Thursday Watch

Late-Night Headlines
Bloomberg:
- The Senate Finance Committee voted to add $8.3 billion in tax breaks for small businesses to legislation that would increase the minimum wage.
- Vincent Reinhart, one of Fed Chairman Bernanke’s top advisers on interest rates, will leave the central bank.
- News Corp.’s(NWS) HarperCollins publishing unit is shutting down its ReganBooks division one month after firing founder Judith Regan, who backed a book by OJ Simpson on how he could have killed his ex-wife.
- Jim Rogers, author of the book “Hot Commodities”, said “when you have big bull markets, 50% corrections, or retractions, are normal.” The CRB Index is currently down 20.9% from its May 2006 high. Rogers still expects oil to eventually exceed $150/bbl. However, Rogers doesn’t buy individual commodities on the advice of his lawyers.
- The US ethanol industry will continue to expand even as soaring corn prices trim profits, said Bruce Rastetter, who runs Hawkeye Holdings, the nation’s third-largest producer of the grain-based fuel.
- Japan’s steel production may surpass a 34-year-old record this year.
- The Bank of Japan left its benchmark interest rate at .25%, appeasing government officials who say consumer spending and inflation are too weak to withstand higher borrowing costs. The yen fell to a 13-month low on the report.
- Hewlett-Packard(HPQ) beat Dell Inc.(DELL) in sales of personal computers for the second straight quarter, extending its lead as the world’s biggest PC maker. HP’s worldwide PC shipments surged 23.8%, while Dell’s fell 8.4% in 4Q.
- The worldwide PC market grew 8.7% in the fourth quarter, according to IDC.

Wall Street Journal:
- The International Energy Agency and China are near an agreement to share plans for the use of oil stockpiles, citing IEA executive director Claude Mandil. Mandil is expected to meet China’s top energy official Chen Deming on Jan. 19 to discuss a non-binding agreement for China to give notice to the IEA before releasing oil from its stockpiles.
- General Electric(GE) is close to buying the diagnostics division of Abbott Labs(ABT).

Nikkei:
- Iraq will “soon” announce a final plan on oil revenue distribution, Foreign Minister Hoshyar Zebari said in an interview in Baghdad. Iraqi officials are close to a deal on a national oil law that would give the central government the power to distribute current and future oil reserves to regions based on their population. An oil law guaranteeing equitable distribution of sales was crucial to the process of national reconciliation and ending the war, according to the Iraq Study Group.

Late Buy/Sell Recommendations
Citigroup:
- Upgraded (ERTS) to Buy, target $64.
- Reiterated Buy on (SCHW), target $22.

Night Trading
Asian Indices are -.25% to +.50% on average.
S&P 500 indicated -.07%.
NASDAQ 100 indicated -.18%.

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Earnings of Note
Company/EPS Estimate
- (BK)/.55
- (BBT)/.77
- (BGG)/-.05
- (COF)/1.24
- (CMA)/1.21
- (CAL)/-.15
- (CREE)/.06
- (ET)/.39
- (FITB)/.07
- (HDI)/.96
- (HTLD)/.22
- (IBM)/2.19
- (IGT)/.35
- (MER)/1.92
- (PPG)/1.02
- (SLM)/.75
- (UB)/1.06
- (UNH)/.85
- (XLNX)/.23

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Consumer Price Index for December is estimated to rise .4% versus an unch. reading in November.
- The CPI Ex Food & Energy for December is estimated to rise .2% versus an unch. reading in November.
- Initial Jobless Claims for last week are estimated to rise to 314K versus 299K the prior week.
- Continuing Claims are estimated to rise to 2438K versus 2428K prior.
- Housing Starts for December are estimated to fall to 1565K versus 1588K in November.
- Building Permits for December are estimated to fall to 1505K versus 1513K in November.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil build of 100,000 barrels versus a -4,990,000 barrel decline the prior week. Gasoline supplies are expected to rise by 2,225,000 barrels versus a 3,763,000 barrel increase the prior week. Distillate supplies are expected to rise by 1,350,000 barrels versus a 5,402,000 barrel increase the prior week. Refinery Utilization is expected to fall by -.5% versus a .41% gain the prior week. Natural gas supplies are expected to fall -80 bcf versus a -49 bcf withdrawal the prior week.

12:00 pm EST
- The Philly Fed for January is estimated to rise to 3.1 versus -2.3 in December.

BOTTOM LINE: Asian indices are mostly higher, boosted by financial and commodity shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.

