Mid-day Report

S&P 500 1,184.62 -.47%
NASDAQ 2,081.24 -.75%

Leading Sectors
Broadcasting +.29%
HMOs +.24%
Energy +.21%

Lagging Sectors
Biotech -1.63%
Iron/Steel -1.97%
Semis -2.37%

Other
Crude Oil 45.65 +.71%
Natural Gas 6.05 -1.85%
Gold 422.30 +.62%
Base Metals 120.49 +1.29%
U.S. Dollar 82.97 -.46%
10-Yr. T-note Yield 4.24% -.55%
VIX 13.21 -.15%
Put/Call .90 +16.88%
NYSE Arms 1.87 +96.84%
ISE Sentiment 218.00 +36.25%

Market Movers

Economic Data
None of note.

Recommendations
-Goldman Sachs: Reiterated Outperform on MCK, GILD and UTX. Reiterated Underperform on UTX.
-Banc of America: Downgraded CHIR, target $30, and REGN, target $4, to Sell. Rated APH Buy, target $41.
-UBS: Cut AMD to Reduce, target $12. Rated DRL Buy, target $60.
-Legg Mason: Raised AT to Buy, target $65.
-CSFB: Raised DF to Outperform, target $37.
-Morgan Stanley: Cut HPQ to Sell.
-Raymond James: Raised SLNK to Strong Buy, target $21.
-Thomas Weisel: Raised DVA to Outperform. Raised RCI to Outperform.
-Deutsche Bank: Raised ROK to Buy, target $55.
-Merrill Lynch: Raised NTAP to Buy, target $40. Raised GCT to Buy, target $14.50.
-JP Morgan: Cut AWA to Underweight.

Mid-day News
U.S. stocks are lower mid-day on weakness in technology shares and continued profit-taking in small-caps. About 43% of individuals with investable assets of more than $10 million lack a will, the Wall Street Journal reported, citing a study of 792 affluent Americans. Ameritrade Holding is offering a basic trading program for $5, about half its regular fee, Dow Jones Newswires reported. The discovery of oil in an area of the Gulf of Mexico controlled by Cuba could help Fidel Castro’s government as it tries to use hard currency for more than buying oil from abroad, the NY Times reported. Shares of Apollo Investment Corp.(AINV), which buys loans, debt and stock in private companies, have risen 11% this year as the company takes advantage of parent Apollo Advisors, the NY Daily News reported. Phelps Dodge Corp. temporarily shut a copper-rod facility in Norwich, Connecticut, after a fire at the plant, American Metal Market reported. President Bush has picked federal appeals court judge Michael Chertoff to be the new secretary of the US Homeland Security Department, the AP reported. Vail Resorts has collected about $50 million in deposits from about 500 buyers interested in 52 condominiums planned for construction at Vail Mountain, the Denver Post reported. The US Supreme Court let a circuit court decision stand that will permit victims of a 1999 shooting at a Jewish community center in California to sue the manufacturers of the perpetrator’s guns, the LA Times reported. Canada has found its third case of mad cow disease, Reuters reported. Nortel Networks completed a restatement of results from 2001 to 2003 and said 12 executives will repay the company about $8.6 million in bonuses they got based on the incorrect figures, Bloomberg said. The 12 South Asian nations hit by the Dec. 26 earthquake and tsunami have enough food to meet emergency needs of an estimated two million people, the UN said. Israeli Prime Minister Sharon spoke today by telephone with Mahmoud Abbas, the newly elected Palestinian Authority president, reviving a dialogue between Israelis and Palestinians that broke down in summer 2003, Bloomberg said. Relief efforts are successfully preventing outbreaks of disease in the aftermath of last month’s Asian tsunami disaster, Bloomberg reported. Harvard Management, which manages $22.6 billion for Harvard University, said CEO Meyer will leave the company and form a private investment firm, Bloomberg reported. The storms battering California have dumped more than 8 feet of snow on the Sierra Nevada since the weekend, the most to fall on the mountains in almost 90 years, closing highways and increasing fears of an avalanche, Bloomberg said. Health spending in the US rose at the slowest rate in seven years in 2003, Bloomberg reported. Apple Computer CEO Jobs introduced the first Macintosh computer priced under $500 in the machine’s 21-year history to expand sales of the line, Bloomberg said. The NYSE received a dual blow as seat prices dropped below $1 million and American International Group, one of its biggest companies, said it will also list its shares on an all-electronic market, Bloomberg reported.

Bottom Line: The Portfolio is slightly lower mid-day as losses in my networking, retail and internet longs are more than offsetting gains in my steel and auto parts shorts. I exited a few longs this morning, bringing the Portfolio back to 50% net long. The tone of the market is poor again today as the advance/decline line is weak and the major indices break down through their recent trading range. Steel stocks are underperforming and I expect this to continue in the intermediate-term. The market’s reaction to Intel’s report after the close will tell a lot about psychology. After recent declines, semis should at least bounce on this report. If not, further losses for the major indices should be expected. US stocks will likely trade mixed-to-weaker into the close.

Tuesday Watch

Earnings of Note
Company/Estimate
INTC/.31
NT/-.04
MTB/1.59

Splits
CMC 2-for-1
MDC 13-for-10

Economic Data
None of note.

Recommendations
None of note.

Late-Night News
Asian indices are mostly higher on strength in automaker shares in the region. US Treasury Secretary Snow said the Bush administration believes the dollar's value should be set by markets, according to Reuters. Shanghai's power shortages may worsen this year as electricity demand will continue to rise, while new power plants won't start operating until next year, National Business Daily reported. Man GroupPlc, the world's largest publicly traded hedge-fund company, may issue a quarterly trading statement tomorrow, the Financial Times said. Israeli Prime Minister Sharon will meet Mahmoud Abbas, who won the Jan. 9 election for Palestinian Authority president, in the next few days, Haaretz reported. Yahoo! will release a related program to scan personal computers for documents and e-mail, following Google and Microsoft, Bloomberg said. China's exports rose 33% to a record in December, widening the trade surplus to an all-time high, as consumers in the US, Europe and Japan bought more Chinese-made clothes, cell phones and computers, Bloomberg reported.

Late-Night Trading
Asian Indices are unch. to +.75% on average.
S&P 500 indicated -.04%.
NASDAQ 100 indicated unch.

BOTTOM LINE: I expect U.S. equities to open modestly lower in the morning on a continuation of today's afternoon weakness. However, stocks should rise later in the day on lower energy prices, short covering and bargain-hunting. The Portfolio is 75% net long heading into tomorrow.

Monday Close

S&P 500 1,190.25 +.34%
NASDAQ 2,097.04 +.40%

Leading Sector
Homebuilders +2.04%
HMOs +1.93%
Biotech +1.17%

Lagging Sectors
Gaming -.79%
Telecom -.80%
Airlines -.97%

Other
Crude Oil 45.39 +.13%
Natural Gas 6.23 +1.15%
Gold 420.40 +.17%
Base Metals 118.95 -.08%
U.S. Dollar 83.35 -.30%
10-Yr. T-note Yield 4.27% +.09%.
VIX 13.23 -1.93%
Put/Call .77 -18.95%
NYSE Arms .95 -24.6%
ISE Sentiment 218.00 +36.25%

After-hours Movers
SCSS +6.71% after boosting 4Q guidance.
ROK +8.02% after substantially boosting 1Q guidance.
TSRA +8.5% after raising 4Q estimates.
DNA -4.2% after missing 4Q estimates.

Recommendations
Goldman Sachs reiterated Outperform on DNA, FSH, CMX, TRI and DTV.

After-hours News
U.S. stocks finished modestly higher today as oil prices fell and homebuilding stocks rose. After the close, Ford Motor CEO Padilla told CNBC that incentives by auto sellers have become a "way of life" and show no signs of ending any time soon. Huawei Technologies, China's top phone-equipment maker, plans to quadruple its annual sales overseas to $10 billion by 2008 through expansion and acquisitions, the Financial Times reported. Overweight people sleep almost two hours less each week than their slimmer counterparts and the conditions appear to be related, according to a study in today's edition of the Archives of Internal Medicine. Alcoa, the world's biggest aluminum maker, said fourth-quarter profit fell 7.9% because of costs to sell some businesses and the weaker US dollar, Bloomberg reported. Genentech said fourth-quarter profit rose 63%, boosted by its Avastin cancer drug, Bloomberg said. Lenovo Group won US antitrust approval to acquire IBM's personal computer business to become the world's No. 3 PC manufacturer, Bloomberg said.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my internet, semiconductor and homebuilding longs. I did not trade in the afternoon, thus leaving the Portfolio 75% net long. The tone of the market deteriorated again this afternoon, however the major indices were able to maintain gains. The major US indices have stabilized over the last 4 days. While I expect stocks to stage a rally over the next few days, I am not ruling out another push lower as complacency remains high. I will remain flexible and trade accordingly.

Monday Watch

S&P 500 1,190.25 +.34%
NASDAQ 2,097.04 +.40%

Leading Sector
Homebuilders +2.04%
HMOs +1.93%
Biotech +1.17%

Lagging Sectors
Gaming -.79%
Telecom -.80%
Airlines -.97%

Other
Crude Oil 45.39 +.13%
Natural Gas 6.23 +1.15%
Gold 420.40 +.17%
Base Metals 118.95 -.08%
U.S. Dollar 83.35 -.30%
10-Yr. T-note Yield 4.27% +.09%.
VIX 13.23 -1.93%
Put/Call .77 -18.95%
NYSE Arms .95 -24.6%
ISE Sentiment 218.00 +36.25%

After-hours Movers
SCSS +6.71% after boosting 4Q guidance.
ROK +8.02% after substantially boosting 1Q guidance.
TSRA +8.5% after raising 4Q estimates.
DNA -4.2% after missing 4Q estimates.

Recommendations
Goldman Sachs reiterated Outperform on DNA, FSH, CMX, TRI and DTV.

After-hours News
U.S. stocks finished modestly higher today as oil prices fell and homebuilding stocks rose. After the close, Ford Motor CEO Padilla told CNBC that incentives by auto sellers have become a "way of life" and show no signs of ending any time soon. Huawei Technologies, China's top phone-equipment maker, plans to quadruple its annual sales overseas to $10 billion by 2008 through expansion and acquisitions, the Financial Times reported. Overweight people sleep almost two hours less each week than their slimmer counterparts and the conditions appear to be related, according to a study in today's edition of the Archives of Internal Medicine. Alcoa, the world's biggest aluminum maker, said fourth-quarter profit fell 7.9% because of costs to sell some businesses and the weaker US dollar, Bloomberg reported. Genentech said fourth-quarter profit rose 63%, boosted by its Avastin cancer drug, Bloomberg said. Lenovo Group won US antitrust approval to acquire IBM's personal computer business to become the world's No. 3 PC manufacturer, Bloomberg said.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my internet, semiconductor and homebuilding longs. I did not trade in the afternoon, thus leaving the Portfolio 75% net long. The tone of the market deteriorated again this afternoon, however the major indices were able to maintain gains. The major US indices have stabilized over the last 4 days. While I expect stocks to stage a rally in the near-term, I am not ruling out another push lower as complacency remains high. I will remain flexible and trade accordingly.

