Monday Watch

Weekend Headlines
Bloomberg:
- President Bush and first lady Laura Bush will attend the funeral of Coretta Scott King, the widow of civil rights leader Martin Luther King Jr., on Feb. 7 in Atlanta.
- Palestinian Authority officials may have stolen billions of dollars from public funds, Palestinian Attorney General Ahmed Al-Meghani said.
- The UN nuclear watchdog agency voted to refer Iran to the Security Council over a nuclear program other countries fear is a cover for making weapons.
- The US dollar rose for a fourth straight week against the euro and a third versus the yen as reports showing US economic growth remains robust bolstered expectations the Fed will lift rates again in March.
- President Bush said Congress should spend more money on grants for teachers and research-related tax breaks for companies as a way of helping the US compete economically with other countries.
- Venezuelan President Hugo Chavez threatened to jail diplomats and close refineries belonging to the US unit of the state oil company in an escalating war of words with the US.
- A majority of New York City voters would support Wal-Mart Stores(WMT) opening its first store in the city, according to a survey by Quinnipiac University Polling Institute.
- Crude oil is rising almost 2% in NY after Iran said it will pursue nuclear research, defying the UN.
- The Pittsburgh Steels beat the Seattle Seahawks 21-10 for their record-tying fifth Super Bowl title.

Wall Street Journal:
- The US may allow its FAA to issue bonds to fund improvement to the nation’s air-traffic-control system.
- Citadel Broadcasting(CDL) is near an agreement to buy most of Walt Disney’s(DIS) radio assets for $2.7 billion in cash and stock.
- American International Group(AIG) is near a settlement of at least $1.5 billion with US federal and state authorities to resolve charges including accounting fraud.

Business Week:
- The US economy is a lot stronger than most think. In a knowledge-based world, the traditional measures don’t tell the whole story. Intangibles like R&D are tracked poorly, if at all. Factor them in and everything changes.

Washington Post:
- Several US states are toughening rules against underage drinking by charging offenders with possession of alcohol even if the evidence already has been consumed.
- President Bush will recommend cutting the growth or eliminating 141 programs to save $14.5 billion in his proposed budget for the 2007 fiscal year.

NY Times:
- President Bush may propose cutting the growth of Medicare spending by as much as $35 billion during the next five years in his fiscal 2007 budget.
- The growing popularity of refilled computer printer ink cartridges is lowering the cost of printing and forcing manufacturers such as Hewlett-Packard(HPQ) to reduce the price of new cartridges.
- The lack of clarity about what information gleaned from the Internet can and can’t be used in civil court cases has forced most service providers to comply with legal requests for information.
- President Bush’s proposed fiscal 2007 budget will include about $250 million to continue technology research as part of a planned nuclear fuel partnership with Russia.
- Health-care courses are gaining popularity on US college campuses as students seek majors with good employment opportunities.
- President Bush is seeking $2.65 billion in spending to help protect the US against bird flu in the fiscal 2007 budget.
- Time Warner’s(TWX) AOL and Yahoo!(YHOO) plan to begin charging companies as much as 1 cent for each e-mail to bypass “spam” filters and go directly to users’ mailboxes.
- Investors have been buying up commodity stocks in a fashion likened to that of the internet bubble in the late 1990s, prompting concern from some analysts and investors that their value has risen too fast.

Newsweek:
- News Corp.(NWS) Chairman Rupert Murdoch will start a business-news cable channel in the US to rival GE’s CNBC by year-end.
- US Senator John McCain has signed up at least three of President Bush’s top fund-raisers for a potential White House run in 2008.

Financial Times:
- Google(GOOG) and Skype Technologies SA have joined other venture capitalists to invest in a Wi-Fi “Hotspot” network.

The Independent:
- Arcelor SA CEO Dolle, who is battling a hostile $28.2 billion takeover bid by Mittal Steel, said he saw no “white knight” coming to Arcelor’s rescue.

