Friday Watch

Late-Night Headlines
Bloomberg:
- The euro headed for the biggest weekly decline in 1 ½ years against the dollar after European Central Bank President Trichet signaled he’s open to cutting interest rates as economic growth slows.
- The rebound in the dollar foreseen by UBS AG, BNP Paribas SA and Deutsche Bank AG is gaining momentum.
- Freddie Mac’s(FRE) losses from mortgage defaults may hit bottom by the end of the year as the housing recovery, CEO Richard Syron said today.
- The US Senate approved a $151 billion economic stimulus measure that will send tax rebates to more than 100 million US households.
- US economic growth is poised to return to its long-term trend in the second half of the year following aggressive interest –rate cuts, said Federal Reserve Bank of Dallas President Richard Fisher.
- OPEC may cut crude production when it meets next month to keep the price above $80 a barrel, oil ministry officials from four of the group’s nations said.
- Cognizant Technology(CTSH) said quarterly revenue rose 41% from year ago levels. The shares surged 13% in extended trading.
- Intermec(IN) reported revenues rose 16% over year ago levels. The shares rose 7.4% in after-hours trading.
- BMC Software(BMC) reported revenues exceeded the high end of guidance, rising 11% from year ago levels. The stock gained 4% in extended trading.
- CF Industries(CF) said net sales rose 62% from year ago levels. The shares jumped 7% in after-hours trading.
- MBIA Inc.(MBI) raised $1 billion by selling shares at $12.15 each in an effort to protect its AAA insurance rating. The stock fell 8.4% in extended trading.

MarketWatch.com:
- Hedge funds had their worst month since the dot-com bust. Fed rate cuts may have made things worse as heavily shorted stocks rallied.

NY Times:
- Benazir Bhutto died from a head wound caused after a bomb blast and not from an assassin’s bullet, according to Scotland Yard investigators probing the Pakistan opposition leader’s killing.

IBD:
- Handhelds Become Instant Hit For Maker Of Ultrasound Devices.
- HR Software Online Rising.

Gizmodo:
- Google(GOOG) Phone Prototype to Be Shown Next Week at Mobile World Congress.

USA Today.com:
- Corporate cafeterias go the green, healthy route.
- It’s not just Clinton, Obama and McCain stressing over the presidential election. Wall Street is, too.

Reuters:
- Three former El Paso(EP) natural gas traders were convicted on Thursday of reporting false deals to manipulate gas prices from 2000-2002.

Financial Times:
- China Investment Corporation, the Chinese sovereign wealth fund, is close to an agreement with JC Flowers, the US pirate equity group, to put about $4 billion into a new fund to invest in ailing financial institutions.
- US and Italian police arrested more than 70 Mafia suspects in NY and Sicily on Thursday, decapitating the second largest crime family in the US and thwarting plans by a new generation of organized crime bosses to re-establish a transatlantic axis.

Late Buy/Sell Recommendations
Citigroup:
- Maintained Buy on (WW), target $62.
- Reiterated Buy on (ARW), raised target to $50..
- Reiterated Buy on (EXPE), target $38.
- Maintained Buy on (MDTH), target $40.
- Maintained Buy on (COV), target $52.
- Maintained Buy on (IP), target $40.
- Reiterated Buy on (CF), target $139.

Night Trading
Asian Indices are -.50% to +.75% on average.
S&P 500 futures -.03%.
NASDAQ 100 futures -.07%.

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Earnings of Note
Company/EPS Estimate
- (ALU)/.14
- (BEC)/1.03
- (CVH)/1.18
- (FNM)/-1.29
- (SKYW)/.64
- (WY)/.34

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- Wholesale Inventories for December are estimated to rise .3% versus a .6% gain in November.

Other Potential Market Movers
- The Fed’s Lockhart speaking, Fed’s Pianalto speaking, Fed’s Yellen speaking, (GLW) investor meeting, (STJ) analyst meeting and CSFB Energy Conference could also impact trading today.

BOTTOM LINE: Asian indices are mixed as gains in automaker stocks are offsetting losses in industrial stocks 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 Higher, Boosted by Retail, Airline and Financial Shares

