Friday Watch

Late-Night Headlines
Bloomberg:
- Most asset-backed securities containing subprime auto loans will be able to maintain an investment-grade credit rating even if they lose guarantees from bond insurers, according to Citigroup analysts. “The vast majority of subprime auto transactions are built to weather the storm,” the analyst said.
- Senate Republicans defeated a Democratic effort to advance a housing bill that included a provision that would let judges modify mortgage terms in bankruptcy proceedings. Industry groups including the Mortgage Bankers Assoc. said the legislation would drive investment from mortgage-backed securities and increase borrowing costs for consumers.
- Gap Inc.(GPS), the largest US clothing retailer, said fourth-quarter profit rose for the first time in three years and forecast further gains this year after it sold more full-prices sweaters and jeans during the holiday season. Gap shares jumped 5.9% in after-hours trading.
- Omnivision Technologies(OVTI) surged 6.2% in extended trading. The maker of image sensors for camera phones said that it earned 55 cents a share in the third quarter versus analysts’ estimates of 47 cents a share.
- FTI Consulting(FCN), the global business advisory firm, announced fourth quarter revenue rose 29%. The stock rose 6.0% in after-hours trading.
- CommScope Inc.(CTV), a global leader in infrastructure solutions for communications networks, reported fourth quarter revenue gained 17%. The stock surged 6.0% in extended trading.
- Deckers Outdoor(DECK) reported fourth quarter sales gained 56.2%, however the stock fell 9.9% in after-hours trading.
- Dell Inc. reported an unexpected drop in fourth quarter profit after an expansion into retail failed to ignite sales. The stock fell .30 to $20.50 in after-hours trading.
- Farmland values in five Midwest states jumped 16% last year, the most in three decades, as demand for crop-based fuel and livestock feed sent corn and soybeans to records, the Federal Reserve Bank of Chicago said.

CNBC.com:
- Take-Two Interactive(TTWO) said on Thursday it has received informal inquiries but not written offers concerning potential business combinations since Electronic Arts(ERTS) proposed a $1.9 billion acquisition.

SmartMoney:
- Blu-ray DVD Chip Maker Offers Risk, Reward.
- Insider-Buying Screen Delivers FedEx(FDX), 7 Others.
- Marvell Technology(MRVL) Can Soar if Problems Are Resolved.

BusinessWeek.com:
- Apple(AAPL) Buy Back This Stock. It’s sitting on a huge pile of cash. Eighteen-and-a-half billion dollars is a lot of money.
- Ever since Google(GOOG) bought the wiki-based online application startup Jotspot in late 2006, people have been wondering if it had disappeared forever inside the bowels of the search giant. Tonight, Google’s launching Google Sites, using Jotspot’s technology to create free group collaboration service that will be part of its online software suite Google Apps.

CNNMoney.com:
- Electric carmaker Think hits the accelerator.

Forbes.com:
- The Brazilian Sugarcane Industry Assoc. applauded today’s remarks by US fed Chairman Ben Bernanke favoring a reduction in tariffs on Brazilian ethanol to help take pressure off food prices in the US as a positive approach that goes far beyond economics.
- Vast fortunes await makers of next-generation batteries.

IBD:
- Railroads On Track With Profits Despite Economic Concerns.

MSNBC.com:
- Democratic House Speaker Nancy Pelosi has asked for a grand jury investigation into whether White House chief of staff Josh Bolten and former counsel Harriet Miers should be prosecuted for contempt of Congress.

Portfolio.com:
- Six-figure jobs on Wall Street and elsewhere just aren’t enough for “Millennial” workers, who want their work to have “meaning” too.

USA Today.com:
- Farm suppliers’ profits bloom as commodity prices jump.

Automotive News:
- Kia Motors Corp., South Korea’s second-largest automaker, will produce transmissions at an auto-assembly plant it’s building in Georgia and also supply them to affiliate Hyundai Motor. Kia will make the components in West Point, Georgia, when the Seoul-based company’s first US In exchange, Hyundai’s Montgomery, Alabama, plan, 80 miles from West Point, will supply the Kia factory with engines. factory opens late next year.

