Tuesday Watch

Late-Night Headlines
Bloomberg:

- President-elect Barack Obama told House Speaker Nancy Pelosi today that he favors a U.S. economic stimulus plan of about $775 billion, a Democratic aide said. Obama met with congressional leaders from both parties at the Capitol to help craft and shore up support for a two-year plan to boost the sagging economy. He said the legislation would cut taxes for individuals and businesses and spend money on government programs to rebuild the nation’s infrastructure. Obama plans to deliver a speech on the economy on Jan. 8.

- The euro fell against the yen and traded near a three-week low versus the dollar before European Union data that may show inflation slowed in December, giving the European Central Bank more room to lower interest rates. “Poor economic fundamentals in euroland warrant further rate cuts from the ECB,” said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments LLC in Boston. “The interest-rate differential is moving in favor of the dollar again.” The euro may fall to $1.30 in three months, said Upadhyaya. “I am very bullish on the dollar throughout 2009,” said Matt Esteve, foreign-exchange trader at currency-trading firm Tempus Consulting Inc. in Washington, in an interview on Bloomberg Television. “I think it’s because the U.S. economy is best set for recovery in 2009.”

- Endo Pharmaceuticals Holdings Inc.(ENDO), the maker of Lidoderm pain patches, said it will buy Indevus Pharmaceuticals Inc.(IDEV) for as much as $637 million, to add new products and expand its sales force by 100 people.

- AU Optronics Corp.(AUO), Taiwan’s largest liquid-crystal display maker, had its 12-month share price target raised 21% at Citigroup Inc., citing “recent improvement in product prices.”

- William Ackman’s hedge fund that invests in Target Corp.(TGT) fell 68 percent last year, more than double the loss by the second-largest U.S. discount chain. Pershing Square IV declined 7.7 percent in December alone, according to a letter to investors from Pershing Square Capital Management LP.

- In many cases, the hedge fund industry has taken a bad situation and made it worse. Many funds have placed limits on withdrawals that investors can make. In effect, people are locked into a falling asset. That is a big mistake.

cnet:

- Apple(AAPL) has cut deals that will finally enable iTunes to offer songs free of copy protection software from the three largest music labels, according to two sources close to the negotiations. In exchange, Apple has agreed to become more flexible on pricing, the sources said.

- Searches at Microsoft's(MSFT) Windows Live Search site dropped again in November from a year ago while Google's(GOOG) continued to rise, according to Nielsen Online figures released on Monday. Searches at Windows Live Search fell 16.7 percent year-over-year, giving Microsoft 9.1 percent market share in the U.S. in November. Google's searches rose 21.7 percent, for 64.1 percent market share, and Yahoo's(YHOO) searches dropped 1.4 percent from November 2007, for 16.1 percent share. Total searches for the month exceeded 8 billion, up 9.6 percent from a year earlier.

CNBC.com:
- Hedge fund firm JD Capital Management is liquidating a roughly $1 billion fund that suffered heavy losses recently, the company's founder said on Monday. "We are unwinding the Tempo Master fund," said J. David Rogers, a former Goldman Sachs executive. He said the fund, which invested roughly $1 billion, was exposed to what he called the "more troubled" spots of the market. People familiar with the fund said it lost more than 40 percent.

NY Times:

- Representatives of 11 Northeastern states signed an agreement today to pursue a low-carbon fuel standard, which would aim to cut greenhouse gas emissions from motor fuels and home-heating fuels. The 11 states — which are the same states, plus Pennsylvania, that entered into the Regional Greenhouse Gas Initiative, a cap-and-trade system for carbon-dioxide emissions from power plants — aim to come up with a concrete plan by the end of this year. It must then be approved by the governors or perhaps the legislatures of the various states. President-elect Barack Obama has sought a similar standard on the national level.

