Friday Watch

Late-Night Headlines
Bloomberg:
- The LA Times named Russ Stanton as editor, its fourth in less than three years after budget cuts drove out previous managers.
- Priceline.com(PCLN), the Internet travel agency, surged as much as 10% in Nasdaq extended trading after reporting fourth-quarter profit that rose more than analysts expected.
- DryShips Inc.(DRYS) reported the best quarter since it became a public company in 2005. The shares jumped 8.2% in after-hours trading.
- Chipotle Mexican Grill(CMG) reported fourth-quarter profit less than analysts’ estimated. Sales jumped 31% to $288.9 million, however the shares fell 13% in after-hours trading.
- Tudor Investment Corp. purchased 300,000 shares of Google Inc.(GOOG) during the fourth quarter, making it the firm’s fifth largest long position, according to a recent SEC filing.
- Citadel LP purchased 601,630 shares of Apple Inc.(AAPL) during the fourth quarter, making it the firm’s sixth largest long position, according to a recent SEC filing. The firm also purchased 162,541 shares of Google Inc.(GOOG) during the fourth quarter, making it the firm’s seventh largest long position.

Wall Street Journal:
- Bernanke Open to a Sizable Rate Cut.

MarketWatch.com:
- Video game sales managed a modest gain in January, beating the expectations of analysts who predicted a decline for the month.
- Some Yahoo(YHOO) shareholders growing impatient.

CNBC.com:
- Bond Insurers MBIA, Ambac Dismiss Bailout Need.

NY Times:
- In figures released on Thursday covering 150 metropolitan areas, the National Assoc. of Realtors said that median home prices were falling in 77 markets – but still rising in 73.

BusinessWeek.com:
- Google’s(GOOG) Wireless Auction Play. Its apparent withdrawal from the wireless auction leaves the coveted C block to Verizon(VZ) and AT&T(T). They could all prove to be winners.
- The eagerly anticipated “God game” is almost ready, and Electronic Arts(ERTS) is finally taking the wraps off the title’s numerous innovations.
- Couples today are meeting, dating, and mating online, and using increasingly sophisticated matchmaking services to find the perfect spouse.

CNNMoney.com:
- Nanopants that might power an iPod.

Forbes.com:
- Best Cities for Bargain House-Hunters.

IBD:
- Merged Microsoft-Yahoo Would Still Struggle Vs. Google.

USA Today.com:
- Fed Chairman Ben Bernanke said Thursday that the USA will avoid a recession and suggested more interest rate cuts are likely.

Reuters:
- Fidelity parent buys Ambac(ABK), MBIA(MBI) stakes.
- Former Fed Chairman Greenspan told an energy conference on Thursday that high oil prices are harming the economy, but that the economy does not face stagflation.

Financial Times:
- Eliot Spitzer, NY governor, gave bond insurers three to five business days to find fresh capital, or face a potential break-up by state regulators who want to safeguard the municipal bond markets.

Mercury:
- The Australian Securities Exchange yesterday signaled that it would investigate allegations that hedge funds are colluding to push down the shares of major Australian companies. ASX head of supervision Eric Mayne yesterday said he would be investigating market rumors that hedge funds were working together in packs to target specific companies. Mr. Mayne also signaled that the ASX was keen for more regulation of the increasingly common practice of short-selling in the market, and would be looking at greater regulation of company directors who had big margin loans against their shares.

Economic Times:
- The New York Stock Exchange will buy a 5% stake in the Multi Commodity Exchange of India Ltd., the nation’s biggest commodity bourse.

Late Buy/Sell Recommendations
Citigroup:
- Maintained Buy on (GME), target $65.
- Maintained Sell on (FRO), target $25.
- Reiterated Buy on (GTIV), target $26.
- Reiterated Buy on (BRCD), added to Top Picks Live list, target $10.
- Reiterated Buy on (HS), target $29.

Night Trading
Asian Indices are -1.50% to -.50% on average.
S&P 500 futures -28%.
NASDAQ 100 futures -.43%.

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Earnings of Note
Company/EPS Estimate
- (ANF)/2.36
- (B)/.38
- (CPB)/.70
- (HRL)/.58
- (SJM)/.77
- (RDN)/-2.38
- (PPP)/.35

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Import Price Index for January is estimated to rise .5% versus unch. in December.
- Empire Manufacturing for February is estimated to fall to 6.5 versus 9.0 in January.

9:00 am EST
- Net Long-term TIC Flows for December are estimated at $73.5 billion versus $90.9 billion in November.

