Stocks Lower into Final Hour on Weakness in Telecom, Insurance and Financial Shares

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Software longs and Semi longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is negative today as the advance/decline line is substantially lower, most sectors are declining and volume is heavy. Investor anxiety is high again. Today’s overall market action is bearish. The total put/call hit a high 1.33 and the ISE Sentiment Index hit a very low 66.0 today. For the second day in a row, the Morgan Stanley Tech sector index is substantially outperforming. Large and mid-cap “growth” stocks are also substantially outperforming “value” stocks. Steel, Computer Hardware, Semi, Computer Service, Construction, Homebuilding, Retail, Restaurant, Airline, Railroad, Software and Energy stocks are all higher or just slightly lower on the day. Cyclical stocks are slightly higher on the day, as well. A number of market leading stocks continue to trade as though they are “washed out” and are under accumulation even as the major averages tick lower. The ECRI Weekly Leading Index has bounced strongly the last two weeks from 134.60 to 137.40. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain hunting.

Leading Indicators Fall Slightly, Consumer Confidence Jumps

- Leading Indicators for December fell .2% versus estimates of a .1% decline and a .4% decline in November.

- Preliminary Univ. of Mich. Consumer confidence

BOTTOM LINE: The Index of US leading economic indicators fell more than forecast in December, Bloomberg reported. However, the Conference Board’s index of coincident indicators, a gauge of current economic activity, rose .1% in December for a second month. The index tracks payrolls, incomes, sales and production. Over the last six months, the leading indicators index has dropped at an annual pace of 1.6%, below the 4-4.5% drop that signals recession. I continue to believe US GDP growth will average about 2% for the year. Growth should pick up in the second half of the year on inventory rebuilding as exports remain at record levels and as the deflator subtracts less on a meaningful deceleration in inflation. This would provide a very positive macro backdrop for true "growth" stocks.

Confidence among US consumers unexpectedly jumped in January despite a rise in gas prices, Bloomberg reported. The Expectations component rose to 69.1 from 65.6 in December. The Present Situation component jumped to 98.1 from 91.0 the prior month. The average 30-year mortgage rate has plunged 48 basis points so far this month to 5.69%. This is also down 105 basis points from June 07 highs. As a result, mortgage refinancings are soaring, which may behind the surge in consumer confidence. A decline in the average 30-year mortgage rate below 5.5%, which I expect over the coming weeks, should greatly help with the mortgage reset situation and prevent many foreclosures that the market currently expects. This would be a large positive surprise for the economy and stock market, in my opinion.

Bear Radar

Style Underperformer:

Large-cap Value (-1.47%)

Sector Underperformers:

Telecom (-4.57%), Insurance (-3.61%) and Oil Service (-2.57%)

Stocks Falling on Unusual Volume:

SLB, ACO, AZZ, IEZ, ZGEN, HSII, ATPG, TTGT, WCBO, LULU, LBAI, HNSN, AMSF, ATNI, NCTY, AGO, DFG, CCOI and MXIM

Bull Radar

Style Outperformer:

Mid-cap Growth (+1.32%)

Sector Outperformers:

Retail (+3.1%), Computer Services (+2.64%) and Semis (+2.37%)

Stocks Rising on Unusual Volume:

PXQ, CXW, XSD, CH, RZV, JKJ, WL, DPZ, FMR, PFGC, LCRD, GFIG, CEDC, FAST, RRGB, LMIA, XLNX, SRCL, XNPT, MELI, QMAR, MICC, ROST, SCSC, PCLN, IRBT, WGOV, GLNG, OMTR, RTP, CHA, BPHX, CLF, TKC, GE, STO, EMR, SU, LFC, AZN, SGP, WHQ, WG, HBC, FNF and MFC

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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
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- (SLB)/1.13
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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.