Monday Watch

Weekend Headlines
Bloomberg:
- Senator John McCain said a “substantial” and “sustained” increase in US troop levels in Iraq is necessary to help the local government establish its own security authority throughout the country.
- The US dollar posted its biggest weekly rally against the euro since June as the US economy added more jobs than traders anticipated and a gauge of manufacturing accelerated.
- Microsoft(MSFT) will team with Ford Motor(F) to provide drivers with voce-activated software that helps them make mobile phone calls and play songs stored on digital music players.
- Eastman Kodak(EK) plans to sell picture frames that display digital phone slideshows to attract customers looking for new ways to present their shots.
- Palestinian Authority President Abbas yesterday declared a militia belonging to the Hams-controlled Interior Ministry illegal after its gunmen killed a security official and four others.
- Israel denied a newspaper report that it’s preparing a nuclear attack against Iranian uranium-enrichment plants and said it remain committed to ending a dispute over Iran’s nuclear program through diplomacy.
- The nation’s retailers enjoyed the strongest back-to-back sales gains in almost a year at the end of 2006, brightening the outlook for the US economy, according to a survey of economists before a government report this week.
- The largest US teachers union is among a group endorsing a plan in Congress that would expand the federal No Child Left Behind law by offering states a single national standard for teaching math and science.
- Toyota Motor(TM), the world’s biggest seller of gasoline-electric hybrid vehicles, expects US hybrid sales to rise as much as 57% this year.
- Gold may fall for a second week on speculation US economic growth will boost the US dollar and erode the appeal of the precious metal as an alternative investment.
- Investors are withdrawing money from Treasury bond mutual funds that protect against inflation for the first time, a sign of confidence that the Federal Reserve will keep price increases from accelerating.
- United Arab Emirates economic growth will slow this year on lower oil prices which will trim export earnings in the second-largest Arab economy, the National Bank of Abu Dhabi said.
- US sales of consumer electronics will increase 7% to more than $155 billion this year, led by game consoles and music players, an industry group predicted.
- The US dollar may strengthen for a fourth day against the euro on speculation Federal Reserve Vice Chairman Kohn will signal interest rates won’t be cut this quarter.
- Stock markets are shrinking as mergers and acquisitions take shares out of public hands faster than companies add them through equity sales. The value of US shares dropped last year by the most since 1984. The contraction may continue in 2007 as dealmaking accelerates.
- The homebuilding industry is about to stop hurting the US economy and later this year may start to help it.
- Bruce Phillips, founder and managing director of Australian Worldwide Exploration, an oil and gas explorer, sees oil at $50/bbl. this year.
- Copper futures in Shanghai are falling for a fourth day, extending last week’s decline to a nine-month low, as rising stockpiles and slowing demand cut investment fund speculation on the metal.
- Microsoft Corp.(MSFT) exceeded a target for sales of its Xbox 360 and will enable the video-game console to function as a television set-top box in time for year-end holiday shopping.
- Under a new law, Iraq’s massive oil reserves will open for Western oil companies. The law would give oil companies like British Petroleum, Shell and ExxonMobil 30-year contracts to have access to Iraqi crude. It would be the first large-scale operation of foreign interests in Iraq since the oil industry was nationalized in 1972.

Christian Science Monitor:
- New prospect for US: glut of ethanol plants

ComputerWorld:
- Apple Computer(AAPL) MacWorld predictions for next week.

NY Times:
- Verizon Communications may announce an agreement tomorrow to offer full-length shows form television networks to mobile phone users.
- Blue Nile(NILE), an online purveyor of jewelry, ranks just behind Tiffany & Co.(TIF) and Zale Corp.(ZLC) in diamond ring sales after a decade in business, citing industry analysts.

Washington Post:
- Nuclear power plants are making a comeback from Asia to South America as governments rush to secure energy resources. Globally 29 nuclear power plants are being built and more than 100 have been written into the development plans of governments for the next 30 years.
- A Texas center is producing ready-made human embryos that can be ordered by single women and couples, alarming ethicists. The Abraham Center of Life LLC in San Antonio calls itself “the world’s first human embryo bank” that allows people to choose from an extensive database of donors, according to their website.
- Democratic Senator Barbara Boxer of California rescinded a “certificate of achievement” her office awarded to an Islamic activist following criticism the group he represents has extremist views and ties to international terrorist organizations.

Crain’s Chicago Business:
- The Chicago Board of Trade(BOT) vowed to block the Chicago Board Options Exchange’s planned 2008 initial public offering unless the parties can settle their differences, citing a CBOT lawyer.

AP:
- The United Nations investigated more than 300 members of its 16 peacekeeping missions for alleged sexual abuse during the past three years, citing a senior official. More than half of those investigated were fired or sent home. The UN is currently probing a report in the British newspaper The Daily Telegraph that alleged UN personnel in southern Sudan sexually abused more than 20 children.
- Iraqi forces will lead a new attempt to take control of Baghdad’s violent neighborhoods from sectarian militias, citing Prime Minister Nuri al-Maliki.
- Google(GOOG) partnered with scientists building a telescope and may provide public access to pictures of objects in space.

Financial Times:
- Citigroup(C) will tomorrow say it has raised $3.3 billion for private equity investments.

Oriental Morning Post:
- Best Buy Co.(BBY), which last month opened its first branded store in China, plans to open between two and four new outlets in the country this year.

China Oil News:
- PetroChina’s Karamay oilfield in the northwestern province of Xinjiang will become the oil producer’s second-biggest oilfield this year, overtaking Liaohe in the northesast.

Nikkei:
- Sony Corp.(SNE) will use organic electroluminescence technology for a new line of flat-panel televisions. Organic electroluminescence is attracting consumer electronics makers as it can provide higher image quality than existing plasma and liquid crystal displays.

Business Standard:
- India plans to announce a policy on developing hydro-power plants in the country in the next month.

Middle East Economic Digest:
- Iran is seeking bids from international companies to explore for and develop oil reserves in 17 areas as it seeks to boost output.

Weekend Recommendations
Barron's:
- Made positive comments on (TYC), (NUE) and (BBBY).
- Made negative comments on (MED).

Morgan Stanley:
- Remains cautious on offshore Chinese equities and is turning cautious on onshore Chinese A-shares. If a bubble does not burst at the tip of negative macro events, it deflates under the weight of valuations it can no longer sustain. Market fundamentals cannot explain today’s valuations and is rallying beyond rationale levels. Typical symptoms of a late-stage peak-market cycle are emerging: 1) a flood of corporate financing 2) loose corporate investment discipline 3) rotational sector rallies without fundamental support 4) target price rises without earnings forecast revisions 5) undaunted confidence in a coming liquidity flow that no one can quantify. Financial shares are in the largest bubble among offshore Chinese equities.

Night Trading
Asian indices are -1.0% to -.50% on average.
S&P 500 indicated +.08%.
NASDAQ 100 indicated +.06%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Before the Bell CNBC Video(bottom right)
Global Commentary
Asian Indices
European Indices
Top 20 Business Stories
In Play
Bond Ticker
Conference Calendar
Daily Stock Events
Macro Calls
Rasmussen Consumer/Investor Daily Indices
CNBC Guest Schedule

Earnings of Note
Company/Estimate
- (SCHN)/.99

Upcoming Splits
- None of note

Economic Releases
3:00 pm EST
- Consumer Credit for November is estimated to rise to $5.4 billion versus -$1.2 billion in October.

BOTTOM LINE: Asian Indices are lower, weighed down by commodity and technology shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the week.

