Market Week in Review

S&P 500 1,167.87 -.81%

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Bottom Line: The S&P 500 declined for a third straight week and is off to the worst January since 2000. Economically sensitive stocks, especially technology shares, fared the worst and the advance/decline line weakened further. Economic and earnings reports were mixed on the week, however most good news went unrewarded. There were some positives last week. Small-caps outperformed, interest rates fell, the US dollar rose, energy prices stabilized and measures of investor anxiety finally begin to increase in a meaningful way. In my opinion, the markets' recent weakness is a result of worries over the ability of the Bush administration to pass meaningful reforms, the possibility the Fed is hiking rates too much, profit-taking, slowing growth in Asia and Europe, continuing overcapacity from the 90's bubble and persistently high energy prices. I continue to expect worries over these problems to peak in the first half of the year, making for a very positive second half.

Weekly Scoreboard*

Indices
S&P 500 1,167.87 -.81%
Dow 10,392.99 -1.07%
NASDAQ 2,034.27 -1.75%
Russell 2000 611.08 +.16%
DJ Wilshire 5000 11,490.38 -.59%
S&P Equity Long/Short Index 1,009.33 +.24%
S&P Barra Growth 562.03 -.94%
S&P Barra Value 601.57 -.69%
Morgan Stanley Consumer 580.07 +.34%
Morgan Stanley Cyclical 744.67 -1.95%
Morgan Stanley Technology 464.28 -2.96%
Transports 164.35 -1.17%
Utilities 331.70 +.61%
Put/Call .83 +13.70%
NYSE Arms 1.67 +13.61%
Volatility(VIX) 14.36 +11.84%
ISE Sentiment 156.00 -.64%
AAII % Bulls 33.66 -.97%
US Dollar 83.26 +1.03%
CRB 284.17 -.34%

Futures Spot Prices
Crude Oil 48.53 +.89%
Unleaded Gasoline 129.96 +3.55%
Natural Gas 6.24 -3.41%
Heating Oil 138.37 +3.18%
Gold 427.30 +.49%
Base Metals 121.05 +1.60%
Copper 143.50 +3.91%
10-year US Treasury Yield 4.14% -1.99%
Average 30-year Mortgage Rate 5.67% -1.22%

Leading Sectors
Iron/Steel +1.98%
Oil Service +1.34%
Broadcasting +.92%

Lagging Sectors
Networking -4.21%
Wireless -4.61%
Airlines -6.68%

*% Gain or loss for the week

Mid-day Report

S&P 500 1,171.36 -.34%
NASDAQ 2,040.18 -.28%

Leading Sectors
Iron/Steel +1.47%
Oil Service +1.28%
Broadcasting +.84%

Lagging Sectors
Papers -1.22%
Disk Drives -1.83%
Airlines -3.01%

Other
Crude Oil 48.90 +3.47%
Natural Gas 6.46 +2.49%
Gold 426.70 +.97%
Base Metals 121.05 +.86%
U.S. Dollar 83.28 -.66%
10-Yr. T-note Yield 4.13% -.56%
VIX 13.85 +.22%
Put/Call .79 -16.84%
NYSE Arms 1.15 -13.64%
ISE Sentiment 172.00 +18.62%

Market Movers
EBAY +5.0% on Legg Mason upgrade to Buy and bounce from yesterday’s sell-off.
SYNA +22.7% after beating 2Q estimates and raising 3Q/4Q guidance.
CVC +10.99% after the company said it will terminate its money-losing Voom satellite-tv business and sell the service’s satellite to EchoStar Communications.
SEAB +14.38% on strong demand for IPO.
HLIT +17.02% after beating 4Q estimates and raising 1Q guidance substantially.
ACR +15.14% on strong demand for secondary.
TRID +14.99% after beating 2Q estimates.
CKFR +7.65% after beating 2Q estimates and raising 3Q outlook.
VIRL -16.62% after meeting 1Q earnings estimates and slightly missing revenue estimates.
ACS -5.82% after meeting 2Q estimates, multiple downgrades and lowering 3Q guidance.
SFA -7.06% after missing 2Q revenue estimates
JNY -4.31% after lowering 4Q and 05 forecasts.