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In Play

Stocks Higher into Final Hour on Less Economic Pessimism, Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Gaming longs and Retail longs. I covered some of my (IWM)/(QQQQ) hedges and some of my (EEM) short this morning, thus leaving the Portfolio 75% net long. The overall tone of the market is mildly positive as the advance/decline line is slightly higher, most sectors are gaining and volume is heavy. Investor anxiety is high. Today’s overall market action is mildly bullish. The VIX is falling 4.3% today, but remains high at 28.0. The ISE Sentiment Index is a below average 106.0 and the total put/call is hitting an above average 1.11. The fact that the market has recouped morning losses despite negative news today is a large positive. Cisco(CSCO) disappointed and it is unch., while many other tech stocks are rising. Moreover, many retailers reported disappointing same-store-sales, yet the Morgan Stanley Retail Index is surging another 4%. Oil is higher, but airlines are rising another 3%. Finally, financials are 1% higher notwithstanding more scary credit-related news and rhetoric. The US Dollar continues to trade as if at the very least an intermediate-term bottom is in place as the ECB finally acknowledged a cut may be in order, which is another large positive. As well, the 10-year T-note is trading as if an intermediate-term top is in, which may indicate subsiding economic pessimism. Fed funds futures imply an 88% chance for another 50 basis point cut and a 12% chance for a 75 basis point cut at the upcoming meeting. (WMS), one of my longs, is hitting a new high today, which is very impressive considering recent market turbulence. I still see substantial upside in the shares over the longer-term as server-based gaming takes hold. Nikkei futures indicate an unch. open in Japan and DAX futures indicate a +80 open in Germany. I expect US stocks to trade modestly higher into the close from current levels on less economic pessimism, bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- US stocks rose, led by consumer companies, after JC Penney(JCP) and Gap Inc.(GPS) said profits will exceed analysts’ estimates.
- The euro fell to the lowest level in more than two weeks against the US dollar as ECB President Trichet said European growth may slow.
- President Bush said the US Senate must promptly vote on his backlog of some 200 nominees, including three for the Federal Reserve Board, and stop treating them like “political pawns.”
- GSO Capital Partners LP, the hedge fund being bought by Blackstone Group LP, hired Najib Canaan and a trading team from Brevan Howard Asset Management LLP to invest in mortgages and bonds hit by the credit-market contraction.
- Bank of America(BAC) increased its stake in Ambac Financial(ABK) from 5.1% at the end of September to 7.06%.
- Copper is surging 3.7% as falling inventories quelled concern that demand for the metal may slump.
- US Treasuries declined as demand was weaker than expected at the government’s $9 billion auction of 30-year bonds, which drew the lowest yield on record.

Wall Street Journal:
- Lehman’s(LEH) Harris Tops List of Forecasters.
- The European Central Bank faces a tough task when it reviews interest rates today, not only because of the economic slowdown but also because hedge funds are trying to exploit disparities within the European Union.
- Actively managed ETFs, soon to become reality, may not offer the low costs and tax-efficiency that have been ETF’s biggest attractions.
- Alcatel-Lucent SA(ALU), the telephone equipment maker that saw its shares drop 60% in 2007, may be a good buy as an industry price war subsides.

NY Times:
- Wal-Mart Will Expand In-Store Medical Clinics.

LA Times:
- Yahoo(YHOO) said to step up talks with Google(GOOG).

Red Herring.com:
- Half of GM(GM) Cars Will Be running on ethanol by 2012. Start-up biofuel company Coskata Inc., part-owned by GM, said it has formed a strategic alliance with ICM Inc. to build a commercial plan to mass produce cellulose-based ethanol. The plant is due to open in late 2010.

Forbes:
- Some 70% of all equity volume is driven by computer models that suddenly trigger a surge in buy or sell orders that are causing the fragmentation, volatility and use of hidden trading venues.

USA Today:
- Al-Qaeda Shifts Iraq Tactics to Salvage Image.

Economic Times:
- Deutsche Bank is on the prowl for acquisitions, its CEO said on Thursday, after it dodged the subprime disaster that hit rivals.

Asharq al-Awsat:
- Saudi Arabian investors have $400 billion in investments in the US, making it the number one destination for their money, citing a report from the Riyadh-based Saudi British Bank. The US funds represent 34% of the $1.2 trillion that Saudis have invested abroad. Saudis diversified their investments away from the US after the terrorist attacks on Sept. 11.

Bear Radar

Style Underperformer:

Mid-cap Value (+.26%)

Sector Underperformers:

Drugs (-1.57%), HMOs (-1.08%) and Computer Hardware (-1.08%)

Stocks Falling on Unusual Volume:

MYL, IAR, GSK, ASF, PRU, AHG, BIOD, EXBD, TLEO, UFPI, CHUX, SFLY, MDTH, JDSU, BG and AZN

Initial Jobless Claims Fall, Pending Home Sales Decline

- Initial Jobless Claims for this week fell to 356K versus estimates of 342K and 378K the prior week.

- Continuing Claims rose to 2785K versus estimates of 2715K and 2710K prior.

- Pending Home Sales for December fell 1.5% versus estimates of a 1.0% decline and a downwardly revised 3.0% decline in November.

BOTTOM LINE: The number of Americans filing first-time claims for unemployment benefits fell this week, Bloomberg reported. The four-week moving average of jobless claims rose to 335,000 versus 326,500 the prior week. The unemployment rate among those eligible for benefits, which tracks the US Jobless claims are still at levels suggesting sluggish growth, not recession. I expect claims to move back down to more healthy levels in the second half of the year. unemployment rate, rose to 2.1%, which is still historically low, versus 2.0% the prior week.

The number of Americans signing contracts to buy previously owned homes fell more than forecast in December, Bloomberg reported. Purchases fell 3.1% in the West, 3% in the South and 1.7% in the Northeast. They jumped 3.4% in the Midwest. I still expect home sales to surprise on the upside as we entire the spring on pent-up demand, lower prices and the plunge in mortgage rates.