Friday Watch

Late-Night Headlines
Bloomberg:

- President Hu Jintao said China is ready to strengthen dialogue and expand cooperation with the US in the face of “complex and profound changes” in the world. “The strategic significance and global implications of China-US relations have become all the more evident,” Hu said in a congratulatory message to President Bush today to mark the 30^th anniversary of the establishment of diplomatic relations between the two countries. The relationship has “greatly contributed to peace, stability and the development of Asia and the world at large,” Hu said.

- The euro fell against the dollar and the yen before a European manufacturing report today that will probably show a recession is deepening in the 16-nation region. The euro, the weakest of the three currencies in 2008, slid on prospects the European Central Bank will lower interest rates to revive economic growth. “There’s a lot more weakness in Europe ahead,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “We’ve got them cutting to 1 percent by March.”

- Yale University is buying debt to help its endowment recover after losing almost $6 billion in the last six months amid the global financial crisis. “There are some really extraordinary opportunities in the credit world,” said David Swensen, the school’s investment chief, in a phone interview on Dec. 30 from his office at the New Haven, Connecticut, university. “Everything, from bank loans to investment-grade bonds to less-than-investment grade bonds, is priced at really extraordinarily cheap levels.”

- The U.S. Treasury threw the door open to taxpayer financing for a widening array of companies and industries by drafting broad guidelines on aid to the auto industry. The Treasury’s guidelines, published yesterday, would let officials provide funds to any company they deem important to making or financing cars. That leaves room for the government to provide money from the Troubled Asset Relief Program beyond loans already committed to General Motors Corp., GMAC LLC and Chrysler LLC. “There are going to be other industries that are going to have just as good a case,” as the auto companies, former St. Louis Federal Reserve Bank President William Poole said in an interview on Bloomberg Television.

- Tech Trends That Shaped 2008, Set Stage for 2009.

- Small-cap Financial Shares Defy Market, Lead Rising US Stocks. In the worst year ever for financial companies, small-cap firms like First BanCorp, First Financial Bankshares Inc. and Tompkins Financial Corp. gave investors some of the best returns of 2008.

- US Album Sales Decline 14% While Online Track Sales Surge.

- The U.S. Securities and Exchange Commission, which sued Bernard Madoff last month for allegedly directing a $50 billion fraud, won’t make public a list of his assets filed yesterday, the regulator said. A federal judge ordered Madoff to provide the SEC an accounting of all investments, loans, lines of credit, business interests, brokerage accounts and other holdings. The court hasn’t authorized its public disclosure, said SEC enforcement official Andrew Calamari, who confirmed receipt of the list.

- China’s manufacturing contracted for a fifth month in December. The CLSA China Purchasing Managers’ Index stood at a seasonally adjusted 41.2, compared with a record low of 40.9 in November, CLSA Asia-Pacific Markets said today in an e-mailed statement. A reading below 50 reflects a contraction. Manufacturers in industries from metals to toys are reducing production or closing down. “Chinese manufacturing was very weak in December,” said Eric Fishwick, head of economic research at CLSA in Singapore. “With five back-to-back PMIs signaling contraction, the manufacturing sector, which accounts for 43 percent of the Chinese economy, is close to technical recession.” “Chinese manufacturers reduced the size of their workforces at the fastest rate recorded by the series to date,” today’s report said.

- China Telecom Corp., the nation’s biggest fixed-line phone company, rose the most in almost two months after the government said it would proceed with issuing licenses for high-speed services. China phone companies will spend as much as $41 billion on network spending for the 3G services that enable faster Web- browsing and music downloads in the next two years, the government said last month.

- LG Display Co., the world’s second-largest maker of liquid-crystal displays, rose the most in six weeks in Seoul LG Display climbed 10% on the Korea Exchange. Prices of notebook and television panels are expected to be flat in January after declining for the past six months, David Hsieh, an analyst at researcher DisplaySearch, said. Some LCD makers have raised prices of computer monitor panels to their customers for January, according to Hsieh. trading on speculation panel prices will halt their declines this month after manufacturers cut production.

