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Thursday Watch

Late-Night Headlines
Bloomberg:
- Fisker Automotive Inc., a startup planning to build rechargeable hybrid luxury cars, will be able to begin sales by 2009 because it’s using a power system already developed for military vehicles, a company director said.
- The International Monetary Fund predicted economic growth in Iraq will accelerate this year to the fastest pace since 2004 as security improves and crude oil output climbs. Iraq’s economy will expand 7.1% this year. Growth is expected to pick up to 10.4% by 2010, the IMF said.
- Harvard University received a record number of applicants for the next freshman class after the end of the school’s early-admissions program gave officials more time to recruit a broader array of students.
- “American Idol,” the most-popular show on primetime television, attracted 33.4 million viewers in its seventh-season debut on the Fox network.
- Ambac Financial Group Inc.(ABK) is being reviewed by Moody’s Investors Service for a possible downgrade.
- Sharp Corp., Japan’s biggest liquid-crystal display maker, climbed the most in more than a month after Goldman Sachs Group(GS) raised the rating on the stock, citing demand for panels.

Wall Street Journal:
- JPMorgan(JPM) CEO Is Hunting In the Credit-Crunched Jungle. It’s time to pounce for JPMorgan CEO James Dimon and other top bosses of financial companies that have avoided a serious battering from the credit crunch.
- Will Silicon Valley Deals Kick Into Overdrive?
- President Bush says “there’s a hope” that, after his talks with Saudi King Abdullah seeking to restrain oil prices, OPEC “would be encouraged to authorized an increase in production,” a White House official said.

MarketWatch.com:
- US lawmakers on Wednesday debated ways to juice a languishing US economy with tax cuts or rebates.
- Wall Street losing its own confidence game.

CNBC:
- US mortgage applications surged last week, with demand hitting its highest in nearly four years as interest rates plunged, an industry group said Wednesday.
- Intel(INTC) Earnings: Is Wall Street Overreacting to Shortfall?

BusinessWeek.com:
- Wall Street is speculating WaMu(WM) will go the way of Countrywide Financial(CFC) and be acquired by a larger player, perhaps JPMorgan Chase(JPM).
- Bank of America’s(BAC) CEO tell Maria Bartiromo why the bank’s acquisition of troubled Countrywide Financial is a good deal.
- A buzzy Web site brings scrutiny to the previously secretive world of VC investing.
- The Economy: Five Signposts to Recovery.

CNNMoney.com:
- The current mortgage mess requires a more intelligent approach than the buzzsaw plan floated by Hillary Clinton.

SmartMoney.com:
- What You Need to Know About Sovereign Wealth Funds.
- Herman Miller’s(MLHR) Business Built to Last.

EnergyNewsToday:
-.Valero Energy Corp.(VLO), the largest US refiner, plans to reduce its processing rate for low-sulfur crude oil by as much as 20% because of shrinking profitability. The move would follow a reduction by Tesoro Corp.(TSO), the owner of seven US refineries, which said Jan. 14 that it cut fuel production this month.

USA Today.com:
- Retirement: Why older boomers have more to lean on financially.
- Apple’s(AAPL) skinny MacBook Air is fat with features.

Reuters:
- Adidas AG, the world’s second-largest sporting-goods maker, reiterated its forecast for sales to increase in the high single-digit percentage range this year.
- Delta(DAL) in merger talks with Northwest: congressman
- Dell(DELL) seen back to strong growth.
- SAP(SAP) sees no sign of global slowdown in ’07 results.

Commercial Times:
- Hon Hai Precision Industry Co. will probably be the second contract manufacturer for Apple Inc.’s(AAPL) MacBook Air laptop computers. Taiwan’s Quanta Computer Inc. has been making the slim laptops for Apple.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (JAVA), target $29.
- Lowered (HOG) to Sell, target $36.

Night Trading
Asian Indices are -1.50% to +.25% on average.
S&P 500 futures +.36%.
NASDAQ 100 futures +.32%.

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Earnings of Note
Company/EPS Estimate
- (PH)/1.19
- (PNC)/1.07
- (CAL)/.06
- (BK)/.69
- (CMA)/1.06
- (CIT)/.27
- (BLK)/2.15
- (AMTD)/.38
- (MER)/-4.82
- (IGT)/.36
- (BBT)/.78
- (PPG)/1.12
- (AMD)/-.38
- (XLNX)/.32
- (WM)/-1.43
- (STX)/.74
- (IBM)/2.68
- (BGG)/.05
- (ORB)/.24

Upcoming Splits
- (FWLT) 2-for-1

Economic Releases
8:30 am EST
- Housing Starts for December are estimated to fall to 1145K versus 1187K in November.
- Building Permits for December are estimated to fall to 1135K versus 1162K in November.
- Initial Jobless Claims for this week are estimated to rise to 331K versus 322K the prior week.
- Continuing Claims are estimated to rise to 2705K versus 2702K prior.