Weekly Outlook

Click here for The Week Ahead by Reuters

There are some economic reports of note and a few significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. - Consumer Credit

Tues. - IDB/TIPP Economic Optimism

Wed. - MBA Mortgage Applications, EIA Weekly Energy Inventories, Trade Balance, Wholesale Inventories

Thur. - Initial Jobless Claims, Monthly Budget Statement

Fri. - Import Price Index, Advanced Retail Sales, Business Inventories

Some of the more noteworthy companies that release quarterly earnings this week are:

Mon. - Schnitzer Steel(SCHN)

Tues. - Alcoa Inc.(AA), Freddie Mac(FRE), Ruby Tuesday(RI)

Wed. - California Pizza Kitchen(CPKI), Genentech(DNA)

Thur. - M&T Bank(MTB), MGIC Investment Corp.(MTG), Stride Rite(SRR)

Fri. - None of note

Other events that have market-moving potential this week include:

Mon. - The Fed’s Kohn speaking, CSFB Building Products Conference, Citigroup Entertainment/Media and Telecom Conference, MacWorld Conference, JPMorgan Healthcare Conference, JPMorgan CES Tech Forum

Tue. - Needham Growth Conference, Cowen Consumer Conference, MacWorld Conference, Raymond James Govt. Services & Tech Summit, Citigroup Entertainment/Media and Telecom Conference, JPMorgan Healthcare Conference

Wed. - The Fed’s Moskow speaking, JPMorgan Healthcare Conference, Cowen Consumer Conference, Citigroup Entertainment/Media and Telecom Conference, MacWorld Conference, Needham Growth Conference

Thur. - The Fed’s Geithner speaking, the Fed’s Bies speaking, Citigroup Entertainment/Media and Telecom Conference, JPMorgan Healthcare Conference, MacWorld Conference, Needham Growth Conference

Fri. - MacWorld Conference, Needham Growth Conference

BOTTOM LINE: I expect US stocks to finish the week modestly higher on mostly positive economic data, buyout speculation, lower energy prices, seasonal strength, stable long-term rates, a firmer US dollar, bargain-hunting and short-covering. I expect the recent substantial outperformance by true “growth” stocks over “value” stocks to continue this week and throughout the year. My trading indicators are giving mostly bullish signals and the Portfolio is 75% net long heading into the week.

Market Week in Review

S&P 500 1,409.71 -.61%*



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was mildly bearish. The advance/decline line fell, sector performance was mixed and volume was heavy on the week. Measures of investor anxiety were mixed. The AAII percentage of Bulls rose to 49.14% last week from 46.0% the prior week. This reading is slightly above average levels. The AAII percentage of Bears fell to 29.31% this week from 36.0% the prior week. This reading is now at average levels. The 10-week moving average of the percentage of Bears is currently 37.1%, an above-average level. The 10-week moving average of the percentage of Bears peaked at 43.0% at the major bear market low during 2002. Moreover, the 50-week moving average of the percentage of Bears is 37.0%, a very high level seen during only two other periods in U.S. history.

I continue to believe that steadfastly high bearish sentiment in many quarters is mind-boggling, considering the S&P 500's 16.4% rise in less than six months, one of the best August/September/October runs in U.S. history, the fact that the Dow made another all-time high last week and that we are in the early stages of what is historically a very strong period for U.S. stocks after a midterm election. Despite recent gains, the forward P/E on the S&P 500 is a very reasonable 16.0 due to the historic run of double-digit profit growth increases, which are poised to continue when fourth quarter earnings come in over the next few weeks. Bears still remain stunningly complacent, in my opinion. As I have said many times over the last few months, they see every pullback as a major top and every move higher as just another shorting/selling opportunity.

As well, there are many other indicators registering high levels of investor skepticism regarding recent stock market gains. The 50-day moving average of the ISE Sentiment Index just crossed above the 200-day moving average for the first time since November 2005. The ISE Sentiment Index plunged to depressed levels again several times last week. Nasdaq and NYSE short interests are very close to record highs. Moreover, public short interest continues to soar to records, and U.S. stock mutual funds have seen outflows for most of the last year, according to AMG Data Services. Finally, investment blogger bullish sentiment is hovering just above record lows. There is still a high wall of worry for stocks to climb substantially from current levels as the general public remains very skeptical of this bull market.

I continue to believe this is a direct result of the strong belief by the herd that the U.S. is in a long-term trading range or secular bear environment. There is still overwhelming evidence that investment sentiment by the public regarding U.S. stocks has never been this poor in history, with the Dow registering all-time highs almost weekly. I still expect the herd to finally embrace the current bull market this year, which should result in another meaningful move higher in the major averages as the S&P 500 breaks out to an all-time high to join the Dow and Russell 2000. Only in a "negativity bubble" could Wall Street strategists' consensus predictions of a 7% gain for the S&P 500 this year be characterized as "very bullish" by the many bearish pundits. I continue to believe the coming bullish shift in long-term sentiment with respect to U.S. stocks will result in the "mother of all short-covering rallies."

The average 30-year mortgage rate was unch. at 6.18%, which is 62 basis points below July highs. I still believe housing is in the process of stabilizing at relatively high levels. The Fed’s Minehan said this week that recent data suggest a “bottoming” in real estate. A belief shared by former Fed Chairman Alan Greenspan, current Fed Chairman Ben Bernanke and several current Fed members. Mortgage applications rose another 3.6% this week and continue to trend higher with the decline in mortgage rates and healthy job market. The Mortgage Bankers Association said last month that the US housing market will “fully regain its footing” by the middle of 2007. Moreover, the California Building Industry Association on Friday gave an upbeat forecast for housing this year, saying production would be near last year’s brisk levels.

As well, housing inventories have been trending lower and homebuilding equities have been moving higher. The Housing Index(HGX) has risen 21.5% from July lows. The Case-Schiller housing futures have improved substantially and are now projecting a 2.1% decline in the average home price by May, up from projections of a 5.2% decline a couple of months ago. Considering the median house has appreciated over 50% during the last few years with record high US home ownership, this would be considered a “soft landing.” The overall negative effects of housing on the US economy and the potential for significant price drops are still being exaggerated by the many bears in hopes of dissuading buyers from stepping up, in my opinion. Housing and home equity extractions have been slowing substantially for well over a year and have been mostly offset by many other very positive aspects of the US economy.

Home values are more important than stock prices to the average American, but the median home has barely declined in value after a historic run-up, while the S&P 500 has risen 11.7% over the last year and 90.2% since the Oct. 4, 2002 low. Americans’ median net worth is still very close to or at record high levels as a result, a fact that is generally unrecognized or minimized by the record number of stock market participants that feel it is in their financial and/or political interests to paint a bleak picture of America. Moreover, energy prices are down significantly, consumer spending remains relatively healthy, unemployment is low by historic standards, interest rates are very low, inflation is below average rates, stocks are surging and wages are rising. The economy has created 840,000 jobs in the last five months. Challenger, Gray & Christmas reported this week that December job cuts plunged 49.3% from year-ago levels. As well, the Monster Employment Index is just off record highs. Moreover, the unemployment rate is a historically low 4.5%, down from 5.1% in September 2005, notwithstanding fewer real estate-related jobs and significant auto production cutbacks. Consumer spending is around long-term average levels and looks poised to remain healthy over the intermediate-term.

The Consumer Price Index for November rose 2.0% year-over-year, down from a 4.7% increase in September of 2005. This is substantially below the long-term average of around 3%. Moreover, the CPI has only been lower during 4 other periods since the mid-1960s. Many other measures of inflation have recently shown substantial deceleration. The Producer Price Index for November rose a historically low .9% year-over-year. Most measures of Americans’ income growth are now more than twice the rate of inflation. Americans’ Average Hourly Earnings rose 4.2% in December, substantially above the 3.2% 20-year average. The recent plunge in many commodities should eventually result in the complete debunking of the problematic inflation myth that so many have perpetuated endlessly over the last couple of years.

The benchmark 10-year T-note yield fell 3 basis points on the week on diminishing inflation concerns and lingering economic worries. In my opinion, investors’ continuing fears over an economic “hard landing” are misplaced. The ISM Manufacturing Index improved in December and is now registering expansion. Moreover, the ISM’s semi-annual forecast was released recently and gave an upbeat assessment of expected manufacturing activity this year. The ISM Non-Manufacturing Index, which is a gauge of the vast majority of U.S. economic activity, came in at a healthy 57.1 for December. Manufacturing accounts for roughly 12% of US economic growth, while consumer spending accounts for about 70% of growth.

U.S. GDP growth came in at 1.1% and 0.7% during the first two quarters of 1995. The ISM Manufacturing Index fell below 50, which signals a contraction in activity, during May 1995. It stayed below 50, reaching a low of 45.5, until August 1996. During that period, the S&P 500 soared 31% as the P/E multiple expanded from 16.0 to 17.2. This was well before the stock market bubble began to inflate. As well, manufacturing was more important to overall US economic growth at that time. Stocks can and will rise as P/E multiples expand, even with more average economic and earnings growth. The S&P 500's P/E has contracted for three straight years. A recent Morgan Stanley report concluded that the S&P 500's P/E has only contracted for four consecutive years twice since 1905. The report says that each point of multiple expansion is equivalent to a 6.6% gain in the S&P 500. As I have said many times before, P/E multiple expansion is the bears' worst nightmare.

Weekly retail sales rose an average 3.2% for the week. Spending is poised to remain strong on lower energy prices, very low long-term interest rates, a rising stock market, healthy job market, decelerating inflation and more optimism. The current conditions component of the December Univ. of Mich. Consumer Confidence Index, which gauges whether or not consumers feel it is a good time to buy big-ticket items, rose to its highest level since March. As well, the Conference Board’s Consumer Confidence reading for December came in at the second highest this cycle.

