Bear Radar

Style Underperformer:
Large-cap Value (+1.32%)

Sector Underperformers:
REITs (-1.29%), Tobacco (+.47%) and Insurance (+.50%)

Stocks Falling on Unusual Volume:
None of note

Stocks With Unusual Put Option Activity:
1) CYPB 2) LLY 3) NBR 4) HOT 5) GT

Bull Radar

Style Outperformer:
Mid-cap Growth (+2.0%)

Sector Outperformers:
Disk Drives (+7.28%), Oil Service (+5.62%) and Steel (+5.46%)

Stocks Rising on Unusual Volume:
CLF, RTP, NIHD, PTR, JLL, CVA, APA, DRYS, UEPS, HURN, NCIT, PWRD, FELE, MDVN, TBSI, AVAV, HURC, EZPW, AKO/A, PBE, MBR, HOT, KRO and SCG

Stocks With Unusual Call Option Activity:
1) CIEN 2) WMB 3) NSM 4) SGR 5) ACE

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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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Earnings of Note
Company/EPS Estimate
- None of note

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.