Wall Street Journal:

- Israeli warplanes killed a senior Hamas leader in the Gaza Strip and hit the territory's parliament building as bombing continued Thursday. But with the militant group still firmly in control there Israeli officials appeared to open the door to a possible cease-fire.

- The man appointed by Illinois Gov. Rod Blagojevich to fill the U.S. Senate seat vacated by President-elect Barack Obama suggested he would challenge any effort to block the move, but said he is confident Senate Democrats will relent and let him take the job. "We think they will come around and recognize that the appointment is legal and valid and I am the junior senator from Illinois," Roland Burris said during an interview at his office.

BusinessWeek:

- China 2009: The Confidence Deficit. Stock markets fell some 65% in 2008. Growth is down, unemployment is up. Will Beijing try to buy its way out of its problems with more exports?

- Investors in Citadel Investment Group’s two main hedge funds can take solace in the fact that 2008 has finally come to an end. Of course, that won’t ease the pain of seeing those two porfolios lose about 53% of their value going into the final week of the year. The latest numbers from Ken Griffin’s Chicago-based investment empire are only marginally better than the performance figures posted by Citadel’s two biggest funds for the past several months. As of Dec. 24, Citadel’s once giant Kensington and Wellington funds were down 9.35% for the month. That’s a slight improvement over the funds’ 14.27% November decline and October’s horrific 22% slide. The big plunge at Citadel is far worse than the 20% average decline this year for hedge funds and greater than the 35% decline in the Dow Jones. That’s a big blow to Griffin’s reputation as one of the titans of the fast-shrinking hedge fund industry—a trader many have tried to emulate over the years because of his long proven track record of success.

IBD:

- Last year was a tough time to be a financial service firm, or a technology firm, or a new IPO. Yet RiskMetrics (RMG) managed to pull off all three without damage.

MacDailyNews:

- Net Applications' Operating System stats for December 2008 show Apple's Mac hit 9.63% share of the operating systems visiting Net Applications' network of websites worldwide. The stats also show Apple iPhone with a new all-time high of 0.44% share and Apple iPod with 0.08%.

AP:

- The U.S. formally transferred control of the Green Zone to Iraqi authorities Thursday in a pair of ceremonies that also handed back Saddam Hussein's former palace. Iraq's prime minister said he will propose making Jan. 1 a holiday marking the restoration of sovereignty. Under the new security agreement between Washington and Baghdad to replace a U.N. mandate for foreign troops in Iraq, the Iraqi government also now has control of American troops' actions and of the country's airspace. The moves came amid a dramatic fall in violence over the past year.

Reuters:

- After worst year ever, commodities may lag recovery. Institutional funds who shunned commodities until earlier this decade flooded into the sector since 2003, increasing investment 20-fold to a peak above $200 billion by the middle of this year, a shift often blamed for the rally in prices. Those funds fell sharply as prices collapsed -- by the fourth quarter, commodity assets under management had fallen by about a third to $144 billion, according to Barclays Capital estimates. But it also said that only a small portion of that drop was caused by active withdrawals, suggesting most of pension funds and investors are sticking with the sector, for now.

- Bank of America Corp completed its purchase of Merrill Lynch & Co and Wells Fargo & Co finished buying Wachovia Corp, the latest sea changes in a transformed banking industry facing dire economic times ahead. The Merrill takeover was completed on Thursday, ending more than 94 years of independence for the Wall Street investment bank and brokerage. The Wachovia merger closed on Wednesday, marking the denouement for a lender that started in 1879 with what it deemed a "very adequate" $100,000 of capital.

- Top 10 best and worst S&P 500 performers for 2008.

Financial Times:
- Lotus, the sports-car manufacturer, plans to enter the burgeoning field of battery-powered cars with a high-performance electric vehicle. The car, like General Motors’ planned Volt, will be equipped with a fuel-based “range extender” to back up its battery. Lotus may show it in concept form at the Geneva motor show in March.

