Today's Headlines

Bloomberg:
- The DJIA, Russell 2000 and S&P 400 are all hitting all-time highs today on strong a strong GDP report, decelerating inflation and constructive Federal Reserve comments.
- The Federal Reserve kept the benchmark US interest rate at 5.25% and acknowledge the economy is picking up after a slowdown last year.
- Carl Icahn, the billionaire shareholder activist seeking a seat on the board of Motorola Inc.(MOT), plans to pressure the mobile-phone maker to return more cash to investors by buying back stock.
- Boeing(BA) said fourth-quarter profit doubled on increased deliveries and Airbus SAS’s failure to produce new models.
- The International Monetary Fund should sell some gold to cover losses, said an advisory panel that includes former Fed Chairman Greenspan and European Central Bank President Jean-Claude Trichet.
- Logitech Intl(LOGI), the biggest maker of computer mice, is the company most likely to join the Nasdaq-100 Index after Comverse Technology is delisted, Lehman Brothers said.
- Exxon Mobil(XOM), Royal Dutch Shell and BP Plc may report fourth-quarter earnings fell, the first time the world’s three largest oil companies all reported a decline since mid-2002.
- The US Treasury said it may scrap its three-year note before the end of the year as the improving budget deficit reduces borrowing needs.
- R. Hunter Biden, a Washington lobbyist and son of US democratic presidential hopeful Senator Joe Biden, fraudulently excluded a partner form the purchase of a hedge-fund investment firm, the partner claims in a lawsuit.

Wall Street Journal:
- Microsoft Corp.(MSFT) dislodged Johnson & Johnson(JNJ) from the top spot in this year’s Harris Interactive/Wall Street Journal ranking of 60 big companies in terms of their reputations.

NY Times:
- Yahoo! Inc.(YHOO) is planning to create individual Web sites for about 100 online entertainment destinations for individual movies, television shows, bands, celebrities and other types of entertainment.

USA Today:
- US states that are reporting their largest budget surpluses and highest reserve-fund levels since 2000 may use that extra money to cut business taxes to lure companies.

Financial Times:
- China’s stock market shows signs of a “bubble”, quoting Cheng Siwei, vice chairman of the National People’s Congress. “Every investor thinks they can win. But many will end up losing,” Cheng said.

Al-Alam Al-Yom:
- Egypt may set up oil exploration companies and sell their shares to smaller investors, citing the country’s petroleum minister.

US Economic Growth Surges Back to Above-Average Rates, Inflation Decelerates Further, Consumption Healthy, Chicago PMI Contracts, Construction Muted

- Advance 4Q GDP rose 3.5% versus estimates of a 3.0% gain and a 2.0% rise in 3Q.
- Advance 4Q Personal Consumption rose 4.4% versus estimates of a 4.4% gain and a 2.8% rise in 3Q.
- Advance 4Q GDP Price Index rose 1.5% versus estimates of a 1.5% increase and a 1.9% gain in 3Q.
- The 4Q Employment Cost Index rose .8% versus estimates of a 1.0% gain and a 1.0% increase in 3Q.
- The Chicago Purchasing Manager for January fell to 48.8 versus estimates of 52.0 and a downwardly revised reading of 51.6 in December.
- Construction spending for December fell .4% versus estimates of unch. and an upwardly revised .1% gain in November.

BOTTOM LINE: The US economy grew at a faster-than-forecast annual pace of 3.5% last quarter, propelled by a rebound in consumer spending as gasoline prices fell and wages grew, Bloomberg said. The US economy grew an above-average 3.4% for all of 2006. The GDP Price Index rose at an annual rate of 1.5%, the smallest gain in more than 3 years, suggesting inflation is well contained, notwithstanding above-average growth. Consumer spending, which accounts for 70% of US economic growth, rose 4.4% last quarter versus a 2.8% increase the prior quarter. A smaller trade deficit also boosted growth as it added 1.6 percentage points to GDP, the most in 10 years. Inventory de-stocking subtracted .7 percentage points from growth. I believe U.S. GDP growth averages 3.0% this year as housing and auto-related weakness subsides and the deflator subtracts less from nominal growth as inflation continues to decelerate.

