Durable Goods Orders Surge, New Home Sales Jump, Housing Inventories Fall Again

- Durable Goods Orders for December rose 3.1% versus estimates of 3.0% and an upwardly revised 2.2% in November.
- Durables Ex Transports for December rose 2.3% versus estimates of a .5% gain and a -1.0% decline in November.
- New Home Sales for December rose to 1120K versus estimates of 1052K and an upwardly revised 1069K in November.

BOTTOM LINE: Orders for US-made durable goods increased in December by the most in three months, reflecting more demand for business equipment, motor vehicles and aircraft, Bloomberg reported. Durables ex Transports rose 2.3%, the most since March 2006. Bookings for non-defense capital goods excluding aircraft, a gauge of future business investment, rose 2.4%, also the most since 2006. Orders for commercial aircraft soared 27% after a 3.8% gain the prior month. The worst of the manufacturing downturn, related to housing and autos, appears over. I suspect activity will accelerate back to more average levels throughout the year.

New Home Sales in the US rose more than forecast in December, showing the real-estate market is improving, Bloomberg said. The median price of a new home rose 1.8% for all of 2006 to $245,300. The supply of new homes available at the current sales pace is 5.9 months’ worth versus 7.2 months’ worth in July of last year. Sales soared 27% in both the Midwest and Northeast. Sales in the South rose .3%. They fell 4.4% in the West. I continue to believe housing has stabilized and will continue to improve modestly throughout most of the year.

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Friday Watch

Late-Night Headlines
Bloomberg:
- China will tighten environmental controls to restrain investment in factories after two interest-rate increases since April failed to slow economic expansion, Deputy Central Bank Governor Wu Xiaoling said. “We’re going to put forth more effort this year in meeting energy consumption controls,” Wu said. The country’s planners aim for a 20% reduction in energy consumption per unit of gross domestic product, a 10% cut in pollutants and a 60% increase in the recycle rate of industrial waste within three years.
- Consumer Reports magazine sent letters today apologizing to its 7 million readers for making a mistake in its crash testing of infant car seats and having to retract the results.
- Japan’s inflation unexpectedly slowed in December as oil prices declined, undermining the central bank’s case that interest rates should be raised.
- Rioting broke out in Beirut hours after Saudi Arabia, the US and France led donors pledging a total of $7.6 billion in new funds to help rebuild Lebanon and lend support to Prime Minister Fouad Siniora’s government.
- The UN development Program Executive Board suspended budget approval for its Norh Korean operations pending the outcome of a probe into whether the agency funneled money to the government of Kim Jong-il.
- Refined nickel imports by China, the world’s biggest consumer of the metal, may fall 11% this year as the country steps up production from low-grade nickel ores bought from the Philippines.
- Helmut Sohmen, whose BW Group owns the largest privately held fleet of oil supertankers, says the industry may experience a severe downturn in 2008 as deliveries from shipbuilders cause a glut of new vessels.
- Kim Jong-il is unlikely to be under house arrest, an official in South Korea’s presidential office said, casting doubt on a Jiji Press report that North Korea’s leader is absent from Pyongyang and may be under detention.

Late Buy/Sell Recommendations
Business Week:
- Louisiana-Pacific(LPX) is a buyout target for private equity groups because it has cash and assets. The company could be worth more than $27 a share in a buyout deal, said Michael Metz, chief investment strategist at Oppenheimer Holdings.
- McDonald’s Corp.(MCD) has increased outlet hours since 2003 to boost sales, a shift from its traditional strategy of relying on opening new stores to bolster revenue.

Night Trading
Asian Indices are -1.75% to -1.0% on average.
S&P 500 indicated +.03%.
NASDAQ 100 indicated -.17%.

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Company/EPS Estimate
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Economic Releases
8:30 am EST
- Durable Goods Orders for December are estimated to rise 3.0% versus a 1.6% increase in November.
- Durables Ex Transports for December are estimated to rise .5% versus a -1.1% decline in November.

10:00 am EST
- New Home Sales for December are estimated to rise to 1052K versus 1047K in November.

