Stocks Finish Near Session Highs, Led by Strong Gains in Tech and Biotech Shares as Commodities Fall Again

Indices
S&P 500 1,418.34 +.12%
DJIA 12,480.69 +.05%
NASDAQ 2,453.43 +1.25%
Russell 2000 789.95 +.32%
Wilshire 5000 14,222.54 +.16%
S&P Barra Growth 653.26 +.31%
S&P Barra Value 763.50 -.06%
Morgan Stanley Consumer 699.12 +.32%
Morgan Stanley Cyclical 893.36 -.22%
Morgan Stanley Technology 579.06 +1.81%
Transports 4,673.07 +.48%
Utilities 455.56 -.46%
Put/Call .82 -3.53%
NYSE Arms 1.19 -.36%
Volatility(VIX) 11.51 -4.40%
ISE Sentiment 132.0 +6.45%
US Dollar 84.35 +.51%
CRB 292.61 -1.97%

Futures Spot Prices
Crude Oil 55.78 -4.36%
Reformulated Gasoline 148.70 -4.0%
Natural Gas 6.13 -.54%
Heating Oil 154.60 -2.65%
Gold 623.80 -.95%
Base Metals 221.84 -.19%
Copper 261.0 -1.47%
10-year US Treasury Yield 4.60% -1.15%

Leading Sectors
Wireless +2.33%
Internet +2.32%
Semis +2.01%

Lagging Sectors
Gold & Silver -1.85%
Coal -2.13%
Oil Service -2.90%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- UnitedHealth Group(UNH) said former CEO McGuire along with other current and former executives entered into an options re-pricing agreement with the company on Dec. 29.
- US Treasuries rose the most in five weeks after falling commodity prices diminished inflation concerns.
- New York Times(NYT) agreed to sell its nine US television stations to Oak Hill Capital Partners for $575 million to focus on its newspapers and Web sites.
- Bill Gross, manager of the world’s biggest bond fund, says the Fed will lower its benchmark interest rate by 100 basis points this year.
- Canadian stocks had their steepest two-day decline in six months, led by commodity producers including Suncor Energy and First Quantum Minerals.
- The CRB Commodities Index fell to a 20-month low as near-record speculation continues to reverse course. The CRB Index is now down 19.9% since May of last year.
- Maple Resources, the second-largest natural gas producer in Peru, plans to invest $100 million to produce ethanol in the country to meet growing demand for alternative fuels in the US.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs, Semi longs, Computer longs, Biotech longs and Commodity shorts. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was modestly positive today as the advance/decline line finished higher, sector performance was mixed and volume was above average. Measures of investor anxiety were mostly lower into the close. Today's overall market action was bullish. I believe today's type of action will repeatedly occur throughout the year as true growth stocks outperform, while the most cyclical over-owned stocks underperform substantially. The Oil Service sector, which was the most loved heading into the new year, is already 8.4% lower year-to-date. Moreover, the Gold & Silver sector is down 5.4%, Energy is down 6.3%, Coal is 6.7% lower and steel is 3.8% lower for the year. Conversely, Airlines are up 4.1%, Networkers are up 3.1%, Wireless is up 2.8% and Internets are up 2.6% already this year. I suspect performance anxiety is beginning to resurface and the year has just begun. I expect today's rally to strengthen over the next few days and would use any early weakness related to a weaker-than-expected employment report tomorrow to add to favorite growth-oriented long positions. I continue to believe January will be a very good month for most U.S. stocks, especially growth stocks, as economic concerns continue to diminish, inflation decelerates further, long-term rates remain low and the mania for commodities continues to reverse course. The herd, which is currently very bearish given recent gains, will likely not begin to jump on the bull bandwagon until the second half of the year.

Stocks Higher into Final Hour, Led by Sharp Gains in Technology and Biotech Shares

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Computer longs, Semi longs and Commodity shorts. I covered my (EEM), (IWM) and (QQQQ) hedges today, thus leaving the Portfolio 100% net long. The tone of the market is modestly positive as the advance/decline line is higher, sector performance is mixed and volume is above average. Bloomberg is reporting that Pimco's Bill Gross is predicting the Fed will cut rates within six months and that the Fed Funds Rate will finish the year 100 basis points lower at 4.25%. He is also predicting the 10-year yield will fall to about 4.5%. I do not believe the Fed will cut that much this year, however one or two cuts are likely as inflation concerns fall off a cliff with commodity prices. I expect US stocks to trade modestly higher into the close from current levels on short-covering, declining long-term rates, bargain-hunting and lower energy prices.

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.