Economic Data
Preliminary Univ. of Mich. Consumer Confidence for January fell to 95.8 versus estimates of 97.5 and 97.1 in December.

Recommendations
-Goldman Sachs: Reiterated Outperform on KSS, INTC and CSCO. Reiterated Underperform on CVC and WTW. Cut SKS to Underperform.
-Merrill Lynch: Added C to its Focus 1 List.
-CSFB: Cut ACS to Underperform, target $48.
-Deutsche Bank: Raised LRCX to Buy, target $33. Raised CVC to Buy, target $32. Raised VZ to Buy, target $40. Raised ACC to Buy, target $25.
-Citi SmithBarney: Rated AD Buy, target $50. Downgraded SXL to Sell, target $36.
-JP Morgan: Rated CNO Overweight. Raised GMST to Overweight.
-Legg Mason: Raised EBAY to Buy, target $100.
-Bear Stearns: Rated TTWO Outperform, target $40.
-Oppenheimer: Rated IPAR Buy, target $19.

Mid-day News
U.S. stocks are lower mid-day on higher energy prices, terrorism worries and economic concerns. US sales of goods over the Internet rose 29% before and during the recent holiday season, but Amazon.com’s gains may have been quite small, the Wall Street Journal reported. Taser International is boosting the power of its new X26 electric stun gun by about 14% to ensure that suspects are subdued when targeted with the device, the NY Times reported. Bond investors are seeking higher yield for their investments as interest rates remain relatively low, and are willing to take on more risk with corporate bonds than before, the NY Times reported. Russia raised its forecast for oil exports in the first quarter, Bloomberg said. Gannett Co., Lee Enterprises Inc. and Stephens Group are expected to make bids for Pulitzer Inc. by Monday, the Wall Street Journal reported. Ten people have been added to the list of those wanted for questing in the federal probe of a possible terror threat in Boston, the AP reported. Actors and Hollywood’s entertainment companies reached a three-year contract agreement that raises the performers’ pay and doesn’t give them a bigger share of revenue from DVD sales, the LA Times reported. 14 Stanford University freshmen posed naked in their dormitory for a calendar that is being sold to help raise money for Save the Children, the San Francisco Chronicle reported. General Electric said fourth-quarter profit rose 18% as acquisitions and higher demand for turbine parts and consumer loans pushed sales higher, Bloomberg reported. Hewlett-Packard will pay $141 million to Intergraph to settle a patent dispute, cutting first-quarter earnings by 3 cents a share, Bloomberg said. BP Plc will avoid doing business in Iran because of US sanctions, focusing instead on Russia, Africa and the Gulf of Mexico, Bloomberg said. US consumer confidence unexpectedly dropped for the first time in three months in early January as stock prices fell, Bloomberg said. US FCC Chairman Powell will resign after four years of struggling to loosen restrictions on media, cable and telephone companies, Bloomberg reported. Crude oil rose almost $1.50/bbl. as freezing weather in the US Northeast increased consumption of heating fuels and unrest before the Iraqi election disrupted oil shipments from the country, Bloomberg said. Goldman Sachs will merger its financing and investment-banking units, Bloomberg reported.

Bottom Line: The Portfolio is slightly higher mid-day on gains in my software, auto parts and semiconductor shorts. I added a few new shorts from various sectors this morning, thus bringing the Portfolio to market neutral(shorts-longs=0). One of my new shorts is ADBL and I am using a $25.75 stop-loss on this position. The tone of the market is moderately weak and measures of investor anxiety are mixed. As I forecasted several months ago, interest rates continue to move lower on decelerating inflation readings, a stabilizing US dollar and worries over slowing global growth. This trend will likely persist for the next several months. Oil prices should begin heading lower in the next 10 days as speculators sell ahead of the Iraqi elections and begin to anticipate warmer weather. I expect US stocks to trade mixed-to-weaker into the close.