The CRB Commodities Index, the main source of inflation fears, has declined 13.3% over the last 12 months and is down 20.3% from May highs despite a historic flood of capital into commodity funds and numerous potential upside catalysts. Oil has declined $22/bbl from July highs. Last year, oil rose $2.05/bbl. on the first trading day of the year and $7.40/bbl. through the first three weeks of trading as commodity funds, flush with new capital, drove futures prices higher. I suspect, given the average commodity hedge fund fell around double-digits last year as the CRB Index dropped 7.4%, that many energy-related funds saw outflows at year-end. Oil has declined over $5/bbl. in the first four trading days of the new year so far. I continue to believe inflation fears have peaked for this cycle as global economic growth stabilizes around average levels, unit labor costs remain subdued and the mania for commodities continues to reverse course.

The EIA reported this week that gasoline supplies rose substantially more than expectations even as refinery utilization increased only slightly. U.S. gasoline supplies are at high levels for this time of the year. Gasoline futures fell substantially for the week and have plunged 48.6% from September 2005 highs even as some Gulf of Mexico oil production remains shut-in and fears over future production disruptions persist. The still very elevated level of gas prices, related to crude oil production disruption speculation by investment funds, will further dampen global fuel demand, sending gas prices still lower over the intermediate-term.

The 10-week moving-average of US oil inventories is approaching 8-year highs. Since December 2003, global oil demand is only up 2%, despite booming global growth, while global supplies have increased 6%, according to the Energy Intelligence Group. OPEC said recently that global crude oil supply would exceed demand by 100 million barrels by the second quarter of this year. Moreover, worldwide oil inventories are poised to begin increasing at an accelerated rate over the next year. One of the main reasons I believe OPEC has been slow to actually meet their pledged cuts has been the fear of losing market share to non-OPEC countries. I continue to believe oil is priced at extremely elevated levels on record speculation by investment funds, not fundamentals.

The Amaranth Advisors hedge fund blow-up is a prime example of the extent to which many investment funds have been speculating on ever higher energy prices through futures contracts, thus driving the price of the underlying commodity to absurd levels. Amaranth, a multi-strategy hedge fund, lost about $6.5 billion of its $9.5 billion under management in less than two months speculating mostly on higher natural gas prices. I continue to believe a number of other funds will experience similar fates over the coming months after managers “pressed their bets” in hopes of making up for recent poor performance, which will further pressure energy prices as these funds unwind their leveraged long positions to meet rising investor redemptions.

Recently, Cambridge Energy Research, one of the most respected energy research firms in the world, put out a report that drills gaping holes in the belief by most investors of imminent "peak oil" production. Cambridge said that its analysis indicates that the remaining global oil base is actually 3.74 trillion barrels, three times greater than "peak oil" theory proponents say and that the "peak oil" theory is based on faulty analysis. I suspect the contango that still exists in energy futures, which encourages hoarding, will begin to reverse over the coming months as more investors come to the realization that the "peak oil" theory is hugely flawed, global storage fills, and Chinese/US demand slows.

A major top in oil is already in place as global crude oil storage capacity utilization is running around 98%. Recent OPEC production cuts are likely resulting in a complete technical breakdown in crude. Demand destruction is already pervasive globally and will only intensify over the coming years as many more alternative energy projects come to the fore. Moreover, many Americans feel as though they are helping fund terrorism or hurting the environment every time they fill up their gas tanks. I do not believe we will ever again see the demand for gas-guzzling vehicles that we saw in recent years, even if gas prices plunge further from current levels, as I expect. OPEC production cuts, with oil still at very high levels and weakening global growth, only further deepens resentment towards the cartel and will result in even greater long-term demand destruction. Finally, as the fear premium in oil dissipates back to more reasonable levels, global growth slows and supplies continue to rise, crude oil should continue heading meaningfully lower over the intermediate-term, notwithstanding OPEC production cuts. Oil has already begun another significant downturn. I suspect crude will eventually fall to levels that most investors deemed unimaginable just a few months ago during the next significant global economic downturn.

Natural gas inventories fell less than expectations this week. Prices for the commodity declined again as record investment fund speculation continues to subside with supplies now 15.3% above the 5-year average and at all-time high levels for this time of year, even as some daily Gulf of Mexico production remains shut-in. Natural gas prices have collapsed 60.7% since December 2005 highs. Notwithstanding this decline, natural gas anywhere near current prices is ridiculous with inventories poised to hit new record highs this year. The long-term average price of natural gas is $4.63 with inventories at much lower levels than currently.

Gold fell substantially on the week as the US dollar rose, inflation concerns subsided further and investment fund speculation for all commodities waned. Gold, natural gas, oil and copper all look both fundamentally and technically weak. The US dollar gained on stronger US economic data and short-covering. I continue to believe there is very little chance of another Fed rate hike anytime soon. An eventual cut is likely this year as inflation continues to decelerate substantially. A Fed rate cut should actually boost the dollar as currency speculators anticipate faster US economic growth. Moreover, last month’s net long-term TIC flows report showed foreign investors’ demand for US securities remains very strong.

Technology stocks outperformed for the week as “growth” companies substantially outpaced “value”. Energy-related stocks underperformed significantly as the fundamentals continue to weaken for the over-owned group and a couple of high-profile companies gave negative forecasts. S&P 500 profit growth for the third quarter came in around 20% versus a long-term historical average of 7%, according to Thomson Financial. This marks the 17th straight quarter of double-digit profit growth, the best streak since recording keeping began in 1936. Moreover, another double-digit gain is likely for the fourth quarter. Just a few months ago many investors expected profit growth to fall to the low single digits last year. Despite a 90.2% total return(which is equivalent to a 16.3% average annual return) for the S&P 500 since the October 2002 bottom, its forward p/e has contracted relentlessly and now stands at a very reasonable 16.0. The 20-year average p/e for the S&P 500 is 23.0.

Current stock prices are still providing longer-term investors very attractive opportunities, in my opinion. In my entire investment career, I have never seen the best “growth” companies in the world priced as cheaply as they are now relative to the broad market. By contrast, “value” stocks are quite expensive in many cases. A CSFB report late last year confirmed this view. The report concluded that on a price-to-cash flow basis growth stocks are cheaper than value stocks for the first time since at least 1977. The entire decline in the S&P 500’s p/e, since the bubble burst in 2000, is attributable to growth stock multiple contraction. I still expect the most overvalued economically sensitive and emerging market stocks to continue underperforming over the intermediate-term as the manias for those shares subside as global growth slows to more average rates. I continue to believe a chain reaction of events has begun that will result in a substantial increase in demand for US stocks.

In my opinion, the market is still factoring in way too much bad news at current levels, notwithstanding recent gains. One of the characteristics of the current “negativity bubble” is that most potential positives are undermined, downplayed or completely ignored, while almost every potential negative is exaggerated, trumpeted and promptly priced in to stock prices. Furthermore, this “irrational pessimism” by investors is resulting in a dramatic decrease in the supply of stock as companies buy back shares, IPOs are pulled and secondary stock offerings are canceled. Booming merger and acquisition activity is also greatly constricting the supply of stock. Many commodity funds, which have received a historic flood of capital inflows over the last few years are likely now seeing redemptions as the CRB Index heads into bear market territory. Some of this capital will likely find its way back to US stocks. As well, money market funds are brimming with cash. There is massive bull firepower available on the sidelines for US equities at a time when the supply of stock has contracted.

I continue to believe the many U.S. stock market bears and most bulls raised cash in December in anticipation of a pullback this month. Considering the overwhelming majority of investment funds failed to meet the S&P 500's 15.8% return last year, I suspect most portfolio managers have a very low threshold of pain this year for falling substantially behind their benchmark once again. Rising optimism for a Fed rate cut, a stronger US dollar, lower commodity prices, seasonal strength, decelerating inflation readings, a pick-up in consumer spending, lower long-term rates, increased consumer/investor confidence, short-covering, investment manager performance anxiety, rising demand for US stocks and the realization that economic growth is poised to accelerate back to around average levels in the second half of the year should provide the catalysts for another substantial push higher in the major averages over the intermediate-term as p/e multiples expand substantially. Another strong performance by US equities is likely this year. Finally, the ECRI Weekly Leading Index surged this week and is forecasting a modest acceleration in US economic activity.