- American Well, a Web service that puts patients face-to-face with doctors online, will be introduced in Hawaii on Jan 15. Its first customer, Hawaii Medical Service Association, the state’s Blue Cross-Blue Shield licensee, will make the Internet version of the house call available to everyone in the state, the company said. The service is for people who seek easier access to physicians because they are uninsured or do not want to wait for an appointment or spend time driving to a clinic, said Roy Schoenberg, co-founder and chief executive of American Well Systems, which is based in Boston.

- The new Congress plans to move aggressively against the tobacco industry in coming months by regulating cigarettes, raising per-pack sales taxes and ratifying an international antitobacco treaty, according to aides for key lawmakers and experts who expect the Obama administration to break a logjam on smoking issues.

- International Business Machines Corp.'s(IBM) chief executive, Samuel Palmisano, advised the Obama transition team last month that $30 billion in government investments in expanding broadband access, computerizing health-care records and improving the electrical grid could create more than 900,000 U.S. jobs.

CNNMoney.com:
- The Treasury Department said Monday it had invested $15 billion in another seven banks, including two companies that recently completed large takeovers of other banks. Under the $700 billion Troubled Asset Relief Program, Treasury has allocated $250 billion for capital investments in banks.

Forbes.com:

- 10 Cities For Job Growth in 2009.

IBD:

- Last summer, Genentech (DNA) rejected Swiss drug maker Roche Holding's $43.7 billion offer to buy the company. The $89-a-share bid was too low, the biotech giant's board said, but it kept the door open for a higher bid.

DailyTech:

- Thanks to a rapid rebound in recent months, global sea ice levels now equal those seen 29 years ago, when the year 1979 also drew to a close. Ice levels had been tracking lower throughout much of 2008, but rapidly recovered in the last quarter. In fact, the rate of increase from September onward is the fastest rate of change on record, either upwards or downwards. The data is being reported by the University of Illinois's Arctic Climate Research Center, and is derived from satellite observations of the Northern and Southern hemisphere polar regions. Earlier this year, predictions were rife that the North Pole could melt entirely in 2008. Instead, the Arctic ice saw a substantial recovery. Bill Chapman, a researcher with the UIUC's Arctic Center, tells DailyTech this was due in part to colder temperatures in the region. Chapman says wind patterns have also been weaker this year. Strong winds can slow ice formation as well as forcing ice into warmer waters where it will melt. Why were predictions so wrong? Researchers had expected the newer sea ice, which is thinner, to be less resilient and melt easier. Instead, the thinner ice had less snow cover to insulate it from the bitterly cold air, and therefore grew much faster than expected, according to the National Snow and Ice Data Center. In May, concerns over disappearing sea ice led the U.S. to officially list the polar bear a threatened species, over objections from experts who claimed the animal's numbers were increasing.

AP:

- Democratic Gov. Bill Richardson has hired a prominent white-collar attorney to represent him while a federal grand jury investigates how a top political donor landed lucrative state contracts, The Associated Press has learned. Peter Schoenburg is a partner in an Albuquerque law firm that specializes in criminal defense, complex civil and commercial litigation, Indian law and other issues.

- Citing growing budget shortfalls and troubling economic trends, Mayor Michael Bloomberg's administration is lobbying for direct aid and other assistance from the federal economic stimulus package, according to a letter sent to New York's congressional delegation. Bloomberg's administration outlined its concerns and requests in an 18-page document sent to the delegation today as Congress works to develop the enormous aid plan. The letter was obtained by The Associated Press.