9:15 am EST
- Industrial Production for January is estimated to rise .1% versus unch. in December.
- Capacity Utilization for January is estimated to fall to 81.3% versus 81.4% in December.

10:00 am EST
- Preliminary Univ. of Mich. Consumer Confidence for February is estimated at 76.0 versus 78.4 in January.

Other Potential Market Movers
- The Fed’s Mishkin speaking, (KMT) analyst meeting and Deutsche Bank Small/Mid-cap Growth Conference could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by technology 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 Near Session Lows, Weighed Down by Tech, Retail, Airline and Financial Shares

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In Play

Stocks Lower into Final Hour on Rise in Oil, Profit-taking

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Semi longs, Software longs and Gaming longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The overall tone of the market is very negative as the advance/decline line is substantially lower, almost every sector is declining and volume is above average. Investor anxiety is above average. Today’s overall market action is bearish. The VIX is rising 2% today and remains high at 25.4. The ISE Sentiment Index is a very low 84.0 and the total put/call is an above-average .99 today. Tech stocks are under pressure on worries that PC growth is slowing after Goldman made negative comments on the industry and removed (INTC) from its Conviction Buy list. However, Goldman maintained its Buy rating on the stock. I think these worries are overdone at this point as most of these stocks’ valuations already reflect a significant slowdown. Today's tech sector weakness is likely more the result of profit-taking after recent sharp gains in many tech stocks. Retailers and airlines are under pressure from the jump in oil. Oil continues to move back near recent highs on massive investment fund speculation, despite a firmer dollar, decelerating global demand and record global production. Moody’s downgraded FGIC’s financial strength to A3 from Aaa. Moody’s still has (ABK) and (MBI) under review. However, they did say that in contrast to XL Capital Assurance and FGIC, MBIA and Ambac are better positioned from a capitalization and business franchise perspective. This may imply a downgrade is not forthcoming. (MBI)/(ABK) are soaring 10% and 17%, respectively. The AAII % Bulls fell to 33.3% this week, while the % Bears fell to 41.9%. Investor sentiment remains at historically depressed levels, which bodes very well for outsized gains over the intermediate-term. Nikkei futures indicate a down -106 open in Japan and DAX futures indicate an up +23 open in Germany. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, less economic pessimism and short-covering.

Today's Headlines

Bloomberg:
- Bernanke Pledges ‘Adequate Insurance’ Against Risks.
- MBIA Inc.(MBI), the world’s biggest bond insurer, said it is equipped to survive the slump in prices of mortgage securities and dismissed suggestions that the industry needs a rescue or stronger federal oversight.
- Treasury two-year notes are yielding the least compared with 10-year debt since 2004.
- Total rail freight volume on US railroads was up during the first week of February in comparison with the same week last year, the Association of American Railroads reported. Total volume was estimated at 32.7 billion ton-miles, up 2.5% from last year.
- The risk of companies defaulting fell the most in two weeks after US retail sales unexpectedly gained and Japan’s economy grew at twice the pace economists forecast, according to traders of credit-default swaps. Contracts on the Market CDX North American Investment Grade Index, tied to the debt of 125 companies in the US and Canada, declined 2.75 basis points to 135.25, according to Deutsche Bank AG. The European benchmark Markit iTraxx Crossover index dropped 19 basis points to 529, according to JPMorgan Chase. The Markit iTraxx Japan index fell 4 basis points to 85, Morgan Stanley said.
- Brett Jefferson, formerly managing director at Marathon Asset Management LLC, is starting a hedge fund to buy distressed collaterialized debt obligations and asset-backed securities. The firm, called Hildene Capital Management LLC, aims to raise $1 billion and plans to start by April. Hildene has also hired John Scannell, a former vp in the CDO structuring group at Citigroup Inc.(C), as COO.
- Morningstar, Inc.(MORN), a leading provider of independent investment research, today launched the Morningstar Rating for hedge funds as well as the Morningstar 1000 Hedge Fund Index and 17 indexes based on the Morningstar Hedge Fund Categories.
- Freddie Mac(FRE), the second-largest provider of money for US home loans, will purchase loans covered by mortgage insurers that don’t meet the company’s standards for the amount of capital backing their policies.
- Treasury Secretary Henry Paulson reiterated his call for Congress to follow up on the economic stimulus package approved last week by passing legislation aimed at slowing a surge in foreclosures.
- President Bush urged the House to extend a law allowing electronic eavesdropping of suspected terrorists and said he may delay his scheduled trip to Africa tomorrow if needed to complete the measure.
- Crude oil is rising $1.78/bbl.to a one-month high as economic indicators from Asia and the US allayed concern that a global recession is imminent. Japan expanded 3.7% last quarter, twice the pace economists forecast, triggering the biggest increase for the country’s stock market in six years. A government report showed that US jobless claims fell last week. The US and Japan are responsible for about 30% of global oil consumption.
- Republican Mitt Romney will endorse John McCain in the Republican presidential race, citing people familiar with the plan.