Mid-day Report

S&P 500 1,194.36 +.69%
NASDAQ 2,110.65 +1.06%

Leading Sectors
Homebuilders +2.76%
Disk Drives +2.51%
Biotech +2.16%

Lagging Sectors
Gaming -.30%
Telecom -.70%
Airlines -.74%

Other
Crude Oil 46.80 +3.02%
Natural Gas 6.34 +5.65%
Gold 419.80 +.05%
Base Metals 118.95 -.08%
U.S. Dollar 83.29 -.37%
10-Yr. T-note Yield 4.28% +.28%
VIX 13.03 -3.41%
Put/Call .84 -11.58%
NYSE Arms .84 -33.33%
ISE Sentiment 221.00 +38.13%

Market Movers
FOX +9.4% after News Corp. offered to buy out minority holders of Fox Entertainment for $5.86 billion to solidify control over its largest US asset.
TASR -10.2% on continuing worries over accounting, safety and insider selling.
APPX +33.9% after the make of generic injectable medicines won US approval to sell a new form of a drug for advanced breast cancer.
STIY +11.0% after announcing Roy C. Cuny, former President and CEO of Smith & Wesson, has joined Stinger Systems as President and will serve on the Board.
DJO +14.1% after raising 4Q guidance.
ALNY +14.0% after scientists demonstrated positive in vivo efficacy data from the company’s pre-clinical program to develop Direct RNAi therapeutics for the treatment of respiratory syncytial virus infection.
PPC +11.33% after boosting 1Q estimates.
DECK -6.5% on profit-taking after boosting 4Q guidance.
NGPS -9.68% on continued profit-taking.
*Homebuilders up across the board on positive comments from multiple firms on underlying fundamentals.

Economic Data
Wholesale Inventories for November rose 1.1% versus estimates of a .7% increase and a 1.1% rise in October.

Recommendations
-Goldman Sachs: Reiterated Outperform on BBY, HD, BAX, AMT, WLP, AMGN, DNA and GILD.
-Citi SmithBarney: Is negative on Autos and Auto Suppliers heading into Detroit Auto Show, lowered estimates on GM, AXL, DCN and DPH. Upgraded PAY to Buy, target $30. Reiterated Buy on BAC, target $57. Reiterated Buy on BK, target $37. Reiterated Buy on WB, target $60. Said pullback in semi-equipment stocks is buying opportunity, favorites are LRCX and AMAT. Rated NRGY Buy, target $32. Reiterated Buy on DE, target $82. Reiterated Buy on WMT, target $65. Upgraded SPRT to Buy, target $8.50. Rated PBI Buy, target $51. Reiterated Buy on CMCSK, target $34. Citi reiterated Sell on SNDK, target $21.
-Banc of America: Upgraded JNY to Buy, target $44. Rated WRNC Buy, target $26.
-UBS: Downgraded TEU to Reduce, target $12. Rated HOV Buy, target $67. Raised AINV to Buy, target $18.
Bear Stearns: Raised SYNA to Outperform.
Thomas Weisel: Raised FLSH to Outperform.
Legg Mason: Rated AINV Buy, target $19.

Mid-day News
U.S. stocks are higher mid-day on a bounce from last week’s sell-off and strength in the homebuilding sector. Comcast plans to market an Internet phone service to 15 million homes by the end of this year, marking one of the biggest challenges so far to US phone companies, the Wall Street Journal said. US dentists have started to earn more money than doctors by avoiding some of the limitations imposed on physicians’ fees by health insurance and by marketing cosmetic and other optional care, the Wall Street Journal reported. Campbell Soup, General Mills and Kraft Foods are among US foodmakers who are trying to cut sugar content, and add vitamins or whole grain to products in hopes of convincing parents to buy their processed foods, the Washington Post said. Alltel Corp. CEO Ford told CNBC the company will become the largest wireless provider in rural parts of the US with its $4.42 billion purchase of Western Wireless, Bloomberg reported. General Motors has attracted a broader customer base, including younger buyers, with its “red hot” Cadillac brand, CEO Wagoner told CNBC. The apartment vacancy rate improved somewhat in 4Q as the low cost of mortgages encouraged people to buy instead of rent and much construction caused an oversupply, the Wall Street Journal reported. The cost of goods leaving British factories fell .4% in December, the biggest monthly drop since 2001, led lower by prices for scrap metal, computers and petroleum products, Bloomberg said. Crude oil is jumping to its highest level in six weeks after stormy weather forced Royal Dutch/Shell to halt output at a North Sea field, bringing Norway’s idled production to 12% for a fourth day, Bloomberg said. Movie Gallery agreed to buy Hollywood Entertainment for $13.25 a share, or about $850 million, Bloomberg said. Microsoft is offering a 25% license-fee discount to PeopleSoft customers who sign up for Microsoft’s Business Solutions services, Bloomberg reported. UnitedHealth Group, Humana and other health insurers lost a US Supreme Court bid to stop a class-action lawsuit that claims 600,000 doctors were underpaid for treating patients, Bloomberg said. Viacom’s CBS said it fired four employees for a September report by news anchor Dan Rather questioning President Bush’s National Guard Service, according to a statement issued by the network. UN officials ignored early warnings that humanitarian goods shipped to Iraq were given cursory inspections, a condition that US investigators say may have helped Saddam Hussein siphon large sums of money from the effort, Bloomberg reported. Saudi Arabia cut the amount of crude oil allocated for February shipments to companies that operated global refining systems, compared with supplies for January, Reuters reported.

Bottom Line: The Portfolio is higher mid-day on gains in my homebuilding, internet and semiconductor longs. I added a few new longs from various sectors this morning, thus bringing the Portfolio to 75% net long. One of my new longs is GS and I am using a $103 stop-loss on the position. The tone of the market is better today as advancers are handily outpacing decliners. Small-caps and tech are outperforming. However, volume is below levels seen during last week’s sell-off. As well, investor anxiety measures are falling again and energy prices are rising into mild weather, which are negatives. I expect US stocks to trade mixed-to-higher into the close.

Monday Watch

Earnings of Note
Company/Estimate
AA/.41
DNA/.22

Splits
LSTR 2-for-1
MTH 2-for-1

Economic Data
Wholesale Inventories for November estimated up .7% versus a 1.1% rise in October.

Weekend Recommendations
Wall Street Week w/Fortune had guests that were positive on WFMI and DF. Bulls and Bears had guests that were positive on C, PKX, CX, TWX, GS, FITB, mixed on NKE, TTF, DE and negative on PFE. Forbes on Fox had guests that were positive on JWN, WMT, DG, EL, COST and WAG. Cashin' In had guests that were positive on KO, UTSI and mixed on SIRI. Barron's had positive comments on DBD and BLK. Goldman Sachs reiterated Outperform on INTC, WLP and MUR. Goldman reiterated Underperform on DE. Business Week had a negative article on the New York Times(NYT).

Weekend News
JetBlue Airways, a low-fare carrier, may offer shuttle flights between Boston and New York, challenging Delta Air Lines and US Airways Group, the Boston Globe reported. Molson Inc. and Adolph Coors executives are planning last-minute meetings with investors next week to muster votes for the companies' proposed merger, the Globe and Mail reported. Procter & Gamble, Estee Lauder and Unilever are turning to new technology to enable their skin care products to get around the body's resistance to chemicals and foreign objects, the NY Times reported. Barclays Plc and Wells Fargo held merger talks in October and November and may resume them after a break for Christmas, Reuters said. Nissan Motor of Japan will start making gasoline-electric hybrid sedans in the US next year, the Wall Street Journal reported. The BBC's share of the UK's television audience fell 4.5% in 2004 to its lowest level in years, the Observer reported. Mittal Steel, set to become the world's largest steel maker, may buy steel mills in Turkey, India, the Czech Republic, Poland and China, South Africa's Business Times reported. Virgin Group Ltd. may make as much as $1 billion through the sale of shares in its US mobile-phone unit Virgin Mobile USA, the Sunday Telegraph said. A stock exchange for trading shares in companies of six Arab states will open in the second quarter near Cairo, said Egypt's Business Monthly. Microsoft Chairman Gates will visit Egypt on Jan. 29 to study the participation of his company in a project to offer government services on line, Al-Ahram reported. The UK will announce that it is sending 650 more troops to Iraq to provide extra security before elections scheduled for Jan. 30, the Sunday Telegraph reported. The UK government has contacted US companies Bechtel Group and Lockheed Martin about buying British Nuclear Group, the Independent reported. UN internal reviews of the program to use Iraqi oil revenue to buy food and medicine found a former aide to Secretary General Kofi Annan didn't monitor closely enough the companies hired to inspect the oil leaving and the goods going into the country, the NY Times reported. Hines Interests LP plans to build a 50-story office tower in downtown Chicago, a move that may contribute to increasing office vacancies in the city, the Chicago Tribune reported. US IPOs last year almost equaled the previous three years combined, the NY Times reported. Palestine Liberation Organization Chairman Mahmoud Abbas won 66% of the vote in today's presidential election, the AP reported. Blackstone Group LP's Columbia House unit, the biggest US distributor of home videos, will start an adult-video club at the end of this month to increase sales in the adult-video industry that has $5 billion in annual sales, the NY Post reported. Teco Electric & Machinery forecast prices for liquid-crystal display televisions will fall about 28% this year, the Commercial Times reported. High oil prices were of a temporary nature and the market's insecurity is now over, the London-based Times said, citing an interview with BP Plc CEO Browne. Marsh & McLennan may be near to agreeing a $1 billion settlement with US regulators in connection with charges that it defrauded clients, the Independent said. News Corp. Chairman Rupert Murdoch is expected to say today that he will buy out shareholders of his Fox properties for about $7 billion, the NY Times reported. United Airlines reached a tentative agreement with its flight attendants' union yesterday that keeps the employee pension plan intact, Bloomberg said. Toyota, Nissan and Honda are aiming to sell more pick-up trucks, sport-utility vehicles and so-called crossovers in the US this year to increase share, Bloomberg reported. Eastman Kodak's new EasyShare-One camera, the first that can send photos without a computer, will appeal to a small number of consumers at first because of its $800 price, Bloomberg said. China's economy will probably expand this year at its slowest pace since 2001 as the government curbs lending and raises interest rates to cool industrial expansion, Bloomberg reported. Ford Motor plans to expand its fleet of gasoline-electric hybrid vehicles as part of CEO Ford's renewed efforts to make cleaner vehicles, Bloomberg said. The price paid for ships to be scrapped and turned into recycled steel rose to a record in Bangladesh last week on expectations reconstruction following the Dec. 26 Tsunami may boost steel demand, Bloomberg said.

