Wednesday Watch

Late-Night Headlines
Bloomberg:
- The yen strengthened against the dollar after NHK Television reported that Bank of Japan Governor Toshihiko Fukui proposed raising the central bank’s benchmark interest rate.
- Delphi Corp., the biggest auto-parts supplier to General Motors(GM), intends to sell its interiors business to billionaire industrialist Ira Rennert as part of an effort to exit bankruptcy.
- Australia’s central bank is “more confident” inflation pressures are easting in the Asia-Pacific region’s fifth-largest economy, Governor Glenn Stevens said.
- Archer Daniels Midland(ADM) expects biodegradable plastics to be the next growth market for corn byproducts. Archer Daniels, together with partner Metabolix, will open its first plant to produce 50,000 tons of biodegradable plastics next year in Clinton, Iowa. Archer Daniels also plans to increase ethanol capacity by 50% to 1.6 billion gallons a year by next year.
- NovaStar Financial(NFI), the 16th largest sub-prime mortgage lender in the US, had a $14.4 million loss for the fourth quarter. Shares plunged 33% in after-hours trading.

AP:
- An Austin, Texas, judge blocked Governor Rick Perry’s approval of TXU Corp.’s plan to build six coal-fired plants in the state. Plaintiffs, who included environmental groups, said the order was unconstitutional.

Xinhua News Agency:
- China plans to boost gold production to 260 tons this year after record output of 240 tons in 2006, citing the State Development and Reform Commission.

Late Buy/Sell Recommendations
Citigroup:
- Lobbyists and politicians noted at the Renewable Fuels Conference that they expect the next Renewable Fuel Standard to be finalized next month with enactment starting July 1st of this year. The current RFS standard mandates 7.5 billion gallons of renewable fuel use by 2012 though we are already above 5 billion gallons of use. The US consumes approximately 140 billion gallons of gasoline annually so obviously E10 adoption(10% of a fuel gallon being ethanol, 90% gas) across the country gets us to 14 billion renewable gallons with E20 getting us to 28 billion gallons. It was noted the government targets 76% of all US gasoline will be E10 blended by 2010, implying the new RFS likely has to be at least 11-12 billion gallons.
- Residential consumption of natural gas has not grown after reaching an early peak in 1973. Conservation drove consumption down to a low in 1983 from the peak in 1973. Since then, despite a 33% pickup in the housing stock, residential demand has only risen by 20%, just enough to return consumption to the 1973 level. Between climate change trends, conservation, migration to the South and West, residential consumption may not be a significant source of growth for natural gas consumption in the US.
- Reiterated Buy on (GILD), target raised to $86.

Night Trading
Asian Indices are -.50% to +.50% on average.
S&P 500 indicated -.08%.
NASDAQ 100 indicated -.04%.

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Earnings of Note
Company/EPS Estimate
- (ANF)/2.14
- (APCC)/.22
- (ADI)/.39
- (BRCD)/.12
- (CLF)/1.52
- (GMR)/.79
- (GGC)/-.20
- (GRT)/.26
- (HSIC)/.67
- (JBX)/.78
- (MHS)/.79
- (MRX)/.21
- (OII)/.56
- (OSIP)/-.14
- (PWR)/.16
- (ROG)/.55
- (RUTH)/.36
- (CRM)/.07
- (SNPS)/.20
- (TK)/1.11
- (TJX)/.51
- (TCC)/1.29
- (TRI)/.55
- (VCLK)/.18
- (WBMD)/.16
- (WFMI)/.41
- (ZLC)/1.87

Upcoming Splits
- (CMCSA) 3-for-2
- (TRMB) 2-for-1

Economic Releases
8:30 am EST
- The Consumer Price Index for January is estimated to rise .1% versus a .4% gain in December.
- The CPI Ex Food & Energy for January is estimated to rise .2% versus a .1% gain in December.

10:00 am EST
- Leading Indicators for January are estimated to rise .2% versus a .3% gain in December.