Friday Watch

Late-Night News
Asian indices are mixed as strength in China is being offset by weakness in Japan. Intel Corp. pared its list of customers in Taiwan after changing its organizational structure to focus on its biggest computer clients on the island, the Commercial Times reported. EBay's China unit, Ebay Eachnet, had transactions valued at 740 million yuan in the fourth quarter, compared with 690 million in the previous three months, the China Daily reported. Archipelago Holdings, which operates the Archipelago Exchange stock-trading network, may buy Reuters Group Plc's Instinet Group for as much as $3 billion, the Financial Times said. America West Airlines will stop operating nonstop flights in three transcontinental markets, the Wall Street Journal reported. Motorola will introduce more versions of its Razr-brand mobile phone handsets, including a candy bar-shaped model later this year, Business Week reported. Mobile-phone users in China sent 217.7 billion text messages last year, up 59% from 2003, Xinhua News Agency reported. F5 Networks CEO McAdam told CNBC that his company's revenue is outpacing market growth as the maker of Internet traffic-management products takes business from competitors, Bloomberg reported. Wipro Ltd., India's third-largest software services exporter, said fiscal third-quarter profit rose 61% as it added new clients, Bloomberg said. Crude oil futures are rising for the first time in four days amid expectations colder weather in the US Northeast will raise demand for heating fuel, Bloomberg reported. Wall Street's biggest bond-trading firms expect the 10-year T-Note's yield to rise this year to 5%, Bloomberg reported. Two years after introducing the "Clear Skies" legislation, only to see it languish in Congress, President Bush is preparing to issue executive orders to implement many of the changes by March, Bloomberg reported.

Late Recommendations
Goldman Sachs reiterated Outperform on STZ, BC, ACS, KLAC and Underperform on ELX, T. Shares of Arbitron Inc.(ARB), which compiles radio ratings for broadcasters, may rise on speculation the company could become the target of a takeover, Business Week reported. Schlumberger Ltd.'s(SLB) stock may benefit from increased spending on oil exploration, Business Week reported.

Night Trading
Asian Indices are -.50%. to +1.0% on average.
S&P 500 indicated +.06%.
NASDAQ 100 indicated +.10%.

Morning Preview
US AM Market Call
Pre-market Commentary
Before the Bell Video(bottom right)
NASDAQ 100 Pre-Market Heatmap
Asian Indices
European Indices
Top 20 Business Stories
In Play
Bond Ticker
Analyst Actions
Macro Calls
CNBC Guest Schedule

Earnings of Note
Company/Estimate
AT/.83
FO/1.21
GE//.49
WY/1.15

Splits
None of note.

Economic Data
Preliminary Univ. of Mich. Consumer Confidence for January estimated at 97.5 versus 97.1 in December.

BOTTOM LINE: I expect US equities to open mixed-to-higher in the morning on a bounce after today's sell-off. However, stocks will likely weaken later in the day on continuing worries over slowing global growth, terrorism and earnings. The Portfolio is 25% net long heading into tomorrow.

Thursday Close

S&P 500 1,175.41 -.78%
NASDAQ 2,045.88 -1.34%

Leading Sectors
Foods +.04%
Hospitals -.05%
Banks -.29%

Lagging Sectors
Wireless -2.76%
Airlines -2.92%
Internet -2.92%

Other
Crude Oil 47.58 +.57%
Natural Gas 6.35 +.75%
Gold 422.50 -.02%
Base Metals 120.02 -.28%
U.S. Dollar 83.78 +.22%
10-Yr. T-note Yield 4.16% -.23%.
VIX 13.83 +4.93%
Put/Call .95 +14.46%
NYSE Arms 1.32 -33.33%
ISE Sentiment 145.00 -11.04%

After-hours Movers
HLIT +8.72% after beating 4Q estimates and raising 1Q guidance substantially.
SYNA +7.74% after beating 2Q estimates and raising 3Q/4Q guidance.
CKFR +3.61% after beating 2Q estimates and raising 3Q outlook.
SFA -7.7% after missing 2Q revenue estimates.
PLAY -7.2% on profit-taking after beating 4Q estimates and raising 1Q guidance.
VIRL -7.2% after meeting 1Q earnings estimates and slightly missing revenue estimates.
LRCX -3.5% after beating 2Q earnings estimates and slightly missing revenue estimates.
TRID +7.2% after beating 2Q estimates.

