Stocks Finish Lower on Profit-taking and Rising Long-Term Rates

Indices
S&P 500 1,423.90 -1.13%
DJIA 12,502.56 -.94%
NASDAQ 2,434.24 -1.30%
Russell 2000 784.19 -1.24%
Wilshire 5000 14,299.17 -1.10%
Russell 1000 Growth 561.80 -1.09%
Russell 1000 Value 817.54 -1.12%
Morgan Stanley Consumer 705.22 -.89%
Morgan Stanley Cyclical 917.13 -.72%
Morgan Stanley Technology 559.54 -.79%
Transports 4,754.86 -1.39%
Utilities 450.62 -.59%
Put/Call 1.20 +44.58%
NYSE Arms .85 +12.68%
Volatility(VIX) 11.22 +13.45%
ISE Sentiment 103.00 -9.65%
US Dollar 85.09 +.19%
CRB 293.49 -.88%

Futures Spot Prices
Crude Oil 54.31 -1.91%
Reformulated Gasoline 145.10 -.73%
Natural Gas 6.85 -7.75%
Heating Oil 155.34 -1.93%
Gold 652.00 -.38%
Base Metals 235.85 +.60%
Copper 263.60 +1.33%
10-year US Treasury Yield 4.87% +1.36%

Leading Sectors
Steel +1.21%
REITs +.64%
Semis -.56%

Lagging Sectors
Homebuilders -2.27%
Oil Service -2.56%
I-Banks -2.68%

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Afternoon Recommendations
Bear Stearns:
- Rated (CNH) Outperform.

Afternoon/Evening Headlines
Bloomberg:
- Natural gas plunged over 7% in NY as record-high inventories for this time of the year caught up with massive speculation by investment funds on the commodity.
- Crude oil fell over $1/bbl. after Energy Secretary Bodman said the US tariff on ethanol imports will probably need to be lifted to meet President Bush’s goal of increasing the use of renewable fuels.
- Amgen Inc.(AMGN) said fourth-quarter profit rose 1% as research spending climbed faster than sales of its anemia and cancer drugs.
- General Motors(GM) said it will delay filing fourth-quarter and 2006 results because it has to restate earlier financial reports.
- Microsoft’s(MSFT) second-quarter earnings fell less than analysts predicted after the world’s largest software maker sold more Xbox video games and database programs. The company raised its profit forecast for this year.
- US treasuries fell, pushing yields to the highest level since August, as an industry report showed housing inventories continue to fall.
- Petroleo Brasileiro SA, Brazil’s state-controlled oil company, plans to begin shipments of ethanol to Nigeria in February, part of the African nation’s plan to add the sugar-based fuel to gasoline.
- WFR, IRF and VSEA are semiconductor companies that are trading substantially higher in after-hours trading on positive earnings reports.

CNBC:
- Georgia Gulf Corp.(GGC), Gateway Inc. and 1-800-Flowers.com Inc. may see their share prices more than double during the next year, Arne Alsin, the founder of Alsin Capital Management.
- Some Harrah’s Entertainment(HET) shareholders think the $90 per share price offered for the company by Apollo Management LP and Texas Pacific Group is too low.

Cnet’s News.com:
- Google is again buying Intel Corp.(INTC) chips to run server computers after the search engine switched to processors from Advanced Micro Devices(AMD) last year.

Miami Herald:
- The number of Venezuelans seeking asylum in the US has risen since President Hugo Chavez came to power in the South American nation, citing the US Office of Immigration Statistics.

Financial Times:
- China’s President Hu Jintao said he wants to “purify the Internet environment” and called for officials to step up efforts to control online activity.

AP:
- NYC may wrap its free condoms in a subway-themed design to boost safe sex and reduce the number of HIV/AIDS cases, citing Health Commissioner Thomas Frieden.