Late-Night Trading
Asian indices are high, +.25% to +.50% on average.
S&P 500 indicated +.14%.
NASDAQ 100 indicated +.16%

BOTTOM LINE: I expect U.S. stocks to open modestly higher in the morning on a bounce after last week's sell-off. The Portfolio is 50% net long heading into the week.

Weekly Outlook

There are a few important economic reports and some significant corporate earnings reports scheduled for release this week. Economic reports include (Mon.)-Wholesale Inventories (Tues.)-None of note (Wed.)-Trade Balance, Monthly Budget Statement (Thur.)-Import Price Index, Advance Retail Sales, Initial Jobless Claims (Fri.)-Producer Price Index, Business Inventories, Industrial Production, Capacity Utilization. Advance Retail Sales, Industrial Production and the Producer Price Index all have market-moving potential.

Mon.-Alcoa(AA), Genentech(DNA) Tues.-Intel(INTC), Nortel Networks(NT) Wed.-Apple Computer(AAPL) Thur.-Sun Microsystems(SUNW) Fri.-Delta Air Lines(DAL), QLogic Corp.(QLGC) and Rambus Inc.(RMBS) are some of the more important companies that release quarterly earnings this week. There are also a number of other events that have market-moving potential. The Citigroup Entertainment, Media and Telecom Conference(Sun.-Wed.), the Consumer Electronics Assoc. Conference(Sun.-Wed.), the Needham Growth Conference(Tue.-Fri.), the Fed's Kohn speaking(Sun.), the Fed's Yellen speaking(Sun.), the Fed's Guynn speaking(Mon.), the JP Morgan Healthcare Conference(Mon.-Thur.), the Deutsche Bank Real Estate Conference(Thur.) and the Fed's Poole speaking(Thur.) could also impact trading this week.

Bottom Line: I expect U.S. stocks to finish the week higher on strong earnings/economic reports, lower energy prices, a stabilizing US dollar, short-covering and bargain-hunting. While weakness will probably re-surface in the near future, a decent bounce should occur next week. Technology shares should outperform on optimism from the Consumer Electronics Show. US economic growth will likely begin to decelerate modestly over the next few months on slowing growth in Asia and Europe, an end to the benefits of hurricane rebuilding, less stimuli and lingering overcapacity issues from the 90's. However, a stabilizing US dollar, lower long-term interest rates, decelerating inflation, lower energy prices and continuing job/income gains should offset most of the drags on US growth. I expect the major US indices to trade mixed-to-modestly higher through the first six months of the year before another significant rise sometime beginning in the 3rd quarter. My short-term trading indicators are still giving Sell signals and the Portfolio is 50% net long heading into the week.

Market Week in Review

S&P 500 1,186.19 -2.12%

Click here for the Weekly Wrap by Briefing.com.

Bottom Line: Market action last week was poor as the S&P 500 had its worst 5-day start to a year since 1991 on profit-taking, fears over slowing global growth and hawkish comments by the Fed. Weakness in small-caps, commodity-related stocks and tech shares was the most pronounced. Volume was relatively heavy and decliners swamped advancers on the week. Most of the major indices seemed to find support around their 50-day moving-averages. From an intermediate-term standpoint, the market still appears very healthy technically. On the positive side, the steepest declines were confined to the biggest winners of last year. As well, the CRB Index fell again, the US dollar posted a significant gain and long-term interest rates were stable. Measures of investor anxiety rose on the week, but remain below levels normally associated with solid bottoms. Walgreen(WAG+8.2%), American International Group(AIG+2.9%) and Wal-Mart(WMT+2.2%) were stand-out performers in the S&P 500.

Economic Week in Review

ECRI Weekly Leading Index 131.40 -1.79%

Construction Spending for November fell .4% versus estimates of a .4% rise and a .3% increase in October. "Construction of all types is still strong, particularly given that November was a month in which the weather did not cooperate," said Neal Soss, chief economist at Credit Suisse First Boston. The month was the fifth-wettest November in US history, according to records dating back to 1895. Construction spending was up 6.9% over the same month in 2003, Bloomberg reported.

ISM Manufacturing for December rose to 58.6 versus estimates of 58.5 and a reading of 57.8 in November. ISM Prices Paid for December fell to 72.0 versus estimates of 72.0 and a reading of 74.0 in November. "The economy was accelerating at the end of the year and into the new year," said Robert Mellman, an economist at JP Morgan. Falling energy prices "are raising real incomes of consumers and making business a little less cautious." The new orders component of the index surged to 67.4, the highest since January of last year, from 61.5 in November, Bloomberg said. The report showed commodity prices were the biggest concern among manufacturers. The CRB Index, the broadest measure of commodity prices, has declined 4.2% since the last week in November. The ISM index averaged 60.5 last year, the highest yearly average since 65.9 in 1973, Bloomberg reported.

Factory Orders for November rose 1.2% versus estimates of a 1.0% increase and an upwardly revised .9% increase in October. Orders would have been even stronger if it were not for the 32% slump in demand for defense equipment, a volatile part of the report, Bloomberg said. Without military hardware, bookings rose 2.3%, the most since March. Bookings waiting to be filled jumped 1.1%, the most since July, suggesting production will accelerate early this year and boost economic growth. "Business confidence about the economy is rising," said Joel Naroff, president of Naroff Economic Advisors. Naroff was the best GDP forecaster for the year ended in June, according to a Bloomberg survey. Bookings waiting to be filled for capital equipment, excluding aircraft, increased .6%. "Its unfilled orders that are the stronger piece of this report," said Neal Soss.

The Federal Reserve's Open Market Committee concluded interest rates were still too low "to keep inflation stable" and said rising prices may become a risk to growth, according to minutes of its Dec. 14 meeting, Bloomberg reported. Treasury securities and stocks declined on the news, Bloomberg said. Some members were concerned about potential signs of "excessive risk-taking" amid low rates, citing credit spreads and increasing numbers of mergers and initial public offerings, the minutes said. "With the economic expansion firmly entrenched, cost and price pressures are likely to become a clearer intermediate-term risk to sustained good economic performance absent further reduction of accommodation," the minutes said.

Total Vehicle Sales for December rose to 18.4M versus estimates of 16.9M and 16.4M in November. Domestic Vehicle Sales in December rose to 14.7M versus estimates of 13.5M and 12.9M in November. Toyota Motor, Nissan Motor and Honda Motor said December US auto sales soared more than 20%, leading the industry to its highest sales rate since no-interest loans restarted the market after the 9/11 attacks, Bloomberg said. "It was a lot stronger month than most people expected," said Sasha Kamper, who helps manage $65 billion at Principal Global Investors. "There really is a heck of a lot of pent-up demand out there," said Robert Hinchliffe, a UBS Securities analyst. "It's a good time for vehicle sales overall, but the Big Three just keep losing market share."

ISM Non-Manufacturing for December rose to 63.1 versus estimates of 61.0 and a reading of 61.3 in November. US services expanded in December at the fastest pace in five months, capping a record year for the biggest part of the economy, Bloomberg reported. Orders accelerated and more companies said they were adding to inventories to meet rising demand, according to the survey. Retailers' sales surged 4.6% in the week after Christmas. This gain amounted to the biggest increase in six months and helped retailers meet a December forecast for a gain of as much as 3.5% at stores open at least a year, Bloomberg reported. "Consumer Spending, fueled by expectations of sustained income growth, should continue to expand at something near the strong pace we have been seeing," said Jeffrey Lacker, president of the Federal Reserve Bank of Richmond.

The Unemployment Rate for December was 5.4% versus estimates of 5.4% and 5.4% in November. Average Hourly Earnings in December rose .1% versus estimates of a .2% increase and a .1% gain in November. The Change in Non-farm Payrolls for December was 157K versus estimates of 175K and an upwardly revised 137K in November. The Change in Manufacturing Payrolls for December was 3K versus estimates of 0K and a downwardly revised –9K in November. Average Weekly Hours for December were 33.8 versus estimates of 33.8 and 33.7 in November. Job gains for October and November were revised higher by a combined 34,000, bringing the total for 2004 to 2.23 million, the best showing since before the stock market bubble burst and the economy began to plunge into recession in 2000, Bloomberg reported. Moreover, manufacturers added 76,000 jobs for the year, the best since 1997. "We have enough job growth to continue to give us income creation, which will help support consumer spending," said Joseph LaVorgna, chief US fixed income economist at Deutsche Bank. "The economy is in good shape and it's really steady as she goes."

Bottom Line: Overall, last week's economic data were positive. Construction will likely slow in 2005, but remain at healthy levels as long-term interest rates remain low by historic standards. Measures of manufacturing accelerated into year-end and should help boost US growth during the first quarter of '05. Prices Paid should fall through most of the first-half of the year as commodity prices weaken further and pricing power remains limited. The Fed's hawkish comments had a substantial negative effect on US financial markets. However, I believe these comments were a reflection of their desire to stem the rate of decline in the US dollar. I do not believe the Fed will raise rates in '05 at the rate the market currently expects. Weaker global growth, a stabilizing US dollar and decelerating inflation readings will prompt the Fed to slow their pace of increases. The very strong gain in vehicle sales in December and good holiday retail sales once again proves the bears incorrect in their obsessive worries over the demise of the US consumer. As long-term interest rates remain low, inflation readings decelerate, income gains continue and increasing employment is sustained, the US consumer should remain relatively healthy in the intermediate-term. In my opinion, the 157,000 jobs created in December is a perfect level for the health of the US economy. Gains consistently under 100,000 would hurt consumer spending and sustained increases above 200,000 would boost unit labor costs. Since unit labor costs are by far the greatest component of inflation, this would result in substantially higher interest rates. The only real negative from last week's data was the abrupt decline in the ECRI Weekly Leading Index. I would become concerned if this index continued to decline at this rate.