- President-elect Barack Obama's decision to fill the nation's top intelligence jobs with two men short on direct experience in intelligence gathering surprised the spy community and signaled the Democrat's intention for a clean break from Bush administration policies. Former Clinton White House Chief of Staff Leon Panetta, an eight-term congressional veteran and administrative expert, is being tapped to head the CIA. Retired Adm. Dennis Blair is Obama's choice to be director of national intelligence, a selection expected for weeks, according to two Democrats who spoke on condition of anonymity because Obama has not officially announced the choices. Obama is sending an unequivocal message that controversial administration policies approving harsh interrogations, waterboarding and extraordinary renditions — the secret transfer of prisoners to other governments with a history of torture — and warrantless wiretapping are over, said several officials. Panetta could face tough questions at his nomination hearing about his background in intelligence. California Sen. Dianne Feinstein, who will chair the Senate Intelligence Committee, said Monday she was surprised by the pick, and neither was informed nor consulted. "I know nothing about this, other than what I've read," she said. "My position has consistently been that I believe the agency is best served by having an intelligence professional in charge at this time."

Reuters:

- Microsoft Corp (MSFT) sold 28 million units worldwide of its Xbox 360 video game console through the end of 2008, expanding the Xbox's lead over rival Sony Corp's PlayStation 3 console in worldwide unit sales, the company said on Monday. Xbox 360 product management director Aaron Greenberg said 2008 "was our biggest year ever in Xbox history" despite a sluggish global economy that's battered U.S. retailers this past holiday season.

The Independent:

- Bernard Madoff, accused of Wall Street's biggest ever fraud, mailed around $1m of jewelry, watches and other family heirlooms to friends and relatives in the days after his arrest, prosecutors say, in an attempt to prevent the authorities from getting their hands on them. Mr Madoff was brought before a New York court yesterday as the government sought to revoke his $10m bail, claiming he had violated its terms and was likely to try to flee the country. Last night, however, he remained free and under house arrest at his $7m penthouse apartment on Manhattan's exclusive Upper East Side, with legal wrangling set to continue before a final ruling on whether he must go straight to prison.

Nikkei:

- The Bank of Japan is likely to cut its outlook for the economy and prices at this month’s policy meeting ending on Jan.22. Members of the policy board, who in October forecast .6% growth for the year beginning April l, now expect the economy will shrink next year. Some members forecast a negligible contraction, while others see the economy shrinking as much as 2%. The central bank will also downgrade a previous forecast for prices to remain flat in fiscal 2009. Lower crude oil and commodity costs, combined with falling demand, will cause prices to fall.

Liberty Times:

- Taiwan’s car sales fell to a 23-year low in 2008, citing numbers from the Taiwan Transportation Vehicle Manufacturers Assoc. Sales dropped 30% to 299,495 vehicles last year.

Late Buy/Sell Recommendations

Bank of America:

- Recommended that investors bet that the Canadian dollar will weaken against the Swiss franc as the commodity boom falters. “The declining stimulus from the energy sector has just started to show up in Canadian economic figures.”

Night Trading
Asian Indices are -.25% to +1.25% on average.
S&P 500 futures -.09%.
NASDAQ 100 futures -.04%.

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Company/EPS Estimate
- (AYI)/.76

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Economic Releases

10:00 am EST

- The ISM Non-Manufacturing report for December is estimated to fall to 36.5 versus a reading of 37.3 in November.

- Factory Orders for November are estimated to fall 2.3% versus a 5.1% decline in October.

- Pending Home Sales for November are estimated to fall 1.0% versus a .7% decline in October.

2:00 pm EST

- Minutes of Dec. 16 FOMC Meeting.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly retail sales reports, Needham Growth Conference and Citi Entertainment/Media/Telecom Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by commodity and technology stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Lower, Weighed Down by Bank, Telecom and Gold Shares