- Germany may add tax cuts to the multi-billion package of measures it will adopt later this month in its second attempt to prevent Europe’s largest economy falling into its deepest recession in history, Angela Merkel, chancellor, said on Wednesday. The suggestion marks a partial concession by the chancellor as she seeks to defuse a dispute with her conservative allies in Bavaria that is threatening to torpedo her plan for a major fiscal boost. The Bavarian Christian Social Union has threatened to veto any package that would not include tax cuts.

- Prominent UK politicians are calling for the ban on short-selling of financial stocks to be extended by the City watchdog when it expires in two weeks’ time.

- US lawmakers will use the findings of Congressional hearings on the alleged $50bn fraud by Bernard Madoff, which begin on Monday, to guide them in rewriting the laws governing US financial markets.

- Investors pulled a net $320bn from mutual funds in 2008, a record in both dollar terms and as a percentage of assets, in one of the biggest flights to safety the industry has seen. The move out of what were previously regarded as safe and stable investments followed a record year of investor inflows in 2007. However, it appears that outflows stabilized and even reversed in the final weeks of the year. Investors put a net $23bn into equity funds during December and withdrew only $3.5bn from bond funds, less than in earlier months.

TimesOnline:
- Stock markets are poised for a resurgence in 2009 after what is likely to be a shaky start to the new year following brutal losses in the past 12 months, leading institutions predict. Despite the still-deepening global recession, stockpickers are defying the economic gloom to back high-stakes bets that shares in the West’s main markets will now rally. Equity strategists and traders are pinning their hopes on past trends that have seen stock markets rally well before recessions end, as well as on further, aggressive action expected from governments and central banks earlier in the year as they strive to limit the scale of the economic slump. Strategists are predicting that a 2009 fightback by the New York equity markets will see US blue chips in the broad-based S&P 500 index jump by almost 11 per cent.

Commercial Times:

- Hon Hai Precision Industry Co. will sell Apple Inc.(AAPL) products in China after the Taiwanese manufacturer was named the sole distributor in the country, citing Chairman Terry Gou. The company’s strategy for 2009 includes entering China’s consumer electronics market, citing Gou. Taipei-based Hon Hai is the world’s largest contract maker of electronics and makes iPhones for Apple and computers for Dell Inc.(DELL).

South China Morning Post:

- Guangdong economy hit by Beijing’s policies, says governor. Guangdong Governor Huang Huahua has admitted publicly for the first time that the provincial economy has been battered by central government policies restricting the export manufacturing industry.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are +.25% to +1.75% on average.
S&P 500 futures n/a.
NASDAQ 100 futures n/a.

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Economic Releases

10:00 am EST

- ISM Manufacturing for December is estimated to fall to 35.4 versus 36.2 in November.

- ISM Prices Paid for December is estimated to fall to 20.0 versus 25.5 in November.

Upcoming Splits
- None of note

Other Potential Market Movers
- None of note

BOTTOM LINE: Asian indices are mostly higher, boosted by commodity and technology 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 Highs, Boosted by REIT, Financial, Commodity, Gaming, Construction, Transport and Hospital Shares

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In Play

Stocks Surging into Final Hour on Less Financial Sector Pessimism, Short-Covering, Bargain-Hunting and Seasonal Strength