BOTTOM LINE: Asian indices are lower, weighed down by technology and financial shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Finish Lower on Profit-taking and Rising Long-Term Rates

Indices
S&P 500 1,423.90 -1.13%
DJIA 12,502.56 -.94%
NASDAQ 2,434.24 -1.30%
Russell 2000 784.19 -1.24%
Wilshire 5000 14,299.17 -1.10%
Russell 1000 Growth 561.80 -1.09%
Russell 1000 Value 817.54 -1.12%
Morgan Stanley Consumer 705.22 -.89%
Morgan Stanley Cyclical 917.13 -.72%
Morgan Stanley Technology 559.54 -.79%
Transports 4,754.86 -1.39%
Utilities 450.62 -.59%
Put/Call 1.20 +44.58%
NYSE Arms .85 +12.68%
Volatility(VIX) 11.22 +13.45%
ISE Sentiment 103.00 -9.65%
US Dollar 85.09 +.19%
CRB 293.49 -.88%

Futures Spot Prices
Crude Oil 54.31 -1.91%
Reformulated Gasoline 145.10 -.73%
Natural Gas 6.85 -7.75%
Heating Oil 155.34 -1.93%
Gold 652.00 -.38%
Base Metals 235.85 +.60%
Copper 263.60 +1.33%
10-year US Treasury Yield 4.87% +1.36%

Leading Sectors
Steel +1.21%
REITs +.64%
Semis -.56%

Lagging Sectors
Homebuilders -2.27%
Oil Service -2.56%
I-Banks -2.68%

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Afternoon Recommendations
Bear Stearns:
- Rated (CNH) Outperform.

Afternoon/Evening Headlines
Bloomberg:
- Natural gas plunged over 7% in NY as record-high inventories for this time of the year caught up with massive speculation by investment funds on the commodity.
- Crude oil fell over $1/bbl. after Energy Secretary Bodman said the US tariff on ethanol imports will probably need to be lifted to meet President Bush’s goal of increasing the use of renewable fuels.
- Amgen Inc.(AMGN) said fourth-quarter profit rose 1% as research spending climbed faster than sales of its anemia and cancer drugs.
- General Motors(GM) said it will delay filing fourth-quarter and 2006 results because it has to restate earlier financial reports.
- Microsoft’s(MSFT) second-quarter earnings fell less than analysts predicted after the world’s largest software maker sold more Xbox video games and database programs. The company raised its profit forecast for this year.
- US treasuries fell, pushing yields to the highest level since August, as an industry report showed housing inventories continue to fall.
- Petroleo Brasileiro SA, Brazil’s state-controlled oil company, plans to begin shipments of ethanol to Nigeria in February, part of the African nation’s plan to add the sugar-based fuel to gasoline.
- WFR, IRF and VSEA are semiconductor companies that are trading substantially higher in after-hours trading on positive earnings reports.

CNBC:
- Georgia Gulf Corp.(GGC), Gateway Inc. and 1-800-Flowers.com Inc. may see their share prices more than double during the next year, Arne Alsin, the founder of Alsin Capital Management.
- Some Harrah’s Entertainment(HET) shareholders think the $90 per share price offered for the company by Apollo Management LP and Texas Pacific Group is too low.

Cnet’s News.com:
- Google is again buying Intel Corp.(INTC) chips to run server computers after the search engine switched to processors from Advanced Micro Devices(AMD) last year.

Miami Herald:
- The number of Venezuelans seeking asylum in the US has risen since President Hugo Chavez came to power in the South American nation, citing the US Office of Immigration Statistics.

Financial Times:
- China’s President Hu Jintao said he wants to “purify the Internet environment” and called for officials to step up efforts to control online activity.

AP:
- NYC may wrap its free condoms in a subway-themed design to boost safe sex and reduce the number of HIV/AIDS cases, citing Health Commissioner Thomas Frieden.

BOTTOM LINE: The Portfolio finished lower today on losses in my Internet longs, Medical longs and I-banking longs. I added IWM/QQQQ hedges in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was negative today as the advance/decline line finished substantially lower, almost every sector declined and volume was above-average. Measures of investor anxiety were higher into the close. Today's overall market action was bearish. Today's selling felt forced to me. While most sectors declined, many small-to-mid-cap stocks were higher beneath the surface. The U.S. Dollar and 10-year yield are near session highs on more economic optimism after housing inventories fell again. Oil is near session lows, after a 7% plunge in natural gas as record inventories for this time of the year are catching up with the massive speculation that has been propping up prices. I sense that a very large percentage of investors are down for the year after underperforming last year. This, combined with confusion over economic readings, is leading to increased volatility in the major averages. I continue to believe the next meaningful move is higher for stocks.