BOTTOM LINE: The Portfolio finished lower today on losses in my Internet longs, Medical longs and I-banking longs. I added IWM/QQQQ hedges in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was negative today as the advance/decline line finished substantially lower, almost every sector declined and volume was above-average. Measures of investor anxiety were higher into the close. Today's overall market action was bearish. Today's selling felt forced to me. While most sectors declined, many small-to-mid-cap stocks were higher beneath the surface. The U.S. Dollar and 10-year yield are near session highs on more economic optimism after housing inventories fell again. Oil is near session lows, after a 7% plunge in natural gas as record inventories for this time of the year are catching up with the massive speculation that has been propping up prices. I sense that a very large percentage of investors are down for the year after underperforming last year. This, combined with confusion over economic readings, is leading to increased volatility in the major averages. I continue to believe the next meaningful move is higher for stocks.

Stocks Sharply Lower into Final Hour on Profit-taking and Rising Long-term Rates

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet longs, Telecom longs and Retail 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, every sector is declining and volume is above-average. The U.S. economy is accelerating modestly based on all the gauges I monitor. I suspect the recent surge in yields is mainly the result of the "housing price collapse" theory quickly losing supporters.Just a few months ago, when the 10-year was around 4.5%, I would guess the majority expected substantial price declines in the average home price, which would have led to much slower economic growth than the mild deceleration seen in the second half of last year. While substantial home price declines are unlikely -- the Case-Schiller Housing futures are now forecasting just a 1.5% decline in the average home price by May, up from projections of a 5.2% increase a few months ago -- I do not expect economic growth to accelerate too much. There are still too many economic drags along with a likely deceleration in global growth. As well, measures of inflation are poised to show another meaningful deceleration as the hugely positive effects of the decline in commodities works through the system. I took profits in most of my iShares Lehman 20+ Year Treasury Bond (TLT) long a few months ago. I will look to build this long position back up on any move in the 10-year yield to around 5%. The bottom line is, in my opinion, that the yield rising modestly is a good thing as a severe economic downturn is less likely while lower inflation readings are more likely. The 10-year yield is currently stabilizing. This should help stocks into the close. The yield is now 5 basis points higher after reaching 7 over the last hour. My intra-day gauges of investor angst are elevated. As well, the VIX is surging 14%. The CBOE total put/call is an above-average 1.27. Considering a triple-digit Dow loss, I have an unusual amount of green on my screens that monitor about 1,000 stocks. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, short-covering, more economic optimism and falling energy prices.

Today's Headlines

Bloomberg:
- Crude oil is falling again, pulled lower by a 7% plunge in natural gas, as speculation subsides with inventories still at record highs for this time of year.
- The US tariff on ethanol imports will probably need to be lifted to meet President Bush’s goal of increasing the use of renewable fuels, Energy Secretary Bodman said.
- Blackstone Group LP increased its offer for Sam Zell’s Equity Office Properties Trust(EOP) to $38.3 billion to thwart Vornado Realty Trust in the world’s biggest leveraged buyout.
- Shares of EBay Inc.(EBAY) rose the most in eight months after the company boosted its full-year profit forecast and posted a 24% fourth-quarter profit gain, spurred by growth in Europe.
- Saudi Arabia, the US and France lead donors pledging a total of $7.6 billion in new funds to help rebuild Lebanon and lend support to Prime Minister Fouad Siniora’s government, French President Jacques Chirac said.

Wall Street Journal:
- American Stock Exchange has appointed Morgan Stanley to advise it on becoming a for-profit company as it prepares for a possible stock offering or merger with another exchange.
- US bank start-ups rose to more than 150 last year, the most since 2000, citing the research firm SNL Financial LP.
- Freeport-McMoRan Copper & Gold’s(FCX) $25.5 billion takeover bid for Phoenix-based Phelps Dodge(PD) is more likely to succeed now than it was when it was proposed in November, thanks to a plunge in copper prices.
- Shares of Research In Motion(RIMM) have fallen 10% since Apple Inc.(AAPL) announced its iPhone on Jan. 9, but it’s far too soon to write off the Canadian company.