*3-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,409.71 -.61%
DJIA 12,398.01 -.52%
NASDAQ 2,434.25 +.79%
Russell 2000 775.87 -1.50%
Wilshire 5000 14,118.65 -.68%
S&P Barra Growth 650.57 -.30%
S&P Barra Value 757.43 -.89%
Morgan Stanley Consumer 694.73 -.11%
Morgan Stanley Cyclical 886.53 -.77%
Morgan Stanley Technology 573.59 +.95%
Transports 4,612.35 +1.14%
Utilities 447.65 -2.0%
MSCI Emerging Markets 110.23 -3.25%
S&P 500 Cum A/D Line 10,962 -4.0%
Bloomberg Crude Oil % Bulls 28.0 -39.4%
CFTC Oil Large Speculative Longs 160,309 +2.0%
Put/Call .88 unch.
NYSE Arms .97 -39.1%
Volatility(VIX) 12.14 +5.1%
ISE Sentiment 150.0 -18.18%
AAII % Bulls 49.14 +6.83%
AAII % Bears 29.31 -18.58%
US Dollar 84.65 +1.2%
CRB 291.11 -5.26%
ECRI Weekly Leading Index 139.0 +2.36%

Futures Spot Prices
Crude Oil 56.17 -8.0%
Reformulated Gasoline 148.88 -7.8%
Natural Gas 6.2 -1.8%
Heating Oil 156.40 -4.94%
Gold 607.70 -5.1%
Base Metals 224.50 -5.2%
Copper 253.50 -11.2%
10-year US Treasury Yield 4.65% -.6%
Average 30-year Mortgage Rate 6.18% unch.

Leading Sectors
Airlines +3.4%
Internet +2.8%
Networking +2.7%
Drugs +1.37%
Software +1.29%

Lagging Sectors
Oil Tankers -2.80%
Steel -3.1%
Coal -5.0%
Oil Service -6.4%
Gold & Silver -6.4%

One-Week High-Volume Gainers
One-Week High-Volume Losers

*3-Day % Change

Stocks Lower into Final Hour on Emerging Market Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Semi longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is very negative as the advance/decline line is substantially lower, almost every sector is declining and volume is above average. The S&P 500's P/E has contracted for three straight years. A recent Morgan Stanley report concluded that the S&P 500's P/E has only contracted for four consecutive years twice since 1905. The report says that each point of multiple expansion is equivalent to a 6.6% gain in the S&P 500.P/E multiple expansion is the many bears' worst nightmare. I expect significant P/E multiple expansion this year to eventually result in the "mother of all short-covering rallies." The developing commodity bear market -- CRB Index is currently down 20.6% from its May 2006 high -- raises the odds of substantial S&P 500 P/E multiple expansion dramatically as inflation concerns continue to rapidly subside. I expect US stocks to trade modestly higher into the close from current levels on short-covering, more economic optimism and bargain-hunting.

Today's Headlines

Bloomberg:
- Emerging-market stocks had their worst week in almost six months on falling commodity prices.
- Google Inc.(GOOG) invested in a Chinese company that helps users download online videos and software to take market share from local competitor Baidu.com(BIDU).
- Treasury benchmark 10-year notes fell by the most in two weeks after the US added more jobs in December than economists forecast and incomes increased by the largest amount in eight months.
- The US dollar surged to a six-week high against the euro after a government report showed US job growth unexpectedly quickened last month.
- CBS Corp.(CBS) and Walt Disney(DIS) will use next week’s Consumer Electronics Show to expand efforts to get more of their movies and television shows onto the Web and mobile devices.
- Best Buy(BBY) and Circuit City Stores(CC) reported December sales that exceeded analysts’ estimates during the holiday shopping season.
- China told banks to set aside more money reserves for the fourth time in seven months to prevent a rebound in lending and investment.
- Crude oil may fall further next week, extending its biggest decline since April 2005, as mild weather reduces heating-fuel demand in the world’s biggest economy.
- Copper is headed for its biggest weekly loss in more than a decade as expanding stockpiles added to speculation that supplies will outpace demand this year for the first time since 2003.
- The cost of transporting oil on supertankers may fall for a third consecutive year as crude shipments ease and new vessels are launched, prompting owners to sell ships as scrap metal or adapt them for other uses.

Wall Street Journal:
- World regulators and central banks are scrutinizing hedge funds, but regulatory proposals are unlikely to get far because approaches differ from country to country.
- Nick Maounis, founder of Amaranth Advisors LLC, the hedge fund that lose $6.4 billion in a few days last year, is seeking to start a new firm.
- Foreign hedge funds operating in the US, which portray themselves as tax shelters to non-US investors, may have to pay taxes because of their growing business in bank loans.
- Andrew Grossman, executive director of Wal-Mart Watch, plans to leave the organization this month to set up a political consulting firm.
- Microsoft’s(MSFT) Robbie Bach, president of the Entertainment and Devices division, is driving a strategic shift at the company toward “connected entertainment” and equipment linked to online services.
- Seagate Technology(STX) plans to sell external hard drives under the FreeAgent brand name to appeal to computer users who want to store digital photographs, movies and songs.

USA Today:
- US cities and counties are using laws that fine adults who supervise house parties where minors drink or possess alcohol by as much as $2,500 to crack down on underage drinking.

NY Times:
- A 30-second commercial on the telecast of this year’s Super Bowl will cost a record $2.6 million.

Jordan Times:
- Jordan has copper reserves of between $1.5 billion and $2 billion that can be mined because of higher metal prices, citing the president of the Jordan Geologists Assoc.

Xinhua News:
- Chinese President Hu Jintao urged Iran to “make a serious response” to a United Nations Security Council resolution on its nuclear program.

Job Creation Above Expectations, Unemployment Rate Still Historically Low, Hourly Earnings Rising More Than Twice Inflation Rate

- The Change in Non-farm Payrolls for December was 167K versus estimates of 100K and an upwardly revised 154K in November.
- The Change in Manufacturing Payrolls for December was -12K versus estimates of -15K and a downwardly revised -20K in November.
- The Unemployment Rate for December was 4.5% versus estimates of 4.5% and 4.5% in November.
- Average Hourly Earnings for December rose .5% versus estimates of .3% and an upwardly revised .3% in November.

BOTTOM LINE: Employers in the US added a greater-than-forecast 167,000 workers to payrolls in December and incomes grew by the most in eight months, adding to evidence that the US economy is poised to accelerate modestly as housing stabilizes and auto production cutbacks subside, Bloomberg reported. Average Hourly Earnings rose 4.2% from year-ago levels, more than twice the inflation rate as measure by the Consumer Price Index. I continue to believe the labor market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

Links of Interest

Market Snapshot
Detailed Market Summary
Quick Summary
Economic Commentary
Movers & Shakers
Today in IBD
NYSE OrderTrac
I-Watch Sector Overview
NYSE Unusual Volume
NASDAQ Unusual Volume
Hot Spots
NASDAQ 100 Heatmap
DJIA Quick Charts
Chart Toppers
Option Dragon
Real-time Intraday Chart/Quote

Friday Watch

Late-Night Headlines
Bloomberg:
- US Treasury Secretary Henry Paulson said compensation for CEOs is a matter to be resolved by shareholders and corporate directors.
- Commercial airlines suffered 27 fatal accidents worldwide last year, equaling the lowest total in 10 years, Flight International said.
- Motorola(MOT) said fourth-quarter profit and sales missed forecasts because of lower-than-projected handset revenue.
- Crude oil is falling for a third day, trading near an 18-month low in New York, as mild US weather curbed near-record speculation by investment funds.
- South Korea’s Foreign Ministry said there is “no particular indication” North Korea plans to detonate a second nuclear bomb, after ABC News reported that the communist nation may be preparing a follow-up to its Oct. 9 test.
- Tohrun Sasaki, chief strategist at JPMorgan Chase and a former chief currency trader at the Bank of Japan, sees “strong” trend for US dollar.
- Peter Beutel, president of energy consultant Cameron Hanover, expects oil to fall below $20/bbl. in the next 4-8 years.
- Frank McGhee, head metals trader at Integrated Brokerage Services, sees further selling of copper.
- Copper futures in Shanghai fell the maximum daily limit of 5% to a nine-month low as rising global inventories fueled concern that demand for the metal will lag behind demand.

Apple Daily:
- Quanta Computer and Asustek Computer will ship 4.5 million MacBook laptop computers for Apple Computer(AAPL) this year, citing estimates by UBS AG. The two Taiwan companies shipped 2.8 million laptops to Apple last year.

Financial Times:
- A probe has found evidence of collusion in the European energy industry, citing a report by the EU’s Competition Commissioner Neelie Kroes.

Commercial Times:
- Powerchip Semiconductor plans to spend as much as $28 billion within five years to build memory chip factories in Taiwan, citing VP Eric Tang.