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In Play

Stocks Lower into Final Hour on Profit-taking, New Shorting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Retail longs, Internet longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is neutral as the advance/decline line is slightly higher, sector performance is mixed and volume is below average. Investor anxiety is above average. Today’s overall market action is mildly bullish. The VIX is rising .05% and is very high at 39.24. The ISE Sentiment Index is below average at 121.0 and the total put/call is slightly below average at .83. Finally, the NYSE Arms has been running high most of the day, hitting 1.88 at its intraday peak, and is currently 1.28. The Euro Financial Sector Credit Default Swap Index is falling 5.73% today to 106.10 basis points. This index is up from a low of 52.66 on May 5^th, but down from 157.81 on Sept. 16^th. The North American Investment Grade Credit Default Swap Index is rising .33% to 200.67 basis points. The TED spread is up .66% to 134 basis points. The TED spread is now down 332 basis points in about three months. The 2-year swap spread is up 2.98% to 77.75 basis points. The Libor-OIS spread is rising .22% to 123 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is unch. at .13%, which is down 248 basis points in about six months and at the lowest level since Bloomberg record-keeping began in August 1998. The 10-year TIPS spread bottomed at .65% in October 1998 during the Asian financial crisis and at 1.24% in October 2001 during the technology bubble-bursting meltdown. The 3-month T-Bill is yielding .08%, which is unch. today. The broad market is performing better today than the major averages suggest. Market leading stocks are especially strong with many posting 2%+ gains. As well, despite more weak economic data, the most economically sensitive shares are top-performers again. The homebuilders are notably very strong, rising 6.4% today. The sell-off in long-term Treasuries remains a positive development. The US dollar continues to trade very well and looks poised for further gains despite being extended short-term. The AAII % Bulls plunged to 24.0%, with the % Bears surging to 54.67% last week, which bodes well for an extension of recent US stock gains after a brief period of consolidation. Nikkei futures indicate an +200 open in Japan and DAX futures indicate an +6 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, less economic pessimism, seasonal strength, less forced selling and short-covering.

Today's Headlines

Bloomberg:

- Byron Wien, the investment strategist who predicted a recession would drive U.S. stocks lower last year, says the Standard & Poor’s 500 Index will rebound 33 percent in 2009 as the economy recovers. “In anticipation of a second-half recovery in the U.S. economy, the market improves from a base of investor despondency and hedge fund and mutual fund withdrawals,” Wien wrote. “The mantra changes from ‘fortunes have been lost’ to ‘fortunes can still be made.’”

- Gold declined in London for a third day as the dollar strengthened, reducing the metal’s appeal as an alternative investment to the U.S. currency. Silver and platinum also declined. Bullion, which typically moves in the opposite direction to the U.S. currency, has lost 3.2 percent this year, while the dollar added 2.9 percent against the euro. The metal will trade at $800 an ounce in one and three months from now, UBS AG analyst John Reade said today in a note. “Unless the dollar remains weak, gold could succumb to some profit taking,” he said. “We are seeing no jewelry demand at the moment and while safe haven buying of coin and bars continues, this may not be enough to drive gold higher.”

- Crude oil rose for a third day on speculation that the conflict in the Gaza Strip may spread and disrupt oil supplies from other parts of the Middle East, and on signs that OPEC production cuts are being implemented.

- Codelco, the world’s biggest copper producer, agreed to further reduce a China sales surcharge as demand slows, after earlier cutting it to a six-year low, two executives said. “Chinese buyers are reluctant to enter into as many long-term contracts as before as they are concerned about demand,” Yang Changhua, an analyst at Beijing Antaike Information Development Co., said by phone today.

- The U.S. Securities and Exchange Commission may come under fire from lawmakers today for failing to quash Bernard Madoff’s alleged $50 billion Ponzi scheme after an investor alerted the agency to the suspected fraud. The House Financial Services Committee is scheduled to hear from one of Madoff’s alleged victims, securities law experts and the SEC’s inspector general, David Kotz, who’s probing the agency’s handling of the matter. Harry Markopolos, the former money manager who says regulators didn’t act on his tips about Madoff, canceled his appearance. “The SEC will have to defend its existence,” said Donald Langevoort, a former agency attorney who teaches securities law at Georgetown University in Washington.

- The cost of borrowing in dollars in London for three months stayed near the lowest level since June 2004 as central banks injected cash into money markets and financial companies to combat the credit squeeze.