The Chicago Purchasing Manager Index unexpectedly contracted for the first time since April 2003 as new orders fell, Bloomberg reported. A gauge of order backlogs rose to 46.4 versus 44.5 in December. As well, the production index rose to 53.2 from 49.7 the prior month. The employment component of the index fell to 42.8 from 48.2 prior. The prices paid component fell to 54.9 from 56.9 prior. I continue to believe manufacturing will trend higher throughout the year as the effects of auto production and housing subside.

Construction spending in the US fell in December, Bloomberg reported. Private residential building fell 1.6%, the ninth straight decrease. Private non-residential construction rose .9% in December and surged 14.5% from year-ago levels. Homebuilding construction will remain muted throughout the year. This will result is a dramatic decline in housing inventories as demand is still relatively healthy.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- The number of elderly and disabled Americans enrolled in the US government’s prescription drug program rose to 23.9 million this year, a 6.2% increase from last year, Medicare said.
- President Bush said his warnings to Iran about its involvement in Iraq have no hidden message and no hint of a threat to invade the Islamic Republic.
- Japan’s wages unexpectedly fell at the fastest pace in 16 months as companies paid lower winter bonuses, signaling a slump in consumer spending may deepen and prevent the central bank from raising interest rates.
- Hynix Semiconductor, Asia’s second-largest maker of memory chips, posted record quarterly profit as the release of Microsoft’s(MSFT) Windows Vista operating system drove up chip demand and prices.
- Crude oil is falling in NY on speculation that yesterday’s advance was overdone as US supplies will be adequate to meet winter demand and OPEC will refrain from cutting production at a meeting in March.
- China National Petroleum, the nation’s biggest oil company, plans to drill 20% more high-yield horizontal wells this year to increases output.
- Japan’s 2006 gasoline demand fell 1.1%, the first decline in 32 years. Oil products demand fell 3.9%. Oil imports from Saudi Arabia fell 12.4%. Liquefied natural gas imports surged 38% to 5.78 million tons.

Financial Times:
- Bristol-Myers Squibb(BMY) hired Lehman Brothers(LEH) to help examine potential takeover bids from companies including Sanofi-Aventis SA.

Edmonton Journal:
- Peace River Oil, a closely held Canadian oil company, plans to spend $2.1 billion on an oil sands project in northwestern Alberta. The investment will double the processing capacity of the Red Deer, Alberta-based company’s Bluesky upgrader to 50,000 barrels of oil a day, including a refinery to make gasoline and diesel.

Xinhua News Agency:
- Chinese shipbuilders produced a record 14.52 million deadweight tons of vessels last year, about a fifth of the world’s total and 20% more than in 2005. More than half the vessels made were large oil tankers, the chairman of the China Assoc. of National Shipbuilding Industry said.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are -1.0% to unch. on average.
S&P 500 indicated -.05%.
NASDAQ 100 indicated -.08%.

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Earnings of Note
Company/EPS Estimate
- (AGN)/1.02
- (MO)/1.22
- (AH).97
- (AVB)/.64
- (BA)/.98
- (CEG)/.89
- (D)/.78
- (EG)/.55
- (LLY)/.82
- (EOG)/.98
- (EL)/.76
- (EFX)/.52
- (GILD)/.68
- (GOOG)/2.92
- (KFT)/.51
- (JDSU)/.10
- (IR)/.73
- (HLT)/.33
- (HES)/1.12
- (LLL)/1.36
- (MCHP)/.33
- (MUR)/.48
- (NMX)/.33
- (PHM)/-.01
- (SEE)/.90
- (SBUX)/.26
- (STN)/.45
- (STE)/.28
- (TWX)/.22
- (TSCO)/.71
- (VRSN)/.25
- (VMC)/1.02
- (WWW)/.39
- (XEL)/.22

Upcoming Splits
- (SSI) 3-for-2

Economic Releases
8:30 am EST
- Advance 4Q GDP is estimated to rise 3.0% versus a 2.0% rise in 3Q.
- Advance 4Q Personal Consumption is estimated to rise 4.4% versus a 2.8% gain in 3Q.
- Advance 4Q GDP Price Index is estimated to rise 1.5% versus a 1.9% gain in 3Q.
- The Employment Cost Index for 4Q is estimated to rise 1.0% versus a 1.0% gain in 3Q.

