6% decline in December.

BOTTOM LINE: US factory orders fell in January as bookings for Boeing(BA) aircraft declined. Orders, excluding transportation equipment, rose 1.6%, Bloomberg reported. Orders for household appliances jumped 16% in January and orders for industrial machinery soared 55%. Orders for non-defense capital goods excluding aircraft, a gauge of future business spending, rose .1%. The inventory-to-shipments ratio was unchanged at 1.15 months in January. I expect factory orders to rebound nicely in February on a jump in aircraft production.

Contracts to purchase previously owned US homes fell for a fifth straight month in January as higher prices and mortgage rates discouraged buyers, Bloomberg said. Pending home sales rose 6% in the Midwest and .4% in the Northeast. Sales fell 1.9% in the West and 5.1% in the South. I continue to believe housing is slowing to more healthy sustainable levels.

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Monday Watch

Weekend Headlines
Bloomberg:
- China announced the biggest increase in its defense budget in four years as the economy grows and tensions flare with political foe Taiwan, regarded as a renegade province by the mainland government.
- President Bush said the US and Pakistan are putting together a trade agreement to spur economic growth in the South Asian nation.
- Warren Buffett, Berkshire Hathaway’s 75-year-old chairman, said his board has selected an executive to eventually succeed him.
- Berkshire Hathaway(BRK/A) said fourth-quarter earnings were little changed because of claims from a record hurricane season.
- Talks between NFL owners and players broke off less than 36 hours before a deadline for a new collective-bargaining agreement that could maintain stability in the nation’s most-popular sports league.
- Iran’s top nuclear negotiator Ali Larijani said his nation won’t renounce its right to enrich uranium on its soil, paving the way for it to be referred to the UN Security Council this week.
- US Joint Chiefs of Staff chairman Peter Pace said Iraq isn’t on the brink of civil war and that there isn’t any deadline for withdrawing American and coalition troops from the country.
- OPEC members will probably keep production close to a two-decade high as a disruption to Nigerian supply and possible sanctions against Iran keep prices above $60 a barrel.

Wall Street Journal:
- Cablevision Systems(CVC) will build a replacement for NYC’s Madison Square Garden arena a block west of the current site.
- AT&T(T) is nearing the acquisition of BellSouth(BLS) for about $65 billion.

Barron’s:
- Companies spun-off from their parents beat the S&P 500 by 45% in their first two years, according to a study conducted by Lehman Brothers’ Chip Dickson.

AP:
- Iraqi President Talabani said he has been assured that US armed forces will remain in Iraq as long as needed.

NY Times:
- Cingular Wireless, owned by AT&T(T) and Bellsouth(BLS), and other US mobile phone providers are working to improve their customer service and keep subscribers from switching carriers.
- DaimlerChrysler’s Chrysler Group says new models to be introduced this year will help the company avoid a sales slump, while a focus on style may allow it to reduce rebates in the longer-term, citing an interview with CEO LaSorda.
- Vermont, which as a population of about 620,000, is faced with the dilemma of convincing young people to stay in the state with few opportunities for jobs and housing.
- Research In Motion(RIMM) reached its $612.5 million settlement with licensing company NTP Inc. after a three-day negotiation session at Citigroup Inc.(C).
- Iran’s ambition to develop nuclear weapons still faces several technical hurdles including converting uranium ore to a gas and then turning the gas into enriched nuclear fuel.

Washington Post:
- Democratic congressional leaders Harry Reid and Nancy Pelosi complained in a private meeting with Democratic National Committee Chairman Howard Dean that he isn’t directing the party’s money to states with key races.

San Francisco Chronicle:
- California officials proposed changes to the state’s method of execution in an attempt to satisfy a judge who blocked the injection of lethal drugs into a convicted murderer last month.

Financial Times:
- The NYSE may offer derivatives trading and may combine with European exchanges as it tries to diversify its product mix, citing CEO Thain.
- Microsoft(MSFT) may reveal details this week for a portable computer sized between a mobile phone and a laptop.