The Star:
- Pioneer Bio Industries, a Malaysian company that produces mangrove palm-based ethanol, plans to spend $398 million to build a biofuel plant.

China Daily:
- Shanda Interactive(SNDA) may form a venture with Sun Media Investment Holdings to sell games to mobile-phone users.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (GILD), raised target to $81.
- Reiterated Buy on (NWS), raised target to $26.

Morgan Stanley:
- Reiterated Overweight on (FORM), target $48.

Business Week:
- AngioDynamics(ANGO), which makes devices used to diagnose and treat vascular disease, will benefit from equipment it’s developing to treat cancers, citing Jeff Jonas of GAMCO Medical Opportunity Fund.
- Federal Realty Investment Trust(FRT), a developer of condominiums and shopping centers, will increase earnings as it redevelops properties, citing Merrill Lynch analyst Steve Sakwa.
- MedImmune, the seventh-largest US biotech company, is likely to get more calls from investors to sell itself, citing David Katz, president of Matrix Asset Advisors.

Night Trading
Asian Indices are -1.50% to -.50% on average.
S&P 500 indicated -.16%.
NASDAQ 100 indicated -.18%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Before the Bell CNBC Video(bottom right)
Global Commentary
Asian Indices
European Indices
Top 20 Business Stories
In Play
Bond Ticker
Conference Calendar
Daily Stock Events
Macro Calls
Rasmussen Consumer/Investor Daily Indices
CNBC Guest Schedule

Earnings of Note
Company/EPS Estimate
- (GPN)/.44
- (SGR)/.19

Upcoming Splits
- (RG) 2-for-1

Economic Releases
8:30 am EST
- The Change in Non-farm Payrolls for December is estimated at 100K versus 132K in November.
- The Change in Manufacturing Payrolls for December is estimated at -15K versus -15K in November.
- The Unemployment Rate for December is estimated at 4.5% versus 4.5% in November.
- Average Hourly Earnings for December are estimated to rise .3% versus a .2% gain in November.

BOTTOM LINE: Asian indices are lower, weighed down by commodity-related shares in the region. I expect US equities to open modestly lower and to rise into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Near Session Highs, Led by Strong Gains in Tech and Biotech Shares as Commodities Fall Again

Indices
S&P 500 1,418.34 +.12%
DJIA 12,480.69 +.05%
NASDAQ 2,453.43 +1.25%
Russell 2000 789.95 +.32%
Wilshire 5000 14,222.54 +.16%
S&P Barra Growth 653.26 +.31%
S&P Barra Value 763.50 -.06%
Morgan Stanley Consumer 699.12 +.32%
Morgan Stanley Cyclical 893.36 -.22%
Morgan Stanley Technology 579.06 +1.81%
Transports 4,673.07 +.48%
Utilities 455.56 -.46%
Put/Call .82 -3.53%
NYSE Arms 1.19 -.36%
Volatility(VIX) 11.51 -4.40%
ISE Sentiment 132.0 +6.45%
US Dollar 84.35 +.51%
CRB 292.61 -1.97%

Futures Spot Prices
Crude Oil 55.78 -4.36%
Reformulated Gasoline 148.70 -4.0%
Natural Gas 6.13 -.54%
Heating Oil 154.60 -2.65%
Gold 623.80 -.95%
Base Metals 221.84 -.19%
Copper 261.0 -1.47%
10-year US Treasury Yield 4.60% -1.15%

Leading Sectors
Wireless +2.33%
Internet +2.32%
Semis +2.01%

Lagging Sectors
Gold & Silver -1.85%
Coal -2.13%
Oil Service -2.90%

Evening Review
Detailed Market Summary
Market Gauges
Daily ETF Performance
Style Performance
Market Wrap CNBC Video(bottom right)
S&P 500 Gallery View
Economic Calendar
Timely Economic Charts
GuruFocus.com
PM Market Call
After-hours Movers
Real-time/After-hours Stock Quote
In Play

Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- UnitedHealth Group(UNH) said former CEO McGuire along with other current and former executives entered into an options re-pricing agreement with the company on Dec. 29.
- US Treasuries rose the most in five weeks after falling commodity prices diminished inflation concerns.
- New York Times(NYT) agreed to sell its nine US television stations to Oak Hill Capital Partners for $575 million to focus on its newspapers and Web sites.
- Bill Gross, manager of the world’s biggest bond fund, says the Fed will lower its benchmark interest rate by 100 basis points this year.
- Canadian stocks had their steepest two-day decline in six months, led by commodity producers including Suncor Energy and First Quantum Minerals.
- The CRB Commodities Index fell to a 20-month low as near-record speculation continues to reverse course. The CRB Index is now down 19.9% since May of last year.
- Maple Resources, the second-largest natural gas producer in Peru, plans to invest $100 million to produce ethanol in the country to meet growing demand for alternative fuels in the US.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs, Semi longs, Computer longs, Biotech longs and Commodity shorts. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was modestly positive today as the advance/decline line finished higher, sector performance was mixed and volume was above average. Measures of investor anxiety were mostly lower into the close. Today's overall market action was bullish. I believe today's type of action will repeatedly occur throughout the year as true growth stocks outperform, while the most cyclical over-owned stocks underperform substantially. The Oil Service sector, which was the most loved heading into the new year, is already 8.4% lower year-to-date. Moreover, the Gold & Silver sector is down 5.4%, Energy is down 6.3%, Coal is 6.7% lower and steel is 3.8% lower for the year. Conversely, Airlines are up 4.1%, Networkers are up 3.1%, Wireless is up 2.8% and Internets are up 2.6% already this year. I suspect performance anxiety is beginning to resurface and the year has just begun. I expect today's rally to strengthen over the next few days and would use any early weakness related to a weaker-than-expected employment report tomorrow to add to favorite growth-oriented long positions. I continue to believe January will be a very good month for most U.S. stocks, especially growth stocks, as economic concerns continue to diminish, inflation decelerates further, long-term rates remain low and the mania for commodities continues to reverse course. The herd, which is currently very bearish given recent gains, will likely not begin to jump on the bull bandwagon until the second half of the year.

Stocks Higher into Final Hour, Led by Sharp Gains in Technology and Biotech Shares

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Computer longs, Semi longs and Commodity shorts. I covered my (EEM), (IWM) and (QQQQ) hedges today, thus leaving the Portfolio 100% net long. The tone of the market is modestly positive as the advance/decline line is higher, sector performance is mixed and volume is above average. Bloomberg is reporting that Pimco's Bill Gross is predicting the Fed will cut rates within six months and that the Fed Funds Rate will finish the year 100 basis points lower at 4.25%. He is also predicting the 10-year yield will fall to about 4.5%. I do not believe the Fed will cut that much this year, however one or two cuts are likely as inflation concerns fall off a cliff with commodity prices. I expect US stocks to trade modestly higher into the close from current levels on short-covering, declining long-term rates, bargain-hunting and lower energy prices.

Today's Headlines

Bloomberg:
- Crude oil fell 8.3% in the last two days, the biggest two-day plunge since December 2004, as mild weather curbed near-record speculation by investment funds.
- US regulators approved 18 new drugs in 2006, close to an eight-year low, as drugmakers struggled to develop products for hard-to-treat disorders.
- Express Scripts(ESRX), pushing its unsolicited $26 billion offer for Caremark Rx. Inc.(CMX), today urged Caremark shareholders to reject a lower bid from CVS Corp.(CVS).
- Emerging-market stocks tumbled, led by Poland’s biggest copper miner and a Brazilian iron ore producer on the prospects for slowing economic growth in emerging economies as commodity prices fall.
- Children will get more shots this year to prevent chickenpox and thwart viruses that cause cervical cancer, severe diarrhea and flu under new US guidelines that would increase use of Merck(MRK) vaccines.
- The US dollar is rising to a two-week high against the euro as reports showing an increase in US factory orders and services growth left most traders betting the Fed will refrain from cutting interest rates this quarter.
- Cisco Systems(CSCO) agreed to buy closely held IronPort Systems for $830 million to push into the security software market.
- Gold is falling a second day in NY as the US dollar strengthened against the euro, reducing the precious metal’s appeal as an alternative investment.
- Copper fell to an eight-month low in NY, extending a slide that began in May, as speculators continue to cut long positions as inventories rise.
- Peru’s copper output rose to an eight-month high in November as three of the country’s four largest mines stepped up production.

Wall Street Journal:
- Toyota Motor Corp.(TM) may this month announce a site for a new $1 billion factory in the US, its eighth in the country. The Japanese automaker has narrowed its selections to between three and five locations in the South, including Chattanooga, TN and Marion, Arkansas.
- Microsoft’s(MSFT) new Office product is useful and more logical in how the commands are laid out, which reflects a complete change in how users interact with the software, Walt Mossberg wrote.