Stocks Sharply Lower into Final Hour on Profit-taking and Rising Long-term Rates

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet longs, Telecom longs and Retail longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is very negative as the advance/decline line is substantially lower, every sector is declining and volume is above-average. The U.S. economy is accelerating modestly based on all the gauges I monitor. I suspect the recent surge in yields is mainly the result of the "housing price collapse" theory quickly losing supporters.Just a few months ago, when the 10-year was around 4.5%, I would guess the majority expected substantial price declines in the average home price, which would have led to much slower economic growth than the mild deceleration seen in the second half of last year. While substantial home price declines are unlikely -- the Case-Schiller Housing futures are now forecasting just a 1.5% decline in the average home price by May, up from projections of a 5.2% increase a few months ago -- I do not expect economic growth to accelerate too much. There are still too many economic drags along with a likely deceleration in global growth. As well, measures of inflation are poised to show another meaningful deceleration as the hugely positive effects of the decline in commodities works through the system. I took profits in most of my iShares Lehman 20+ Year Treasury Bond (TLT) long a few months ago. I will look to build this long position back up on any move in the 10-year yield to around 5%. The bottom line is, in my opinion, that the yield rising modestly is a good thing as a severe economic downturn is less likely while lower inflation readings are more likely. The 10-year yield is currently stabilizing. This should help stocks into the close. The yield is now 5 basis points higher after reaching 7 over the last hour. My intra-day gauges of investor angst are elevated. As well, the VIX is surging 14%. The CBOE total put/call is an above-average 1.27. Considering a triple-digit Dow loss, I have an unusual amount of green on my screens that monitor about 1,000 stocks. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, short-covering, more economic optimism and falling energy prices.

Today's Headlines

Bloomberg:
- Crude oil is falling again, pulled lower by a 7% plunge in natural gas, as speculation subsides with inventories still at record highs for this time of year.
- The US tariff on ethanol imports will probably need to be lifted to meet President Bush’s goal of increasing the use of renewable fuels, Energy Secretary Bodman said.
- Blackstone Group LP increased its offer for Sam Zell’s Equity Office Properties Trust(EOP) to $38.3 billion to thwart Vornado Realty Trust in the world’s biggest leveraged buyout.
- Shares of EBay Inc.(EBAY) rose the most in eight months after the company boosted its full-year profit forecast and posted a 24% fourth-quarter profit gain, spurred by growth in Europe.
- Saudi Arabia, the US and France lead donors pledging a total of $7.6 billion in new funds to help rebuild Lebanon and lend support to Prime Minister Fouad Siniora’s government, French President Jacques Chirac said.

Wall Street Journal:
- American Stock Exchange has appointed Morgan Stanley to advise it on becoming a for-profit company as it prepares for a possible stock offering or merger with another exchange.
- US bank start-ups rose to more than 150 last year, the most since 2000, citing the research firm SNL Financial LP.
- Freeport-McMoRan Copper & Gold’s(FCX) $25.5 billion takeover bid for Phoenix-based Phelps Dodge(PD) is more likely to succeed now than it was when it was proposed in November, thanks to a plunge in copper prices.
- Shares of Research In Motion(RIMM) have fallen 10% since Apple Inc.(AAPL) announced its iPhone on Jan. 9, but it’s far too soon to write off the Canadian company.

NY Times:
- Hedge fund managers are becoming significant fund-raisers for political candidates, providing at least $2.8 million in contributions to candidates and party committees last year. Hillary Clinton’s campaign will get money from Lisa Perry, whose husband, Richard, runs a $12 billion hedge fund. John Edwards has gotten money from executives he worked with at Fortress Investment, a $29.7 billion fund. Chelsea Clinton was hired by Avenue Capital, a $12 billion fund whose head contributes to the Clintons.

Washington Post:
- Lockheed Martin Corp.(LMT) has won a bid to provide high-tech identification cards for US ports.

Financial Times:
- Kohlberg Kravis Roberts’ decision to buy $700 million of Sun Microsystems(SUNW) convertible notes limits the buyout firm’s risks, and it gives KKR a chance for gains if Sun stock rises enough.

Rzeczpospolita:
- Sniace SA, a Spanish chemicals maker, will build a bio-fuel plan in west Poland for as much as $156 million.

Haaretz:
- SanDisk Corp.(SNDK) may close down the disc-on-key unit of M-Systems Flash Disk Pioneers Ltd. two months after completing its acquisition of the smaller company.