9:45 am EST
- The Chicago Purchasing Manager Index for January is estimated to rise to 52.0 versus a reading of 51.6 in December.

10:00 am EST
- Construction Spending for December is estimated unch. versus a -.2% decline in November.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil build of 1,500,000 barrels versus an in increase of 789,000 barrels the prior week. Gasoline supplies are expected to rise by 1,800,000 barrels versus a 4,009,000 barrel build the prior week. Distillate supplies are expected to fall by -2,100,000 barrels versus a 750,000 barrel increase the prior week. Refinery Utilization is expected to remain unch. versus a -.54% decline the prior week.

2:15 pm EST
- The FOMC is expected to leave the Fed Funds rate at 5.25%.

BOTTOM LINE: Asian indices are mostly lower on weakness in automaker and technology shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the day.

Stocks Finish Slightly Higher Ahead of Fed Announcement and Key Economic Data

Indices
S&P 500 1,428.82 +.58%
DJIA 12,523.31 +.26%
NASDAQ 2,448.64 +.31%
Russell 2000 797.97 +.61%
Wilshire 5000 14,379.32 +.58%
Russell 1000 Growth 563.14 +.40%
Russell 1000 Value 822.25 +.71%
Morgan Stanley Consumer 705.47 +.06%
Morgan Stanley Cyclical 921.60 +.47%
Morgan Stanley Technology 564.61 +.65%
Transports 4,788.24 +.51%
Utilities 453.59 +.53%
Put/Call .92 -4.17%
NYSE Arms .95 -26.09%
Volatility(VIX) 10.96 -4.28%
ISE Sentiment 165.0 +4.43%
US Dollar 84.99 -.12%
CRB 298.30 +2.54%

Futures Spot Prices
Crude Oil 56.84 +5.24%
Reformulated Gasoline 152.0 +5.48%
Natural Gas 7.67 +10.6%
Heating Oil 163.88 +5.8%
Gold 652.70 +.57%
Base Metals 226.75 -.16%
Copper 256.25 +.81%
10-year US Treasury Yield 4.87% -.38%

Leading Sectors
Oil Service +3.21%
Steel +2.18%
HMOs +1.52%

Lagging Sectors
Gaming -.05%
Tobacco -.30%
Airlines -2.09%

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Afternoon Recommendations
- None of note:

Afternoon/Evening Headlines
Bloomberg:
- Natural gas soared 12% as rampant investment fund speculation increased on colder weather despite record inventories.
- Citigroup Inc.(C) and closely held Relativity Media LLC agreed to finance 90 movies over the next five years in what may be the biggest ever film-production fund.
- The US EPA’s staff is recommending the government toughen its standards for ground-level ozone, or smog, for public health reasons.

BOTTOM LINE: The Portfolio finished about even today as gains in my Retail longs and Medical longs offset losses in my Commodity shorts. I added (IWM) and (QQQQ) hedges 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, almost every sector rose and volume was about average. Measures of investor anxiety were mostly lower into the close. Today's overall market action was bullish. The fact that the 10-year yield finished near session lows at 4.87% is a big positive considering the jump in energy prices and stronger-than-expected consumer confidence reading. Volatility will likely rise tomorrow. I would expect a strong stock market rally if the yield remains stable or falls on tomorrow’s economic reports and Fed statement. A sharp rise in the yield will likely result in initial stock market weakness. However, I continue to believe it would take a move above 5.25%, which I do not expect, in the 10-year yield before the Fed would even contemplate a hike.

Stocks Slightly Higher into Final Hour on More Economic Optimism, Stable Long-Term Rates

BOTTOM LINE: The Portfolio is about even into the final hour as gains in my Retail longs and Medical longs are offsetting losses in my Commodity shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly positive as the advance/decline line is modestly higher, almost every sector is rising and volume is about average. It is a positive that the 10-year yield is stable in the face of a jump in energy prices and a good consumer confidence reading. I will closely monitor the bond’s response to tomorrow’s likely above-expectations economic reports and the Fed’s likely upbeat commentary. I expect US stocks to trade mixed-to-higher into the close from current levels on more economic optimism and stable long-term rates.