AFP:
- The Danish far left and far right are marching in Copenhagen today, protesting the international fall-out caused by a Danish newspaper publishing cartoons depicting the prophet Muhammad.
- Rioters in Lebanon attacked property and overturned cars in a Christian area of Beirut is protest to satirical cartoons portraying the Muslim prophet Mohammed that appeared in European newspapers.

Sunday Times:
- US buyout firms Kholberg Kravis Roberts and Hellman & Friedman LLC are putting together a bid worth $11 billion for credit checker Experian Information Solutions.
- GlaxoSmithKline Plc(GSK), the biggest drugmaker in the UK, may bid as much as $11 billion to acquires Serono SA, Europe’s largest biotechnology company.

Business Standard:
- Indian companies’ net profits grew 3.6% in the quarter ended Dec. 31, the slowest in 14 quarters, because of higher production costs.

Asharq al-Awsat:
- Twenty-three al-Qaeda prisoners, including those convicted of bombing the USS Cole, escaped jail in Yemen by digging a tunnel.

Weekend Recommendations
Barron's:
- Had positive comments on (ACP) and (GT).
- Had negative comments on (PSS).

Goldman Sachs:
- None of note

Night Trading
Asian indices are unch. to +.50% on average.
S&P 500 indicated +.03%.
NASDAQ 100 indicated unch.

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
Daily Stock Events
Macro Calls
Rasmussen Consumer/Investor Daily Indices
CNBC Guest Schedule

Earnings of Note
Company/Estimate
(ATVI)/.36
(CNET)/.15
(FLS)/.26
(HAS)/.58
(HUM)/.45
(JP)/1.01
(LPX)/.65
(MNT)/.38
(NBR)/1.31
(PPS)/.07
(RCII)/.44
(TIN)/.27
(DIS)/.30
(YUM)/.78

Upcoming Splits
- (NOBL) 3-for-2

Economic Releases
- None of note

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

Weekly Outlook

Click here for The Week Ahead by Reuters

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

Economic reports for the week include:

Mon. - None of note
Tues. - Consumer Credit
Wed. - None of note
Thur. - Initial Jobless Claims, Wholesale Inventories
Fri. - Trade Balance, Monthly Budget Statement

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

Mon. - Activision(ATVI), Flowserve(FLS), Hasbro(HAS), Humana(HUM), Jefferson-Pilot(JP), Louisiana-Pacific(LPX), Nabors Industries(NBR), Temple-Inland(TIN), Walt Disney(DIS), Yum! Brands(YUM)
Tues. - Alkermes(ALKS), Anadarko Petroleum(APC), BMC Software(BMC), Boston Scientific(BSX), Cendant(CD), Cisco Systems(CSCO), Computer Sciences(CSC), Emerson Electric(EMR), Fisher Scientific(FSH), Fortune Brands(FO), Occidental Petroleum(OXY), Overstock.com(OSTK), Polo Ralph Lauren(RL), Sohu.com(SOHU), Wm. Wrigley Jr.(WWY)
Wed. - Alcon Inc.(ACL), Applebees Intl.(APPB), Cigna(CI), Diamond Offshore(DO), Electronic Data Systems(EDS), Energy Conversion Devices(ENER), IAC Interactive Corp.(IACI), News Corp.(NWS/A), PepsiCo(PEP), Prudential Financial(PRU), St. Joe(JOE), Whole Foods Market(WFMI), XTO Energy(XTO)
Thur. - Aetna(AET), Allegheny Energy(AYE), Amylin Pharmaceuticals(AMLN), Analog Devices(ADI), Boyd Gaming(BYD), Global SantaFe(GSF), Marriott International(MAR), MBIA Inc.(MBI), Panera Bread(PNRA), Sirius Satellite(SIRI), Timberland(TBL)
Fri. - Bausch & Lomb(BOL), Arch Coal(ACI), CNA Financial(CAN), Loews Corp.(LTR), Office Depot(ODP), Pixar(PIXR), Reebok International(RBK), XM Satellite Radio(XMSR)

