Friday Watch

Late-Night Headlines
Bloomberg:
- IBM Corp.(IBM), the biggest computer services company, forecast 2008 profit that beat analysts’ estimates. The shares surged 4.9% in after-hours trading.
- Advanced Micro Devices(AMD), the second largest maker of personal computer processors, reported a smaller loss than analysts estimated after it sold more higher priced chips. The shares jumped 5.5% in extended trading.
- The Bush administration is close to completing an economic-stimulus proposal that will include $800 rebates for individuals and $1,600 for households as well as tax breaks for businesses.
- BP Plc(BP), Europe’s second-largest oil company, said the world is producing “all the oil it needs” and consumption may fall in the future because of the environmental pressure to cut greenhouse gas emissions. “People will run out of demand before they run out of oil,” Davies said. World oil production rose by about .2% last year to 85.5 million barrels a day. Production recently hit a new record of 87.3 million barrels per day, according to the Energy Intelligence Group. Production of 100 million barrels per day “is achievable,” Davies said. “An imminent peak in oil production is not likely in the near term,” he said.
- China’s copper consumption will grow 8% this year, after jumping 22% in 2007, as credit tightening policies curb demand in the world’s biggest user of the metal, Maike Metal International Group said.
- Alliance Data Systems Inc.(ADS) said there had been no change in its agreement to be acquired by Blackstone Group Inc.(BX).
- NYSE Euronext(NYX), owner of seven securities markets in Europe and the US, agreed to buy the American Stock Exchange for $260 million to capture a bigger share of the fast-growing options and fund-trading businesses.
- The US dollar is rising tonight against the euro and the yen on speculation an economic-stimulus proposal being prepared by President Bush will support growth in the world’s largest economy.
- Richard Branson plans to establish a company in China to help the world’s biggest emitter of greenhouse gases develop clean energy and cut emissions.

MarketWatch.com:
- China became the world’s largest gold producer last year, helped by Canadian- and Australian-led projects that aim to add millions in ounces to the world gold supply.
- Video game sales see December blowout.
- More employers seeking 50+ workers.

CNBC:
- Seagate(STX) Profit Triples, Disks in Tight Supply.

NY Times:
- Google(GOOG) Offers a Map for Its Philanthropy.
- BlackRock Inc.(BLK) posted a 90% jump in fourth-quarter profit on Thursday, handily beating estimates, as it benefited form the credit market turmoil and acquisitions.

CNNMoney.com:
- Buffett boosts railroad stake. Berkshire Hathaway increase ownership of nation’s second largest railroad to 17.8%.

Forbes.com:
- Hedge funds have been strong net sellers of equity markets since July of last year, preferring energy and commodities, according to Societe Generale Cross Asset Research. They are particularly long on gold and oil and have reopened longs on soft commodities.

IBD:
- While Venture Capital Shines On Solar, Focus Moves To Energy Alternatives.

Wired:
- High Gas Prices Truly Cut Dependence on Foreign Oil. It’s a 58-page doorstop, but a new study from the Congressional Budget Office shows consumer response to higher gas prices. The study began looking at trends beginning in 2003. Here are its key findings:

Financial Times:
- Goldman Sachs(GS) raised $7 billion for its latest hedge fund, making GS Investment Partners the largest fun launch ever and securing the US investment bank’s reputation as a powerhouse in the hedge fund industry.

TimesOnline:
- Doom-laden forecasts that world oil supplies are poised to fall off the edge of a cliff are wide of the mark, according to leading oil industry experts who gave warning that human factors, not geology, will drive the oil market. A landmark study of more than 800 oilfields by Cambridge Energy Research Associates has concluded that rates of decline are only 4.5% a year, almost half the rate previously believed, leading the consultancy to conclude that oil output will continue to rise over the next decade.

Xinhua:
- Iran held constructive talks with China and agreed the issue over its nuclear program should be resolved peacefully through negotiations, citing Iran’s nuclear negotiator Saeed Jalili.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (UA), target $65.
- Reiterated Buy on (PPG), target $78.
- Upgraded (PCLN) to Buy, target $124.
- Maintain Buy on (STX), target $30.
- Our top three internet picks are #1 (EXPE), #2 (GOOG) and #3 (MNST).

Night Trading
Asian Indices are -1.5% to -.25% on average.
S&P 500 futures +.67%.
NASDAQ 100 futures +.85%.