Stocks Finish Lower on Tech Share Weakness and Bounce in Oil

Indices
S&P 500 1,430.62 -.09%
DJIA 12,577.15 -.04%
NASDAQ 2,479.42 -.74%
Russell 2000 788.77 -.34%
Wilshire 5000 14,357.15 -.10%
Russell 1000 Growth 567.75 -.24%
Russell 1000 Value 816.11 +.05%
Morgan Stanley Consumer 708.99 +.31%
Morgan Stanley Cyclical 913.97 +.13%
Morgan Stanley Technology 575.62 -.95%
Transports 4,813.62 -.99%
Utilities 446.71 +.11%
Put/Call .86 -7.53%
NYSE Arms .90 -14.90%
Volatility(VIX) 10.61 -1.40%
ISE Sentiment 116.0 -33.71%
US Dollar 84.97 -.11%
CRB 289.09 +.65%

Futures Spot Prices
Crude Oil 52.14 +1.82%
Reformulated Gasoline 137.80 +.64%
Natural Gas 6.25 -5.77%
Heating Oil 149.91 +1.27%
Gold 632.90 +1.12%
Base Metals 220.18 -1.57%
Copper 256.50 -.48%
10-year US Treasury Yield 4.78% +.68%

Leading Sectors
Oil Service +1.56%
Energy +1.19%
Homebuilders +1.08%

Lagging Sectors
Internet -1.60%
Networking -1.95%
Airlines -3.57%

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Afternoon Recommendations
UBS:
- Made positive comments on (INTC), believes the stock represents good value at current levels.

Afternoon/Evening Headlines
Bloomberg:
- Apple Inc.(AAPL) said first-quarter profit soared 78% after holiday shoppers snapped up iPod music players in record numbers and Macintosh computers. Net income rose to $1.14 versus analysts’ consensus estimates of .78.
- The perceived risk of owning the bonds of US homebuilders fell to the lowest in at least eight months on speculation that a growing economy will offset a rise in the supply of unsold homes, according to traders who bet on corporate creditworthiness in the credit-default swap market.
- Natural gas plunged 6% today. Natural gas prices have “melted in the winter sun” and won’t recover because inventories are much higher than usual, according to UniCredit economists.
- Fewer people died of cancer in the US in 2004, the second year in a row that the death rate for the disease has dropped, the American Cancer Society reported.
- Merrill Lynch(MER) CEO Stanley O’Neal is making acquisitions at the fastest pace in more than a decade to catch up with Goldman Sachs Group(GS).

BOTTOM LINE: The Portfolio finished lower today on losses in my Airline longs, Internet longs, Computer 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 negative today as the advance/decline line finished mildly lower, sector performance was mostly negative and volume was heavy. Measures of investor anxiety were mixed into the close. Today's overall market action was slightly bearish. Weakness was mainly contained to select large-cap tech and airline stocks. Energy-related stocks outperformed throughout the day on a slight bounce in oil prices, despite a 6.5% plunge in natural gas. It appears to me that money is sloshing around from one "hot commodity" to the next, however the bear market remains firmly in tact, despite the many calls for a bottom. The Nasdaq is still 2.7% higher ytd despite, which is a very strong showing to start the year. I plan to add to my Apple (AAPL) long on any substantial weakness related to the conservative guidance this evening. The NAHB Homebuilding Index rose to 35 this month vs. estimates of 33 and 33 in December. The Sales Expectations component remained at 49. However, the Index of Buyer Traffic rose to 26 from 23 and Current Sales component rose to 36 from 33. I suspect this will lead to another move higher in the Case-Schiller May Housing Price futures. Recent economic data suggest the U.S. economy is accelerating modestly and nowhere near recessionary levels.

Stocks Lower into Final Hour on Bounce in Oil and Tech Stock Earnings Jitters

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet longs, Airline longs, Computer longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is modestly negative as the advance/decline line is modestly lower, sector performance is mostly negative and volume is above average. Why are so many pundits and traders attacking Apple (AAPL)? It is a great American "growth" story that has the potential to turn the bearish herd bullish on U.S. stocks, specifically "growth" stocks. The hordes of newly minted "value" short-sellers, since 2000, can't allow that. Their business models depend on it. Apple, along with Google (GOOG) and several others, has the ability to help propel the Nasdaq substantially higher this year, which would result in the "mother of all short-covering rallies." This is why the attacks on these companies are so vigorous, notwithstanding the fact that most of the attackers aren't even short the stocks. Anyone can pick apart any company at any time. Being able to see the big picture is the key to serious long-term gains, in my opinion. In today's short-term trading oriented environment, I see the "noise" preventing many from capitalizing on substantial long-term opportunities. The bears have been stunningly wrong on Apple for a long time. I see no reason why they will be proven right now. Nobody is even talking about the Mac. I suspect that will change after this evening's report. I expect Apple to rise 50% this year from current levels, notwithstanding any short-term weakness related to conservative guidance. Apple(AAPL) remains my second largest long position behind Google(GOOG). I expect US stocks to trade modestly higher into the close from current levels on short-covering, more economic optimism and bargain-hunting.

