Today's Headlines

Bloomberg:
- Crude oil fell 8.3% in the last two days, the biggest two-day plunge since December 2004, as mild weather curbed near-record speculation by investment funds.
- US regulators approved 18 new drugs in 2006, close to an eight-year low, as drugmakers struggled to develop products for hard-to-treat disorders.
- Express Scripts(ESRX), pushing its unsolicited $26 billion offer for Caremark Rx. Inc.(CMX), today urged Caremark shareholders to reject a lower bid from CVS Corp.(CVS).
- Emerging-market stocks tumbled, led by Poland’s biggest copper miner and a Brazilian iron ore producer on the prospects for slowing economic growth in emerging economies as commodity prices fall.
- Children will get more shots this year to prevent chickenpox and thwart viruses that cause cervical cancer, severe diarrhea and flu under new US guidelines that would increase use of Merck(MRK) vaccines.
- The US dollar is rising to a two-week high against the euro as reports showing an increase in US factory orders and services growth left most traders betting the Fed will refrain from cutting interest rates this quarter.
- Cisco Systems(CSCO) agreed to buy closely held IronPort Systems for $830 million to push into the security software market.
- Gold is falling a second day in NY as the US dollar strengthened against the euro, reducing the precious metal’s appeal as an alternative investment.
- Copper fell to an eight-month low in NY, extending a slide that began in May, as speculators continue to cut long positions as inventories rise.
- Peru’s copper output rose to an eight-month high in November as three of the country’s four largest mines stepped up production.

Wall Street Journal:
- Toyota Motor Corp.(TM) may this month announce a site for a new $1 billion factory in the US, its eighth in the country. The Japanese automaker has narrowed its selections to between three and five locations in the South, including Chattanooga, TN and Marion, Arkansas.
- Microsoft’s(MSFT) new Office product is useful and more logical in how the commands are laid out, which reflects a complete change in how users interact with the software, Walt Mossberg wrote.

USA Today:
- A Web site created by the National Council on Teacher Quality will provide state and union data on teachers’ contracts, including working schedules, salaries and benefits.

NY Times:
- Warner Brothers Entertainment plans to announce next week a new videodisc that can play in both the competing DVD technologies of Blu-ray and HD-DVD.

Washington Post:
- US House Democrats plan to divert oil subsidies and other incentives to new tax breaks for renewable energy sources.

LA Times:
- California Governor Schwarzenegger will push for universal health coverage for the state’s children, including those there illegally, citing officials.

Business Day:
- Eastern Platinum Ltd. may increase output from its South African unit by 70% this year, citing a report from Canaccord Adams.

Asharq al-Awsat:
- Saudi Arabia and Eqypt feel threatened by Iran’s nuclear ambitions.

Economic Times:
- World steel production rose 9.4% last year to 1.21 billion metric tons from 1.1 billion in 2005, citing estimates from the Intl. Iron & Steel Institute.

Tehran Times:
- Iran lowered its expected oil revenue for the year that ends in March by $3 billion.

al-Hayat:
- Gold demand in Saudi Arabia declined 9% in the last 10 months, with consumers deterred by a plunging local stock market and declining prices for the precious metal, citing World Gold Council.

Job Market Still Healthy, Factory Orders Rise, Service Sector Strong, Pending Home Sales Fall Slightly

- Initial Jobless Claims for last week rose to 329K versus estimates of 320K and 319K the prior week.
- Continuing Claims fell to 2446K versus estimates of 2500K and 2522K prior.
- Factory Orders for November rose .9% versus estimates of a 1.3% gain and a -4.5% decline in October.
- ISM Non-Manufacturing for December fell to 57.1 versus estimates of 57.0 and 58.9 in November.
- Pending Home Sales for November fell -.5% versus estimates of a .7% increase and a -1.5% decline in October.

BOTTOM LINE: Jobless Claims came in slightly higher than estimates, while continuing claims fell more than estimates, Bloomberg reported. The four-week moving-average of jobless claims rose to 317,500 versus 316,250 the prior week. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, held at a very low 1.9%. Moreover, Challenger, Gray & Christmas reported today that job cuts for December plunged 49%. I continue to believe the labor market will remain healthy over the intermediate-term as service employers gain confidence in the sustainability of the current expansion, offsetting construction and auto-related cutbacks.

Orders placed with US factories rose in November, Bloomberg said. Orders for computers and electronics equipment rose 7.7% versus a 9.8% decline the prior month. Orders for construction machinery fell 20% versus a 12% decline the prior month. Orders for capital goods excluding aircraft and military equipment, a gauge of future business investment, fell 1.1% versus a 4.0% decline the prior month. The inventory-to-shipments ratio rose to 1.24 months versus 1.23 months in October. I continue to believe the worst of the manufacturing slowdown is over, but activity will remain muted as homebuilders and automakers continue to work down inventories.