Financial Times:
- Leading private equity firms, including Apollo Management LP and Kohlberg Kravis Roberts, are continuing to raise billions of dollars for new funds.
- London’s edge over New York eroded. Proposed changes to the UK’s tax system will make London less attractive as a financial center, according to a survey of international business professionals.
- Google(GOOG) reveals plans for health database. Google on Thursday laid out plans for one of its most anticipated new services, a digital health records system meant to give users more control over their personal healthcare.
- The most disturbing aspect of the US primary season is the Democratic consensus that liberal trade is opposed to the national interest. The next Democratic administration promises to repair US alliances and standing in the world. A worthy aim. Yet its first act, the party says, will be to tell its closest neighbors that the rules they are all agreed to are defunct – and if they do not like it, tough luck.

Late Buy/Sell Recommendations
Citigroup:
- Buy (SCHW) and (AMTD) for pure play exposure to retail brokerage.
- Maintained Buy on (GILD), target $55. Abacavir’s link to increased myocardial infraction risks and poor efficacy in the DAD and ACTG 5202 studies provide substantial backwind to Gilead’s(GILD) tenofovir-based regimens (Viread Truvada and Atripla) in HIV. We see attractive leverage with any potential market share gains. IMS prescription data also suggest of better than consensus Q1 sales. Our analysis suggests that every 10% market share gain from abacavir to Truvada in the US and every 15% gain in Europe should boost EPS by .05 and our target price by $1, respectively. This suggests that our $4.1 billion vs. consensus $4.0 billion ’08 HIV sales estimates could have upside.
- Reiterated Buy on (GPS), target $23.

CSFB:
- Reiterated Outperform on (GILD), target $53.
- Reiterated Outperform on (FLR), target $185.

Night Trading
Asian Indices are -1.50% to unch. on average.
S&P 500 futures -.42%.
NASDAQ 100 futures -.21%.

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Earnings of Note
Company/EPS Estimate
- (CIEN)/.35
- (SUP)/.15

Upcoming Splits
- (NJR) 3-for-2
- (PRXL) 2-for-1

Economic Releases
8:30 am EST
- Personal Income for January is estimated to rise .2% versus a .5% gain in December.
- Personal Spending for January is estimated to rise .2% versus a .2% gain in December.
- The PCE Deflator for January is estimated to rise .3% versus a .2% increase in December.

9:45 am EST
- The Chicago Purchasing Manager report for February is estimated to fall to 49.5 versus a reading of 51.5 in January.

10:00 am EST
- Final Univ. of Mich. Consumer Confidence for February is estimated to rise to 70.0 versus a prior estimate of 69.6.

Other Potential Market Movers
- The Fed’s Evans speaking, Fed’s Poole speaking, Fed’s Lockhart speaking, Fed’s Mishkin speaking, Fed’s Rosengren speaking, (CPN) analyst meeting, Pacific Crest Data Center Conference and Wachovia Homebuilding Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by automaker 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 100% net long heading into the day.

Stocks Finish Lower, Weighed Down by Airline, Homebuilding, Retail and Financial Shares

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In Play

Stocks Lower into Final Hour on Another Spike in Economic Pessimism

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Computer longs, Biotech longs and Alternative Energy longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is below average. Investor anxiety is high again. Today’s overall market action is just mildly bearish. The VIX is rising 2.2% today and remains relatively high at 23.2. The ISE Sentiment Index is a low 92.0 and the total put/call is a high 1.25 again today. Finally, the NYSE Arms has been running slightly above-average most of the day. Again, considering today’s economic data, recent stock gains, the rise in oil and fall in the US dollar, today’s action isn’t bad. There continues to be a strong bid under many market leading stocks, which is a big positive. This is much healthier, in my opinion, than a market being led by the most heavily shorted stocks with fundamental problems. Moreover, growth stocks have begun to significantly outperform value again, likely as a result of the recent drop in long-term rates and very cheap valuations. I suspect with oil solidly above $100 and interest rates falling, alternative energy stocks will begin outperforming again pretty soon. I still see substantial upside for my (AMSC) long, which is breaking back above its 50-day moving-average today. (AAPL) is trading near session highs, rising 6.3%. I continue to believe the stock, as well as (GOOG), has made a major bottom for the year. Nikkei futures indicate a -225 open in Japan and DAX futures indicate an +48 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short covering, lower long-term rates and bargain hunting.