Today's Headlines

Bloomberg:
- US Treasury yields are rising after an index of homebuilder confidence improved this month and most of the Fed’s 12 district banks reported a moderate pace of economic expansion.
- Brookfield Asset Management Inc. agreed to pay $1.35 billion for Mills Corp.(MLS), gaining 38 US regional shopping malls at half the price it would have had to pay a year ago.
- NYC Mayor Bloomberg proposed ending automatic teacher tenure, $1 billion in tax cuts and steps to increase development citywide in his sixth State of the City address today.
- Sirius Satellite(SIRI) and XM Satellite(XMSR) wouldn’t win approval of a merger under current US FCC rules, agency Chairman Martin said.
- Lennar Corp.(LEN) the fourth-largest US homebuilder, said profit may rise this year, helped by a robust economy.
- Fewer than two of every five participants passed the most recent first-level exam toward the designation of chartered financial analyst, the test’s administrator said.
- Industry analysts are becoming increasingly cautious on US stocks as the market advances, rather than jumping on the bandwagon as they did during the 1990s Internet bubble. Just 46.2% of their calls in January have been “buy” ratings or equivalents, according to Bloomberg. This percentage is the lowest since the stats started in 1997 and has fallen six months in a row.

Wall Street Journal:
- European Union staffers have advised EU Antitrust Commissioner Neelie Kroes to charge Intel(INTC) with illegally restricting competition in computer chips.
- News Corp.’s(NWS) MySpace.com, the most-viewed US Web site, plans to distribute software to give parents information about their children’s online profiles.
- Pittsburgh’s commercial real estate market is starting to stabilize as demand from financial services, health care, construction and hotels offsets a loss of manufacturing jobs.
- Sprint Nextel(S), AT&T(T) and Google(GOOG) are considering how to put more advertising on cell phones.
- Cablevision Systems(CVC), Time Warner(TWX) and other cable operators are targeting businesses.
- Nike Inc.(NKE) may consider acquisitions for faster growth, citing analysts.

NY Times:
- Procter & Gamble(PG) is putting a $100 million advertising campaign behind its new Crest Pro-Health toothpaste, in an effort to regain a sales lead over Colgate-Palmolive(CL).

Washington Post:
- Democratic Senate Majority Leader Harry Reid would like lobbying legislation aimed at reducing the influence of family connections in the chamber to include a provision that exempts spouses who are already lobbyists. Senator David Vitter, a Louisiana Republican who drafted the bill proposing to ban spouses of senators from lobbying any part of the chamber, said he would oppose Reid’s proposal.

Producer Prices Bounce, TIC Flows Below Estimates, Industrial Production/Capacity Utilization Rise

- The Producer Price Index for December rose .9% versus estimates of a .5% increase and a 2.0% gain in November.
- The PPI Ex Food & Energy for December rose .2% versus estimates of a .1% gain and a 1.3% rise in November.
- Net Long-term TIC Flows for November fell to $68.4 billion versus estimates of $75.0 billion and $85.3 billion in October.
- Industrial Production for December rose .4% versus estimates of a .1% gain and a downwardly revised -.1% decline in November.
- Capacity Utilization for December rose to 81.8% versus estimates of 81.7% and a downwardly revised 81.6% in November.

BOTTOM LINE: Prices paid to US producers rose more than forecast in December, reflecting higher costs for crude oil and gasoline that have since reversed, Bloomberg said. Excluding Food & Energy, intermediate goods’ prices fell .1% after falling .3% in November. The price of US steel sheet, a product most commonly used in cars and appliances, fell 5.3% in December to a 13-month low, according to Purchasing Magazine. Falling demand, purchase delays and surging imports crimped pricing. Costs for passenger cars fell .2% after increasing 2.2% in November. I expect the Producer Price Index to begin another meaningful deceleration next month as the hugely positive effects of the current commodity bear take hold.

International investment in US long-term assets slowed in November as the dollar weakened. The US dollar has since turned higher. Including short-term securities, such as T-bills and so-called non-market transactions, foreigners purchased a net $74.9 billion versus $60.4 billion the prior month. As well, private investors bought a net $101 billion of long-term securities in November, compared with a net $78.9 billion the prior month. I expect foreigners’ appetite for US securities to increase over the intermediate-term as the commodity bear leads to slower growth in emerging economies, an acceleration in US growth to more average levels, stable long-term interest rates, a firmer US dollar and rising US stock prices.

Industrial Production in the US rose more than forecast in December, driven by demand for computers, home electronics and automobiles, Bloomberg reported. Manufacturing, which makes up about fourth-fifths of industrial production, rose .7% last month, the most since June, versus unch. the prior month. Computer production rose 3.1%, auto production rose 4% and home electronics rose 1.9%. I expect industrial production to bounce around current levels before another acceleration in the second-half of the year.

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