Existing Home Sales Slow

- Existing Home Sales for December fell to 6.6M versus estimates of 6.87M and 7.0M in November.

BOTTOM LINE: Sales of previously owned homes fell in December to the lowest level since March 2004, Bloomberg reported. Sales still finished 2005 at an all-time record high of 7.072 million. The median selling price rose 10.5% in December(y-o-y) to $211,000. Inventories rose to 5.1 months’ worth at the current sales pace versus 5 months’ worth in November. Home re-sales fell 11% in the West, 2.6% in the Northeast and 7.2% in the South. They were unchanged in the Northeast. I continue to believe housing is slowing to more healthy sustainable levels.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Sony Corp.(SNE) will probably revise its annual forecast to a profit from a loss on higher holiday season sales of Bravia flat-screen televisions and digital cameras.
- Crude oil is falling for a third day in NY before a report that may show US oil stockpiles rose last week as mild temperatures sapped heating demand.
- China’s economy grew 9.9% in 2005, overtaking France as the world’s fifth largest, powered by exports and investment in factories, roads and power plants.

Financial Times:
- UK companies are less willing to make acquisitions in emerging markets than companies in the US or other European countries, citing KPMG International research.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on (SYK), (PKG), (DD) and (MSFT).
- Reiterated Underperform on (LU), (EAT) and (CR).

Night Trading
Asian Indices are +.25% to +1.25% on average.
S&P 500 indicated +.14%.
NASDAQ 100 indicated +.21%.

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Earnings of Note
Company/EPS Estimate
(ABT)/.76
(ADP)/.45
(AMG)/1.29
(ATI)/.88
(ALTR)/.19
(AHC)/3.26
(ABC).40
(AMTD)/.22
(BLS)/.45
(BMY)/.28
(BR)/2.35
(CL)/.68
(COP)/2.62
(EXC)/.73
(GD)/1.97
(HSY)/.75
(JNPR)/.20
(KMG)/.161
(MXIM)/.41
(NSC)/.75
(NVLS)/.16
(QCOM)/.38
(ROW)/-.21
(STJ)/.40
(SWK)/.82
(VAR)/.33
(WLP)/1.04

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- Existing Home Sales for December are estimated to fall to 6.87M versus 6.97M in November.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude build of 1,400,000 barrels. Gasoline inventories are estimated to rise 1,400,000 barrels, and distillate supplies are expected to increase by 875,000 barrels. Finally, refinery utilization is expected to remain unchanged.

BOTTOM LINE: Asian indices are higher on falling energy prices and reports of strong economic growth in the region. I expect US equities to open mixed and to rally later in the day, finishing higher. The Portfolio is 75% net long heading into the day.

Stocks Finish Higher as Oil Prices Fall and Merger Activity Rises

Indices
S&P 500 1,266.86 +.24%
DJIA 10,712.22 +.22%
NASDAQ 2,265.25 +.75%
Russell 2000 718.02 +1.44%
S&P Barra Growth 605.14 +.12%
S&P Barra Value 657.46 +.36%
Morgan Stanley Consumer 596.73 +.01%
Morgan Stanley Cyclical 783.20 +1.17%
Morgan Stanley Technology 532.59 -.03%
Transports 4,275.02 +2.38%
Utilities 425.02 +.78%
Put/Call .53 -39.08%
NYSE Arms 1.13 +8.69%
Volatility(VIX) 13.31 -4.45%
ISE Sentiment 187.00 +1.63%
US Dollar 88.10 +.17%
CRB 343.72 -.31%

Futures Spot Prices
Crude Oil 66.74 -.48%
Unleaded Gasoline 173.30 -.65%
Natural Gas 8.60 -.94%
Heating Oil 180.76 -.52%
Gold 558.90 +.14%
Base Metals 165.06 +.77%
Copper 214.90 -.16%
10-year US Treasury Yield 4.39% +.81%

Leading Sectors
Steel +7.48%
Airlines +3.27%
Oil Tankers +2.95%

Lagging Sectors
Networking -.93%
Oil Service -1.03%
Drugs -1.29%

Evening Review
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In Play

Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on (UTX), (ACLS), (SYMC) and (EMC).

Afternoon/Evening Headlines
Bloomberg:
- The WB and UPN television broadcast networks, which have failed to improve their audience ratings, will merge to form the CW Television Network to lure younger viewers.
- Advanced Micro Devices(AMD) won more than 20% of the market for chips to run personal computers for the first time in more than four years, snatching sales from Intel Corp.(INTC).
- One in 13 California homes sold for more than $1 million last year as more condominiums and new homes surged past the million-dollar mark.
- Google(GOOG) passed Intel(INTC) and IBM(IBM) to become the world’s second-most valuable technology company after Microsoft(MSFT).
- Corning(GLW) posted a fourth-quarter loss on tax-related expenses and issued a first-quarter forecast that fell short of some analysts’ estimates.
- Intuitive Surgical(ISRG)will replace Siebel Systems(SEBL) in the Nasdaq 100 prior to the market open on Feb.1.

