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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Crude oil in NY is falling from a two-month high amid expectations mild US temperatures will help bolster winter heating fuel supplies.
- Samsung Electronics topped $100 billion in market value today, joining Vodafone Group Plc(VOD) as the only technology stocks outside the US to pass the milestone.
- The dollar fell to a two-month low against the euro and dropped versus the yen in Asia after minutes from the Fed’s last meeting suggesting it is closer to halting an 18-month policy of raising interest rates.

AP:
- Lynn Swann, a member of the Pro Football Hall of Fame and veteran television football analyst, is expected to announce tomorrow that he’s running for the Republican nomination for governor of Pennsylvania.

Bangkok Post:
- Crude oil prices are likely to trade in a range of $40 to $55 a barrel this year amid steady growth in the energy industry, citing the president of PTT Pcl, Thailand’s biggest energy company.

Economic Daily News:
- China Steel has cut export prices for its hot-rolled and cold-rolled steel by an average of $80 to $100 a metric ton due to weak demand.

Commercial Times:
- AU Optronics(AUO) plans to invest as much as $1.1 billion to expand its so-called fifth-generation production lines to cope with strong demand, citing unidentified equipment suppliers.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Underperform on SMP.

Night Trading
Asian Indices are +.50% to +1.25% on average.
S&P 500 indicated +.01%.
NASDAQ 100 indicated -.09%.

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Earnings of Note
Company/EPS Estimate
(AYI).42
(BCF)1.01
(DCN)-.02
(SONC).27

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- Factory Orders for November are estimated to rise 2.4% versus a 2.2% increase in October.

Afternoon
- Total Vehicle Sales for December are estimated to rise to 16.8M versus 15.7M in November.

BOTTOM LINE: Asian indices are higher, led by technology shares in the region, on optimism the US fed will soon end interest rate hikes. I expect US equities to open mixed and to rally modestly into the afternoon. The Portfolio is 100% net long heading into the day.

Stocks Finish Near Session Highs on Dovish Fed Comments, Bargain Hunting and Short-Covering

Indices
S&P 500 1,268.80 +1.64%
DJIA 10,847.41 +1.21%
NASDAQ 2,243.74 +1.74%
Russell 2000 684.05 +1.61%
DJ Wilshire 5000 n/a
S&P Barra Growth 606.65 +1.70%
S&P Barra Value 657.81 +1.58%
Morgan Stanley Consumer 595.91 +.75%
Morgan Stanley Cyclical 792.44 +.94%
Morgan Stanley Technology 531.30 +1.74%
Transports 4,199.16 +.07%
Utilities 413.55 +2.08%
Put/Call .72 -5.26%
NYSE Arms .74 -55.14%
Volatility(VIX) 11.14 -7.71%
ISE Sentiment 152.00 -6.17%
US Dollar 89.85 -1.34%
CRB 336.37 +1.37%

Futures Spot Prices
Crude Oil 62.92 -.35%
Unleaded Gasoline 174.50 -.31%
Natural Gas 10.47 -1.46%
Heating Oil 179.25 -.22%
Gold 535.10 +.49%
Base Metals 153.83 +.93%
Copper 204.65 -.10%
10-year US Treasury Yield 4.36% -.58%

Leading Sectors
Gold & Silver +6.3%
Oil Service +5.69%
Energy +4.68%

Lagging Sectors
Papers -.05%
Airlines -1.18%
Broadcasting -1.35%

Evening Review
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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on (WAG) and (MSNT).
- Reiterated Underperform on (DJ).

Afternoon/Evening Headlines
Bloomberg:
- US stocks began the year with their biggest rally since October, sparked by a signal that the Fed may soon stop raising interest rates.
- Citigroup Inc.(C), the biggest US bank, may buy Goldman Sachs Group(GS) this year, Wall Street commentator James Cramer wrote in a NY magazine column.
- CBS Corp.(CBS) plans to drive growth with its Internet sites and the sale of television shows on handheld, Chief Executive Officer Leslie Moonves said.
- US Treasury notes rose after the Federal Reserve said in the minutes of its Dec. 13 meeting that the amount of additional interest rate increases needed to control inflation “probably would not be large.”
- Shares of Google(GOOG) had their biggest gain in more than two months after Piper Jaffray analyst Safa Rashtchy said the stock may jump to $600 this year.
- Estee Lauder(EL) will replace Mercury Interactive(MERQE) in the S&P 500.

AP:
- Rhode Island legalized medical marijuana use after the legislature overrode a veto by Republican Governor Don Carcieri.
- Republican Governor George Pataki said New York state will end the fiscal year with a $2 billion surplus.

BOTTOM LINE: The Portfolio finished substantially higher today. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, almost every sector rose and volume was above average. Measures of investor anxiety were mostly lower into the close. Overall, Today's action was very good for the bulls as the major averages finished near session highs on above-average volume. As I speculated last week, it does appear many funds sold in advance of January. Today's gains are the type that will likely result in further gains into week's end as shorts scramble to stay in the ballgame.

