Wednesday Watch

Late-Night Headlines
Bloomberg:
- President Bush, in the State of the Union address, urged both political parties to put aside differences and focus on battling terrorism and accomplishing “big things” for the American people.
- The risk premium on high-yield, high-risk corporate bonds fell to the lowest in a decade as a drop in oil prices and surging consumer confidence boosts optimism the US economy will grow fast enough to limit defaults.
- Broadcom Corp.(BRCM) restated financial results to reflect $2.2 billion in costs for misdated stock-option grants, a problem it blamed on former CEO Henry Nicholas.
- Australia’s consumer prices unexpectedly fell for the first time in almost eight years, driving down the nation’s bond yields and currency as investors bet the central bank won’t raise interest rates.

Financial Times:
- Rupert Murdoch’s News Corp.(NWS) joined the Chandler family in its offer to buy Tribune Co.(TRB).

Guardian:
- The UK is not involved in a “war on terror” and “fear-driven” responses to a perceived threat could harm respect for fair trials and provide a temptation to “abandon our values,” citing an interview with Director of Public Prosecutions Ken MacDonald.

BBC:
- Ford Motor(F) has developed a vehicle that runs on non carbon-based alternative fuels, citing Sue Cischke, head of Ford’s safety programs. The car, called the Edge, is a hybrid that can operate on a combination of compressed hydrogen and a battery pack that plugs into a light socket.

Xinhua News Agency:
- China’s government will punish local officials who expand investments “blindly” without saving energy and protecting the environment, citing construction minister Wang Guangtao.

Night Trading
Asian Indices are +.75% to +1.0% on average.
S&P 500 indicated +.13%.
NASDAQ 100 indicated +.34%.

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Earnings of Note
Company/EPS Estimate
- (ABT)/.74
- (AMG)/1.73
- (APD)/.93
- (ATI)/1.61
- (ABC)/.56
- (CBT)/.50
- (CHKP)/.39
- (CPS)/.39
- (COP)/1.95
- (GLW)/.28
- (EBAY).28
- (ETH)/.70
- (FFIV)/.45
- (FDC)/.34
- (GD)/1.14
- (HSY)/.71
- (HTCH)/.10
- (LSI)/.17
- (MCD)/.61
- (NSC)/.96
- (NVLS).55
- (PMTC)/.21
- (QCOM)/.42
- (RMBS).09
- (RYL)/1.84
- (SYMC)/.25
- (TER)/.02
- (TDW)/1.49
- (TRID)/.26
- (VAR)/.36

Upcoming Splits
- None of note

Economic Releases
10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil build of 1,300,000 barrels versus a 6,768,000 barrel build the prior week. Gasoline supplies are expected to rise by 1,500,000 barrels versus a 3,491,000 barrel increase the prior week. Distillate inventories are estimated to fall by -250,000 barrels versus a 910,000 barrel increase the prior week. Refinery Utilization is estimated to fall -.40% versus a -3.53% decline the prior week.

BOTTOM LINE: Asian indices are higher, boosted by technology and commodity shares in the region. I expect US equities to open modestly higher and to maintain gains into the afternoon. The Portfolio is 75% net long heading into the day.

Stocks Finish Higher on Rising Economic Optimism, Led by Cyclicals and Small-Caps

Indices
S&P 500 1,427.99 +.35%
DJIA 12,533.80 +.45%
NASDAQ 2,431.41 +.01%
Russell 2000 785.38 +.95%
Wilshire 5000 14,333.19 +.43%
Russell 1000 Growth 562.58 +.23%
Russell 1000 Value 820.34 +.49%
Morgan Stanley Consumer 709.71 +.21%
Morgan Stanley Cyclical 921.14 +1.04%
Morgan Stanley Technology 556.86 -.22%
Transports 4,827.36 +.30%
Utilities 449.52 +.48%
Put/Call .89 -6.32%
NYSE Arms .94 -28.26%
Volatility(VIX) 10.34 -3.99%
ISE Sentiment 137.0 -10.46%
US Dollar 84.66 -.44%
CRB 296.65 +2.30%