CNBC:
- Johnson & Johnson(JNJ) may make a bid for ImClone Systems(IMCL), said Josh Kosman, consulting editor for Mergermarket.

Women’s Wear Daily:
- Eddie Bauer Holdings, the outdoor apparel retailer with 399 stores, may be purchased by VF Corp.(VFC) or a private equity firm.

TechWeb.com:
- Grade school students, parents and teachers at Freehold Borough School District in New Jersey are undergoing digital iris scans as a way of identifying them before letting them onto school grounds.

BOTTOM LINE: The Portfolio finished higher today on gains in my Semi longs, Internet longs, Biotech longs, Energy-related shorts and Retail longs. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was positive today as the advance/decline line finished higher, sector performance was mostly positive and volume was above average. Measures of investor anxiety were mostly lower into the close. Overall, today's performance was pretty good for the bulls as the major averages and breadth finished near session highs even without leadership from tech and energy. Small-caps continue to outperform substantially with the Russell 2000 now up 6.7% already for the year. This is comparable to the best performing emerging market indices, with much less risk in my opinion. I expect volatility to increase tomorrow as shorts capitulate or longs take profits after the recent bounce.

Stocks Higher Into Final Hour as Oil Declines and Irrational Pessimism Over Earngings Subsides

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Biotech longs, Retail longs and Semi longs. I added to my PLAY long and NBR short, thus leaving the Portfolio 75% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are gaining and volume is above average. Measures of investor anxiety are mostly lower. The Johnson Redbook same-store sales index rose 3.3% year-over-year last week vs. a 3.1% rise the prior week. This week's gain is up from a 1.5% increase in late April, and it's the 38th week in a row that the index has risen 3% or more. Retail sales continue to remain healthy, despite higher oil prices. A healthy labor market, low long-term interest rates, falling energy prices and rising stock prices should cushion any weakness this year related to a slowing housing market. I expect US stocks to trade modestly higher from current levels into the close on short-covering.

Today's Headlines

Bloomberg:
- FedEx Corp.(FDX) will buy its joint venture partner in China for $400 million as the country’s economic expansion boosts demand for the transport of goods.
- ImClone Systems(IMCL) may put itself up for sale after it replaced CEO Frost and said its fourth-quarter earnings were half as much as analysts estimated.
- Janus Capital(JNS) named David Corkins to run its $11.2 billion flagship Janus Fund, which has trailed rivals under manager Blaine Rollins.
- The US Senate Judiciary Committee, voting 10-8, cleared the way for the full Senate to consider confirming Supreme Court nominee Samuel A. Alito Jr. to succeed retiring Justice Sandra Day O’Connor.
- Steve Klinsky, a former partner at buyout firm Forstmann Little, is raising $750 million for a hedge fund to invest in companies and lobby for changes to boost their share prices.

Wall Street Journal:
- DaimlerChrysler AG(DCX) is likely to say today that it plans to reduce management staff by about a fifth.
- NY-based Pfizer(PFE) finds the task of seeking to stem the tide of counterfeit drugs coming out of China without alienating officials there to be a careful balance.
- US forces in Iraq are working to build up the confidence and efficiency of Iraqi troops as part of an administration effort to hand over military control to local units.

NY Times:
- Walt Disney(DIS) may announce today plans to acquire Pixar Animation(PIXR) for $7 billion in stock.

Focus-Money:
- Volkswagen AG is working on a hybrid diesel engine that will be ready for market in 2008, citing an unidentified Volkswagen manager.

Moscow Times:
- Boeing Co.(BA) expects to do $3 billion worth of business in Russia in the next five years, 20% more than in the last five years, citing Michael Cave, Boeing vp for airplane programs.

Xinhua News Agency:
- About two-thirds of Chinese aluminum producers lost money in the first eleven months of 2005 because of a domestic glut and rising costs of alumina, the main raw material, citing the National Development and Reform Commission.

Interfax:
- Russia replaced 61% of the oil it extracted last year and 110% of the gas it produced, the first time in 15 years that gas reserves grew faster than output, citing the resources agency.
- OAO Gazprom will invest $1.5 billion in oil and gas projects with Uzbekistan’s state energy company, citing Uzbek President Karimov.