2:00 pm EST
- Minutes from Jan. 31 FOMC Meeting

BOTTOM LINE: Asian indices are mixed as gains in technology and steel shares are offsetting losses in energy stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

DJIA Hits Another All-Time High, Led by Technology and Retail Shares, as Energy Prices Fall

Indices
S&P 500 1,459.68 +.28%
DJIA 12,786.64 +.15%
NASDAQ 2,513.04 +.67%
Russell 2000 826.12 +.97%
Wilshire 5000 14,734.23 +.39%
Russell 1000 Growth 576.95 +.49%
Russell 1000 Value 841.75 +.21%
Morgan Stanley Consumer 719.01 +.61%
Morgan Stanley Cyclical 971.44 +.31%
Morgan Stanley Technology 588.16 +.38%
Transports 5,145.81 +.78%
Utilities 477.26 +.49%
MSCI Emerging Markets 118.02 +.25%

Sentiment/Internals
Total Put/Call .95 +25.0%
NYSE Arms 1.04 +4.89%
Volatility(VIX) 10.24 +2.20%
ISE Sentiment 127.0 -18.6%

Futures Spot Prices
Crude Oil 58.07 -2.22%
Reformulated Gasoline 164.30 -.14%
Natural Gas 7.63 +1.69%
Heating Oil 164.40 -1.76%
Gold 662.10 -1.59%
Base Metals 230.20%
Copper 260.25 -2.07%

Economy
10-year US Treasury Yield 4.68% -1 basis point
US Dollar 84.18 +.19%
CRB Index 303.46 -1.03%

Leading Sectors
Gaming +1.12%
Software +1.11%
Retail +1.06%

Lagging Sectors
Energy -.75%
Oil Service -.98%
Gold & Silver -1.77%

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Afternoon Recommendations
UBS:
- Rated (GILD), (CELG) Buy. (GILD) top pick.

Afternoon/Evening Headlines
Bloomberg:
- Crude oil fell $1.32/bbl. today on forecasts for milder weather and comments from Russia that oil prices would fall this year and next year.
- Consol Energy(CNX), the second-biggest US coal producer, said it formed an alliance with coal processor Headwaters(HW) to develop refineries that will make liquid fuel from Consol’s reserves.
- BlackRock Inc.(BLK) reported a 7.1% stake in FuelCell Energy(FCEL), a maker of industrial power plants that generate electricity by converting hydrogen and oxygen into water.
- Frank McGhee, head metals trader at Integrated Brokerage Services LLC in Chicago, says he sees a technical failure in the price of gold.
- Hewlett-Packard(HPQ) said first-quarter profit rose 26% after the company won consumer sales away from Dell Inc.(DELL). (HPQ) is falling .26 after-hours.
- Sam Zell, the Chicago billionaire who sold Equity Office Properties Trust for $39 billion in the biggest leveraged buyout ever, said office rents will continue to rise and he didn’t sell at the top of the market. “The office market at least for the next 24 months looks extremely strong and extremely good,” Zell said.
- Copper prices in NY fell the most in two weeks on renewed speculation that global mine output will exceed demand for the metal.
- Crocs Inc.(CROX) said fourth-quarter earnings jumped almost 500% as demand for the company colorful line of casual shoes pushed sales to a record. (CROX) rose .50 after-hours.

AP:
- OJ Simpson will have to pay royalties and other earnings from his past projects to the family of Ron Goldman following a judge’s ruling.
- The last floats of the 2007 Mardi Gras season rolled through New Orleans today as officials and businesses said attendance was likely to exceed last year.

Interfax:
- OAO VSMPO-Avisma, the world’s largest producer of titanium, increased production 15% to 23,900 tons last year.

BOTTOM LINE: The Portfolio finished higher today on gains in my Retail longs, Telecom 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 positive today as the advance/decline line finished higher, almost every sector gained and volume was heavy. Measures of investor anxiety were higher into the close. Today's overall market action was bullish as the major averages and breadth finished at session highs. Small caps led the way once again. The Russell 2000 is already 4.8% higher year-to-date with the Naz a close second, up 4.0%. Most commodities were under pressure throughout the day and the 10-year yield is finishing near session lows, dropping another basis point to 4.68%. "Growth" stock outperformance over "value" has recently picked up steam. My intraday gauge of investor angst was at above-average levels throughout the day, notwithstanding the rally from morning lows. I expect stocks to build on today's gains later this week.

