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Friday Watch

Late-Night Headlines
Bloomberg:
- General Motors(GM) increased its 2005 loss by $2 billion and restated earnings for the four previous years on accounting errors after delaying an annual filing to US regulators because of financial reporting problems at a mortgage unit.

Wall Street Journal:
- H&R Block(HRB) CEO Mark Ernst called NY Attorney General Eliot Spitzer’s $250 million lawsuit an “unfair attack” against the company.
- St. Paul Travelers(STA) is in talks to acquire Zurich Financial Services of Switzerland, the country’s biggest insurer.

China Oil News:
- China is creating a system for disclosing information on the oil market to help it manage energy trading in the country.

Late Buy/Sell Recommendations
Business Week:
- Vodafone Group’s(VOD) ADRs are undervalued and may rise, citing Gary Stroik of investment firm Wealth Builders.
- Hershey(HSY) could put itself up for sale, citing Michael Metz of Oppenheimer Funds.
- Cortex Pharmaceuticals(COR), which is developing a hyperactivity drug, could rise as the company seeks to attract a major drugmaker as a partner, citing analyst Elemer Piros of Rodman & Renshaw.

Night Trading
Asian Indices are unch. to +.50% on average.
S&P 500 indicated -.11%.
NASDAQ 100 indicated unch.

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Earnings of Note
Company/EPS Estimate
- (TKLC)/.19
- (TEX)/.86
- (TRY)/.06

Upcoming Splits
- (WBSN) 2-for-1

Economic Releases
9:15 am EST
- Industrial Production for February is estimated to rise .8% versus a .2% decline in January.
- Capacity Utilization for February is estimated to rise to 81.4% versus 80.9% in January.
- The Preliminary Univ. of Mich. Consumer Confidence Index for March is estimated to rise to 88.0 versus a reading of 86.7 in February.

BOTTOM LINE: Asian indices are mostly higher, boosted by financial shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.

Stocks Finish Mixed as Gains in Energy and Homebuilders Offset Losses in Tech

Indices
S&P 500 1,305.33 +.18%
DJIA 11,253.24 +.39%
NASDAQ 2,299.56 -.53%
Russell 2000 743.79 +.11%
Wilshire 5000 13,131.50 +.15%
S&P Barra Growth 615.19 +.10%
S&P Barra Value 686.85 +.25%
Morgan Stanley Consumer 613.50 +.03%
Morgan Stanley Cyclical 810.43 +.35%
Morgan Stanley Technology 535.70 -1.15%
Transports 4,553.10 -.84%
Utilities 410.07 +.71%
Put/Call .29 -58.57%
NYSE Arms 1.30 +48.85%
Volatility(VIX) 11.98 +5.55%
ISE Sentiment 120.00 -9.09%
US Dollar 89.07 -.70%
CRB 327.55 +.59%

Futures Spot Prices
Crude Oil 63.58 unch.
Unleaded Gasoline 186.10 -.71%
Natural Gas 7.27 +.04%
Heating Oil 181.25 unch.
Gold 556.30 +.16%
Base Metals 168.61 +.25%
Copper 226.40 -.07%
10-year US Treasury Yield 4.64% -1.82%

Leading Sectors
Homebuilders +1.57%
Energy +1.50%
Oil Service +1.41%

Lagging Sectors
Computer Hardware -.88%
Disk Drives -1.56%
Semis -3.23%

Evening Review
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In Play

Afternoon Recommendations
Cowen:
- Upgraded (VZ) to Outperform.

Merrill Lynch:
- Cut (MATK) to Sell.

Afternoon/Evening Headlines
Bloomberg:
- The US dollar declined for a fourth day against the euro and yen after a report showing slower-than-expected inflation eased speculation the Fed will raise interest rates more than twice this year.
- Yahoo!(YHOO) said it granted CEO Terry Semel the option to buy 1.3 million shares in lieu of a cash bonus for 2005.
- A proposed condominium and hotel tower that would be the tallest building in North America won approval from the Chicago City Council’s planning Commission today, putting it a step closer to the start of construction later this year.
- US Treasuries rallied, pushing 10-year notes to their biggest gain since December, as a report showing consumer prices rose less than forecast bolstered optimism that the Fed has inflation under control.

BOTTOM LINE: The Portfolio finished lower today on losses in my Networking longs, Semi longs and Energy-related shorts. I added to my (IWM) and (QQQQ) shorts in the final hour, thus leaving the Portfolio 50% net long. The tone of the market was slightly negative today as the advance/decline line modestly lower, sector performance was mixed and volume was heavy. Measures of investor anxiety were mostly higher into the close. Overall, today's market performance was mildly bearish. The rise in oil and fall in the U.S.-dollar weighed on the averages today. As well, the action in technology stocks remains a concern. I suspect the next bear argument will be that the economy is slowing too much and that companies will lose pricing power. These fears will likely generate the last good long entry point in stocks for the year.