10:00 am EST
- The Philly Fed for January is estimated to rise to -1.0 from -5.7 in December.

Other Potential Market Movers
- The Fed’s Bernanke speaking, Fed’s Fisher speaking, Fed’s Lockhart speaking, weekly EIA natural gas inventory report, (AMAT) analyst meeting, (AEE) analyst meeting and Goldman Sachs Energy Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and financial stocks 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 Weakness in Commodity and Tech Sectors

Evening Review

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In Play

Stocks Mostly Higher into Final Hour on Bargain-Hunting, Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Biotech longs, Software longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 75% net long. The overall tone of the market is positive today as the advance/decline line is higher, most sectors are rising and volume is heavy. Investor anxiety is high again. Today’s overall market action is bullish. The 3.4% gain in the semiconductor index(SOX), despite (INTC), is a big positive. As well, financials, retail and reits are trading substantially higher. While the VIX is only 1.6% higher, volatility in market leaders is very high today. Moreover, while we haven’t seen a “whoosh” lower in the broad market that might indicate a bottom, we did see a “whoosh” lower this morning in market leading stocks. Agriculture shares, which had previously been immune to recent selling, saw substantial drops. The total put/call hit a very high 1.45 and the ISE Sentiment Index hit a depressed 71.0 again today. The TED spread, a meaningful gauge of credit market angst, is dropping another 3 basis points today to 82 basis points. The TED spread is down 142 basis points in just over one month and is at its lowest level since August of last year. The fact that the credit markets are functioning much better is a large positive. I suspect we will see another substantial drop in mortgage rates this week. The average 30-year mortgage rate is currently 5.87%. A decline below 5.5% would greatly help the situation with upcoming mortgage resets. I expect that to occur over the next 6 weeks, which could provide a large positive catalyst for stocks. Refinancings soared 43.3% this week, according to the MBA Mortgage Applications report. I want to see how Asian stocks, which closed at their lows last night, react to our reversal today before further shifting market exposure. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, bargain hunting, diminishing credit angst and lower energy prices.

Consumer Prices Decelerate, International Demand for US Assets Stronger Than Expected, Industrial Production Higher Than Expected

- The CPI for December rose .3% versus estimates of a .2% gain and a .8% rise in November.

- The CPI Ex Food & Energy for December rose .2% versus estimates of a .2% gain and a .3% rise in November.

- Net Long-term TIC Flows for November fell to $90.9 billion versus estimates of $50.0 billion and $114.0 billion in October.

- Industrial Production for December was unch. versus estimates of a .2% decline and a .3% increase in November.

- Capacity Utilization for December fell to 81.4% versus estimates of 81.2% and 81.6% in November.

BOTTOM LINE: Consumer prices in the US rose at a slower pace in December, signaling that inflation may decelerate, Bloomberg said. Slower economic growth will make it harder for companies to pass on higher costs to consumers, economists said. Core consumer prices rose 2.4% for all of last year versus a 2.6% gain in 2006. Energy prices rose .9% in December versus a 5.7% gain the prior month. Fuel costs were up 18% in 2007, the most in 17 years. The 10-year TIPS spread, a good gauge of inflation expectations, fell to 2.18% this morning, which is the lowest level it has been since August 2003. If the commodity mania is finally ending, as I suspect, inflation expectations are about to drop dramatically. I continue to believe inflation fears have peaked for this cycle and the secular trend of disinflation remains firmly in tact.

International buying of US financial assets rose more than forecasts in November, Bloomberg reported. International holdings of US stocks rose a net $4.6 billion in November. I continue to believe international demand for US assets will remain healthy and may even strengthen over the intermediate-term as the US dollar firms.

Industrial Production in the US was greater than forecast in December as exports surged, Bloomberg reported. Record US exports and a consumer that slows, but doesn’t collapse, will help the US economy to avoid recession, economists said. Utility production fell .2% after 2 months of no change. Output of computers and peripherals rose 1.1% versus a 1.7% gain the prior month. I expect industrial production to increase slightly this month on more seasonal weather and inventory rebuilding.

Bull Radar

Style Outperformer:

Small-cap Value (+.46%)

Sector Outperformers:

Hospitals (+1.22%), HMOs (+1.15%) and Telecom (+1.14%)

Stocks Rising on Unusual Volume:

APU, CH, BEAS, NWPX, NITE, VRUS, QDEL, WOOF, RRGB, LLTC, PPDI, PENN, JAVA, FORM, IPCC, TXCO, LBTYA, LPHI, WYNN, SYMC, SCHL, CFFN, AMRI, LTC, SKS, GGP, AET and GLBC