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

Mon. - JP Morgan High Yield Conference, Thomas Weisel Tech Conference
Tue. - Thomas Weisel Tech Conference, Merrill Lynch Global Pharma/Biotech/Medical Device Conference, CSFB Software Conference, SG Cowen Global Aerospace Conference
Wed. - Merrill Global Pharma/Biotech/Medical Device Conference, CSFB Financial Services Conference, SG Cowen Global Aerospace Conference, Thomas Weisel Tech Conference
Thur. - Merrill Global Pharma/Biotech/Medical Device Conference, CSFB Financial Services Conference
Fri. - CSFB Financial Services Conference

BOTTOM LINE: I expect US stocks to finish the week modestly lower on geopolitical concerns, increasing Fed rate hike worries, mixed forward earnings guidance and more profit-taking. My trading indicators are now giving mostly bearish signals and the Portfolio is 75% net long heading into the week.

Market Week in Review

S&P 500 1,264.03 -1.53%*



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was negative as US stocks posted losses even as economic data was mostly positive, energy prices fell and long-term rates were stable. The advance/decline line fell, most sectors declined and volume was heavy on the week. Measures of investor anxiety were higher. However, the AAII % Bulls rose to 44.7% and is now back to average levels. The average 30-year mortgage rate rose to 6.23% which is still only 102 basis points above all-time lows set in June 2003. The benchmark 10-year T-note yield increased 1 basis point on the week as mostly positive economic data and mixed inflation readings offset worries over Iran and a rising US dollar.

Unleaded Gasoline futures fell again and are now 42% below September highs even as refinery utilization remains below normal as a result of the hurricanes and fears over Iranian production disruptions persist. Natural gas inventories fell as expected this week. However, supplies are now 28.0% above the 5-year average, still approaching an all-time record high for this time of year, even as 17% of daily Gulf of Mexico production remains shut-in. Natural gas prices have plunged over 45% in 7 weeks. Gold was about unchanged on the week as geopolitical concerns and mixed inflation data were offset by a rising US dollar.

I still believe prices for many commodities are being driven by fear and record capital inflows into commodity funds, rather than fundamentals. I continue to expect global energy demand destruction, decelerating economic growth and a significant increase in supplies into 2006 to push oil prices substantially lower from current levels. Elevated prices related to Iran only make this outcome more likely. The latest weekly energy data show US oil demand is already down .8% over the last 4 weeks from the same period last year. The EIA is currently projecting US oil demand growth of 1.6% for all of 2006, which is highly unlikely given last year’s decline.

Small-caps outperformed, falling less than the broad market. The Russell 2000 is still up a very strong 7.7% for the year. In my opinion, US small-caps offer similar return potential to that of most emerging international markets with much less risk going forward. Technology shares underperformed this week as investors were disappointed with the forward earnings guidance by several sector leaders. S&P 500 earnings growth for the fourth quarter is still on pace to rise 13% year-over-year, almost double the long-term average. This would be the 15th consecutive quarter of double-digit profit growth, the best streak since record-keeping began in 1936. Moreover, companies have sufficiently lowered the bar as to allow for better-than-expected 1Q results. As of now, analysts are projecting 9.8% earnings growth for the first quarter, still very good by historic standards.

The ECRI Weekly Leading Index fell slightly from cycle highs and is forecasting continued healthy US economic activity. While volatility will likely increase going forward, I still expect the S&P 500 to return 15% this year, notwithstanding any temporary weakness related to issues with Iran. High single-digit earnings growth, average economic growth of around 3%, an end to Fed rate hikes, low long-term interest rates, lower energy prices, a healthy labor market, a more sustainable housing market, p/e multiple expansion, a stable US dollar, decelerating inflation, increased corporate spending, rising demand for US assets and a lifting of irrational pessimism should provide the catalysts for strong gains this year.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,264.03 -1.53%
DJIA 10,793.62 -1.04%
NASDAQ 2,262.58 -1.81%
Russell 2000 724.22 -1.09%
S&P Equity Long/Short Index 1,164.53 +1.73%
S&P Barra Growth 611.84 -1.57%
S&P Barra Value 657.78 -1.49%
Morgan Stanley Consumer 589.28 -1.62%
Morgan Stanley Cyclical 779.83 -2.37%
Morgan Stanley Technology 526.48 -3.01%
Transports 4,263.56 -1.07%
Utilities 405.37 -2.57%
S&P 500 Cum A/D Line 7,796 -7.0%
Bloomberg Crude Oil % Bulls 40.0 -31.61%
Put/Call 1.06 +35.90%
NYSE Arms 1.21 +32.97%
Volatility(VIX) 12.96 +8.27%
ISE Sentiment 159.00 -19.70%
AAII % Bulls 44.70 +45.27%
AAII % Bears 33.33 unch.
US Dollar 89.89 +.63%
CRB 345.90 -.31%
ECRI Weekly Leading Index 138.20 -.07%