Stocks Mixed into Final Hour as Lower Long-term Rates Offset Higher Energy Prices

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Internet longs, Semi longs and Energy-related shorts. I added (IWM)/(QQQQ) shorts and added to my existing (EEM) short, thus leaving the Portfolio 75% net long. The tone of the market is mixed as the advance/decline line is slightly lower, sector performance is mixed and volume is heavy. The AAII percentage Bulls rose to 46.55% this week from 41.21% the prior week. This reading is still around average levels. The AAII percentage of Bears rose to 32.76% this week from 30.77% the prior week. This reading is now at above average levels. Considering the major averages are near five-year highs, these numbers remain bullish for US stocks. I expect bullish sentiment to rise modestly next week. I expect US stocks to trade mixed into the close from current levels as lower long-term rates offset higher energy prices.

Today's Headlines

Bloomberg:
- Iran is ready to hold talks with the US on Iraq, the country’s top nuclear negotiator Ali Larijani said, signaling a shift in Iran’s policy toward the US.
- Shares of Qualcomm(QCOM) were raised to “buy” at Merrill Lynch(MER) on expectations the company will win sales form market leader Texas Instruments(TXN).
- More Americans, especially gay men, are getting syphilis, a potentially deadly infection, US data show.
- Microsoft(MSFT) plans to spend $500 million on a new ad campaign and sales strategy to help win corporate customers from IBM(IBM).
- Oil is rising after the US and Iraqi forces launched the largest air assault in Iraq since the March 2003 liberation that ousted Saddam Hussein.
- US Treasuries are rallying, pushing 10-year notes to their biggest gain since December, as a report showing consumer prices rose less than forecast bolstered optimism that the Fed has inflation under control.

Wall Street Journal:
- Google(GOOG) plans to increase the number of retailers who can receive payment through Google Base, the company’s online payment-processing service.
- The tv business, which in the past relied upon a network of invisible fences and geographical limitations to protect its income, is losing out to the Internet as viewers use the web to access for free content that they would normally have to pay for.

NY Times:
- The National Collegiate Athletic Association men’s basketball tournament is a bigger draw for advertisers than the Super Bowl or World Series, citing TNS Media Intelligence.

News in Ghana:
- Ghana may have at least 2 billion barrels of oil reserves, based on prospects identified by nine energy companies.

Al-Hayat:
-.Saudi Arabia may split the par value of stocks listed on its bourse to lure more investors after the benchmark index fell to a five-month low this week.

WAM:
- The United Arab Emirates central bank and bourse officials raised the amount banks can lend investors to buy shares and ordered companies to repay share sale surpluses to counter declining stock prices.

Reuters:
- McAfee(MFE) will provide security software to mobile phone makers and wireless carriers under five new contracts.

Inflation Decelerates, Housing Starts Slow, Jobless Claims Steady, Philly Manufacturing Healthy

- The Consumer Price Index for February rose .1% versus estimates of a .1% increase and a .7% increase in January.
- The CPI Ex Food & Energy for February rose .1% versus estimates of a .2% increase and a .2% gain in January.
- Housing Starts for February fell to 2120K versus estimates of 2030K and 2303K in January.
- Building Permits for February fell to 2145K versus estimates of 2110K and 2216K in January.
- Initial Jobless Claims for last week rose to 309K versus estimates of 298K and 304K the prior week.
- Continuing Claims fell to 2445K versus estimates of 2498K and 2494K prior.
- Philly Fed for March fell to 12.3 versus estimates of 13.5 and a reading of 15.4 in February.

BOTTOM LINE: US consumer prices rose in February at a slower pace than the previous month as Americans paid less for fuel and the cost of clothing declined, Bloomberg said. The cost of all goods including cars, apparel and food fell .1% last month. Computer prices fell .9% in February and are now down 14.8% over the last 12 months. I continue to believe inflation measures will decelerate throughout most of the year as commodity prices weaken further, unit labor costs remain subdued and US growth slows to average levels.

The pace of US housing starts fell less than expected last month, suggesting housing demand is holding up in the face of higher mortgage rates, Bloomberg reported. Starts fell 24% in the Northeast, 11% in the South and 10% in the Midwest. Starts rose 7.9% in the West. I expect starts to continue to decelerate throughout most of the year as the housing market slows to more healthy sustainable levels.

First-time claims for US unemployment benefits unexpectedly rose last week to a level that still signals strength in the labor market, Bloomberg said. The labor market is poised to create another 2 million jobs this year. The four-week moving-average of initial claims increased to 296,500 from 293,750 the prior week. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, remained at 1.9%. The US job market is off to its best start since the heights of the bubble in 1999. I continue to believe the job market will remain healthy without generating substantial unit labor costs increases, the main component of inflation.

Manufacturing in the Philly region expanded at a slower pace in March, Bloomberg said. Only 23% of companies reported price increases versus 53% in January. The prices paid component of the index fell 12 points and has plunged 74.2% in five months. This is the largest percentage decline since 2000-2001, when the bubble burst. I continue to believe manufacturing will add to US growth over the intermediate-term. Almost all of the prices paid indices are in the middle of significant declines.