Weekly Scoreboard*

Indices
S&P 500 1,186.19 -2.12%
Dow 10,603.96 -1.66%
NASDAQ 2,088.61 -3.99%
Russell 2000 613.21 -5.89%
DJ Wilshire 5000 11,629.17 -2.70%
S&P Equity Long/Short Index 1,007.81 -.79%
Morgan Stanley Consumer 583.13 -1.30%
MS Cyclical 762.97 -2.70%
MS Technology 484.65 -4.53%
Transports 171.42 -3.49%
Utilities 324.68 -3.07%
Put/Call .95 +53.23%
NYSE Arms 1.26 +5.0%
Volatility(VIX) 13.49 +1.51%
ISE Sentiment 160.00 -24.88%
AAII % Bulls 38.10 -33.92%
US Dollar 83.60 +3.39%
CRB 278.86 -1.79%

Futures Spot Prices
Gold 419.60 -4.29%
Crude Oil 45.43 +4.80%
Unleaded Gasoline 121.42 +7.83%
Natural Gas 6.00 -2.26%
Heating Oil 127.33 +1.70%
Base Metals 119.05 -5.26%
10-year US Treasury Yield 4.27% +1.18%
Average 30-year Mortgage Rate 5.77% -.69%

Leading Sectors
Insurance -.46%
HMOs -1.32%
Wireless -1.51%

Lagging Sectors
Networking -6.45%
Iron/Steel -7.06%
Airlines -13.98%

*% Gain or loss for the year

Mid-day Report

S&P 500 1,189.81 +.16%
NASDAQ 2,097.30 +.35%

Leading Sectors
Semis +1.90%
Boxmakers +1.19%
Internet +.73%

Lagging Sectors
Energy -.31%
Gaming -.63%
Oil Service -1.26%

Other
Crude Oil 45.75 +.42%
Natural Gas 6.02 -.48%
Gold 417.90 -.90%
Base Metals 119.05 +1.59%
U.S. Dollar 83.78 +.76%
10-Yr. T-note Yield 4.27% +.14%
VIX 13.27 -2.28%
Put/Call .67 -14.10%
NYSE Arms 1.02 +22.89%
ISE Sentiment 150.0 -32.43%

Market Movers

Economic Data
Unemployment Rate for December remained at 5.4% versus estimates of 5.4% and a prior reading of 5.4%.
Average Hourly Earnings for December rose .1% versus estimates of a .2% increase and a .1% rise in November.
Change in Non-farm Payrolls for December was 157K versus estimates of 175K and an upwardly revised 137K in November.
Change in Manufacturing Payrolls for December was 3K versus estimates of 0K and a downwardly revised -9K in November.
Average Weekly Hours for December was 33.8 versus estimates of 33.8 and 33.7 in November.

Recommendations
-Goldman Sachs: Reiterated Outperform on RIG, DO, SII, BHI, SLB, ROH, INTC, MRVL and LIZ. Downgraded BMC to Underperform.
-Citi SmithBarney: Said to Buy Chemicals on pullback, favorites are DOW, NCX and LYO. Remains bearish on commercial aerospace sector. Reiterated Sell on BA, target $40. Reiterated Buy on MSFT, target $32.
-CSFB: Rated AGU Outperform, target $18.
-JP Morgan: Rated LABS, PDLI and MEDX Overweight. Raised SHPGY, SYMC to Overeweight. Cut SUN to Underweight.
-Legg Mason: Rated WEN Buy, target $46.
-Banc of America: Rated HRB Sell, target $42.
-Bear Stearns: Downgraded DE to Underperform.
-Morgan Stanley: Downgraded OVNT, CNF to Underweight. Raised FDX, UPS to Overweight.
-Oppenheimer: Rated CAO Buy, target $18.50.

Mid-day News
U.S. stocks are modestly higher mid-day on strength in the semiconductor sector and a jobs report that met most expectations. US office vacancy rates dropped to 16.2% from 16.6% in the fourth quarter as more companies snapped up space, the Wall Street Journal reported. Rents were unchanged for the second quarter in a row at an annual $20.11 a square foot, the paper said. Scientists at Pfizer said they may have found a simple test to diagnose for Parkinson’s disease, the Wall Street Journal reported. A “sharp” increase in US government spending on military research programs is expected to boost total funding for research and development in the country this year, the Wall Street Journal reported. Burlington Resources CFO Shapiro told CNBC the price of crude oil may be $30-$40/bbl. by the end of the year, Bloomberg said. MedImmune has sold only about 1 million doses of its FluMist nasal spray after it increased the number of doses to 3 million amid reports of a shortage of flu vaccine, the AP reported. Crude oil prices may fall next week as warmer-than-normal weather in the eastern US cuts demand for heating fuel and refineries boost supplies, according to a survey by Bloomberg. Shares of Taser International are dropping after the company said the SEC is looking into its products’ safety and a recent order, Bloomberg reported. A growing number of Krispy Kreme shareholders are seeking the ouster of CEO Livengood, Bloomberg reported. President Bush picked former Senators Mack and Breaux to head a nine-member panel of former lawmakers, business owners and tax experts that will recommend ways to overhaul the US tax code, Bloomberg said. Tiffany & Co., the largest US luxury jewelry retailer, said holiday sales increased 12% as demand for diamond jewelry and watches rose, Bloomberg reported. The US dollar rose against the euro for a sixth straight day after Treasury Secretary Snow said members of the Bush administration “want to do things to sustain the strength” of the US currency, Bloomberg reported. US employers added 157,000 workers in December, capping the best year for job growth since before the stock market bubble burst and the economy began plunging into recession in 2000, Bloomberg reported.

Bottom Line: The Portfolio is slightly lower mid-day as losses in my security and homebuilding longs more than offset gains in my internet and networking longs. I added a few new technology longs this morning, thus bringing the Portfolio to 25% net long. One of my new longs is JNPR and I am keeping a tight stop-loss of $25.10 on this position. The tone of the market remains weak today as more stocks are declining than advancing as small-caps fall and a number of sectors are lower. However, it is a positive to see semiconductors outperform substantially. While the US dollar likely has further to go on the upside, I do not expect such a rally as to substantially damage multi-national corporate profits. I expect US stocks to rise modestly into the close on short-covering and bargain-hunting in the tech sector.

Friday Watch

Earnings of Note
Company/Estimate
BLUD/.11
SGR/.14

Splits
CCJ 3-for-1

Economic Data
Unemployment Rate for December estimated at 5.4% versus 5.4% in November.
Average Hourly Earnings for December estimated up .2% versus a .1% increase in November.
Change in Non-farm Payrolls for December estimated at 175K versus 112K in November.
Change in Manufacturing Payrolls for December estimated at 0K versus a loss of 5K in November.
Average Weekly Hours for December estimated at 33.8 versus 33.7 in November.
Consumer Credit for November estimated at $6.0B versus $7.7B in October.

Recommendations
Goldman Sachs reiterated Outperform on CZN, ACN, FORM, CSCO, GLW, MMM, MDT, DD, ROH, XOM, AHC, PFE, AGN and Underperform on DCLK, PSS, DDS, MAY, HBAN. Share of Marathon Oil(MRO) may rise more than 35% this year as the company is an attractive acquisition target for ChevronTexaco and Total SA and has "bright prospects" in Libya, Russia and West Africa, Business Week reported. Shares of Movado Group(MOV) may rise as the market for luxury goods expands, Business Week reported. Cornell Cos.(CRN) may be worth as much as $20 a share in a buyout, Business Week reported.

Late-Night News
Asian indices are mostly lower on weakness in electronics shares in the region. France may change its legal code to allow class-action lawsuits, the Financial Times reported. Boeing and Lockheed Martin rockets will be used to launch US government satellites at least through the end of the decade, the Wall Street Journal reported. Toyota Motor plans to assemble Camry sedans with gasoline-electric engines at its Kentucky plant starting in 2005, the Yomiuri newspaper reported. Adelphia Communications is unlikely to be sold in one piece to buyout firms, which may not want to pay the $17.5 billion sought by an Adelphia creditor, the Wall Street Journal reported. Avantest Corp., the world's biggest maker of gear used to test computer memory chips, received more orders in the fiscal third quarter than its $391 million forecast, CEO Oura said. The dollar headed for its biggest weekly gain against the euro in more than five months in Asia on optimism a jobs report today will bolster the case for higher interest rates, Bloomberg said. Unocal Corp. shares had their biggest gain in almost six years after the Financial Times said China National Offshore Oil Corp., China's third-biggest oil company, may bid more than $13 billion for the U.S. energy producer, Bloomberg reported. Greek shipping companies First Financial, Golden Energy Management SA, Drytank SA plan to sell shares to finance new vessels, betting that demand from China will boost freight rates after a slump since November, Bloomberg said. Oil & Natural Gas Corp., India's biggest oil explorer, is in talks to purchase assets of OAO Yukos Oil Co., Bloomberg said. GM, Ford, Toyota and other automakers recalled a record 30.7 million vehicles in the US last year, increasing costs and further diminishing public perception of auto quality, Bloomberg said. Sprint Corp. and Virgin Group Ltd. may sell shares of their Virgin Mobile USA joint venture, the Wall Street Journal reported.

Late-Night Trading
Asian Indices are -1.0% to +.50 on average.
S&P 500 indicated -.08%.
NASDAQ 100 indicated -.03%.

BOTTOM LINE: I expect U.S. equities to open modestly lower in the morning as interest rates rise on a better-than-expected employment report or worries increase over slowing growth on a below-expectations report. However, a below-expectations report may spur a rally later in the day as interest rates fall. The Portfolio is market neutral heading into tomorrow.

Thursday Close

S&P 500 1,187.89 +.35%
NASDAQ 2,090.00 -.06%

Leading Sectors
Gaming +1.98%
Oil Service +1.88%
Energy +1.80%

Lagging Sectors
Internet -.89%
Software -1.63%
Airlines -2.34%

Other
Crude Oil 45.35 -.46%
Natural Gas 6.03 -.31%
Gold 422.00 +.09%
Base Metals 117.19 -1.29%
U.S. Dollar 83.08 unch.
10-Yr. T-note Yield 4.26% unch.
VIX 13.58 -3.62%
Put/Call .78 -16.13%
NYSE Arms .83 -27.83%
ISE Sentiment 222.00 +11.56%

After-hours Movers

Recommendations

After-hours News

BOTTOM LINE: The Portfolio finished unchanged today as gains in my networking and homebuilding longs offset losses in my steel and software shorts. I added to a few of my existing longs and shorts in the afternoon, thus leaving the Portfolio market neutral. The tone of the market weakened again this afternoon on lighter volume. Most measures of investor anxiety remain low and technology shares underperformed substantially. I continue to believe any near-term rally will be short-lived until complacency falls.