Stocks Higher into Final Hour, Led by Small-Caps, as Energy Prices Fall

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Telecom longs, Retail longs, Biotech longs, Computer longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, almost every sector is higher and volume is heavy. Reuters is reporting that Advanced Micro Devices' (AMD) CEO is saying that the market is underestimating the positive impact from Microsoft's (MSFT) Vista and that the new operating system will drive "a lot of technology upgrades." Moreover, Bill Gates is saying that "reception for Vista has been incredibly good." This morning, CSFB said buyout funds have the potential to purchase companies with a market value of $2 trillion this year. As well, according to a recent survey by Private Equity Intelligence, private equity funds may raise $500 billion this year, a 16% increase over last year's record amount. This potential demand for equities comes at a time when the total value of U.S. shares contracted last year by the most in 22 years. Let's also not forget that the percentage of U.S. mutual fund assets in domestic stocks is the lowest since at least 1984, when record-keeping began. This is another huge potential source of demand for U.S. equities. I continue to believe a low supply of U.S. stock and increasing demand will make for a lethally bullish combination this year. I expect US stocks to trade modestly higher into the close from current levels on declining energy prices, bargain hunting and short-covering.

Today's Headlines

Bloomberg:
- The US Supreme Court tightened the constitutional limits on punitive damages, setting aside a $79.5 million award in a smoker case against Altria Group’s(MO) Phillip Morris USA unit.
- Crude oil is falling $1.60/bbl. to $57.79/bbl. on forecasts for milder weather and comments from Russia that oil would decline in price this year and next.
- Wal-Mart Stores(WMT) said fourth-quarter profit rose 9.8%, exceeding analysts’ estimates after discounts on toys and electronics attracted holiday shoppers.
- Shire Plc, the UK maker of attention-deficit drug Adderall XR, agreed to buy New River Pharmaceuticals(NRPH) for $2.6 billion to gain full control of Vyvanse, a potential successor.
- Buyout funds have the potential to acquire more than $2 trillion worth of stocks this year, according to strategists at Credit Suisse Group.
- Hewlett-Packard(HPQ) trounced Dell Inc.(DELL) in the personal-computer market last quarter, widening its lead and boosting sales and earnings.
- The yen dropped for a third day against the dollar and euro as the Bank of Japan began a two-day monetary policy meeting under pressure from politicians to keep borrowing costs low.
- General Motors Corp.(GM) stands a 50% chance of buying DaimlerChrysler’s(DCX) Chrysler unit and may seek the purchase as a “defensive maneuver,” Merrill Lynch analyst John Murphy said.
- Frontier Oil Corp.(FTO) announced today the acquisition of Ethanol Management Company. EMC’s primary assets are a 25,000 barrel-per-day products terminal and blending facility.
- Gold is falling the most in two weeks, $12/oz., in NY as a rising dollar, falling oil and lower inflation readings make the precious metal a less attractive investment.
- Copper is falling 2.2% on another 1.3% increase in Comex copper inventories.
- Russia, the world’s fourth-largest steel producer, will impose three-year duties on stainless-steel sheet imports from the European Union that are likely to help domestic producers win market share from competitors.

Wall Street Journal:
- The Container Store, a closely held retailer specializing in storage-and-organization items, has hired JP Morgan Chase(JPM) and Cravath, Swaine & Moore LLP to find a buyer.
- US women took more than half the new jobs in the first half of this decade and also managed to find better-paying positions, citing Bureau of Labor Statistics for 2000-2005.
- Callaway Golf(ELY) has tripled the marketing budget for its Top-Flite golf balls to boost sales of the redesigned ball.
- Kraft Foods will sell more complete meals with its products as ingredients as part of a new strategy as it gets ready to spin off from Altria Group(MO).

NY Times:
- JetBlue Airways(JBLU) will begin reimbursing customers who last week were stranded as a result of the airline’s missteps when a winter storm swept the US East Coast.

Globe and Mail:
- Canada’s governing Conservative Party moved into the lead in voter popularity largely because of the leadership of Prime Minister Stephen Harper, according to a new poll.

Daily Telegraph:
- Mohamed ElBaradei, the head of the Intl. Atomic Energy Agency(IAEA), said countries possessing nuclear weapons can’t without hypocrisy tell others, such as Iran, that they may not do so.

Interfax:
- Russia expects weapons exports to increase to $7.5 billion this year, led by India and China, citing First Deputy Prime Minister Sergei Ivanov.

Asharq al-Awsat:
- Saudi Arabia’s Tadawul, the Arab world’s biggest stock market that is down 60% from its high last year, is among the region’s “weakest” in terms of attracting new listings, citing a bourse official.

Economic Releases

- None of note

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