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Technology longs, Financial longs, Retail longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is bullish as the advance/decline line is substantially higher, almost every sector is rising and volume is light. Investor anxiety is above average. Today’s overall market action is bullish. The VIX is falling 5.4% and is very high at 39.38. The ISE Sentiment Index is below average at 124.0 and the total put/call is around average at .86. Finally, the NYSE Arms has been running above average most of the day, hitting 1.72 at its intraday peak, and is currently .72. The Euro Financial Sector Credit Default Swap Index is rising 3.64% today to 113.65 basis points. This index is up from a low of 52.66 on May 5^th, but down from 157.81 on Sept. 16^th. The North American Investment Grade Credit Default Swap Index is rising .74% to 197.24 basis points. The TED spread is up .01% to 135 basis points. The TED spread is now down 331 basis points in just over ten weeks. The 2-year swap spread is up 1.43% to 71.0 basis points. The Libor-OIS spread is falling 2.85% to 121 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 7 basis points to .13%, which is down 248 basis points in just under six months and at the lowest level since Bloomberg record-keeping began in August 1998. The 10-year TIPS spread bottomed at .65% in October 1998 during the Asian financial crisis and at 1.24% in October 2001 during the technology bubble-bursting meltdown. The 3-month T-Bill is yielding .08%, which is down 1 basis point today. The (XLF) is trading very well again today, rising 3.5%. This news from the Treasury Dept. is helping. Today's overall stock gains are broad-based. The sell-off in long-term Treasuries is a positive development. Oil is surging over 10% today, which is most likely the result of year-end hedge fund activity. Traders are the most net long crude oil futures since May, even as commercials increase their short position in the commodity, which is another bearish development for oil. I suspect we will see an extension of recent positive US stock market action on Friday. Nikkei futures indicate an +340 open in Japan on Friday. DAX futures aren't trading. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, diminishing credit market angst, less financial sector pessimism, seasonal strength, less forced selling and short-covering.

Today's Headlines

Bloomberg:

- U.S. mortgage rates dropped to the lowest in more than three decades as the government stepped up efforts to revive the housing market.

The average rate on a 30-year fixed mortgage tumbled for a ninth straight week, to 5.10 percent from 5.14 percent a week earlier, Freddie Mac said in a report today. That’s the lowest on record, according to data that goes back to 1971, the McLean, Virginia-based mortgage buyer said.

- John Paulson, who runs the $36 billion hedge-fund firm Paulson & Co., has some harsh words for his peers and their tendency this year to block or curb clients’ attempts to get their money back. “We think it’s a mistake for managers to use gates and other tools to limit investor access to their funds,” Paulson wrote in a 2009 outlook to investors. “While we recognize the difficulties of the current environment, we think it is a manager’s responsibility to raise liquidity to meet the redemption needs of their investors.”

- Yields on Fannie Mae, Freddie Mac and Ginnie Mae mortgage bonds declined to record lows after the Federal Reserve announced plans to buy $500 billion of the securities faster than expected. Yields on Washington-based Fannie’s current-coupon 30-year fixed-rate mortgage bonds declined 1 basis point, or .01 percentage point, to 3.81 as of 10:45 am in NY, according to Bloomberg. The difference between the yields on the bonds and 10-year Treasuries narrowed 8 basis points to 164 basis points.

- The cost of borrowing in dollars in London for three months dropped for the third day, ending 2008 at the lowest level in more than four years as policy makers provide cash and lower interest rates. The London interbank offered rate, or Libor, for such loans fell one basis point to 143 basis points, the least since June 8, 2004, according to British Bankers’ Association data. “There’s no reason for the easing in rates not to continue,” said David Keeble, head of fixed-income strategy in London at Calyon, the investment-banking unit of Credit Agricole SA. “The banking sector is more stable and cash is coming into the system.” The Libor-OIS spread, a gauge favored by former Fed Chairman Alan Greenspan, narrowed one basis point to 125 basis points today. The TED spread, the difference between what the U.S. government and banks pay to borrow for three months, dropped two basis points to 133 basis points. That’s two basis points lower than on Sept. 12, the last working day before Lehman Brothers Holdings Inc. collapsed.