NY Times:
- Hedge fund managers are becoming significant fund-raisers for political candidates, providing at least $2.8 million in contributions to candidates and party committees last year. Hillary Clinton’s campaign will get money from Lisa Perry, whose husband, Richard, runs a $12 billion hedge fund. John Edwards has gotten money from executives he worked with at Fortress Investment, a $29.7 billion fund. Chelsea Clinton was hired by Avenue Capital, a $12 billion fund whose head contributes to the Clintons.

Washington Post:
- Lockheed Martin Corp.(LMT) has won a bid to provide high-tech identification cards for US ports.

Financial Times:
- Kohlberg Kravis Roberts’ decision to buy $700 million of Sun Microsystems(SUNW) convertible notes limits the buyout firm’s risks, and it gives KKR a chance for gains if Sun stock rises enough.

Rzeczpospolita:
- Sniace SA, a Spanish chemicals maker, will build a bio-fuel plan in west Poland for as much as $156 million.

Haaretz:
- SanDisk Corp.(SNDK) may close down the disc-on-key unit of M-Systems Flash Disk Pioneers Ltd. two months after completing its acquisition of the smaller company.

Job Market Still Healthy, Existing Home Sales Stable

- Initial Jobless Claims rose to 325K versus estimates of 310K and 289K the prior week.
- Continuing Claims fell to 2484K versus estimates of 2480K and 2523K prior.
- Existing Home Sales for December fell to 6.22M versus estimates of 6.25M and 6.27M in November.

BOTTOM LINE: The number of Americans filing first-time claims for state unemployment benefits rose more than forecast last week from the lowest level in 11 months, Bloomberg reported. The four-week moving average rose to 309,250 from 307,750 the prior week. The unemployment rate held near a five-year low in December and average hourly wages rose 4.2%, almost twice the current inflation rate as measured by the Consumer Price Index. The weekly unemployment rate among those eligible for benefits, which tracks the US unemployment rate, remained steady at 1.9%. According to a recent survey by the National Assoc. for Business Economics, 33% of executives plan to add jobs over the next 6 months, up from 29% the prior quarter. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

Sales of previously owned homes in the US declined in December after increases the prior two months that point to a gradual improvement in the housing market. The median price of an existing home finished the year at $222,000 and 1.1% higher from 2005 levels. The median home has risen in value by over 50% the last few years. The number of existing homes on the market at the current sales pace fell to 6.8 months’ worth, down from 7.3 months’ worth at the end of the prior month. I continue to believe home inventories will plunge this year back to more normal levels as demand has only fallen half of the amount construction has declined. Existing home sales fell 9.1% in the West and 2.8% in the Northeast. They rose 4.3% in the Midwest and .8% in the South. I still believe that the worst of the housing downturn is over and that it will subtract less from economic growth through year-end and begin adding again in 2008.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- China’s economy grew 10.4% in the fourth quarter, down from 11.5% in the second quarter and 10.6% in the third quarter. “China’s growth is exceptionally high, but it’s unbalanced” said Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong. “The big challenge is to make growth more sustainable and avoiding a hard landing.”
- South Korea’s economy slowed more than expected in the fourth quarter as exports fell, business investment cooled and consumer spending remained weak. Asia’s third-largest economy grew .8% in 4Q, down from growth of 1.1% in 3Q.
- The US plans to offer $770 million in aid to Lebanon to help shore up the country and its pro-Western government, Secretary of State Rice said.
- “American Idol,” the most popular show in primetime television, withstood last week’s criticism over judging and returned last night with the third-largest audience for an entertainment show this season with about 32.6 million viewers.
- The US government would start raising fuel-efficiency standards for cars within 3 years and for light trucks such as sport-utility vehicles two years later, under a plan by President Bush’s administration. The proposal would reduce gasoline use 5% during the next 10 years, Transportation Secretary Mary Peters said. “The president believes we can reduce our gasoline consumption by up to 8.5 billion gallons by 2017, which amounts to a savings of about 1 million barrels of oil a day.”
- SEC officials, financial advisers and attorneys plan to review whether new eligibility thresholds for investing in hedge funds go far enough to help regulate the $1.3 trillion industry.
- Nasdaq Stock Market(NDAQ) CEO Greifeld rebuffed the London Stock Exchange’s challenge to raise his offer for the UK bourse before it expires at the end of this week.
- Jiangxi Copper Co., China’s biggest producer of the metal, said it will boost production capacity 25% this year.
- PT Aneka Tambang, Indonesia’s second-largest nickel miner, said it may incrase output of the metal by as much as 52% this year.
- Imports of crude oil by Japan, the world’s largest consumer of oil after the US and China, fell for an eighth month in December from a year earlier.
- Hedge funds are fleeing the tax haven of the Virgin Islands, hounded by IRS.