- GE Capital Corp., the lending arm of Fairfield, Connecticut-based General Electric Co., plans to raise $10 billion in the biggest offering of debt backed by the Federal Deposit Insurance Corp. since the program began.

Wall Street Journal:

- The man who helped John Paulson pull off one of the greatest trades of this decade is leaving his side. Paolo Pellegrini, who played a crucial role in helping to implement bets against subprime mortgages that netted Paulson & Co. about $15 billion in 2007, resigned from the $36 billion hedge-fund firm Dec. 31. While Mr. Paulson is the visionary within the firm who drives its general direction, Mr. Pellegrini and a few others helped find the riskiest subprime-mortgage securities to bet against, and figured out the best way to capitalize on their expected falls in value.

- A multibillion-dollar hedge fund run by Renaissance Technologies LLC's James Simons has waived all its management fees for 2009, a rare move suggesting fund managers' pay will come under greater pressure in the year ahead. Mr. Simons recently told investors in his year-old futures fund, Renaissance Institutional Futures, that he was waiving the 1% fixed management fee this year following poor performance in 2008. That 12-month fee break equates to about a $30 million price cut from what investors in the $3 billion fund would have paid.

- Bernard L. Madoff Investment Securities LLC was examined at least eight times in 16 years by the Securities and Exchange Commission and other regulators, who often came armed with suspicions. SEC officials followed up on emails from a New York hedge fund that described Bernard Madoff's business practices as "highly unusual." The Financial Industry Regulatory Authority, the industry-run watchdog for brokerage firms, reported in 2007 that parts of the firm appeared to have no customers. Mr. Madoff was interviewed at least twice by the SEC. But regulators never came close to uncovering the alleged $50 billion Ponzi scheme that investigators now believe began in the 1970s.

- Support for property-tax rollbacks is building from Arizona to New York, fueled by angry homeowners in some locales who are seeing rising tax bills despite plunging home prices. Legislatures in New York, Georgia, Oklahoma and Wyoming are considering taking up proposals to curb property taxes in their 2009 sessions. In Indiana, a cap on property taxes enacted last year became effective Jan. 1, and lawmakers are planning to vote this year on whether to put before voters a constitutional amendment that would cap taxes permanently at 1% of a property's value.

- Illinois U.S. Senate appointee Roland Burris is leaving for Washington on Monday afternoon for a high-stakes showdown on Capitol Hill about whether he'll succeed President-elect Barack Obama in Congress. Mr. Burris, appointed by embattled Gov. Rod Blagojevich, was leaving a day after dozens of black leaders and ministers organized by Rep. Bobby Rush gave him a rousing send-off at New Covenant Church on Chicago's South Side.

CNBC.com:
- The Day the Apple(AAPL) Shorts Have Dreaded. First of all, good health and best wishes, Mr. Jobs. Second, Apple and Steve Jobs did this morning what they should've done months ago: quiet the rumors with a simple release indicating that he's OK.

MarketWatch:
- The New York Times(NYT), seeking more ways to generate revenue during a severe industry downturn, on Monday broke with longstanding policy and placed its first front page ad, with media giant CBS taking advantage of the new opportunity.

NY Times:

- LG Electronics, the third-largest television manufacturer in terms of United States sales, will announce on Monday a line of televisions that can directly receive Internet video in addition to satellite and cable signals.

- The Federal Reserve Bank of New York said Monday that it had begun purchasing mortgage-backed securities in an effort to bolster the battered housing market. The program, initially announced Nov. 25, allows the Fed to spend $500 billion to buy mortgage-backed securities guaranteed by mortgage giants Fannie Mae and Freddie Mac and another $100 billion to directly purchase mortgages held by Fannie, Freddie and the Federal Home Loan Banks. The program is aimed at driving down the price of mortgages and making home loans more available.