Today's Headlines

Bloomberg:
- Crude oil is rising above $102/bbl. on a weaker dollar, a shipment disruption in Iraq and historic investment fund speculation.
- Prince Harry, third in line to the British throne, is fighting with his regiment in Afghanistan, the UK Ministry of Defense said.
- PIMCO’s Bill Gross told CNBC the firm is buying some commercial mortgage backed securities and is still buying municipal debt.
- Thornburg Mortgage’s(TMA) CEO said the common stock dividend should be safe.

Wall Street Journal:
- London-based hedge fund Richmond Capital LLP has stumbled badly this year, losing about half its money in January alone.
- Bebo.com, MySpace Turn to Videos to Gain Ads, Users.

Forbes:
- “I don’t anticipate stagflation,” Fed Chairman Bernanke said under questioning from the Senate Banking Committee. “I don’t think we’re anywhere near the situation that prevailed in the 1970s. I do expect inflation will come down,” he said.

NY Sun:
- NYC is launching a campaign to motivate public school students by giving them free cell phones and upgrading features if they do things such as show up to class and behave.

Financial Times:
- Emirates Telecommunications, is close to forming a joint venture with a mobile operator in the Kurdish region of Iraq, citing the company’s CEO.
- A hedge fund’s demise: the Peloton pile-up.

Saba:
- Yemen plans to raise its oil production by more than 50% to 500,000 barrels a day by 2010, citing the country’s oil minister. Yemen’s oil production reached 317,000 barrels a day last year.

Bear Radar

Style Underperformer:

Small-cap Value -1.91%

Sector Underperformers:

Airlines (-3.80%), Homebuilders (-3.47%) and Banks (-3.39%)

Stocks Falling on Unusual Volume:

EPL, WNR, CGV, PBKS, PDGI, LHCG, ENOC, COMV, AMAG, REXX, CRDN, COGT, EWBC, RHD, IRM, MYL, PKE, SFI, EPL and LTD

4Q GDP Rises Slightly Less Than Estimates, Initial Jobless Claims Rise More Than Estimates

- Preliminary 4Q GDP rose .6% versus estimates of a .8% gain and prior estimates of a .6% increase.

- Preliminary 4Q Personal Consumption rose 1.9% versus estimates of a 2.0% gain and prior estimates of a 2.0% increase.

- Preliminary 4Q GDP Price Index rose 2.7% versus estimates of a 2.6% gain and prior estimates of a 2.6% increase.

- Preliminary 4Q Core PCE rose 2.7% versus estimates of a 2.7% gain and prior estimates of a 2.7% increase.

- Initial Jobless Claims rose to 373K versus estimates of 350K and 354K the prior week.

- Continuing Claims rose to 2807K versus estimates of 2785K and 2786K prior.

BOTTOM LINE: The US economy grew .6% in the fourth quarter, the same as initial estimates, Bloomberg reported. Consumer spending rose 1.9% in the fourth quarter. Personal Income rose at a 4.1% rate during 4Q. According to Intrade.com the odds the US slips into recession this year have fallen to 61.5% from 77.5% last month. I continue to believe the US will avoid recession as growth comes in around 1% during the first half of the year before accelerating modestly in the second half as the effects of fiscal/monetary stimulus take hold, exports continue to boom to new records, inflation decelerates and companies rebuild depleted inventories.

The number of Americans filing first-time jobless claims for unemployment benefits rose more than forecast last week, Bloomberg reported. The unemployment rate among those eligible to collect benefits, which tracks the US unemployment rate, held steady at a historically low 2.1%. The four-week moving average of claims fell to 360,500 from 361,750 the prior week. Four states and territories reported an increase in new claims, while 49 actually had a decrease. The current trend in jobless claims is still not at levels normally associated with economic contraction. Fed fund futures now imply a 68.0% chance for a 50 basis point cut at the March 18^th meeting. The odds of a 75 basis point cut have risen to 32.0% from 10.0% yesterday. I continue to believe the job market will improve to more healthy levels in the second half of the year and will remain very healthy over the intermediate-term without generating substantial unit labor cost increases, which account for about two-thirds of inflation.