Friday Watch

Late-Night Headlines
Bloomberg:
- Japan’s inflation slowed to zero percent in January as oil prices dropped, making it more difficult for the central bank to justify raising interest rates again soon after last week’s increases.
- Japan’s household spending unexpectedly rose for the first time in moiré than a year, suggesting the nation’s consumers may have recovered an appetite for shopping.
- Australia’s retail sales rose almost twice as much as expected in January as surging employment bolstered consumer confidence, signaling the Reserve Bank may not be done raising interest rates after three increases last year.
- Gold fell for a second day in Asia as speculators cut record long positions further on worries over demand for emerging markets. Tokyo gold futures dropped the daily limit.
- Petroleos Mexicanos plans to drill 50 to 60 oil wells in deep waters in the Gulf of Mexico over the next 5 years.

Wall Street Journal:
- BHP Billiton Ltd.(BHP) plans to almost triple its iron ore output during the next decade to more than 300 million metric tons a year, citing Ian Ashby, president of BHP’s iron ore unit.

London-based Times:
- Royal Dutch Shell Plc plans to produce a new road fuel from wood chips and straw in a joint venture with Choren Industries, a German biofuel company, citing Ken Fisher, Shell’s vp for strategy.

Late Buy/Sell Recommendations
Business Week:
- SuperGen(SUPG), a drugmaker expanding in new markets through partnerships, remains undervalued at a time when its stock is likely to climb. This year, sales of Dacogen are expected to reach $120 million, citing Elemer Piros of Rodman & Renshaw who rates the stock a buy, with a 12-month target of $24.
- Tyco Intl(TYC), the conglomerate splitting into three companies, has excited some investors, who are snapping up shares in the anticipation that the split will boost the stock. John Maloney, president of M&R Capital Management Inc., says a sum-of-the-parts valuation puts Tyco’s worth at $40 a share, and owning 100% of three companies will be a big bonus for shareholders.
- Altair Technologies’(ALTI) sales may rise on higher demand for its high-power NanoSafe battery packs. Phoenix orders in 2007 alone may tally as much as $42 million, citing John Roy of WR Hambrecht.

Night Trading
Asian Indices are -.25% to +.75% on average.
S&P 500 indicated +.26%.
NASDAQ 100 indicated +.14%.

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Company/EPS Estimate
- (DRC)/.49

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10:00 am EST
- Final Univ. of Mich. Consumer Confidence for February is estimated to rise to 93.5 versus 93.3.

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

Stocks Finish Only Modestly Lower on Heavy Volume

Indices
S&P 500 1,403.17 -.26%
DJIA 12,223.34 -.28%
NASDAQ 2,404.21 -.49%
Russell 2000 791.03 -.29%
Wilshire 5000 14,177.23 -.26%
Russell 1000 Growth 554.25 -.34%
Russell 1000 Value 810.15 -.18%
Morgan Stanley Consumer 691.99 -.22%
Morgan Stanley Cyclical 933.57 -.27%
Morgan Stanley Technology 562.10 -.42%
Transports 4,855.47 -.17%
Utilities 480.69 +.31%
MSCI Emerging Markets 110.04 -1.35%

Sentiment/Internals
Total Put/Call 1.39 +26.36%
NYSE Arms 1.17 +22.79%
Volatility(VIX) 15.82 +2.59%
ISE Sentiment 107.0 -6.14%

Futures Spot Prices
Crude Oil 61.81 +.03%
Reformulated Gasoline 190.34 +1.58%
Natural Gas 7.33 +.48%
Heating Oil 177.62 -.11%
Gold 666.40 -.91%
Base Metals 244.60 +1.79%
Copper 275.20 unch.

Economy
10-year US Treasury Yield 4.55% -2 basis points
US Dollar 83.75 +.22%
CRB Index 312.24 -.05%

Leading Sectors
HMOs +1.11%
Oil Service +.65%
Gaming +.39%

Lagging Sectors
Networking -1.72%
Biotech -1.96%
Gold & Silver -2.15%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- American Intl. Group(AIG), the world’s largest insurer, said fourth-quarter profit rose almost eightfold a year after the company paid $1.64 billion to settle probes of accounting and sales practices. The stock fell .30 after-hours.
- Berkshire Hathaway(BRK/A), run by billionaire Warren Buffett, said fourth-quarter profit fell 30% on lower investment gains.
- Senate Democrats “overwhelmingly” rejected a proposal to cut the Bush Administration’s war spending request for next year by $20 billion, according to Budget Committee Chairman Kent Conrad.
- Dell Inc.(DELL) posted fourth-quarter profit and sales that trailed analysts’ reduced estimates after the company lost customers to rivals over the holidays. The stock fell .40 after-hours.
- Kohl’s Corp.(KSS), the fourth-largest US dept.-store company, said fourth-quarter profit rose 29%, helped by sales of home goods. Earnings and sales beat estimates. The stock is rising $1.50 in after-hours trading.
- Dennis Gartman, economist, trader and editor of the Gartman Letter, sees gold falling to $630/oz. within a few weeks.