USA Today:
- A Web site created by the National Council on Teacher Quality will provide state and union data on teachers’ contracts, including working schedules, salaries and benefits.

NY Times:
- Warner Brothers Entertainment plans to announce next week a new videodisc that can play in both the competing DVD technologies of Blu-ray and HD-DVD.

Washington Post:
- US House Democrats plan to divert oil subsidies and other incentives to new tax breaks for renewable energy sources.

LA Times:
- California Governor Schwarzenegger will push for universal health coverage for the state’s children, including those there illegally, citing officials.

Business Day:
- Eastern Platinum Ltd. may increase output from its South African unit by 70% this year, citing a report from Canaccord Adams.

Asharq al-Awsat:
- Saudi Arabia and Eqypt feel threatened by Iran’s nuclear ambitions.

Economic Times:
- World steel production rose 9.4% last year to 1.21 billion metric tons from 1.1 billion in 2005, citing estimates from the Intl. Iron & Steel Institute.

Tehran Times:
- Iran lowered its expected oil revenue for the year that ends in March by $3 billion.

al-Hayat:
- Gold demand in Saudi Arabia declined 9% in the last 10 months, with consumers deterred by a plunging local stock market and declining prices for the precious metal, citing World Gold Council.

Job Market Still Healthy, Factory Orders Rise, Service Sector Strong, Pending Home Sales Fall Slightly

- Initial Jobless Claims for last week rose to 329K versus estimates of 320K and 319K the prior week.
- Continuing Claims fell to 2446K versus estimates of 2500K and 2522K prior.
- Factory Orders for November rose .9% versus estimates of a 1.3% gain and a -4.5% decline in October.
- ISM Non-Manufacturing for December fell to 57.1 versus estimates of 57.0 and 58.9 in November.
- Pending Home Sales for November fell -.5% versus estimates of a .7% increase and a -1.5% decline in October.

BOTTOM LINE: Jobless Claims came in slightly higher than estimates, while continuing claims fell more than estimates, Bloomberg reported. The four-week moving-average of jobless claims rose to 317,500 versus 316,250 the prior week. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, held at a very low 1.9%. Moreover, Challenger, Gray & Christmas reported today that job cuts for December plunged 49%. I continue to believe the labor market will remain healthy over the intermediate-term as service employers gain confidence in the sustainability of the current expansion, offsetting construction and auto-related cutbacks.

Orders placed with US factories rose in November, Bloomberg said. Orders for computers and electronics equipment rose 7.7% versus a 9.8% decline the prior month. Orders for construction machinery fell 20% versus a 12% decline the prior month. Orders for capital goods excluding aircraft and military equipment, a gauge of future business investment, fell 1.1% versus a 4.0% decline the prior month. The inventory-to-shipments ratio rose to 1.24 months versus 1.23 months in October. I continue to believe the worst of the manufacturing slowdown is over, but activity will remain muted as homebuilders and automakers continue to work down inventories.

Growth at US service industries slowed modestly in December after reaching a six-month high the prior month, Bloomberg reported. Readings above 50 indicate expansion in industries that comprise almost 90% of the US economy. The New Orders component fell to 54.4 versus 57.1 the prior month. The Prices Paid component rose to 59.1 versus 55.6 the prior month. The Employment component rose to 53.3 versus 51.6 in November. The average price of a gallon of gas during December was $2.32, 24% below last year’s peak of $3.04/gallon. Americans spent 26% more on the Internet in the 56 days through Dec. 26 than a year earlier, boosted by spending on electronics and books, according to ComScore Networks. I continue to believe the service sector, which accounts for the vast majority of US economic growth, will remain healthy over the intermediate-term as energy prices drop further, inflation decelerates more, interest rates remain very low, stocks continue to rise, housing stabilizes at relatively high levels and auto production cutbacks subside.

Fewer Americans signed contracts to buy previously owned homes in November, Bloomberg reported. The decline from the previous year has been narrowing over the last six months, which suggests sales are stabilizing. Pending re-sales fell 2.8% in the Northeast, 2.6% in the West and 1.1% in the South. Re-sales rose 4.8% in the Mid-west. The average 30-year mortgage rate declined to 6.14% last month, the lowest since October 2005, according to Freddie Mac. I continue to believe the housing market is stabilizing at relatively high levels.

Links of Interest

Market Snapshot
Detailed Market Summary
Quick Summary
Economic Commentary
Movers & Shakers
Today in IBD
NYSE OrderTrac
I-Watch Sector Overview
NYSE Unusual Volume
NASDAQ Unusual Volume
Hot Spots
NASDAQ 100 Heatmap
DJIA Quick Charts
Chart Toppers
Option Dragon
Real-time Intraday Chart/Quote

Thursday Watch

Late-Night Headlines
Bloomberg:
- Homes in Unterhaching, a German town of 22,000 south of Munich, will be warmed by hot water piped from 3,300 meters underground starting in May. They’re at the leading edge of a shift toward geothermal power generation that may swell Germany’s capacity 1,000-fold within a decade.
- Crude oil is falling another .14/bbl. in NY after yesterday plunging the most in 20 months as mild US weather curbed near-record speculation by investment funds.
- US Senator Charles Grassley said a balanced US budget by 2012 is “very possible.”
- Copper futures in Shanghai fell the maximum daily limit of 4% to a six-month low on diminishing speculation by investment funds as stockpiles rise.

Wall Street Journal:
- Gains in the yuan are eroding profit margins at an increasing number of Chinese exporters, citing local business executives.

Financial Times:
- Tribune Co.(TRB) bidders interested in buying the company, which owns media outlets and the Chicago Cubs, face a deadline of mid-January to make final offers.

Financial Express:
- Verizon Communications(VZ) may enter the race to acquire Indian wireless operator Hutchison Essar Ltd.

Night Trading
Asian Indices are -.75% to +.75% on average.
S&P 500 indicated +.04%.
NASDAQ 100 indicated -.06%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Before the Bell CNBC Video(bottom right)
Global Commentary
Asian Indices
European Indices
Top 20 Business Stories
In Play
Bond Ticker
Conference Calendar
Daily Stock Events
Macro Calls
Rasmussen Consumer/Investor Daily Indices
CNBC Guest Schedule

Earnings of Note
Company/EPS Estimate
- (AYI)/.64
- (ARRO)/.34
- (STZ)/.60
- (LI)/.57
- (MON)/.10
- (TXI)/.55
- (GPN)/.44
- (RI)/.28
- (SGR)/.19

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Initial Jobless Claims for last week are estimated to rise to 320K versus 317K the prior week.
- Continuing Claims for last week are estimated to fall to 2500K versus 2530K prior.

10:00 am EST
- Factory Orders for November are estimated to rise 1.3% versus a -4.7% decline in October.
- ISM Non-Manufacturing for December is estimated to fall to 57.0 versus a reading of 58.9 in November.
- Pending Home Sales for November are estimated to rise .8% versus a -1.7% decline in October.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -2,000,000 barrels versus an -8,132,000 barrel decline the prior week. Gasoline supplies are expected to rise by 1,500,000 barrels versus a 2,938,000 barrel rise the prior week. Distillate inventories are estimated to rise by 850,000 barrels versus a 472,000 barrel increase the prior week. Finally, Refinery Utilization is expected to rise .2% versus a .23% increase the prior week.