Wall Street Journal:
- Home Depot(HD) CEO Frank Blake rejected the company’s first compensation package as too rich, in contrast to predecessor Robert Nardelli who came under fire for his pay. Blake preferred equity grants related to performance measures, a salary of less than $1 million an a total package worth less than what Lowe’s Cos. CEO Robert Niblock is paid.

Commercial Times:
- Texas Pacific Group, KKR and Silver Lake Partners, are among buyout funds interested in buying Taiwanese chipmaker United Microelectronics.

AFP:
- Russia and Japan plan to increase joint cooperation in the energy sector after completing the first round of talks.

Xinhua News Agency:
- Chinese geologists have discovered copper deposits that contain 26.8 million tons of the metal, citing Zhang Hongtao, deputy head of the China Geological Survey. The mines are expected to boost China’s copper mine production by 33%, easing the nation’s reliance on imports.

Late Buy/Sell Recommendations
Citigroup:
- Upgraded (GLW) to Buy, target $29.
- The Congressional Budget office projected the US government budget deficit will drop 31% to $172 billion, or 1.3% of the economy, for the 2007 fiscal year. This is well below the August estimate of $286 billion. The 40-year average for the US budget deficit is 2.3% of GDP.

Morgan Stanley:
- Rated (AFFY) Overweight, target $47.

Night Trading
Asian Indices are -.25% to +.25% on average.
S&P 500 indicated -.03%.
NASDAQ 100 indicated +.21%.

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Earnings of Note
Company/EPS Estimate
- (AGR)/.22
- (AMGN)/.94
- (T)/.59
- (BAX)/.61
- (BZH)/.26
- (BEBE)/.28
- (BDX)/.92
- (BJS)/.96
- (BMY)/.16
- (ELY)/-.12
- (CAH)/.77
- (DOW)/.93
- (DJ)/.43
- (EMN)/.93
- (ELX)/.27
- (FII)/.48
- (F)/-1.00
- (BEN)/1.51
- (HAL)/.61
- (HAR)/1.20
- (HIG)/2.26
- (IMCL)/.41
- (IRF)/.54
- (KMB)/1.02
- (LEA)/-.19
- (LM)/1.13
- (LMT)/1.45
- (MEE)/1.08
- (MHP)/.59
- (MCK)/.68
- (MSFT)/.23
- (NOC)/1.26
- (NUE)/1.13
- (BTU)/.63
- (RHI)/.44
- (SHW)/.67
- (SO)/.23
- (STJ)/.39
- (SWK)/.98
- (SYK)/.55
- (SY)/.46
- (WDC)/.53
- (ZOLL)/.19

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Initial Jobless Claims for last week are estimated to rise to 310K versus 290K the prior week.
- Continuing Claims are estimated to fall to 2480K versus 2530K prior.

10:00 am EST
- Existing Home Sales for December are estimated to fall to 6.25M versus 6.28M in November.

BOTTOM LINE: Asian indices are mixed as strength in technology shares is being offset by weakness in financial shares in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.