London-based Times:
- The NYSE’s chief executive officer, John Thain, wants to “share out” contracts with investment banks, citing Thain.

Sunday Telegraph:
- Britain and the US will withdraw all their troops from Iraq next year as they seek to bring peace to the nation, citing a senior defense source.

Sunday Times:
- National Grid Plc, the British owner of electric utilities in NY and Massachusetts, was interested in making another purchase in the northeastern US, citing CEO Urwin.

AFP:
- Ayman al-Zawahiri, the deputy leader of al-Qaeda, has urged Islamist movement Hamas to carry on its fight and not accept agreements between the Palestinian government and Israel

Reuters:
- The investment show Mad Money, hosted by Jim Cramer, has drawn a loyal following since it began nearly a year ago.

China Securities Journal:
- China will cut duties on certain products to spur imports this year, part of efforts to seek balanced trade.

Weekend Recommendations
Barron's:
- Had positive comments on (AIG), (ATPG), (PFE), (CMCSK), (BSX), (FLR) and (SU).
- Had negative comments on (ARXT).

Goldman Sachs:
- Reiterated Outperform on (MDT).

Night Trading
Asian indices are -.25% to +.50% on average.
S&P 500 indicated +.09%.
NASDAQ 100 indicated +.09%.

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Earnings of Note
Company/Estimate
(ALD)/.34
(BOL)/1.20
(IMDC)/.65
(JAS)/.31
(KFX)/-.08
(LEXR)/-.15
(MEDX)-.36
(SMTC)/.17

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Economic Releases
10:00 am EST
- Factory Orders for January are estimated to fall 5.4% versus a 1.1% rise in December.
- Pending Home Sales for January are estimated to rise .5% versus a 3.0% decline in December.

BOTTOM LINE: Asian Indices are mostly higher, boosted by gains in financial shares in the region. I expect US stocks to open mixed and to rally modestly into the afternoon. The Portfolio is 75% net long heading into the week.

Weekly Outlook

Click here for The Week Ahead by Reuters

There are several important economic reports of note and a few significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. - Factory Orders, Pending Home Sales
Tues. - Final 4Q Non-farm Productivity, Final 4Q Unit Labor Costs, Consumer Credit
Wed. - None of note
Thur. - Trade Balance, Initial Jobless Claims
Fri. - Change in Non-farm Payrolls, Unemployment Rate, Change in Manufacturing Payrolls, Average Hourly Earnings, Wholesale Inventories, Monthly Budget Statement

Some of the more noteworthy companies that release quarterly earnings this week are:

Mon. - Allied Capital(ALD), Bausch & Lomb(BOL), Inamed Corp.(IMDC), KFx Inc.(KFX), Medarex(MEDX), Semtech(SMTC)
Tues. - Albertson’s(ABS), Cooper Cos.(COO), Copart Inc.(CPRT), Dick’s Sporting Goods(DKS), Kroger Co.(KR), Martek Biosciences(MATK), OSI Pharmaceuticals(OSIP), Pixar(PIXR), Sports Authority(TSA)
Wed. - Dynegy(DYN), Liberty Media(L), Michaels Stores(MIK), Tech Data(TECD), Wind River(WIND)
Thur. - Aeropostale Inc.(ARO), Andrx Corp.(ANDX), Blockbuster Inc.(BBI), Claire’s Stores(CLE), DreamWorks(DWA), Hansen Natural(HANS), Hibbett Sporting Goods(HIBB), McData Corp.(MCDTA), National Semiconductor(NSM), Quiksilver Inc.(ZQK), Renal Care(RCI), Sears(SHLD), Urban Outfitters(URBN)
Fri. - AnnTaylor Stores(ANN), Children’s Place(PLCE)

Other events that have market-moving potential this week include:

Mon. - Morgan Stanley Semiconductor Conference, Cowen & Co. Healthcare Conference, Raymond James Institutional Investors Conference
Tue. - Cowen & Co. Healthcare Conference, Citigroup Global Industrial Manufacturing Conference, Raymond James Institutional Investors Conference, Morgan Stanley Semiconductor Conference, Bear Stearns Consumer Conference
Wed. - Morgan Stanley Semiconductor Conference, Cowen & Co. Healthcare Conference, Lehman Brothers Global Healthcare Conference, Raymond James Institutional Investors Conference, Citigroup Global Industrial Manufacturing Conference, Bear Stearns Consumer Conference, Thomas Weisel Internet Conference
Thur. - Cowen & Co. Healthcare Conference, Lehman Brothers Global Healthcare Conference, Bear Stearns Consumer Conference, Thomas Weisel Internet Conference
Fri. - Bear Stearns Consumer Conference, Lehman Brothers Global Healthcare Conference

BOTTOM LINE: I expect US stocks to finish the week mixed as mostly positive economic data, short-covering and lower energy prices offsets higher long-term rates. My trading indicators are now giving mostly bullish signals and the Portfolio is 75% net long heading into the week.

Market Week in Review

S&P 500 1,287.23 -.17%*



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was slightly bullish considering the rise in long-term rates, weaker housing data and increase in oil prices. The advance/decline line fell slightly, most sectors rose and volume was above average on the week. Measures of investor anxiety were mostly higher. The AAII % Bulls fell to 40.94% and is now below average levels, which is a positive. The average 30-year mortgage rate fell to 6.24% which is only 103 basis points above all-time lows set in June 2003. The benchmark 10-year T-note yield rose 11 basis points on the week as most economic data points were positive. However, the yield is still 25 basis points lower than it was in 2004 and 209 basis points below levels at the peak of the bubble in 2000.

Unleaded Gasoline futures bounced again for the week, but have collapsed 40% from September highs even as refinery utilization remains below normal as a result of the hurricanes last year, 24.2% of Gulf of Mexico oil production remains shut-in and fears over Iranian/Nigerian production disruptions persist. Natural gas inventories fell slightly more than expected this week. However, supplies are now 48.2% above the 5-year average, approaching an all-time record high for this time of year, even as 15.2% of daily Gulf of Mexico production remains shut-in. Natural gas prices have plunged 57% in 11 weeks. Many oil bulls point to the potential for a supply disruption as the main reason oil prices remain extremely elevated while fundamentals for the commodity deteriorate. I would point out that natural gas bulls used the same rationale before the historic supply disruptions related to the hurricanes. This did not prevent a collapse in the price of natural gas. I expect deteriorating fundamentals for oil to trump fear over the intermediate-term, thus sending prices substantially lower. Gold rose modestly for the week as the US dollar weakened and energy prices rose. The dollar’s decline was mainly the result of hawkish comments from central bankers in Asia and Europe.

Small-caps continue to outperform as the Russell 2000 has already gained almost 10% for the year. Moreover, technology stocks outperformed for the week, led by Networking shares on more evidence of increased spending by telecom companies. S&P 500 earnings growth for the fourth quarter was up about 15.0% year-over-year, more than double the long-term average. This is the 15th consecutive quarter of double-digit profit growth, the best streak since record-keeping began in 1936. Moreover, companies have sufficiently lowered the bar as to allow for better-than-expected 1Q results. As of now, analysts are projecting 9.8% earnings growth for the first quarter, still very good by historic standards. I continue to believe the S&P 500’s forward p/e multiple will expand back to around 19 by year-end, thus helping to push the index about 15% higher for the year. The average stock, as measured by the Value Line Geometric Index, is already up 6.2% this year. The ECRI Weekly Leading Index fell slightly, but is still forecasting healthy, but decelerating, US economic activity. I expect US GDP growth to peak for the year this quarter, rising a brisk 4-4.5%. Growth should moderate to more average levels of around 3% the remainder of the year.

*5-day % Change