Recommendations
Goldman Sachs reiterated Outperform on CAL.

After-hours News
U.S. stocks finished lower today, led by tech shares, on earnings and economic worries. After the close, Japan has joined the US in its opposition to the European Union’s proposed lifting of its arms embargo on China, the Financial Times said. The 12 European Union countries that have adopted the euro as their currency saw their combined trade deficit with China increase to $48.1 billion in the first 10 months of 2004, the Financial Times reported. An antibody treatment may reverse structural nerve damage caused by Alzheimer’s disease within three days, researchers from the Washington University School of Medicine report in a study released today. KLA-Tencor Corp. said second-quarter profit more than doubled after sales jumped 57% and that is quarter’s revenue will rise more than analysts expected, Bloomberg reported. MCI Inc. will make at least three acquisitions in the first half of this year to increase its technology services for corporate customers, Business Week reported. Online gaming sales in China may surge 35% a year, reaching about $1.3 billion in 2009, China Daily reported. China plans to put two astronauts into space on a five-day mission as early as September, China Daily reported. Tokyo residential land prices increased in 2004 for the first time in 17 years, the Nihon Keizai newspaper said.

BOTTOM LINE: The Portfolio finished unchanged today as gains in my software, oil service and auto parts shorts offset losses in my homebuilding longs. I did not trade in the afternoon, thus leaving the Portfolio 25% net long. The tone of the market took another turn for the worse in the afternoon as volume accelerated, almost all sectors fell, the advance/decline line ended at its daily lows and the major indices finished near their daily lows. Measures of investor anxiety rose, but are still not at levels normally associated with a durable bottom. An oversold rally could occur at any time, however stocks will likely continue modestly lower over the near-term.

Mid-day Report

S&P 500 1,175.80 -.75%
NASDAQ 2,051.80 -1.05%

Leading Sectors
Hospitals -.02%
Foods -.07%
Semis -.11%

Lagging Sectors
Gaming -2.34%
Internet -2.75%
Wireless -2.78%

Other
Crude Oil 46.85 -1.47%
Natural Gas 6.25 -.68%
Gold 422.30 -.24%
Base Metals 120.02 -.28%
U.S. Dollar 83.85 +.29%
10-Yr. T-note Yield 4.15% -.33%
VIX 13.83 +5.08%
Put/Call .89 +7.23%
NYSE Arms 1.34 -32.32%
ISE Sentiment 149.00 -8.59%

Market Movers
EBAY -18.55% after slightly missing 4Q estimates, lowering 05 guidance, multiple downgrades and announcing 2-for-1 split.
QCOM -7.55% after beating 1Q estimates and lowering 2Q outlook.
RMBS +16.41% after the company said it won a ruling that Hynix Semi infringed some Rambus patents.
MAY +8.7% after the Wall Street Journal reported Federated Dept. Stores is holding talks to buy it.
IGT -8.9% after disappointing 1Q results and multiple downgrades.
MACR +21.9% after beating 3Q estimates, raising 4Q guidance and multiple upgrades.
PGNX +12.4% after announcing positive top-line results from a phase 2 clinical trial of its investigational drug, methylnaltrexone for the management of post-operative bowel dysfunction and Legg Mason upgrade to Buy.
FFIV +10.05% after substantially beating 1Q estimates and raising 2Q guidance.
SPW +6.74% after selling its Kendro lab and life sciences business for $833.5 million to Thermo Electron.
KNX +6.96% after beating 4Q estimates and BB&T upgrade to Buy.
DOX +7.04% after beating 1Q estimates, raising 2Q guidance and Janney Montgomery upgrade to Buy.
AVCT +6.41% after meeting 4Q estimates.
BEBE -14.12% after missing 2Q estimates and lowering 3Q guidance.
CREAF -12.33% after missing 2Q estimates.

Economic Data
-Leading Indicators for December rose .2% versus estimates of a .2% increase and a .3% rise in November.
-Philadelphia Fed. for January fell to 13.2 versus estimates of 25.0 and a reading of 25.4 in December.