BOTTOM LINE: Asian indices are mixed as gains in automakers are offsetting losses in commodity shares in the region. I expect US equities to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Finish Slightly Higher as Commodities Drop

Indices
S&P 500 1,416.60 -.12%
DJIA 12,474.52 +.09%
NASDAQ 2,423.16 +.33%
Russell 2000 787.42 -.03%
Wilshire 5000 n/a
S&P Barra Growth 651.23 -.20%
S&P Barra Value 763.93 -.04%
Morgan Stanley Consumer 696.91 +.20%
Morgan Stanley Cyclical 895.36 +.21%
Morgan Stanley Technology 568.79 +.10%
Transports 4,650.66 +1.98%
Utilities 457.68 +.20%
Put/Call .85 -3.41%
NYSE Arms 1.20 -23.31%
Volatility(VIX) 12.04 +4.15%
ISE Sentiment 124.0 -24.85%
US Dollar 83.96 +.83%
CRB 298.49 -2.80%

Futures Spot Prices
Crude Oil 58.14 -4.77%
Reformulated Gasoline 154.50 -4.41%
Natural Gas 6.15 -2.22%
Heating Oil 158.33 -3.94%
Gold 629.50 -1.33%
Base Metals 222.26 -4.83%
Copper 266.0 -7.35%
10-year US Treasury Yield 4.66% -.47%

Leading Sectors
Airlines +3.88%
I-Banks +1.46%
Networking +1.44%

Lagging Sectors
Gold & Silver -3.73%
Energy -3.78%
Oil Service -4.36%

Evening Review
Detailed Market Summary
Market Gauges
Daily ETF Performance
Style Performance
Market Wrap CNBC Video(bottom right)
S&P 500 Gallery View
Economic Calendar
Timely Economic Charts
GuruFocus.com
PM Market Call
After-hours Movers
Real-time/After-hours Stock Quote
In Play

Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Crude oil in NY plunged the most in 20 months as mild US weather curbed record speculation by investment funds.
- Blockbuster Inc.(BBI) reached its goal of 2 million paying subscribers for its online service by the end of 2006. The shares touched a 14-month high.
- Manhattan apartment prices rose another 3.2% in the fourth quarter from a year earlier.
- The UN is investigating a report that its peacekeeping troops in Sudan raped and sexually abused children as young as 12.
- About 750,000 US port workers must get criminal background checks and carry federal identification cards for access to secure areas, the Homeland Security Dept. said.
- General Motors(GM) and Ford Motors’(F) December US sales each fell 13% as consumers bought fewer gas guzzling pick-up trucks and sport-utility vehicles. Toyota Motors’ rose 12%.
- The S&P 500 will exceed 1,600 this year because profits will grow more than 10%, said Byron Wien, chief market strategist of Pequot Capital Management.
- The US Dollar rose the most since July against the euro and reached a two-month high versus the yen after a report showed manufacturing in the US expanded in December.
- Copper prices in NY plunged 7.7% to a seven-month low as record speculation by investment funds continues to subside as inventories rise.

BOTTOM LINE: The Portfolio finished slightly lower today as losses in my Medical longs, Biotech longs and Semi longs more than offset gains in my Internet longs and Commodity shorts. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was slightly positive today as the advance/decline line finished slightly higher, most sectors rose and volume was heavy. Measures of investor anxiety were mostly higher into the close. Today's overall market action was slightly bearish. Last year, oil rose $2.05/bbl. on the first trading day of the year and $7.40/bbl. through the first three weeks of trading as commodity funds, flush with new capital, drove futures prices higher. I suspect, given the average commodity hedge fund fell around double-digits last year as the CRB Index dropped 7.4%, that many energy-related funds saw outflows at year-end. Today, oil fell $2.84/bbl. I continue to believe the many U.S. stock market bears and many bulls raised cash in December in anticipation of a pullback this month. Considering the overwhelming majority of funds failed to meet the S&P 500's 15.8% return last year, I suspect most managers have a very low threshold of pain this year for falling substantially behind their benchmark once again. There is still massive bull firepower available on the sidelines as short interest remains near record highs, the herd remains bearish on U.S. stocks, money market funds are flush with cash and buyout firms remain active. U.S. stocks remain cheap and p/e multiple expansion should accelerate this year. I still expect US stocks, with the exception of commodity-related shares, to post strong January gains notwithstanding today’s intraday volatility.

Stocks Slightly Slower into Final Hour on Substantial Decline in Commodities

BOTTOM LINE: The Portfolio is slightly lower into the final hour as looses in my Medical longs, Semi longs and Biotech longs more than offset gains in my Commodity shorts. I added (EEM), (IWM) and (QQQQ) hedges today, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is heavy. "High School Dropout" copper is plunging another 7% today and is down 34.6% from its May 11, 2006, all-time high. Freeport-McMoRan Copper & Gold (FCX) is now down almost 10% since it announced its acquisition of Phelps Dodge (PD) and I said it made an excellent short. I continue to believe that this deal won't be accretive for years as FCX vastly overpaid for PD. At $4.07 per pound, copper was priced at absurd levels. Even as U.S. housing construction slowed dramatically and Chinese consumption decelerated meaningfully, copper bulls tried to justify ever higher prices. Copper quit trading on fundamentals quite some time ago as psychology and record speculation by investment funds, spurred by a massive historic influx of capital, drove the metal to astronomical levels. With most commodity funds posting double-digit losses last year, I suspect this flood of capital is receding significantly. Copper's demise is a function of the ending of a mania and does not indicate a substantial slowdown in global economic activity. In my opinion, the recent dramatic decline in copper even as the U.S. dollar weakened, inventories remained low by historic levels and economic data exceeded estimates unmasked the true fluff that had been propping up the commodity. I believe one of the big stories of 2007 will be the continuation of the stunning declines in many commodities as the CRB Index breaks down into bear market territory, which will have meaningful negative consequences for many commodity-dependent emerging market economies and stock markets. The CRB Index is already down 18.2% from record highs. Many of the same investment funds that had been speculating on ever higher commodity prices will likely switch sides and jump on the downside bandwagon, thus driving prices even lower than would otherwise be the case. I suspect energy and then gold will follow copper substantially lower over the coming months. I suspect many funds that came into the new year overweight commodity stocks, especially energy, are now hunkering down to re-evaluate strategy. This could last a few more days, but I still expect January to be a good month for U.S. stocks, excluding commodities. Overseas markets, especially emerging, will likely come under pressure tonight on the commodity drop and U.S. stock reversal. I expect US stocks to trade modestly higher into the close from current levels on short-covering, declining long-term rates and lower energy prices.

Today's Headlines

Bloomberg:
- Crude oil in NY plunged the most in 20 months as mild US weather curbed demand and record speculation by investment funds continues to subside.
- Copper prices in NY plunged 7.7% to a seven-month low as rising global inventories cut record speculation by investment funds. Copper is now down 35% from May 06 highs.
- The US Dollar is rising the most since July against the euro and reached a two-month high versus the yen after a report showed manufacturing in the US expanded in December.
- Fed Reserve officials concluded that the risk inflation would fail to slow was “the predominant concern” last month while acknowledging that chances for slower economic growth increased.
- Home Depot(HD) ousted CEO Nardelli after investors criticized him for earning $225 million while the company’s stock fell during his six-year tenure.
- The northeastern US may start to see winter-like temperatures by the middle of January, countering a warmer-than-average December, forecasters said.

NY Times:
- Makers of air fresheners are focusing on teenagers as younger consumers are becoming big users of the product.
- Education is the single social factor researchers agree is consistently linked to a longer life.

AP:
- US military helicopters and the National Guard are delivering food to people stranded by blizzards in Colorado, Kansas, Nebraska, and Oklahoma.

Multichannel News:
- News Corp.(NWS) has reached a distribution commitment agreement for its planned business-news network with Time Warner(TWX) as part of a broader accord. Time Warner’s large subscriber base and strong presence in Manhattan is critical to the success of the proposed News Corp. channel against rivals including CNBC.

Washington Post:
- US shopping malls, which have become modern day town centers, starting this month will train their 20,000 security guards to fight terrorism.

Financial Times:
- Investments in clean and renewable energy rose 43% to $70 billion last year, citing research company New Energy Finanace.

Construction Falls Less Than Estimates, ISM Manufacturing Expands, ISM Prices Paid Declines Again

- Construction Spending for November fell -.2% versus estimates of a -.5% decline and an upwardly revised -.3% decline in October.
- ISM Manufacturing for December rose to 51.4 versus estimates of 50.0 and a reading of 49.5 in November.
- ISM Prices Paid for December fell to 47.5 versus estimates of 54.0 and a reading of 53.5 in November.

BOTTOM LINE: Construction spending in the US fell for a third straight month in November, but less than analysts had expected and the prior month was revised higher. Spending on private residential building fell 1.6%. Construction of offices, warehouses, hospitals and schools is cushioning the slowdown in homebuilding. Total non-residential construction rose 14.7% from year-ago levels. While the worst of the housing slowdown is very likely over, homebuilders will continue to pare down inventories which will mute overall construction spending through at least the first half of this year.

Manufacturing in the US unexpectedly expanded in December, Bloomberg reported. A reading above 50.0 signifies expansion. Resilient consumer spending and continued growth in exports has resulted in lower inventories, helping stabilize factory production. The Employment Component of the index rose to 49.7 versus 49.2 the prior month. The New Orders Component of the index rose to 52.1 versus 48.7 the prior month. The Inventory Component fell to 48.4 versus 49.7 the prior month. Manufacturing will likely improve slowly during the first half of the year as auto production cutbacks and housing inventories continue to subside.