Reuters:
- TXU Corp.(TXU), the Texas power producer that agreed to a $45 billion buyout by KKR and Texas Pacific, will contract up to 60 companies to gauge their interest in submitting a rival offer, citing CEO John Wilder.

Canadian Broadcasting Corp.:
- Canadian Prime Minister Stephen Harper’s Conservative Party has widened its lead over the main opposition Liberal Party to 9 percentage points, citing a Decima Research survey.

BOTTOM LINE: The Portfolio finished about even today as gains in my Retail longs and Computer longs offset losses in my Medical longs. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was negative as the advance/decline line finished lower, sector performance was mixed and volume was heavy. Measures of investor anxiety were higher into the close. Today's overall market action was just mildly bearish as the major averages recouped much of this morning's substantial losses. My intraday gauge of investor angst finished the day again at an elevated level. I have heard many say they wish they had seen more panic the last few days, however my gauge registered very elevated levels of investor angst. The “whoosh” bottom that everyone looked for last year never materialized before the major averages ripped higher. I suspect the same will be the case this time as everyone looks for the exact same thing and the bearish camp is extraordinarily crowded given just slight losses in the major averages. A lot will depend on tonight's trading in Asia, but I have a feeling that U.S. stocks will build on today's sharp upside reversal tomorrow. While manufacturing data have been on the weak side of late, recent consumer-related data has been improving. The Conference Board's Consumer Confidence Index hit a cycle high last month, despite higher energy prices and the media's obsession with housing. Personal Income growth for January has only been exceeded 13 times over the last 20 years. Weekly retail sales have been trending higher the last few weeks. Personal spending, as evidenced in today's report, has also been trending higher. As well, all three US automakers reported better-than-expected sales for February, with GM reporting a 3.4% gain versus estimates of a 7% decline. Finally, can the consumer be weakening meaningfully when Mac sales soared 100% in January? Housing only matters to the extent that it significantly impacts the consumer, in my opinion. Manufacturing alone can't bring down the U.S. economy. Moreover, manufacturing should improve meaningfully over the course of the year as inventory rebuilding occurs and the auto sector improves markedly.

Stocks Surge Substantially from Morning Lows on Heavy Volume

BOTTOM LINE: The Portfolio is about even into the final hour as gains in my Computer longs and Retail longs are offsetting losses in my Medial longs. I covered some of my (IWM) and (QQQQ) hedges into this morning’s weakness, thus leaving the Portfolio 75% net long. The tone of the market is modestly negative as the advance/decline line is modestly lower, sector performance is mixed and volume is very heavy. Subprime and emerging markets are investors' two chief worries. The subprime indices are stabilizing. Given that most emerging markets are getting very oversold short term, I wouldn't be surprised to see nice gains tonight in Asia. Considering the extent to which hedging and selling has occurred over the last three days, too much hot money may be leaning the wrong way. My intraday gauge of investor angst is still very elevated. As well, considering downside volume is once again swamping upside volume, the major averages' minor losses must be disturbing to the many bears. The airline, gaming, homebuilding, HMO, disk drive, software, restaurants, I-banks, Banks, computer hardware, steel, oil service, energy and utility sectors are now in positive territory. Tech leader Apple (AAPL) is near session highs, surging 3.8%. AppleInsider.com reported today that Pacific Crest made comments in a morning note that Mac sales accelerated to over 100% growth during the month of January vs. 55% growth in December. This surge also comes amid an increase in average selling prices.This bodes very well for Apple's (AAPL) upcoming quarter, and I believe that it is a sign of things to come for the entire year. I still expect the stock to rise at least 50% this year. It remains my second-largest long position. I expect US stocks to trade modestly higher into the close from current levels on short-covering, better economic data and bargain-hunting.