Recommendations
-Goldman Sachs: Reiterated Outperform on GCI, EBAY, MDT, COH, KRB and INTC. Reiterated Underperform on TRB, MAY, PRXL, BA and DJ. Rated STR Outperform. Downgraded NDC to Underperform.
-Citi SmithBarney: Reiterated Buy on EBAY, target $110. Reiterated Buy on FFIV, target $65. Reiterated Buy on EXTR, target $11. Reiterated Buy on INTC, target $26.50. Reiterated Buy on SWKS, target $11. Reiterated Buy on PRE, target $71. Reiterated Sell on MYG, target $13. Reiterated Buy on LRCX, target $38. Downgraded SAFC to Sell, target $44. Reiterated Sell on TRMK, target $26. Reiterated Buy on TER, target $17.50. Reiterated Buy on LLTC, target $44. Reiterated Buy on SLR, target $7. Reiterated Buy on APH, target $48. Reiterated Buy on FD, target $62. Reiterated Buy on BK, target $37. Reiterated Buy on DOX, target $34.
-CSFB: Raised BNI to Outperform, target $54. Cut UNP to Underperform, target $54. Raised WWY to Outperform, target $67. Raised URS to Outperform, target $36.
-Deutsche Bank: Raised FON to Buy, target $25.50. Raised TEO to Buy, target $12.20.
-UBS: Rated UAPH, target $13.
-Morgan Stanley: Raised HAS to Overweight, target $23.50.
-Bear Stearns: Raised HOTT to Outperform. Raised QLGC to Outperform, target $43-$47.
-Legg Mason: Raised PGNX to Buy, target $23.
-Thomas Weisel: Rated ERTS Outperform.

Mid-day News
U.S. stocks are lower mid-day on weakness in technology shares and worries over slowing economic growth. EarthLink plans to begin offering wireless high-speed Internet services in certain markets in the US in the second half of the year, and other companies have similar plans, the Wall Street Journal reported. Air America, the US liberal radio network thrown off the air in Los Angeles and Chicago last year after running out of money, plans to broadcast to Washington, Detroit and Cincinnati after getting fresh financing and new management, the Wall Street Journal reported. The Financial Accounting Standards Board, which sets the US’s accounting standards, may require companies to more accurately reflect the state of their pension plans, the NY Times reported. Apple Computer’s new Mac Mini personal computer, which will sell for $499 beginning Jan. 22, will be a more viable option for PC users seeking to switch brands, the Wall Street Journal reported. Bank of America signed a 15-year lease with Tishman Speyer Properties for 34,000 square feet of space at 50 Rockefeller Plaza, the NY Post reported. The Fed will probably keep raising its target interest rate at a “measured” pace because inflation remains “subdued,” Gary Stern, president of the Fed Bank of Minneapolis said. California is introducing a temporary tax amnesty to allow people to pay back taxes with interest for the years before 2003, without penalties or prosecution, the San Francisco Chronicle reported. Sony cut its full-year operating profit and sales targets as prices of digital products fell, Bloomberg said. Citigroup said fourth-quarter earnings rose 12% to a record as revenue from consumer and investment banking climbed, Bloomberg reported. UnitedHealth Group said fourth-quarter profit increased 46% as the company added members through acquisitions, Bloomberg said. S&P may soon upgrade Gap Inc.’s bonds from junk status, Bloomberg reported. Manufacturing in the Philadelphia area expanded at a slower pace this month, missing economists’ estimates, Bloomberg said. Crude oil is falling to a one-week low after an Energy Dept. report showed that US fuel stockpiles increased more than expected, Bloomberg reported. A forward-looking measure of the US economy rose for a second straight month in December, lifted by gains in stock prices and consumer confidence, Bloomberg said.

Bottom Line: The Portfolio is unchanged mid-day as gains in my oil service, auto parts and software shorts are offsetting losses in my homebuilding and computer service longs. I have not traded today and the Portfolio remains 25% net long. The tone of the market is poor once again as decliners swamp advancers, volume is good and all sectors are lower. Falling interest rates and energy prices are muting declines to an extent. Most tech stocks are underperforming, however semis are showing relative strength. This is a positive considering the decline in leader QCOM. Most measures of investor anxiety are rising today which is also a positive. I expect US stocks to trade mixed-to-higher into the close.