- Treasuries fell, trimming their biggest annual rally since 1995, as stocks rose after fewer Americans filed initial claims for jobless benefits last week. The Securities Industry and Financial Markets Association recommends that Treasuries trading end today at 2 p.m. New York time for New Year’s Eve and stay shut around the world tomorrow for New Year’s Day and in Japan on Jan. 2. The number of Americans filing first-time claims for jobless benefits dropped by 94,000 to 492,000 in the week ended Dec. 27, from 586,000 the previous week, the Labor Department said today. The median forecast in a Bloomberg News survey of economists was for a decline to 575,000. U.S. yields indicate traders expect almost no inflation for the next decade. The difference between yields on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional notes, which reflects the outlook among traders for consumer prices, was eight basis points.

- Crude oil rose after a government report showed a smaller-than-expected gain in U.S. fuel stockpiles. Futures are heading for a record annual drop.

- The US dollar’s share of foreign exchange reserves climbed in the third quarter as the currency rebounded and central banks sought the safety of the world’s leading reserve currency, data from the International Monetary Fund showed. The dollar accounted for 64.6 percent of the reserves held by governments and central banks at the end of September, up from 63 percent at the end of June, the Washington-based lender said today.

- GMAC LLC, the auto lender that’s getting a $6 billion federal bailout, completed a debt swap designed to bolster its capital after falling short of its $38 billion goal.

- Hamas is prepared to halt rocket attacks on Israel if the Israeli government lifts its blockade of the Gaza Strip, Russian Foreign Minister Sergei Lavrov said. Hamas’ Damascus-based political leader Khalid Mashaal made the offer in a telephone call today with Lavrov, the Russian Foreign Ministry said on its Web site.

- Bernard Madoff will file a list of his assets with the U.S. Securities and Exchange Commission today, his lawyer said, meeting the regulator’s deadline for disclosure of what money he has left.

- Tremont Group Holdings Inc., a hedge- fund firm owned by Massachusetts Mutual Life Insurance Co., was sued for investing with financier Bernard Madoff who allegedly confessed to a $50 billion Ponzi scheme.

Wall Street Journal:

- Mortgage lenders who wake up Thursday with a New Year's hangover are likely to face another headache soon: The effort to give bankruptcy judges the power to rewrite mortgages is gaining steam. The banking industry hoped the mortgage "cram-down" measure died when Congress removed it from the $700 billion bailout bill that passed in October. But it has been gathering momentum in Democrat-controlled Washington, as evidence emerges that current voluntary foreclosure-prevention programs are falling short.

- The concert industry has so far bucked the recession, according to year-end data from trade magazine Pollstar, but promoters are bracing for a bumpy 2009. Box-office receipts from North American concerts through December were $4.2 billion, up 7.8% from 2007.

- Buyout Shops Swoop In for a Feast on the Cheap.

CNBC.com:
- These Airline Stocks Will Soar: Strategist.

- Demand for U.S. mortgage applications was unchanged during the Christmas holiday week, holding the highest levels in more than five years with loan rates near record lows, an industry group said on Wednesday.

ChannelWeb:

- Developers who have been reluctant to develop applications for Google's(GOOG) mobile Android platform because apps have only been available for free should be much happier in 2009. Google plans to start offering paid applications for sale as early as the first quarter, according to reports.

Seeking Alpha:
- Google(GOOG): A Gorilla Not to Be Missed.

The Detroit News:

- It is hard to imagine the head of any automaker -- foreign or domestic -- being optimistic about 2009. But Ford Motor Co. CEO Alan Mulally is downright ebullient. While he is all too aware of the dangers posed by the deepening recession, Mulally says Ford's decision to pass on the initial federal bailout of the U.S. auto industry has resonated with many Americans. The challenge now is getting them to come into the showroom and buy a Ford car or truck.

The Boston Globe:

- US Representative Barney Frank said yesterday he wants the government to spend $10 billion to jump-start the stalled development of affordable rental housing nationwide, including 31 projects in Massachusetts that can't move forward because of a lack of funds. Frank is proposing that the US Treasury buy $5 billion in low-income housing tax credits, a key source of funding for affordable housing, and provide states with another $5 billion they can spend on hundreds of stalled projects.