Mid-day Report

S&P 500 1,188.13 +.37%
NASDAQ 2,094.29 +.20%

Leading Sectors
Energy +2.16%
Oil Service +2.01%
Biotech +1.48%

Lagging Sectors
Internet -.77%
Software -99%
Airlines -2.12%

Other
Crude Oil 45.25 +4.29%
Natural Gas 5.92 +1.49%
Gold 422.20 -1.19%
Base Metals 118.72 +1.32%
U.S. Dollar 83.11 +.68%
10-Yr. T-note Yield 4.27% -.18%
VIX 13.61 -3.69%
Put/Call .88 -5.38%
NYSE Arms .98 -13.91%
ISE Sentiment 226.0 +13.57%

Market Movers
SYMC -5.95% on multiple downgrades due to competition from MSFT.
WWCA +14.29% on speculation of buyout by Alltel(AT) -3.51%.
STIY +34.0% on optimism for its stun gun.
ANTP +14.96% on rebound from recent fall.
ANN +12.34% on optimism over Dec. same-store-sales and outlook.
CHS +11.1% after reporting strong Dec. same-store-sales and 2-for-1 split.
PNRA +15.4% on strong Dec. same-store-sales and Piper Jaffray upgrade to Outperform.
GTRC +9.9% after boosting 4Q forecast.
AEOS +6.0% on strong Dec. same-store-sales.
HELE +9.5% after beating 3Q estimates and affirming 4Q outlook.
BKST -15.63% on weak holiday same-store-sales and Southwest Securities downgrade to Neutral.
NWY -12.8% after cutting 4Q and 05 forecasts.
MSM -6.9% on profit-taking after meeting 1Q estimates and lowering 2Q outlook.
TGT -4.89% after cutting 4Q growth estimates.
ARO -7.07% on disappointing Dec. same-store-sales and multiple downgrades.
CPWM -7.6% after lowering 4Q guidance.

Economic Data
Initial Jobless Claims for last week were 364K versus estimates of 331K and a downwardly revised 321K the prior week.
Continuing Claims were 2840K versus 2779K prior.

Recommendations
-Goldman Sachs: Reiterated Outperform on CAT, IBM, IR, BBY, PFE, MDT, KSS, MSFT and Underperform on AG, CNH, IHR, MHX, MAY.
-Citi SmithBarney: Upgraded ELX to Buy, target $20.50. Said to Buy CPO now on weakness before earnings report, target $57. Reiterated Buy on EXTR, target $11. Reiterated Buy on FFIV, target $60. Reiterated Buy on FDRY, target $15. Reiterated Buy on RDWR, target $32. Reiterated Buy on JNPR, target $36. Reiterated Buy on AA, target $42. Reiterated Buy on SEBL, target $12.
-JP Morgan: Rated BK Overweight.
-Deutsche Bank: Rated POWI Buy, target $23.
-Morgan Stanley: Raised STN to Overweight, target $66. Rated CLF Overweight. Rated RSAS Overweight, target $21. Rated SYMC Underweight, target $22. Rated CHKP Underweight, target $17.
-Bear Stearns: Raised MDT Outperform.
-Banc of America: Raised IPXL to Buy, target $21.
-Oppenheimer: Rated WGII Buy. Raised CL to Buy, target $61.

Mid-day News
U.S. stocks are modestly higher mid-day on strength in energy-related stocks and lower interest rates. Apple Computer is being sued for allegedly violating antitrust laws with its iTunes online music store, which doesn’t work with digital music players other than the company’s iPod, Reuters reported. Audiovox Electronics, Pioneer Electronics and Alpine Electronics are among companies likely to benefit from increased demand for car navigation systems that help drivers avoid traffic congestion, the Wall Street Journal said. Investment returns on university and foundation endowments rose to 14.7% in the fiscal year ended June 2004, the best results in four years, the Wall Street Journal reported. Six Apart, which makes the Moveable Type software to publish Blogs, bought Danga Interactive, which publishes the LiveJournal.com Web log site, the NY Times reported. A joint session of the US Congress plans today to certify the presidential election results, and Senator Kerry said he would not participate in a possible protest by Democrats, the NY Times reported. Honeywell Intl. was sued by the state of Illinois for polluting the air after two accidental releases of toxic gas from a plant in southern Illinois, the AP reported. US Airways reached an agreement with its machinists union, which is expected to be ratified in the next few weeks, CNBC said. American Airlines and four other US carriers matched Delta Air Lines lower prices on some flights and dropped other restrictions, Bloomberg reported. US retailers including Wal-Mart and Saks posted the second-biggest holiday sales gain of the last five years after a late shopping surge lifted December sales, Bloomberg said. Microsoft released a free tool to erase spyware programs and will offer a virus-removal program, Bloomberg reported. Crude oil is rising after the Iranian and Qatari oil ministers signaled that OPEC may follow through on output cuts promised last month, Bloomberg said. The US dollar is rising against the euro for a fifth day, the longest rally in more than a year, on optimism faster US job growth will bolster the case for higher interest rates, Bloomberg reported.

Bottom Line: The Portfolio is unchanged mid-day as gains in my internet and networking longs are offsetting losses in my software and steel shorts. I have not traded today and the Portfolio is still market neutral. The tone of the market is better, but not good. Advancers are outpacing decliners modestly and volume is lighter. Technology stocks are underperforming the broad market. Measures of investor anxiety are mostly lower today, however the AAII % Bulls plunged to 38.1% this week, which is a positive. I expect US stocks to trade modestly higher into the close on short-covering ahead of tomorrow’s employment report.

Thursday Watch

Earnings of Note
Company/Estimate
ACN/.31
STZ/.85
EMMS/.28
SCHN/1.30

Splits
None of note.

Economic Data
Initial Jobless Claims for last week estimated at 331K versus 326K the prior week.
Continuing Claims estimated at N/A versus 2732K prior.

Recommendations
Goldman Sachs reiterated Outperform on DHR, IBM, FS, HOT, ACH and MDT. Goldman reiterated Underperform on ELX.

Late-Night News
Asian indices are mostly lower on declines in technology shares in the region. Harrah's Entertainment's planned joint venture with Gala Group, Britain's largest bingo club owner, to build eight casinos in the UK has ended, the London-based Times said. Taiwan, aiming to prod the development of its semiconductor and flat-panel display industries, plans to cut taxes for companies that invest in more advanced-production technology, the Commercial Times reported. Taiwan plans to sell 130 million Taiwan Semiconductor Manufacturing shares in the US this year, the Commercial Times said. Drug industry associations in the US, Europe and Japan may today pledge to publish more data on clinical trial of their drugs on the Internet, the Financial Times said. Michael Newdow, an atheist who won a lawsuit challenging the phrase "under God" in the Pledge of Allegiance, filed a new lawsuit in California to stop public schools from making students recite the pledge, the AP reported. Saudi Television Manufacturing plans this month to start selling the first mobile telephone made in Saudi Arabia with features such as Muslim prayer times in more than 5,000 cities worldwide, Arab News reported. Lakshmi Mittal, one of Britain's richest men, may suffer from a fall in steel prices as he puts together the world's biggest steelmaker, the Wall Street Journal reported. Microsoft may supply television software to Bell South and will work with TiVo to play recorded TV on phones and portable devices, part of Microsoft's efforts to sell more programs for consumer electronics, Bloomberg said.

Late-Night Trading
Asian Indices are -1.25% to -.25% on average.
S&P 500 indicated +.11%
NASDAQ 100 indicated +.19%.

BOTTOM LINE: I expect U.S. equities to open modestly lower in the morning on weakness in Asia and continuing worries over slowing global growth. While a bounce could occur at any time, another push lower is likely before a solid trading bottom is in place. The Portfolio is market neutral heading into tomorrow.

Wednesday Close

S&P 500 1,183.74 -.36%
NASDAQ 2,091.24 -.79%

Leading Sectors
HMOs +1.08%
Defense +.36%
Insurance +.18%

Lagging Sectors
Iron/Steel -1.71%
Broadcasting -1.78%
Airlines -5.81%

Other
Crude Oil 43.35 -.09%
Natural Gas 5.82 -.21%
Gold 427.30 unch.
Base Metals 118.72 +1.32%
U.S. Dollar 82.54 +.02%
10-Yr. T-note Yield 4.28% -.18%.
VIX 14.09 +.79%
Put/Call .93 +22.37%
NYSE Arms 1.15 -53.82%
ISE Sentiment 199.0 -22.57%

After-hours Movers
ELX +4.27% after boosting 2Q forecast.
HOTT +8.18% after reporting better-than-expected December same-store-sales.
OTEX +10.10% after boosting 2Q estimates substantially.
AGIX -6.2% after saying it had been contacted by the SEC and the NASD about an informal inquiry into the company’s Sept. 27 announcement of study results and related trading.
SBUX -3.6% after December same-store-sales failed to meet expectations.

Recommendations
Banc of America upgraded IPXL to Buy.

After-hours News
U.S. stocks finished lower today on continued weakness in small-cap, technology and commodity-related shares. After the close, Toyota Motor Corp. plans to introduce industrial robots at all 12 of its factories in Japan to address anticipated labor shortages caused by the country’s declining birthrate, Nikkei English News reported. The US-led “core group” of nations set up in the aftermath of the Dec. 26 tsunami flood disaster will be dissolved tomorrow as the UN takes control of the international relief effort, the Financial Times reported. Amazon.com’s UK division plans to offer products from across “the entire retail segment,” the London-based Times said. Economists Lawrence Kudlow, who served in former President Reagan’s administration and is a CNBC commentator, will head a panel to reform New York State’s tax code, NY Governor Pataki said. Campbell Soup said it is boosting the price of some soups and other US products by about 4.8% effective Feb. 28, Bloomberg said. Babies born extremely prematurely often suffer from mental and physical problems when they reach school age, according to a study to be publish in the New England Journal of Medicine, Bloomberg said. Pfizer’s Lipitor and Bristol-Myers Squibb’s Pravachol cholesterol drugs reduce inflammation levels, decreasing another risk factor for heart attacks and strokes, according to two studies in the Jan. 6 New England Journal of Medicine. Priceline.com said COO Truwit resigned to take a job with Cendant Corp., Bloomberg reported. UN Secretary-General Annan will ask governments today for $977 million to lead a record relief effort for the Asian tsunami victims, two weeks after calling 2004 a “horrible” year for the UN, marked by the Iraqi Oil-for-food scandal and sexual misconduct allegations, Bloomberg reported. CNN may cancel its political debate show “Crossfire” and will not renew the contract of conservative host Tucker Carlson, the AP reported.

BOTTOM LINE: The Portfolio finished unchanged today as my declining commodity-related shorts offset losses in my technology longs. I added a few new technology shorts in the afternoon, thus leaving the Portfolio market neutral(longs-shorts=0). One of my new shorts is HYSL and I am using a $47.25 stop-loss on this position. The overall tone was again weak with decliners handily outpacing advancers on good volume. Measures of investor anxiety remained mixed. I expect another push lower within the next few days that will likely mark a trading bottom.

