Mid-day Report

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

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

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

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

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

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

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

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

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

Tuesday Watch

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

Splits
None of note.

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

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

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

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

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

Monday Close

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

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

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

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

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

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

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

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

Mid-day Report

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

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

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

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

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

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

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

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

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

Monday Watch

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

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

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

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

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

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

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

4th Quarter Scoreboard*

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

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

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

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

*% Gain or loss for the quarter