Futures Spot Prices
Crude Oil 54.80 +4.22%
Reformulated Gasoline 144.35 +4.95%
Natural Gas 7.63 +4.22%
Heating Oil 157.54 +4.44%
Gold 648.10 +2.21%
Base Metals 230.50 +2.49%
Copper 258.70 +2.27%
10-year US Treasury Yield 4.81% +1.02%

Leading Sectors
Gold & Silver +4.41%
Steel +4.25%
Oil Service +2.86%

Lagging Sectors
Internet -.80%
Networking -1.15%
Airlines -3.57%

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In Play

Afternoon Recommendations
Deutsche Bank:
- Rated (NSR) Buy, target $40.

Afternoon/Evening Headlines
Bloomberg:
- President Bush plans to double the size of the country’s emergency oil reserves by 2027, Energy Secretary Bodman said. This would amount to only 100,000 barrels per day or .12% of daily global oil demand. Current global oil demand is 85.7 million barrels per day, however oil is rising $2.27/barrel on the report. Bush will also propose tonight cutting US gasoline consumption by 20% over the next 10 years through a combination of higher vehicle fuel efficiency and greater use of renewable fuels like ethanol.
- Sun Microsystems(SUNW) reported a profit after five quarters of losses and said it received a $700 million investment from KKR. SUNW is rising 8.3% after-hours.
- Citrix Systems(CTXS) reported annual revenue growth of 25%. CTXS is rising 11.2% after-hours.
- DuPont Co.(DD) said supplies of the company’s most profitable variety of corn seed will sell out this year because rising demand for ethanol in North America has spurred increased planting.
- US crude-oil inventories probably rose last week as refiners began maintenance programs, a Bloomberg News survey indicated.
- Yahoo! Inc.(YHOO) said fourth-quarter profit dropped 61% after delays in its newest Internet advertising software and costs from employee stock options. YHOO is falling 2.2% in after-hours trading.
- Advanced Micro Devices(AMD) reported a loss of $574 million on expenses tied to its acquisition of ATI Technologies. AMD is falling 4.9% after-hours.
- Lieutenant General David Petraeus said he couldn’t successfully carry out his new mission of leading US forces in Iraq and providing security for Baghdad without the additional 21,500 troops that President Bush plans to send.
- The Colts’ 38-34 win over the New England Patriots for a berth in the Super Bowl drew 46.7 million viewers on CBS, the most-watched American Football Conference championship game in 21 years.

BOTTOM LINE: The Portfolio finished about even today as gains in my Retail longs, Medical longs and Telecom longs were offset by losses in my Computer 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 modestly 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 mildly bullish. Tech lagged, however small-caps and cyclicals outperformed on rising economic optimism. I do believe the economy is accelerating, but not enough to buy deep cyclicals. Oil is $2.46 higher on news of Bush's proposals and a weaker U.S. Dollar. I believe oil bulls are misinterpreting the President’s initiatives. Adding 100,000 barrels per day to the SPR is only equivalent to .12% of current global demand of 85.7 million bpd. Plans to curtail U.S. gasoline consumption by 20% within 10 years would way more than offset that increase in demand for the SPR. I suspect the current rally in energy will prove short-lived as this sinks in. The 10-year yield is finished at 4.81%, rising 4 basis points. I continue to believe it would take a move above 5.25% to result in any meaningful weakness for equity investors. I do not expect that as economic growth is only accelerating modestly and inflation measures are poised to decelerate further. I have heard and read numerous bears insinuate or flat out state that they are the only ones that are bearish, which is one of the really surreal aspects of the current U.S. "negativity bubble." I don't closely follow the recently released UBS survey of investor sentiment that rose to a three-year high. However, its findings are very interesting. Notwithstanding the rise in the headline index, I would hardly call the overall survey "bullish" much less "excessively bullish." Only 37% of those surveyed expect the DJIA to rise this year. Of those 37%, only 11% expect a gain of more than 10%. As well, of the 37% that expect a rise, 22% expect a meager gain of 1%-4%. Finally, 46% expect the DJIA to remain unchanged for the year. I think the fact that the findings of this survey, which began when the bubble was bursting in 2000, are construed as “bullish” is a great example how deep-seated and ingrained the pessimism really is.