Growth at US service industries slowed modestly in December after reaching a six-month high the prior month, Bloomberg reported. Readings above 50 indicate expansion in industries that comprise almost 90% of the US economy. The New Orders component fell to 54.4 versus 57.1 the prior month. The Prices Paid component rose to 59.1 versus 55.6 the prior month. The Employment component rose to 53.3 versus 51.6 in November. The average price of a gallon of gas during December was $2.32, 24% below last year’s peak of $3.04/gallon. Americans spent 26% more on the Internet in the 56 days through Dec. 26 than a year earlier, boosted by spending on electronics and books, according to ComScore Networks. I continue to believe the service sector, which accounts for the vast majority of US economic growth, will remain healthy over the intermediate-term as energy prices drop further, inflation decelerates more, interest rates remain very low, stocks continue to rise, housing stabilizes at relatively high levels and auto production cutbacks subside.

Fewer Americans signed contracts to buy previously owned homes in November, Bloomberg reported. The decline from the previous year has been narrowing over the last six months, which suggests sales are stabilizing. Pending re-sales fell 2.8% in the Northeast, 2.6% in the West and 1.1% in the South. Re-sales rose 4.8% in the Mid-west. The average 30-year mortgage rate declined to 6.14% last month, the lowest since October 2005, according to Freddie Mac. I continue to believe the housing market is stabilizing at relatively high levels.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- Homes in Unterhaching, a German town of 22,000 south of Munich, will be warmed by hot water piped from 3,300 meters underground starting in May. They’re at the leading edge of a shift toward geothermal power generation that may swell Germany’s capacity 1,000-fold within a decade.
- Crude oil is falling another .14/bbl. in NY after yesterday plunging the most in 20 months as mild US weather curbed near-record speculation by investment funds.
- US Senator Charles Grassley said a balanced US budget by 2012 is “very possible.”
- Copper futures in Shanghai fell the maximum daily limit of 4% to a six-month low on diminishing speculation by investment funds as stockpiles rise.

Wall Street Journal:
- Gains in the yuan are eroding profit margins at an increasing number of Chinese exporters, citing local business executives.

Financial Times:
- Tribune Co.(TRB) bidders interested in buying the company, which owns media outlets and the Chicago Cubs, face a deadline of mid-January to make final offers.

Financial Express:
- Verizon Communications(VZ) may enter the race to acquire Indian wireless operator Hutchison Essar Ltd.

Night Trading
Asian Indices are -.75% to +.75% on average.
S&P 500 indicated +.04%.
NASDAQ 100 indicated -.06%.

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Earnings of Note
Company/EPS Estimate
- (AYI)/.64
- (ARRO)/.34
- (STZ)/.60
- (LI)/.57
- (MON)/.10
- (TXI)/.55
- (GPN)/.44
- (RI)/.28
- (SGR)/.19

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Initial Jobless Claims for last week are estimated to rise to 320K versus 317K the prior week.
- Continuing Claims for last week are estimated to fall to 2500K versus 2530K prior.

10:00 am EST
- Factory Orders for November are estimated to rise 1.3% versus a -4.7% decline in October.
- ISM Non-Manufacturing for December is estimated to fall to 57.0 versus a reading of 58.9 in November.
- Pending Home Sales for November are estimated to rise .8% versus a -1.7% decline in October.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -2,000,000 barrels versus an -8,132,000 barrel decline the prior week. Gasoline supplies are expected to rise by 1,500,000 barrels versus a 2,938,000 barrel rise the prior week. Distillate inventories are estimated to rise by 850,000 barrels versus a 472,000 barrel increase the prior week. Finally, Refinery Utilization is expected to rise .2% versus a .23% increase the prior week.

BOTTOM LINE: Asian indices are mixed as gains in automakers are offsetting losses in commodity shares in the region. I expect US equities to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Finish Slightly Higher as Commodities Drop

Indices
S&P 500 1,416.60 -.12%
DJIA 12,474.52 +.09%
NASDAQ 2,423.16 +.33%
Russell 2000 787.42 -.03%
Wilshire 5000 n/a
S&P Barra Growth 651.23 -.20%
S&P Barra Value 763.93 -.04%
Morgan Stanley Consumer 696.91 +.20%
Morgan Stanley Cyclical 895.36 +.21%
Morgan Stanley Technology 568.79 +.10%
Transports 4,650.66 +1.98%
Utilities 457.68 +.20%
Put/Call .85 -3.41%
NYSE Arms 1.20 -23.31%
Volatility(VIX) 12.04 +4.15%
ISE Sentiment 124.0 -24.85%
US Dollar 83.96 +.83%
CRB 298.49 -2.80%

Futures Spot Prices
Crude Oil 58.14 -4.77%
Reformulated Gasoline 154.50 -4.41%
Natural Gas 6.15 -2.22%
Heating Oil 158.33 -3.94%
Gold 629.50 -1.33%
Base Metals 222.26 -4.83%
Copper 266.0 -7.35%
10-year US Treasury Yield 4.66% -.47%