Mid-day Report

S&P 500 1,191.84 +.32%
NASDAQ 2,111.23 +.16%

Leading Sectors
HMOs +1.55%
Telecom +.98%
Disk Drives +.87%

Lagging Sectors
Broadcasting -1.19%
Iron/Steel -1.34%
Airlines -5.68%

Other
Crude Oil 43.30 -1.39%
Natural Gas 5.83 -1.22%
Gold 427.30 -.44%
Base Metals 118.72 +1.32%
U.S. Dollar 82.43 -.12%
10-Yr. T-note Yield 4.26% -.64%
VIX 13.35 -4.58%
Put/Call 1.04 +36.84%
NYSE Arms .82 -67.07%

Market Movers
TARR +23.3% after affirming 04 and raising 05 guidance.
EDLG +22.7% after CIT Group agreed to buy it for $19.05/share.
KERX +21.2% after saying its experimental KRX-101 drug for the treatment of kidney damage in diabetics was safe in a study.
TOO +13.0% after raising 4Q guidance.
LCRD +13.2% on optimism over homeland security products.
AFFX +5.9% after pre-announcing 4Q.
JWN +4.2% on strong December same-store-sales.
ANTP -20.1% after saying its backlog of orders fell.
NGPS -10.5% on continued profit-taking.
RGS -9.2% after lowering 2Q and 05 forecasts.
BMHC -11.7% on profit-taking.
ACH -5.7% on worries over falling aluminum prices.
*Airlines down across the board on pricing concerns.

Economic Data
ISM Non-Manufacturing for December rose to 63.1 versus estimates of 61.0 and a reading of 61.3 in November.

Recommendations
-Goldman Sachs: Reiterated Outperform on KO, DO, SVU, CEN and BSX. Reiterated Underperform on LSI and FRX. Said to Buy Jan. 05 $65 calls and Sell Jan. 05 $70 calls on AAPL before next week’s earnings and MacWorld.
-Citi SmithBarney: Downgraded JBX to Sell, target $34. Reiterated Buy on MCD, target $36. Reiterated Buy on PFCB, target $68. Reiterated Buy on SBUX, target $70. Reiterated Buy on SYY, target $42. Reiterated Buy on AINV, target $18. Reiterated Buy on CIT, target $50. Reiterated Buy on F, MGA and BWA. Reiterated Buy on TXT, target $83. Reiterated Buy on INTU, target $54. Reiterated Buy on MCRL, target $13.50. Reiterated Buy on FON, target $27.
-CSFB: Raised CINF to Outperform. Rated AGP Outperform, target $90. Rated NPSP Outperform, target $28. Rated VRTX Outperform, target $16.
-Morgan Stanley: Raised CRM to Overweight, target $21. Rated ASO Overweight, target $26. Rated BEC Overweight, target $77.
-Wells Fargo: Raised AMD to Buy, target $27.
-Lazard Freres: Cut MEDI to Sell, target $21.
-Merrill Lynch: Cut ESPD, DAL, AAI to Sell.
-Banc of America: Raised PG to Buy, target $62. Cut CL to Sell, target $44.
-Raymond James: Raised CCI to Strong Buy, target $19.

Mid-day News
U.S. stocks are mildly higher mid-day on falling interest rates and oil prices. Iraq’s national elections, scheduled for Jan. 30, will be held on time, Prime Minister Allawi said today, according to Agence France-Presse. The Consumer Electronics Show, which holds its media day today and likely will draw 130,000 to the exposition, has attracted a large audience of consumers and executives alike to Las Vegas, the NY Times reported. Morningstar Inc. is the subject of three reviews by regulators after 20 years without scrutiny, the Wall Street Journal reported. United Airlines’ creditors and some banks and unions oppose an agreement the bankrupt airline reached with pilots to terminate employee pension plans in exchange for equity in the carrier, the NY Times reported. The tsunami that struck Asian coastlines last week may cause delays in shipments of coffee, cocoa, sugar and cotton and lead to price increases, the NY Post reported. Pamela Thomas-Graham, the president of CNBC, may resign because of poor ratings, the NY Post reported. IBM and customers including Sony plan to invest $1.9 billion to build a semiconductor plant in Fishkill, NY, Reuters said. Massachusetts companies are optimistic about the economy and may hire more people in 2005, the Boston Globe reported. Sanford Wallace, know as the “Spam King,” agreed to stop sending spyware programs until a federal lawsuit against him is resolved, the AP said. EchoStar Communications will increase monthly subscription rates for satellite television packages by as much as $4 starting next month, the Rocky Mountain News reported. The Bush administration is beginning a campaign to change US laws on frivolous medical-malpractice and class-action lawsuits that raise the cost of healthcare, the Washington Post reported. A three-year rally in global commodity markets is faltering and prices may drop for the next six months or more, Barclays Capital said. Delta Air is cutting domestic air fares by as much as 50% in an effort to win back passengers from low-fare competitors and recover from more than $6 billion in accumulated losses, Bloomberg said. Nordstrom said sales rose 11.7% for the five-week period ending Jan. 1 compared with a year ago, Bloomberg said. Bonds of Halliburton may gain after reaching a $4.7 billion settlement of asbestos-damage claims, allowing two units to emerge from bankruptcy, Bloomberg reported. AIG said it will raise the company’s dividend by two-thirds after profits surged, Bloomberg reported. US services expanded at a stepped-up pace in December, capping a record year for the economy’s largest segment, Bloomberg said. RealNetworks will provide a free radio service to Comcast’s 6.5 million high-speed Internet users to gain customers, Bloomberg reported. Sirius Satellite Radio said it plans to offer a video service in automobiles with Microsoft next year and expects to create several channels with children’s programming, Bloomberg said. GlaxoSmithKline, Novartis and Johnson & Johnson may be potential buyers of Bristol-Myers Squibb’s consumer-products business, which includes the Excedrin and Bufferin headache medicines, Bloomberg reported. Oil prices dropped after a government report showed that US fuel inventories rose last week, signaling that a mild winter is helping ease demand for heating oil, Bloomberg said.

Bottom Line: The Portfolio is slightly higher mid-day as my steel and chemical shorts are declining and my internet longs are rising. I have not traded today and the Portfolio is still 25% net long. The tone of the market is weak again as the advance/decline line remains negative, volume is relatively heavy and small-caps continue to underperform. Measures of investor anxiety are mixed and not at levels normally associated with bottoms. However, an oversold rally could occur at any time. I expect US stocks to rise into the close on short-covering, falling energy prices and declining interest rates.

Wednesday Watch

Earnings of Note
Company/Estimate
LFB/.19
MON/.13
NDC/.06
RI/.30

Splits
None of note.

Economic Data
ISM Non-Manufacturing for December estimated at 61.0 versus 61.3 in November.

Recommendations
UBS raised DNA to Buy, target $67. Citi SmithBarney cut CHL to Sell.

Late-Night News
Asian indices are lower on worries over slowing global growth and comments from the US Fed. Samsung Electronics sees global semiconductor sales growing at a "stable" rate in 2005, on demand for chips that go into consumer electronics, the Korea Herald reported. The Bush administration is developing a Social Security proposal that would allow younger workers to invest almost two-thirds of their share of federal payroll taxes in private accounts, the AP reported. Motorola and four other companies yesterday submitted bids for the construction of CAT Telecom Plc's $332 million mobile-phone network expansion across Thailand, the Bangkok Post reported. China Southern Airlines plans to buy 20 Boeing 7E7 planes to be put into operation during the 2008 Olympic Games in Beijing, the Beijing News reported. Six US congressmen will head for North Korea's capital, Pyongyang, on Jan. 11, as part of visits to nations involved in trying to persuade North Korea to dismantle its nuclear weapons program, JoongAng Ilbo newspaper reported. The four major US companies providing local telephone service asked a federal appeals court to rapidly consider their challenge to rules allowing competitors to lease networks to serve businesses, Reuters said. Bristol-Myers Squibb is in talks to sell its over-the-counter medicines business for as much as $1 billion, the NY Times reported. BMW AG used a 22% rise in December sales to top Volkswagen's namesake brand in the US for the second time since Volkswagen began its US sales in 1949, Bloomberg reported. Shares of Honda Motor rose after the company's sales in the US increased 35% last month, Bloomberg said. The Australian dollar is falling the most in almost a month after a plunge in the price of metals the country exports such as aluminum and copper, Bloomberg said. Dongfeng Motor Group, China's fourth-largest automaker, may raise as little as $500 million from its first overseas share sale, half the original goal, after auto stocks slumped, Bloomberg reported. UBS AG surpassed Citigroup as the biggest underwriter of US municipal bonds last year, Bloomberg said.

Late-Night Trading
Asian Indices are -1.25% to -.25% on average.
S&P 500 indicated unch.
NASDAQ 100 indicated +.06%.

BOTTOM LINE: I expect U.S. equities to open mixed in the morning and to move higher later in the day on an oversold bounce, decline in energy prices and fall in interest rates. The Portfolio is 25% net long heading into tomorrow.

Tuesday Close

S&P 500 1,188.05 -1.17%
NASDAQ 2,107.86 -2.06%

Leading Sectors
Tobacco +.11%
Restaurants -.13%
Hospitals -.23%

Lagging Sectors
Networking -3.45%
Defense -3.59%
Airlines -6.79%

Other
Crude Oil 43.68 -.52%
Natural Gas 5.95 +.73%
Gold 428.10 -.26%
Base Metals 117.17 -6.76%
U.S. Dollar 82.50 -.02%
10-Yr. T-note Yield 4.29% +.09%.
VIX 13.98 -.71%
Put/Call .76 unch.
NYSE Arms 2.49 +87.22%

After-hours Movers

Recommendations

After-hours News

BOTTOM LINE: The Portfolio finished lower today on losses in my technology, security and biotechnology longs. I did not trade in the afternoon, thus leaving the Portfolio 25% net long. The tone of the market worsened throughout the day as volume remained heavy and the advance/decline line finished at its lows. While a short-term bounce is likely near-term, measures of investor anxiety are not yet at levels normally associated with bottoms. As well, some technical damage is being done that will need time to repair.