Stocks Higher into Final Hour on Rising Economic Optimism

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Medical longs and Retail longs. I covered some of my (EEM) short and added to my (IWM)/(QQQQ) hedge today, thus leaving the Portfolio 75% net long. The tone of the market is slightly positive as the advance/decline line is higher, sector performance is mixed and volume is around average. NYSE short interest rose .62% from mid-December through mid-January to 9.68 billion shares. Short interest is now just off the all-time high of 9.74 billion shares set in October of last year. I suspect we will see another new record high next month.

Here are the 10 NYSE stocks with the largest percentage increase in short interest relative to their floats from mid-December through mid-January:

1. RGC +33.5%
2. NMX +23.7%
3. HEI +21.6%
4. EVR +11.3%
5. TOA +8.1%
6. CAO +6.9%
7. CCO +6.4%
8. NYX +6.2%
9. LNN +6.2%
10. WLK +6.2%

I expect US stocks to trade mixed into the close from current levels as rising oil prices and long-term rates offsets more economic optimism.

Today's Headlines

Bloomberg:
- President Bush plans to double the size of the country’s emergency oil reserves by 2027, Energy Secretary Bodman said. This would amount to only 100,000 barrels per day or .12% of daily global oil demand. Current global oil demand is 85.7 million barrels per day, however oil is rising $2.27/barrel on the report. Bush will also propose tonight cutting US gasoline consumption by 20% over the next 10 years through a combination of higher vehicle fuel efficiency and greater use of renewable fuels like ethanol.
- Shares of Texas Instruments(TXN) rose the most in 11 months after fourth-quarter profit topped analysts’ estimates and the company said it’s working through stockpiles of processors.

Wall Street Journal:
- Several pharmaceutical companies are in advanced-stage trials for drugs to treat lupus, the strongest sign of advancement in 50 years for the 1.5 million Americans suffering the autoimmune disorder.
- US pension plans have returned to financial health on improved investments gains and higher interest rates, citing studies by benefits consultants.
- Wal-Mart Stores(WMT) plans to adjust the merchandise its sells in some of its outlets to better meet local demand.
- Cisco Systems(CSCO) is testing new products including video conferencing in a bid to juice growth.
- MGM Mirage and other US casinos may be considering splitting their real estate interests from gambling to benefit from a rise in Las Vegas property prices.

NY Times:
- Blackstone Group LP, which took the parent company of Orbitz Inc. private in August, hired UBS AG to explore an IPO of Orbitz stock.
- Europe is seeing strong interest in business ventures that develop energy from less polluting or renewable sources.

International Herald Tribune:
- The British Broadcasting Corp.(BBC) is in talks about putting some of its programming on Google’s(GOOG) YouTube online video site.

Leading Indicators on the Rise

- Leading Indicators for December rose .3% versus estimates of a .2% increase and a downwardly revised unch. reading in November.

BOTTOM LINE: An index of leading US economic indicators rose last month for the first time since September, as job growth and rising stock prices pointed to a strong start for 2007, Bloomberg said. Jobless claims averaged 316,500 in December, down from 328,600 a month earlier. As well, the S&P 500 averaged 1,416 in December versus 1,388 in November. Housing related gauges also helped boost the index. I continue to believe the US economy is accelerating modestly from slightly below average rates to more average rates of growth as housing and auto production cutbacks subtract less, the job market remains healthy, energy prices fall further, long-term rates remain low, inflation decelerates further, consumer spending strengthens and confidence in the sustainability of the current expansion rises.

Links of Interest

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