Links of Interest

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Wednesday Watch

Weekend Headlines
Bloomberg:
- US stocks rose last week, extending their biggest annual gain since 2003 after reports on home sales and consumer confidence suggested the economy has weathered the worst of the housing slump.
- The Dow Jones Industrial Average finished 2006 with a 19.0% total return and near an all-time high.
- Former Iraqi dictator Saddam Hussein, who was accused of killing more than 100,000 civilians during his 23-year rule over oil-rich Iraq, was hanged in Baghdad for crimes against humanity.
- The death of Iraq’s former dictator Saddam Hussein was “divine justice,” Kuwait’s Minister of Social Affairs and Labor Sheikh Sabah Al-Khalid Al-Hamad Al-Sabah said.
- Wal-Mart Stores(WMT) said December sales at US stores open at least a year rose about 1.6%, the most since August.
- US Treasuries had their best half-year since 2002 as the Federal Reserve ended two years of interest-rate increases and investors began to anticipate rate cuts next year.
- China’s central bank, under pressure from the US and other Group of Seven nations to make the yuan more flexible, will in 2007 pursue a “stable currency policy” to promote economic growth.
- Cattle can be genetically altered to lack the protein that causes mad-cow disease without adverse health effects, a study suggests.
- South Korea isn’t likely to face a “drastic” economic slowdown as oil prices decline further and concerns about North Korea’s nuclear weapons diminish, Finance Minister Kwon Okyu said.
- Hundreds of mourners filed through the US Capitol to pay final respects to President Gerald Ford.
- An EIA report that showed US crude-oil supplies fell 8.13 million barrels last week was partly a correction of the previous week’s report.
- Hedge-fund managers and other large speculators increased their net-long position in NY crude oil futures last week, according to the CFTC. Oil drillers, refiners, marketers and other commercials users were net short 3,755 contracts, an increase of 2,093 contracts or 126% from the prior week.
- The price of US steel sheet fell to the lowest in 13 months as demand fell, companies delayed new orders and imports surged, Purchasing Magazine said. Prices fell for the fourth month in a row after US imports in the nine months ended September soared 45%.
- Lennar Corp.(LEN) said it will post a loss in the fiscal fourth quarter due to a one-time charge of as much as $500 million.
- European manufacturing growth unexpectedly slowed in December after interest rates rose and the stronger euro clouded the outlook for exports.
- Bear, Stearns’(BSC) Francois Trahan, one of Wall Street’s biggest bears during a four-year rally in US stocks, raised his year-end forecast for the S&P 500 Index to 1600 from 1550.
- US gasoline at the pump declined 7 cents to $2.33/gallon last week, an EIA report showed.
- Copper fell the most in seven weeks in London, extending a slump to an eight-month low.
- The cost of transporting crude oil to Asia and the US from the Middle East may fall, extending a two-week decline, as reduced import demand leaves a surplus of vessels.
- Pfizer(PFE), Amgen(AMGN) and the rest of the pharmaceutical industry awake to a new reality this week: a Congress controlled by Democrats determined to impose costly restrictions on their business. Five committees are planning investigations into how to lower prices paid by Medicare and make generic medications available faster. Further probes and policy salvos may follow.
- Ensco Intl.(ESV) will join the S&P 500 Index, replacing BellSouth Corp.
- Starbucks Corp.(SBUX) removed trans fatty acids from pastries and drinks at more than 2,700 company-owned restaurants in the US and is aiming cutting the unhealthy fats entirely.

Wall Street Journal:
- Economists think that US economic growth will accelerate in the second half of this year as service businesses boom and housing and manufacturing slumps lessen, citing its own survey of 60 economists. On average, the economists forecast that real gross domestic product will increase at an annualized rate of 2.3% in the first half and 2.8% in the second half.
- The biggest US airlines will report for 2006 their first overall full-year profit since 2000, as the US economy remained strong and the companies filled their planes, citing data from the Air Transport Association trade group.
- AT&T(T) plans to focus on selling wireless services to consumers and corporations.

CBS Marketwatch.com:
- If the supply of equities continues to dwindle and retail investors also rediscover their former penchant for US stock mutual funds, it could mean the market in 2007 would get a significant push higher, some strategists say.

NY Times:
- Pitney Bowes(PBI), the world’s biggest maker of postal meters, is looking to China and direct marketers to counter a decline in single-letter mailings since the introduction of e-mail, citing CEO Critelli.
- Walt Disney(DIS) will introduce Jan. 8 the yearlong makeover of its Disney.com Web site, which has been called amateurish and difficult to navigate.
- Wal-Mart Stores(WMT) wants consumers to embrace compact fluorescent lamps, which burn less electricity than traditional light bulbs, as part of a plan to lower energy use.
- Investment banks, such as UBS AG and Bear Stearns(BSC), lease space in their offices to hedge fund firms, a relationship that may lead to a potential conflict of interests.
- The US and its European allies are working to increase pressure on Iran to end its nuclear ambitions by developing a financial and psychological strategy.

Washington Post:
- The Department of Homeland Security is helping fund intelligence centers run by local and state law enforcement agencies.
- Senators Hillary Clinton and Barack Obama, likely frontrunners for the 2008 Democratic presidential nomination, have opposed earch other on at least 40 roll-call votes taken during the overlap in their Senate terms.

AP:
- The Spokane Tribe of Indians has reached a tentative agreement with Washington state and the federal government to operate as many as five casinos in the state.
- The American College of Obstetricians and Gynecologists recommended that every pregnant woman, regardless of age, be given the option of having a test for Down syndrome.

LA Times:
- Enterprise Rent-A-Car Co., which last year had $9 billion in sales, expects increasing rentals of luxury cars to California drivers who want to make an impression.
- Boeing’s(BA) orders for its latest version of the 747 passenger jetliner, the 747-8, have prompted the company’s suppliers to increase hiring, citing executives at suppliers.

Financial Times:
- Warren Buffett’s $31 billion donation to Microsoft Corp.(MSFT) Chairman Bill Gates’ Bill & Melinda Gates Foundation last year helped make 2006 a record year for US charitable donations, citing Chronicle of Philanthropy data.
- Many commodities investors lost money in 2006, and individual commodities varied in price rather than went up or down in unison. The Goldman Sachs Commodities Index dropped 15% last year, as many investors lost money on oil futures.

National Post:
- A Few Kind Words About Growth Stocks by Noah Blackstein.

The Observer:
- Online Christmas shopping in the UK increased by 50% this year compared to 2005, citing Interactive Media in Retail Group.

The Mail on Sunday:
- Nasdaq Stock Market(NDAQ) said it will set up a rival market to the London Stock Exchange if its bid for the LSE fails.

Times of London:
- A venture of Verizon Communications(VZ) and Vodafone Group Plc(VOD) may bid for Alltel Corp.(AT), the fifth biggest cell-phone operator in the US, to become the nation’s largest.
- Some 10% of television will soon be watched via the internet rather than traditional broadcasts, according to the BBC.

PAP newswire:
- PKN Orlen SA, Poland’s largest oil company, may spend more than $140 million on investments in oil extraction this year.

Fars News Agency:
- Iran will loan Iraq $1 billion for infrastructure projects.

Bild-Zeitung:
- McDonald’s(MCD) is Germany’s favorite restaurant, followed by LSG Lufthansa, the airline caterer, and Burger King(BKC).

Xinhua News Agency:
- Chinese corn processors are expanding ethanol production, with a yearly output of 10 million tons planned compared with 1.02 million tons today.

Weekend Recommendations
Barron's:
- Made positive comments on (GXP).
- Made negative comments on (T) and (SWY).

Night Trading
Asian indices are -.25% to +.50% on average.
S&P 500 indicated +.60%.
NASDAQ 100 indicated +.68%.

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Earnings of Note
Company/Estimate
- (BLUD)/.18
- (SONC)/.19
- (WITS)/.18

Upcoming Splits
- None of note

Economic Releases
8:15 am EST
- ADP Employment Change for December is estimated at 123K versus 158K in November.

10:00 am EST
- Construction spending for November is estimated to decline -.5% versus a -1.0% decline in October.
- ISM Manufacturing for December is estimated to rise to 50.0 versus 49.5 in November.
- ISM Prices Paid for December is estimated to rise to 54.0 versus 53.5 in November.

2:00 pm EST
- Minutes of Dec. 12 FOMC Meeting

Afternoon:
- Total Vehicle Sales for December are estimated to rise to 16.5M versus 16.1M in November.

BOTTOM LINE: Asian Indices are mostly higher, boosted by financial and technology shares in the region. I expect US stocks to open modestly higher and to maintain gains into the afternoon. The Portfolio is 100% net long heading into the week.