Mid-day Report

S&P 500 1,196.23 -.49%
NASDAQ 2,121.58 -1.42%

Leading Sectors
Oil Service +.90%
Energy +.55%
Restaurants +.50%

Lagging Sectors
Defense -3.12%
Semis -3.18%
Airlines -5.03%

Other
Crude Oil 43.65 +3.63%
Natural Gas 5.94 +2.59%
Gold 428.50 -.28%
Base Metals 117.17 -6.76%
U.S. Dollar 82.36 +1.30%
10-Yr. T-note Yield 4.24% +.69%
VIX 14.01 -.50%
Put/Call .65 -14.47%
NYSE Arms 1.53 +15.04%

Market Movers
AMZN -5.7% on Citi SmithBarney downgrade to Sell.
KVHI +11.7% on Janco Buy rating.
ROV +14.0% after agreeing to buy lawn-and-garden products manufacturer United Industries for $475 million.
TONS +11% on short-squeeze.
LPNT +5.2% on Bear Stearns upgrade to Outperform.
SONC +6.68% after beating 1Q estimates and reiterating 2Q guidance.
CHIR +4.7% on Deutsche Bank upgrade to Buy.
TCNO +9.94% after agreeing to be acquired by UGS PLM Solutions for $227.7 million.
RDA +9.96% after saying it paid down approximately $200 million in debt in the Fiscal 2005 second quarter.
BCSI +7.9% on Pacific Growth upgrade to Overweight.
RFIL -18.7% on profit-taking after yesterday’s gains.
NGPS -17.57% on profit-taking.
ZOLL -13.22% after cutting 1Q and ’05 estimates.
VLTR -11.36% on profit-taking.
DRIV -8.95% on profit-taking and AMZN downgrade.

Economic Data
Factory Orders for November rose 1.2% versus estimates of 1.0% and an upwardly revised rise of .9% in October.

Recommendations
-Goldman Sachs: Reiterated Outperform on CAL and WAG.
-Citi SmithBarney: Cut AMZN to Sell, target $40.
-CSFB: Added LLY to Focus List. Removed GCI from Focus List.
-UBS: Downgraded DPH to Reduce, target $6. Rated BMCS Reduce.
-Bear Stearns: Cut UNP to Underperform, target $65. Raised LPNT to Outperform, target $43
-Deutsche Bank: Raised CHIR to Buy, target $42.
-CIBC: Downgraded KNTA to Sector Underperform.
-Morgan Stanley: Rated IM, TECD Underweight.

Mid-day News
U.S. stocks are lower mid-day on higher energy prices/interest rates, profit-taking and weakness in technology shares. Morgan Stanley will lease space in lower Manhattan, returning to the area for the first time since 2001, the NY Times reported. Motorola is installing phone headsets into motorcycle helmets and ski apparel, enabling people to ski or drive while talking, the Wall Street Journal reported. Walt Disney, GE’s NBC and News Corp.’s Fox plan to roll racier and more complex television serials in the next few weeks to replace programs that flopped in the fall, the Wall Street Journal reported. The number of US companies increasing dividends rose 7.2% last year, buoyed by cash flows and a change in tax law, the NY Times reported. Job prospects for graduating college seniors are improving as the US economy improves, the Wall Street Journal reported. The US Department of Homeland Security has met a congressional deadline to establish a new fingerprint identification system at the nation’s 50 busiest land ports of entry, the Washington Times said. O’Hare International Airport handled a record 992,471 flights in 2004 as traffic from smaller jets continues to increase, the Chicago Tribune said. New Jersey Acting Governor Codey will propose using $500 million in state funds to invest in stem cell research, the Star-Ledger reported. A shareholder lawsuit accused Krispy Kreme Doughnuts of doubling shipments to wholesalers at the end of quarters to boost its sales, the AP reported. The pharmaceutical industry is starting a program that will help poor New Jersey residents get prescription drugs at discount prices or for free, the Star-Ledger reported. DaimlerChrysler AG and competitors claim steel companies including ThyssenKrupp AG are charging too much for the metal they supply to Germany’s car industry, Capital reported. Priceline.com could be the target of a takeover, an Internet analyst at S&P told CNBC. The Mexican government is distributing a book with safety tips to people planning to cross illegally into the US, the LA Times reported. Krispey Kreme Doughnuts will restate its 2004 earnings amid a federal investigation into its accounting and may default of a $150 million credit line, Bloomberg said. China cut its money supply growth target for 2005 to curb inflation and slow expansion in the world’s fastest-growing major economy, the People’s Bank of China said. The US dollar rose the most since August against the euro after an acceleration in manufacturing growth spurred optimism the US economy will outpace the 12-nation euro region for the fourth straight year, Bloomberg reported. Ford Motor said US vehicle sales rose 1% in December from a year earlier on sales of new cars, while Nissan Motor said sales rose 38%, Bloomberg reported. Crude oil in New York rose on speculation that declining production will make it harder for refiners to meet rising fuel demand, Bloomberg said. Aluminum prices in London plunged the most in more than 17 years and copper fell on speculation that investors are reducing holdings as Chinese demand for metals slows, Bloomberg said. Orders placed with US factories rose in November by the most in four months, paced by improving demand for commercial aircraft and business equipment, Bloomberg said. Sales surged 4.6% in the week after Christmas at US retailers as shoppers bought discounted items and redeemed gift cards, Bloomberg said.

Bottom Line: The Portfolio is lower mid-day on losses in my technology, biotech and security longs. I exited a number of longs this morning, thus leaving the Portfolio 25% net long. The tone of the market is very weak again today as volume is strong and decliners swamp advancers. Rather than just temporary profit-taking, it appears the major indices are in a correction. Investors are worried about a lack of stimuli with slowing global growth. Overcapacity and deflation are still more of a concern than inflation in my opinion. However, Fed comments seem to suggest otherwise, further pressuring shares. Measures of investor anxiety are not yet at levels associated with a trading bottom. My short-term trading indicators are now giving sell signals. I expect US shares to trade mixed into the close.

Tuesday Watch

Earnings of Note
Company/Estimate
DLP/-.15
FINL/.05
OXM/.51

Splits
None of note.

Economic Data
Factory Orders for November estimated to rise 1.0% versus a .5% increase in October.
Total Vehicle Sales for December estimated at 16.9M versus 16.4M in November.
Domestic Vehicle Sales for December estimated at 13.5M versus 12.9M in November.
Minutes of Dec. 14 FOMC Meeting.

Recommendations
Goldman Sachs reiterated Outperform on STZ, KO, BAX, BSX, DNA, AMLN, MDT AMGN and Underperform on HRB. Goldman said to buy the common shares and sell short the bonds of companies where the equity yield is higher than the inflation-adjusted (real) bond yield, provided the dividend is secure.

Late-Night News
Asian indices are mostly lower on losses in China and Taiwan. China is close to injecting $30 billion into Industrial and Commercial Bank of China to pave the way for the overseas listing of the country’s largest lender, the Financial Times said. Ford Motor’s Jaguar Cars unit is negotiating with its parent company over additional funds after taking a charge of $1.03 billion to cover the cost of abandoning its growth strategy, the Financial Times said. Tatung, Taiwan's fourth-largest electronics maker, is selling laptop computers under its band name for the first time in US outlets run by Wal-Mart Stores, the Commercial Times reported. Sonus Networks CEO Ahmed told CNBC that the company's accounting problems are behind it, Bloomberg reported. Lazard LLC may be near completing plans for a $3.2 billion listing on the NYSE, the London-based Times said. Defense projects headed by Lockheed Martin and Northrop Grumman represent much of the $30 billion in proposed program cuts in the US within six years, Reuters reported. Prices for uranium, used to generate 16% of the world's electricity, may rise a quarter this year as stockpiles of the nuclear fuel dwindle and reactors being built in China, India and Russia seek supplies, Bloomberg reported.

Late-Night Trading
Asian Indices are -1.25% to unch. on average.
S&P 500 indicated -.02%.
NASDAQ 100 indicated +.03%.

BOTTOM LINE: I expect U.S. equities to open modestly lower in the morning on a continuation of today's profit-taking. However, stocks will likely begin to rally later in the afternoon ahead of Friday's employment data. The Shanghai Index is breaking down through technical support tonight. I continue to believe decelerating demand from Asia and Europe, increased supply and a stabilizing US dollar will lead to underperformance in commodity-related stocks in the intermediate-term. I also expect the yield on the benchmark 10-yr. T-note to test its lows during the first half of the year on decelerating inflation readings, a stabilizing US dollar and worries over global growth. The Portfolio is 75% net long heading into tomorrow.

Monday Close

S&P 500 1,202.08 -.81%
NASDAQ 2,152.15 -1.07%

Leading Sectors
Airlines +.27%
Insurance -.27%
Telecom -.38%

Lagging Sectors
Iron/Steel -3.04%
Energy -3.48%
Oil Service -3.68%

Other
Crude Oil 42.26 +.33%
Natural Gas 5.79 unch.
Gold 430.60 +.21%
Base Metals 125.66 +.55%
U.S. Dollar 81.30 +.56%
10-Yr. T-note Yield 4.21% -.19%.
VIX 14.08 +5.94%
Put/Call .76 +22.58%
NYSE Arms 1.33 +10.83%

After-hours Movers
VLCCF -4.2% on continuing pessimism for oil-tanker stocks.
PRFT +4.95% on continuing optimism over 4Q raised guidance.
ADLR +4.6% after the drugmaker said it agreed to promote GlaxoSmithKiline's Arixtra medication to treat vein thrombosis and pulmonary embolism in the US.

Recommendations
Goldman Sachs reiterated Outperform on WAG. Goldman thinks defense spending cuts are not being factored into stocks, negative for LMT, NOC and BA.

After-hours News
U.S. stocks finished lower today on profit-taking in small-caps and commodity-related stocks. After the close, Iraqi Defense Minister al-Shaalan told Agence France-Presse the Jan. 30 elections could be moved to another date if Sunni Muslims agreed to vote. Rayovac Corp., the No. 3 US battery maker, is near a $1.5 billion agreement to buy closely held United Industries, which makes lawn and garden products, Reuters said. The average US retail price for regular-grade gasoline fell 1.3 cents the past week to $1.778 a gallon, the lowest in 9 months, the Energy Department said. Delta Air may expand to its entire network some of the lower fares and fees adopted four months ago in Cincinnati, a step an Internet travel analyst said would force rivals to follow suit, Bloomberg said.

BOTTOM LINE: The Portfolio finished lower today on losses in my small-cap technology longs. I exited a number of positions in the afternoon as they hit stop-losses, thus leaving the Portfolio 75% net long. The overall market weakened throughout the day as volume swelled and decliners swamped advancers. While today’s action was disheartening for the bulls, I am not reading too much into it at this point. Significant declines were mainly confined to stocks that have risen substantially over the last year. I will become more concerned if losses continue throughout the week, which I do not expect. On the positive side, energy prices fell, interest rates declined and measures of investor anxiety rose.