Wall Street Journal:
- Ambac’s(ABK) Callen in Talks to Raise Cash, Keep Rating.
- ETF Industry Produces New Power Brokers.
- Bill Clinton to End Ties to Yucaipa as Scrutiny Grows.
- Comcast(CMCSA) to Deploy New High-Speed Internet Technology.

NY Times:
- NY Times to Eliminate 100 Newsroom Jobs.

PC World:
- Google(GOOG) to Enter China Online Music Market.

Morningstar:
- Brazil’s Petrobras(PBR) To Build Large New Biodiesel Plant.

Financial Times:
- European companies are increasingly being forced to turn to the US dollar markets to raise funding as the credit crunch makes it almost impossible for them to launch deals in the euro-denominated market. A gap between the two markets has opened up with US investment grade issuance at a record high for a January, while Europe slumped to a record low, according to Dealogic.

Caijing Magazine:
- Citic Securities and Bear Stearns(BSC) may lift their stakes in each other now that both their shares have fallen. The new plan may be announced in April if US and Chinese regulators approve it.

Bear Radar

Style Underperformer:

Small-cap Growth -1.93%

Sector Underperformers:

Airlines (-3.82%), Retail (-2.94%) and Banks (-2.05%)

Stocks Falling on Unusual Volume:

HPY, DVA, LIZ, ESI, LAZ, BBW, BYI, NHWK, MDRX, ATRO, NTGR, SBNY, ECLP, GPRO, SUNH, KNOT, CPLA, TASR, NVDA, TECD, PVA and UBS

Trade Deficit Shrinks as US Exports Set Record for 10th Consecutive Month, Jobless Claims Fall

- The Trade Deficit for December shrank to -$58.8 billion versus estimates of -$61.5 billion and -$63.1 billion in November.

- Initial Jobless Claims for this week fell to 348K versus estimates of 347K and 357K the prior week.

- Continuing Claims fell to 2761K versus estimates of 2759K and 2770K prior.

BOTTOM LINE: The US trade deficit narrowed more than forecast in December as exports surged to another record, Bloomberg reported. The gap between imports and exports shrank 6.9% in December, the most in more than a year. As well, the trade deficit for all of 2007 fell 6.2%, the largest decline since 1991. Exports rose 1.5% in December, setting a record for a 10^th consecutive month and reflecting strong demand for US-made capital equipment and industrial goods. For the year, exports soared 12% to a record $1.622 trillion. Imports in December fell 1.1%, led by a 14% decline in purchases from China, which helped shrink the month’s trade gap with China by 22%. Petroleum imports rose 4.2% to a record $36 billion. For all of last year, trade contributed .55 percentage point to GDP growth, the most since 1991. A better-than-expected trade deficit and inventory rebuilding in December should lead to an upward revision to 4Q GDP. I expect the US trade deficit to continue to improve over the intermediate-term.

The number of Americans filing first-time claims for unemployment benefits fell for a second week, Bloomberg reported. The four-week moving average of claims rose to 347,250 from 335,350. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, remained steady at a historically low 2.1%. Fed fund futures now imply an 80.0% chance for another 50 basis point rate cut at the March 18 meeting and a 20.0% chance for a 75 basis point rate cut. Fed Chairman Bernanke said today that the Fed will act in a “timely manner” to help growth. He also said price expectations are “reasonably well anchored” and that he sees stronger growth “starting later this year.” Finally, he said if housing improves, some bank writedowns will reverse. Treasury Secretary Hank Paulson said tax rebate payments will start in early May and that the Treasury is “actively” monitoring the bond insurers. According to Intrade.com, the odds of a US recession this year have declined to 65.3% from 77.5% a few weeks ago. The 10-year TIPS spread is falling to 2.27% today, despite the rise in oil. I expect the US job market to improve back to very healthy levels over the intermediate-term without generating substantial unit labor cost increases.