Stocks Soaring Mid-day on Release of Fed Minutes

Indices
S&P 500 1,267.13 +1.51%
DJIA 10,835.89 +1.10%
NASDAQ 2,243.90 +1.75%
Russell 2000 683.55 +1.54%
DJ Wilshire 5000 n/a
S&P Barra Growth 606.18 +1.63%
S&P Barra Value 656.96 +1.46%
Morgan Stanley Consumer 595.74 +.71%
Morgan Stanley Cyclical 792.32 +.91%
Morgan Stanley Technology 531.98 +1.87%
Transports 4,196.21 unch.
Utilities 411.83 +1.66%
Put/Call .79 +3.95%
NYSE Arms .77 -53.51%
Volatility(VIX) 11.12 -7.87%
ISE Sentiment 152.00 -6.74%
US Dollar 89.80 -1.39%
CRB 336.33 +1.36%

Futures Spot Prices
Crude Oil 63.14 +3.44%
Unleaded Gasoline 175.05 +1.34%
Natural Gas 10.62%
Heating Oil 179.64 +1.50%
Gold 533.80 +.24%
Base Metals 153.83 +.93%
Copper 204.75 -.05%
10-year US Treasury Yield 4.36% -.58%

Leading Sectors
Gold & Silver +5.69%
Oil Service +5.22%
Energy +4.38%

Lagging Sectors
Papers -.10%
Broadcasting -1.0%
Airlines -1.49%

BOTTOM LINE: The Portfolio is substantially higher mid-day on gains in my Internet longs, Semi longs, Computer longs and Biotech longs. I exited the remainder of my (IWM) and (QQQQ) shorts and added (GILD), (RACK) and (ITRN) long, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are higher and volume is above average. Measures of investor anxiety are mixed. Overall, today’s market action is positive considering recent losses, the rise in oil and weaker-than expected economic data. A record $20.3 billion flowed into funds investing in emerging market equities last year, up 500% from the prior year. Argentina and Brazil were two of the largest recipients of these flows. As growth in the U.S. and China slows, emerging market economies will suffer disproportionately. I believe the mania for emerging market investments will end in 2006. I expect US stocks to trade modestly higher into the close on short-covering, bargain hunting and optimism over dovish Fed comments.

Today's Headlines

Bloomberg:
- Worldwide trade in caviar from wild sturgeon has been banned by the Convention on International Trade in Endangered Species, pending better plans to manage dwindling stocks of sturgeon.
- Iraq’s President Talabani said he won’t object if the dominant Shiite Muslim political coalition again selects Ibrahim al-Jaafari as prime minister.
- Children are just as likely to be injured in an accident riding in a sport-utility vehicle as in a passenger car, a study found.
- US Treasuries are rising after an industry report showed manufacturing in December slowed more than forecast and increases in prices paid for raw materials were less widespread.
- Crude oil is surging above $63/bbl., a two-month high, after a pricing dispute between Russia and Ukraine disrupted shipments of natural gas to Europe.

Wall Street Journal:
- The US economy should expand for the fifth year in a row in 2006 as business thrives, even as a sluggish housing market slows the rate of growth, citing its own survey of 56 economists.
- Motorola(MOT) mobile-phone sales in India are way behind those of Nokia, even thought the Illinois-based company sells a handset for about $43, compared with Nokia’s $54.
- Wyeth(WYE), which makes the Prevnar meningitis medicine, and Trubion Pharmaceuticals agreed to develop and market jointly antibody-like drugs.
- Schulte Roth & Zabel LLP, a NY City law firm, built a clientele of hedge funds and has prospered as the funds have become the movers behind billion-dollar mergers and acquisitions.
- Microsoft(MSFT), Cisco Systems(CSCO) and Intel Corp.(INTC) are leading an effort to develop systems to enable Web-based sports, music videos and news to be shown over television sets.
- Yellow Roadway(YELL) plans to operate its own trucks in China, transporting goods made by US companies to the port of Shanghai, citing CEO Zollars.
- The number of securities fraud suits filed against US companies in 2005 fell 17%, citing a study by Stanford University and Cornerstone Research.

NY Times:
- A group of investment firms is close to agreeing to buy Affiliated Computer Services(ACS), the world’s largest processor of student-loan payments, for more than $8 billion.
- Liberty Media’s(L) Starz plans to offer a monthly subscription service that will enable movie downloads from the Internet and viewing on portable devices.

LA Times:
- Google(GOOG) has been in talks with retailers including Wal-Mart Stores over a plan to sell an inexpensive personal computer.

USA Today:
- The top US general in Iraq is optimistic the US will turn a substantial part of the country over to Iraqi control this year.

Financial Times:
- Emerging market funds received record inflows in 2005, citing Emerging Portfolio Fund Research.

Construction and Manufacturing Slow, Measure of Inflation Decelerates

- Construction Spending for November rose .2% versus estimates of a .7% increase and a .8% gain in October.
- ISM Manufacturing for December fell to 54.2 versus estimates of 57.5 and a reading of 58.1 in November.
- ISM Prices Paid for December fell to 63.0 versus estimates of 68.7 and a reading of 74.0 in November.

BOTTOM LINE: US construction spending rose less than forecast in November as homebuilding declined for the first time in five months, Bloomberg reported. However, nonresidential construction spending gained .5% in November. I expect construction spending to remain healthy over the intermediate-term as commercial building and hurricane rebuilding accelerates.

US manufacturing growth slowed in December after expanding at the fastest pace of the year in the months following the Gulf Coast hurricanes, Bloomberg said. The new orders component of the index fell to 55.5 from 59.8 the prior month. The employment component of the index dropped to 52.7 from 56.6 in November. Manufacturing slowed from torrid rates in October and November to healthy rates in December. I continue to believe manufacturing will add to US growth over the intermediate-term as demand remains healthy and inventories are rebuilt.