Mid-day Report

S&P 500 1,205.22 -.55%
NASDAQ 2,159.18 -.75%

Leading Sectors
Airlines +.82%
Insurance +.23%
Networking -.10%

Lagging Sectors
Iron/Steel -2.42%
Energy -3.30%
Oil Service -3.31%

Other
Crude Oil 41.55 -4.3%
Natural Gas 5.77 -6.16%
Gold 429.20 -2.1%
Base Metals 125.66 +.55%
U.S. Dollar 81.30 +.56%
10-Yr. T-note Yield 4.21% -.19%
VIX 13.97 +5.12%
Put/Call .77 +24.19%
NYSE Arms .99 -17.50%

Market Movers
RSTG +32.9% on optimism for its electric motor technology.
DCAI +17.4% on optimism over its potential growth prospects.
NIHD +5.5% on optimism for growth prospects in Latin and South America.
WAG +4.48% on better-than-expected 1Q earnings report.
WWCA +6.2% on Merrill upgrade to Buy.
BDY -16.4% on Raymond James downgrade to Market Perform.
AGIX -13.8% after a disappointing update on its AGI-1067 clinical program for the treatment of atherosclerosis in patients with coronary artery disease.
MCRS -5.4% on profit-taking.
MACR -9.4% on comments from Piper Jaffray.
*Energy-related stocks down across the board on lower energy prices and profit-taking.

Economic Data
Construction Spending for November fell .4% versus estimates of a .4% rise and a .3% increase in October.
ISM Manufacturing for December rose to 58.6 versus estimates of 58.5 and a reading of 57.8 in November.
ISM Prices Paid for December fell to 72.0 versus estimates of 72.0 and a reading of 74.0 in November.

Recommendations
-Goldman Sachs reiterated Outperform on EMC, WAG and BC. Goldman lowered BE to Underperform.
-Banc of America upgraded SPG to Buy, target $67. Banc of America raised PXLW to Buy, target $15. Banc of America upgraded MMC to Buy, target $39.
-Citi Smith Barney said they would remain sellers of oil-tanker stocks, OSG, FRO, GMR and SFL. Citi says upside not factored in at BEAS, SEBL, ASCL, INFA and SY.
-UBS cut EQY to Reduce, target $21. UBS cut GGP to Reduce, target $34.
-Morgan Stanley raised ZMH to Overweight, target $95. Morgan raised GSF to Overweight, target $45. Morgan raised CAM to Overweight, target $70.
-Raymond James upgraded WSM to Strong Buy, target $47.50.
-Merrill Lynch upgraded WWCA to Buy, target $36.
JP Morgan raised SYK to Overweight.

Mid-day News
U.S. stocks are lower mid-day on profit-taking in small-caps and declines in commodity-related stocks. Conde Nast Publications, the publisher of Vogue, will start an online shopping Web site in March after a trial of the service in September, the Wall Street Journal reported. The FBI said incidents in which laser beams were shone at commercial airplanes weren’t related to terrorist activity, USA Today reported. A US law change means more retirees can switch Individual Retirement Accounts to so-called Roth IRAs, from which they aren’t compelled to withdraw money in their lifetimes, the Wall Street Journal reported. The US trade deficit shows foreigners are investing in the US economy, and doesn’t mean Americans are living beyond their means, Arthur Lafffer, chairman of Laffer Associates, wrote in the Wall Street Journal. Economists at Eaton Corp. won the Wall Street Journal’s semi-annual economic forecasting contest, the paper reported. The “Dogs of the Dow” failed to beat the Dow’s total return in 2004, the Wall Street Journal reported. Wal-Mart Stores estimated that December sales at US stores open at least a year rose about 3%, boosted by a surge of after-Christmas shoppers, Bloomberg said. Shares of Skis Rossignol SA jumped to a four-year high after the world’s largest ski maker said its controlling shareholder is considering combining the company with California surf-equipment maker Quiksilver, Bloomberg reported. Manhattan apartment prices gained 16% in the fourth quarter as the city’s economy accelerated and incomes rose at the fastest pace in six years, Bloomberg reported. President Bush today will name two former presidents, his father George Bush and Bill Clinton, to lead a nationwide fund-raising effort to aid victims of the Asian tsunamis, a White House spokesman said. Morgan Stanley’s Wien predicts the S&P 500 will be little changed in 2005, the US dollar will extend its decline against the yen and euro and Japan’s economy will slip into recession, Bloomberg reported. Advanced Micro Devices this week will unveil a chip to let people download digital television programs from a set-top box to a portable media player, without a PC, Bloomberg reported. Crude oil in NY plunged more than $2/bbl. on the first day of trading in 2005 on warmer weather, Bloomberg reported. The US dollar rose for a second day against the euro as a report showed manufacturing grew in December, suggesting production will boost the economy in 2005, Bloomberg said. Gold in NY fell to the lowest price in two months as the dollar rallied against the euro, eroding the appeal of precious metals as an alternative investment to US stocks and bonds, Bloomberg said. US manufacturing grew at a quicker pace in December as more factories reported a rise in orders and exports increased, a sign the economy strengthened heading into 2005, Bloomberg said.

Bottom Line: The Portfolio is lower mid-day on losses in my small-cap technology long positions. I have not traded today and the Portfolio is still 125% net long. The tone of the market is weak today as volume is heavy and the advance/decline line is poor. However, most of the selling is confined to last year’s big winners. The ISM continues to show significant improvement in manufacturing. The index averaged 60.5 last year, the highest since 1973. The report showed the biggest concern among manufacturers was higher commodity prices, which are currently falling. I expect commodity prices to continue to fall through the first-half on a stabilizing US dollar, decelerating demand from Europe/Asia and increased supply. Profit-taking in small-caps, which have substantially outperformed over the last few years, will likely ebb over the coming days as historically a rising dollar and strong US economy benefits these stocks. I expect US stocks to rise from current levels into the close.

Monday Watch

Earnings of Note
Company/Estimate
NAV/1.86
SONC/.25
WAG/.29

Splits
CLF 2-for-1
LUK 3-for-2
MBT 4-for-1
NX 3-for-2

Economic Data
Construction Spending for November estimated up .4% versus 0.0% in October.
ISM Manufacturing for December estimated at 58.5 versus 57.8 in November.
ISM Prices Paid for December estimated at 72.0 versus 74.0 in November.

Weekend Recommendations
Forbes on Fox had guests that were positive on TXN, SDA, BRK/B, TOL, LEN, CTX, GE, BAC and mixed on PIXR. Cashin' In had guests that were positive on TXN, SCO, MRK, TGT, CME, mixed on CRM and negative on GG. Bulls and Bears had guests that were positive on HOV, EBAY, SIRI, CME, COCO, EQIX, LYG, WFII, mixed on MSFT, PKZ and negative on GT, AGI, MSO. Barron's had positive comments on ELN, IM and TEX. Goldman Sachs reiterated Outperform on MRVL, INTC, NSM, COH, RE, ENH. Goldman raised estimates on GOOG, YHOO and reiterated Outperform. Banc of America cut VSEA and CYMI to Sell. Forbes has 10 tech trends to watch in 2005.

Weekend News
The District of Columbia had few than 200 homicides in 2004 for the first time in nearly two decades, the Washington Post reported. The Post said experts attributed the lower homicide count to an improving economy, waning wars by gangs dealing cocaine, and a rising prison population. Walgreen, CVS Corp. and Rite Aid Corp. and other drugstores are losing some business as more corporations mandate the use of ordering drugs for chronic conditions through the mail, the NY Times reported. US military planes began bringing supplies to Phuket and other beach resorts in southern Thailand hit by the tsunami, as relief workers try to preserve the remains of the dead for identification, the NY Times reported. Rhode Island's health department has approved regulations allowing Canadian pharmacies to operate in the state, the AP reported. Braces, long considered a dental rite of passage for teenagers, are becoming more common among Americans 55 and older, the Chicago Tribune reported today. Lockheed Martin won two contracts from the US Air Force for $716 million to keep working on the F/A-22 stealth fighter-bomber amid media reports that funding for the fighter may be cut back, Reuters reported. US securities firms and investment advisers are looking forward to additional mergers and acquisitions in 2005 as companies feel more confident about the US economy, the NY Times reported. US helicopters began airlifting quake and tsunami survivors from an isolated region on the west coast of Aceh province today, Agence France-Presse reported. Malcolm Bricklin, an automotive entrepreneur, and US investment bank Allen & Co. have signed an agreement with Chery Automobile, owned by the government of eastern China's Anhui province, to import Chinese-built cars into the US, the Detroit News reported. Delta Air Lines is expected to overhaul its ticket prices and policies, including rules on Saturday-night stays, Times magazine reported. The Dept. of Homeland Security has created 18 fugitive squads to track down about 370,000 foreign nationals who never left the US after being ordered deported, the Washington Post reported. Medicare will start covering routine screening for alcoholism this week, the LA Times reported. The Dec. 26 earthquake and tsunami may have only a minor effect on the economies of Asian countries in the region, the NY Times reported. Bill Miller's $16 billion Legg Mason Value Trust beat the S&P 500 for a record 14th straight year after a holiday rally in Amazon.com shares capped a comeback for the fund, Bloomberg reported. Crude oil futures are falling tonight in NY as mild weather in the US Northeast cut heating oil demand and the New Year weekend passed without a major terrorist attack in an oil-producing country, Bloomberg said.

Late-Night Trading
Asian indices are mostly higher, -.25% to +.50% on average.
S&P 500 indicated -.05%.
NASDAQ 100 indicated -.12%.

BOTTOM LINE: I expect U.S. stocks to open modestly higher in the morning on falling energy prices, a stabilizing US dollar, more optimism and money managers putting new cash to work. The Portfolio is 125% net long heading into tomorrow.

4th Quarter Scoreboard*

Indices
S&P 500 1,211.92 +7.11%
Dow 10,783.01 +5.79%
NASDAQ 2,175.44 +12.0%
Russell 2000 651.57 +11.37%
DJ Wilshire 5000 11,951.47 +8.07%
Morgan Stanley Consumer 590.79 +8.33%
MS Cyclical 784.10 +10.37%
MS Technology 507.67 +10.44%
Transports 177.61 +14.97%
Utilities 334.95 +12.28%
Put/Call .62 -24.39%
NYSE Arms 1.20 +27.66%
Volatility(VIX) 13.29 -.38%
AAII % Bulls 57.66 +40.39%
US Dollar 80.85 -7.48%
CRB 283.90 -.38%

Futures Spot Prices
Gold 438.40 +3.86%
Crude Oil 43.45 -9.48%
Natural Gas 6.15 -23.14%
Base Metals 125.66 +3.61%
10-year US Treasury Yield 4.22% +2.43%
Average 30-year Mortgage Rate 5.81% +1.93%

Leading Sectors
Airlines +35.59%
Gaming +25.8%
Boxmakers +25.41%

Lagging Sectors
Oil Service +.62%
Telecom unch.
Wireless -2.05%

*% Gain or loss for the quarter