Today's Headlines

Bloomberg:
- The average US home price rose 5.87% during the fourth quarter from the fourth quarter a year ago.
- General Motors(GM) reported a 3.4% gain in February sales versus estimates of a 7% decline.
- US Treasury Secretary Henry Paulson said the economy is “healthy,” citing low unemployment and rising consumer confidence.
- The perceived risk of owning low-rated sub-prime mortgage bonds plunged today as a government report suggested that US home-price appreciation is stable.
- Corn, soybean and wheat prices plunged in Chicago after a US government report showed export sales of all three commodities declined last week.
- Gold in NY fell for a third straight day as speculators trimmed record long positions on worries over falling emerging market demand.

Wall Street Journal:
- People who put money into mutual funds that invest abroad took a beating in this week’s global share sell-off, citing figures from the Investment Company Institute. Funds that invest in the Asia-Pacific region, including Japan and China, fell 4.2%, those that spread their money over a wide range of emerging markets dropped 5% and those that concentrate on Latin America did worst, declining 7.7%.
- The US administration and Congress are trying to reach a compromise that would allow pending international trade agreements to move ahead while providing safeguards for labor rights.

NY Times:
- General Electric’s(GE) NBC may oust John Reiss as executive producer of “Nightly News With Brian Williams.” NBC executives told the Times that changes to the program aren’t a reaction to the sharp ratings drop.
- Oracle Corp.(ORCL) is close to a deal to buy Hyperion Solutions(HYSL) for more than $3.1 billion.

Financial Times:
- Home Depot’s(HD) wholesale supply unit is being targeted by three groups of private-equity firms and might fetch $11 billion if sold.

Wirtschaftswoche:
- SAP AG, the world’s largest business-management software maker, may get an offer from US buyout firm Silver Lake Partners.

Saudi Press Agency:
- Saudi Aramco, the world’s largest state oil company, reported a production capacity of 10.7 million barrels a day by the end of 2006, citing Abdallah Jum’ah, the company’s CEO. Aramco made gas finds last year of 10.4 trillion cubic feet, doubling the company’s target. The Haradh 300,000-barrel-a-day Arabian Light Crude increment was completed five months ahead of schedule.

Personal Incomes Jump, Spending Exceeds Estimates, Jobless Claims Rise Modetsly, Manufacturing Expands, Construction Falls

- Personal Income for January rose 1.0% versus estimates of a .3% increase and a .5% gain in December.
- Personal Spending for January rose .5% versus estimates of a .4% gain and a .7% increase in December.
- PCE Core for January rose .3% versus estimates of a .2% increase and a .1% gain in December.
- Initial Jobless Claims for last week rose to 338K versus estimates of 325K and 331K the prior week.
- Continuing Claims rose to 2640K versus estimates of 2520K and 2506K prior.
- ISM Manufacturing for February rose to 52.3 versus estimates of 50.0 and a reading of 49.3 in January.
- ISM Prices Paid for February rose to 59.0 versus estimates of 54.0 and a reading of 53.0 in January.
- Construction Spending for January fell -.8% versus estimates of a -.5% decline and an upwardly revised .6% increase in December.

BOTTOM LINE: Personal spending in the US increased more than forecast in January and incomes rose by the most since January 2006, Bloomberg reported. The surge in incomes may help to explain the Conference Board’s Consumer Confidence reading hitting cycle highs last month. The year-over-year PCE Core, the Fed’s favorite inflation gauge, rose 2.3%, well below last month’s Average Hourly Earnings’ increase of 4.0%. I expect personal spending and incomes to remain healthy over the intermediate-term as interest rates remain low, inflation decelerates, housing stabilizes at relatively high levels, stocks rise further, confidence increases and the job market remains healthy.

More Americans applied for state jobless benefits last week, and continuing claims rose, Bloomberg reported. The four-week moving-average of jobless claims rose to 335,250 from 327,750 the prior week. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, rose to 2% from 1.9% the prior week. While upcoming monthly job reports will likely weaken a bit, I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

Manufacturing in the US unexpectedly expanded by the most in five months in February, suggesting production is starting to stabilize, Bloomberg reported. The Orders to Be Filled Component surged to 51.5 from 43.5 the prior month. Manufactures have now pared inventories for seven straight months. Inventory de-stocking has been occurring at a very rapid rate. I expect manufacturing to improve meaningful over the course of the year as inventories are rebuilt and auto production rises.

Construction spending in the US fell by the most in three months in January, pulled lower by homebuilding and a jump the prior month, Bloomberg reported. Residential construction fell 19.1% at an annual rate during the fourth quarter as homebuilders sought to cut inventory. I continue to believe construction will remain muted throughout the year as homebuilders continue to slash inventory.

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