Futures Spot Prices
Crude Oil 65.37 -3.64%
Unleaded Gasoline 168.17 -7.34%
Natural Gas 8.61 +.38%
Heating Oil 178.16 -3.17%
Gold 571.60 +.07%
Base Metals 175.83 +4.13%
Copper 230.40 +3.41%
10-year US Treasury Yield 4.52% +.22%
Average 30-year Mortgage Rate 6.23% +1.80%

Leading Sectors
Airlines +4.16%
Alternative Energy +3.56%
HMOs +3.19%
Restaurants +2.14%
Networking +1.57%
Telecom +.72%

Lagging Sectors
Utilities -2.57%
Software -2.60%
Tobacco -2.78%
Internet -3.65%
Semis -4.02%

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

*5-Day % Change

Stocks Lower into Final Hour on Fed Rate Hike Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Semiconductor longs, Medical longs and Internet longs. I took profits in some existing longs and added to my (IWM) and (QQQQ) shorts this afternoon, thus leaving the Portfolio 75% net long. The tone of the market is mildly negative as the advance/decline line is slightly lower, most sectors are declining and volume is heavy. The ECRI Weekly Leading Index fell slightly to 138.20 this week from 138.30 the prior week. This is still near last week's cycle high and up from 132.00 during the last week of May 2005. This gauge of future economic activity is still forecasting healthy U.S. growth. Measures of investor anxiety are mostly lower. I expect US stocks to trade modestly higher into the close from current levels on lower long-term rates and short-covering.

Today's Headlines

Bloomberg:
- The US Senate’s approval of a $70 billion tax-cutting measure opens the way for negotiations with the House on final legislation that may produce a two-year extension of the 15% rate on dividends and capital gains.
- The US dollar is rising to a high for the year against the yen and climbed versus the euro after a government report signaling a stronger US labor market will continue to propel US growth higher than that of other industrialized nations.
- Research In Motion’s chances of avoiding the US shutdown of its BlackBerry wireless e-mail service improved this week after decisions by two government agencies, legal analysts said.
- European news organizations, citing freedom of speech, showed cartoons that sparked outrage among Muslims, as protests spread across the Islamic world.
- The UN nuclear watchdog delayed voting on a resolution to send Iran to the UN Security Council over its atomic program because some countries want the measure to declare the Middle East a nuclear weapons-free zone.

Wall Street Journal:
- The US is likely to avoid a military confrontation with Iran because of concern over a backlash in the region and possible retaliation against the US and Israel.
- The SEC’s new registration requirements allow potential investors to review hedge fund managers’ registration forms, adding that since the rule was passed 934 hedge fund advisers have registered.
- Investors are betting on a wave of steel-industry mergers, whether or not Mittal Steel succeeds with its $23.7 billion hostile bid for Arcelor SA.

NY Times:
- US deaths of car drivers struck by a sport utility vehicle or pickup have dropped sharply after automakers reluctantly agreed in 2003 to adopt design changes.

CNet News.com:
- Google(GOOG), fighting a US Justice Dept. demand for records to help the government defend an anti-pornography law, will take its case to a federal court on March 13.

USA Today:
- Some US cities are displaying “wanted” posters on billboards in a bid to capture criminals.