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Earnings of Note
Company/EPS Estimate
- (GE)/.68
- (JCI)/.37
- (SLB)/1.13
- (RMBS)/-.06

Upcoming Splits
- (FWLT) 2-for-1

Economic Releases
10:00 am EST
- The Univ. of Mich. preliminary January confidence reading is estimated at 74.5 versus 75.5 in December.
- Leading Indicators for December are estimated to fall .1% versus a .4% decline in November.

Other Potential Market Movers
- The Fed’s Lacker speaking, Bear Stearns Mortgage Servicer Conference and Wachovia Healthcare 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 mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Near Session Lows on Weakness in Financial and Cyclical Shares

Evening Review
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In Play

Stocks Sharply Lower into Final Hour as Extreme Pessimism Builds

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Software longs and Semi longs. I covered my (QQQQ)/(IWM) hedges and took profits in some existing shorts today, thus leaving the Portfolio 100% net long. The overall tone of the market is very negative today as the advance/decline line is substantially lower, most sectors are declining and volume is heavy. Investor anxiety is very high again. Today’s overall market action is bearish. The total put/call hit a very high 1.48 and the ISE Sentiment Index hit a record low 23.0 today. The VIX is finally spiking today, rising 11%, to a relatively high 27. There are some bright spots today despite the headline losses. The Morgan Stanley Tech sector index is only .2% lower on the day. Computer services, biotech, retail, restaurants, networking, semis, software and computer hardware are all higher or just slightly lower on the day. As well, a number of market leading stocks are being accumulated today on every tick lower in the averages and others trade as though they are “washed out.” There are also an unusual number of stocks rising on volume today given the losses in the major averages. I will monitor the close today and decide whether or not to further shift market exposure. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain hunting and lower energy prices.

Housing Starts Fall Again, Jobless Claims Plunge, Philly Fed Contracts More Than Expected

- Housing Starts for December fell to 1006K versus estimates of 1145K and 1173K in November.

- Building Permits for December fell to 1068K versus estimates of 1135K and 1162K in November.

- Initial Jobless Claims for this week fell to 301K versus estimates of 331K and 322K the prior week.

- Continuing Claims rose to 2751K versus estimates of 2705K and 2685K prior.

- The Philly Fed for January fell to -20.9 versus estimates of -1.0 and -5.7 in December.

BOTTOM LINE: Housing starts were lower than expected in December as homebuilders try to pare down inventory, Bloomberg reported. For all of 2007, housing starts fell 25%. I continue to believe new home construction will remain muted over the intermediate-term as homebuilders continue to work down inventories. With home sales stabilizing over the last three months near mid-1995 levels and mortgage rates plunging recently, I wouldn’t be surprised to see home sales surprise on the upside over the coming months on some pent up demand.

The number of Americans filing first-time claims for unemployment benefits unexpectedly plunged to a three-month low last week, Bloomberg reported. The four-week moving average of claims fell to a two-month low of 328,500, from 340,250 the prior week. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, rose back to 2.1% from 2.0% the prior week, which is still a historically low level. With all the housing-related job losses that have already occurred over the last two years, continuing record US exports and the impending retirement of millions of baby-boomers, it is very possible the job market is stabilizing at still healthy levels.

Manufacturing in the Philly region contracted more than expected in January, Bloomberg reported. The New Orders component fell to -15.2 from 12 the prior month. The Inventory component fell to -11.7 from -6.5 the prior month. The Employment component fell to -1.5 from 3.8 in December. The Future Expectations component fell to 5.2 from 11.1. While this number is surprisingly negative, it is important to note that it averaged -15.1 for four months during the 1995 mid-cycle slowdown, hitting a low of -21.0 during that period, and the US economy, which was more dependent on manufacturing then than now, never tipped into recession. I expect this indicator to improve next month on inventory rebuilding.

ISE Sentiment Index(ISEE) Makes New Record Low

Bottom Line: The ISE Sentiment Index(ISEE) made a new record low this morning of 23.0. This is well below the prior record of 36.0 on July 3, 2006. This contrary indicator has had a very good track record in the past for marking meaning market bottoms.

Bull Radar

Style Outperformer:

Large-cap Growth (-.76%)

Sector Outperformers:

Homebuilders (+1.38%), Networking (+1.12%) and Computer Hardware (+.93%)

Stocks Rising on Unusual Volume:

CGV, ELY, PENN, LCRD, COGO, HMSY, ICLR, URBN, VRUS, MATR, JASO, ASML, LULU, GENZ, CVCO, ULBI, AKAM, NUVA, TRMB, ADCT, OMCL, TIF, CN, WSM, BRP, FELL, HMC, MO, PPG, BK, ROC, AFSI, BCS and AZN