MarketingVOX:

- Worldwide iPhone WiFi ad requests grew 52% month-over-month to 359 million in November, giving the iPhone 6.3% share of global total requests and 9.9% share of requests in the US, where it is now the #1 device, according to research from AdMob.

VentureBeat:

- Local yogurt store tells blogger that Steve Jobs is “in great health.”

denverpost.com:

- Solar-panel incentives lure customers.

USA Today:

- As 2008 ends, U.S. troop deaths for the year in Iraq and Afghanistan are the lowest combined total since the Iraq war began in 2003.

Barron’s:

- While rumors of forthcoming Apple (AAPL) products for at Macworld next week have been relatively muted this month, Friedman, Billings, Ramsey analyst Craig Berger put out a note this morning stating that his “incremental checks into the Apple supply chain” have revealed the prospect that “a lower-cost version of the iPhone is coming … possibly in mid 2Q. Berger’s takeaway is that swings in production are lessening for Apple, and that that could lead to more stable order patterns for components, which could benefit Apple suppliers such as Intel (INTC), Marvel Technology (MRVL), LSI Logic (LSI), Nvidia (NVDA), while being “neutral” for suppliers of parts to primarily the iPhone, including Broadcom (BRCM), Marvel, Lattice Semiconductor (LLTC), National Semiconductor (NSM), Triquint (TQNT), and Skyworks Solutions (SWKS).
Berger prefers On Semiconductor (ONNN), Marvel, Microsemi (MSCC), Silicon Labs (SLAB), International Rectifier (IRF), Broadcom, Fairchild Semiconductor (FCS), and Atmel (ATML).

- ComScore (SCOR) last night published statistics from its measurement of U.S. visits to shopping Web sites from home and work, and found that Apple (AAPL) and Amazon.com (AMZN) had the biggest jump in unique visitors for the period November 1 to December 23. Apple’s traffic soared, up 19% to 35 million unique users, from 29.5 million in the year-earlier period. Amazon saw a surge of 7%, rising to 76.2 million unique users. Ebay (EBAY) topped the charts for unique users, with 85.4 million unique users, but that number was down 4% year-over-year. Wal-Mart Stores (WMT) and Target (TGT) were third and fourth, after eBay and Amazon, with Apple coming in number five in unique visitors.

ClimateBiz:

- Growing numbers of U.S. financial firms have started to play on the European Climate Exchange (ECX) as they seek to gain experience of how carbon markets operate ahead of the launch of a U.S. cap-and-trade scheme. Sara Stahl, business development director for the ECX, said the second half of the year had seen an influx of U.S. firms joining the exchange, helping to drive traded volumes of carbon credits up to record levels.

Interfax:

- China will issue third-generation phone licenses tonight, citing an official at a telecom equipment supplier.

Sankei:
- Toshiba Corp. plans to increase sales of liquid-crystal-display televisions by at least 43% in fiscal 2009. The company plans to increase its global market share to 10% from about 6% currently, by March 2011.

Bear Radar

Style Underperformer:
Large-cap Value (+1.01%)

Sector Underperformers:
Tobacco (-.77%), HMOs (-.74%) and Insurance (+.53%)

Stocks Falling on Unusual Volume:
DOW

Stocks With Unusual Put Option Activity:
1) AKAM 2) CDNS 3) ELN 4) KMP 5) MHK

Bull Radar

Style Outperformer:
Small-cap Growth (+2.17%)

Sector Outperformers:
Construction (+2.87%), Disk Drives (+2.35%) and I-Banks (+2.05%)

Stocks Rising on Unusual Volume:
WAG, EZCH, TWGP, NWPX, CERN, DRYS, SBNY, SNDA, VLCCF, ATAC, FLIR, NNDS, FSTR, INDB, IAT, RFG, PSD, FEU, DBV, ICB, OI, VIG, DSV, JKG, NY, IWW, STC and GNI

Stocks With Unusual Call Option Activity:
1) NTAP 2) FNF 3) IR 4) HOG 5) NFLX