Washington Post:

- In his first meeting of a recent day, Vivek Kundra stood in front of a large monitor, grilling employees about the status of projects to revamp technology in Washington's schools, police cars, jails and health clinics. His ideas have caught the eye of President-elect Barack Obama's transition team and landed him a role as a tech policy adviser to the new administration. His approach could serve as a model for how a federal chief technology officer, a new position Obama has pledged to appoint, might operate. Kundra has been mentioned as a possible candidate for the job.

LA Times:

- For nearly a decade, television makers have been asking consumers to step into high definition. This week, they'll be asking buyers to step into three dimensions. At the Consumer Electronics Show in Las Vegas, companies such as Panasonic Corp., Samsung and Texas Instruments Inc. will show off TV technology capable of displaying 3-D-like pictures. The industry is billing it as the next big leap in TV technology.

The Big Money:

- Google(GOOG) Blog Outs New Product. Given Google's notorious secrecy, this doesn't happen too often: Over at Google's rarely noticed student blog, where the company hypes its internship programs, a blog editor accidentally divulged that Google was developing a major new enterprise search product for companies.

Reuters:
- Core OPEC oil producers in the Gulf would ignore Iran's call for Islamic countries to cut supplies to supporters of Israel in response to the Israeli offensive in Gaza, an OPEC source said on Monday. "There are no plans to do this and I think it is very unlikely," the source told Reuters.

- An investment arm of Australia's Macquarie Group Ltd has slashed prices by about a third from levels quoted nine months ago for one of its top-end Shanghai properties, underlining the difficulties investors face exiting China's cooling real estate market.

Handelsblatt:

- Germany’s coalition government agreed on the goalposts for a second stimulus program to tackle the recession, citing unnamed government officials. Senior Christian Democrats and Social Democrats agreed on additional infrastructure investment, aid to carmakers and lower taxes and social security contributions. The package will be worth $35 billion for this year.

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El Mercurio:

- Chilean energy demand in the most populated area of the country dropped .75% last year, the first decline since 1982.

Arabian Business:
- Villa prices at Nakheel PJSC’s Jumeirah Park and Jumeirah Island in Dubai have declined as much as 45% as speculators sell properties, citing Imran Aslam, an agent at property broker AAA.

Gulf News:

- Banks in the UAE and Kuwait have the highest exposure to the real-estate industry among Middle East lenders while those in Saudi Arabia have the least, citing a report by Credit Suisse Group AG. About 35% of UAE bank loans are exposed to the property industry as a significant portion of corporate and personal loans has been invested in real estate, citing Credit Suisse analysts Mohammad Hawa and Digvijay Singh. Kuwait banks’ exposure to the property industry is about 31%, while for Saudi Arabian lenders it averages 7.5%, the report said.

Bear Radar

Style Underperformer:
Large-cap Value (-.80%)

Sector Underperformers:
Gold (-1.86%), Medical Equipment (-1.65%) and Drugs (-1.44%)

Stocks Falling on Unusual Volume:
ENDP, VZ, KNDL, GEOY, GOLD, DB, CNMD, ALGT, NTES and VOLC

Stocks With Unusual Put Option Activity:
1) EK 2) YUM 3) AGU 4) LVS 5) SUN

Bull Radar

Style Outperformer:
Mid-cap Growth (+.50%)

Sector Outperformers:
Oil Service (+3.60%), Homebuilders (+2.57%) and Steel (+2.52%)

Stocks Rising on Unusual Volume:
MWE, EVEP, SU, NGS, PCZ, WLL, RIO, CMC, AAPL, MBT, EQIX, VPHM, SGP, MRK, WAG, APA, DRYS, MFLX, SQNM, AVAV, NTRI, RMBS, LEAP, HURC, CWEI, TBSI, SNDK, AEIS, EZCH, VCO, IRM and PXQ

Stocks With Unusual Call Option Activity:
1) ITMN 2) JASO 3) ARO 4) WYE 5) SYMC