Leading Sectors
Airlines +3.88%
I-Banks +1.46%
Networking +1.44%

Lagging Sectors
Gold & Silver -3.73%
Energy -3.78%
Oil Service -4.36%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Crude oil in NY plunged the most in 20 months as mild US weather curbed record speculation by investment funds.
- Blockbuster Inc.(BBI) reached its goal of 2 million paying subscribers for its online service by the end of 2006. The shares touched a 14-month high.
- Manhattan apartment prices rose another 3.2% in the fourth quarter from a year earlier.
- The UN is investigating a report that its peacekeeping troops in Sudan raped and sexually abused children as young as 12.
- About 750,000 US port workers must get criminal background checks and carry federal identification cards for access to secure areas, the Homeland Security Dept. said.
- General Motors(GM) and Ford Motors’(F) December US sales each fell 13% as consumers bought fewer gas guzzling pick-up trucks and sport-utility vehicles. Toyota Motors’ rose 12%.
- The S&P 500 will exceed 1,600 this year because profits will grow more than 10%, said Byron Wien, chief market strategist of Pequot Capital Management.
- The US Dollar rose the most since July against the euro and reached a two-month high versus the yen after a report showed manufacturing in the US expanded in December.
- Copper prices in NY plunged 7.7% to a seven-month low as record speculation by investment funds continues to subside as inventories rise.

BOTTOM LINE: The Portfolio finished slightly lower today as losses in my Medical longs, Biotech longs and Semi longs more than offset gains in my Internet longs and Commodity shorts. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was slightly positive today as the advance/decline line finished slightly higher, most sectors rose and volume was heavy. Measures of investor anxiety were mostly higher into the close. Today's overall market action was slightly bearish. Last year, oil rose $2.05/bbl. on the first trading day of the year and $7.40/bbl. through the first three weeks of trading as commodity funds, flush with new capital, drove futures prices higher. I suspect, given the average commodity hedge fund fell around double-digits last year as the CRB Index dropped 7.4%, that many energy-related funds saw outflows at year-end. Today, oil fell $2.84/bbl. I continue to believe the many U.S. stock market bears and many bulls raised cash in December in anticipation of a pullback this month. Considering the overwhelming majority of funds failed to meet the S&P 500's 15.8% return last year, I suspect most managers have a very low threshold of pain this year for falling substantially behind their benchmark once again. There is still massive bull firepower available on the sidelines as short interest remains near record highs, the herd remains bearish on U.S. stocks, money market funds are flush with cash and buyout firms remain active. U.S. stocks remain cheap and p/e multiple expansion should accelerate this year. I still expect US stocks, with the exception of commodity-related shares, to post strong January gains notwithstanding today’s intraday volatility.

Stocks Slightly Slower into Final Hour on Substantial Decline in Commodities

BOTTOM LINE: The Portfolio is slightly lower into the final hour as looses in my Medical longs, Semi longs and Biotech longs more than offset gains in my Commodity shorts. I added (EEM), (IWM) and (QQQQ) hedges today, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is heavy. "High School Dropout" copper is plunging another 7% today and is down 34.6% from its May 11, 2006, all-time high. Freeport-McMoRan Copper & Gold (FCX) is now down almost 10% since it announced its acquisition of Phelps Dodge (PD) and I said it made an excellent short. I continue to believe that this deal won't be accretive for years as FCX vastly overpaid for PD. At $4.07 per pound, copper was priced at absurd levels. Even as U.S. housing construction slowed dramatically and Chinese consumption decelerated meaningfully, copper bulls tried to justify ever higher prices. Copper quit trading on fundamentals quite some time ago as psychology and record speculation by investment funds, spurred by a massive historic influx of capital, drove the metal to astronomical levels. With most commodity funds posting double-digit losses last year, I suspect this flood of capital is receding significantly. Copper's demise is a function of the ending of a mania and does not indicate a substantial slowdown in global economic activity. In my opinion, the recent dramatic decline in copper even as the U.S. dollar weakened, inventories remained low by historic levels and economic data exceeded estimates unmasked the true fluff that had been propping up the commodity. I believe one of the big stories of 2007 will be the continuation of the stunning declines in many commodities as the CRB Index breaks down into bear market territory, which will have meaningful negative consequences for many commodity-dependent emerging market economies and stock markets. The CRB Index is already down 18.2% from record highs. Many of the same investment funds that had been speculating on ever higher commodity prices will likely switch sides and jump on the downside bandwagon, thus driving prices even lower than would otherwise be the case. I suspect energy and then gold will follow copper substantially lower over the coming months. I suspect many funds that came into the new year overweight commodity stocks, especially energy, are now hunkering down to re-evaluate strategy. This could last a few more days, but I still expect January to be a good month for U.S. stocks, excluding commodities. Overseas markets, especially emerging, will likely come under pressure tonight on the commodity drop and U.S. stock reversal. I expect US stocks to trade modestly higher into the close from current levels on short-covering, declining long-term rates and lower energy prices.