GDP Slows on Hurricane Effects, Inflation Decelerates, New Home Sales Improve

- Advance 4Q GDP rose 1.1% versus estimates of a 2.8% increase and a 4.1% rise in 3Q.
- Advance 4Q Personal Consumption rose 1.1% versus estimates of a .4% increase and a 4.1% rise in 3Q.
- Advance 4Q GDP Price Index rose 3.0% versus estimates of a 2.7% gain and a 3.3% rise in 3Q.
- New Home Sales for December rose to 1269K versus estimates of 1225K and 1233K in November.

BOTTOM LINE: The US economy grew at a slower-than-expected 1.1% pace in the fourth quarter as consumers spent less and corporations limited equipment purchases, Bloomberg reported. This snapped the string of 10 straight quarters exceeding 3% growth, the best stretch since 1986. A drop in October car sales weighed on consumer spending during the quarter. The US economy expanded 3.5% for all of 2005, above the long-term average of 3.1% growth. Government spending declined last quarter at a 2.4% annual rate, the biggest drop in 5 years. The core pce, the Fed’s favorite inflation measure, rose 2.2% during the quarter. GDP was weighed down in the fourth quarter by the effects of the hurricanes. I expect GDP to bounce back above 3% this quarter as hurricane rebuilding takes hold, corporate spending accelerates, the job market remains healthy, housing improves, consumer spending bounces back and the Fed stops raising interest rates.

Sales of new US homes unexpectedly increased in December, capping a fifth straight record year for the industry and suggesting job and income growth are keeping the housing market from withering, Bloomberg reported. The median selling price was $221,800, down 3.4% from a year earlier. The supply of new homes on the market remained at 4.9 months’ worth. For the year, the median price of a new home rose 7.4% to $237,300. I expect home sales to continue to improve in January as overall growth slows to more healthy sustainable levels.

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Friday Watch

Late-Night Headlines
Bloomberg:
- Sony Corp.(SNE) shares headed for their biggest gain in 15 years, raising the company’s market value by $5 billion, as higher sales of Bravia TVs and Playstation game players helped generate record profit in its third quarter.
- US Senate Republican leaders said they have enough support to end debate on Supreme Court nominee Samuel A. Alito Jr. and confirm him next week as some Democrats staged a last-ditch filibuster to try to derail his confirmation.

Financial Times:
- EMC Corp.(EMC) may raise its full-year growth targets and plans acquisitions in 2006, citing an interview with Chairman and CEO Tucci.

Wall Street Journal:
- North Korea has become one of the leading international producers of counterfeit cigarettes, providing a source of financing for its nuclear weapons program.

Business Week:
- Microsoft(MSFT) is working on plans to develop its own portable digital media device that will challenge the iPod.

London-based Times:
- The “long-term chances of survival of the euro should be questioned,” citing Frits Bolkestein, the former EU Internal Market Commissioner.

Electronic Times:
- Research in Motion Ltd. may start offering its BlackBerry e-mail in South Korea in May through KT Powertel.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on (MSFT), (DHR), (T), (MEH), (MCK), (KLAC), (GNW) and (PFE).
- Reiterated Underperform on (FLWS), (UST), (BOW) and (MRO).

Night Trading
Asian Indices are +1.0% to +2.0% on average.
S&P 500 indicated +.27%.
NASDAQ 100 indicated +.74%.

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Earnings of Note
Company/EPS Estimate
(BOL)/1.20
(BDK)/1.90
(CVX)/1.89
(GCI)/1.41
(GDT)/.34
(ITT)/1.41
(MSTR)/1.34
(NUE)/1.88
(OSTK)/-.05
(PG)/.69
(RBK)/.58
(TROW)/.83

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Advance 4Q GDP is estimated to rise 2.8% versus a 4.1% increase in 3Q.
- Advance 4Q Personal Consumption is estimated to rise .4% versus a 4.1% gain in 3Q.
- Advance 4Q GDP Price Index is estimated to rise 2.7% versus a 3.3% gain in 3Q.

10:000 am EST
- New Home Sales for December are estimated to fall to 1225K versus 1245K in November.

BOTTOM LINE: Asian indices are sharply higher on gains in US shares and reports of strong economic growth in the region. I expect US equities to open higher and build on gains throughout the day. The Portfolio is 100% net long heading into the day.

Stocks Finish Sharply Higher on Strong Economic Data, Falling Natural Gas Prices and Less Irrational Earnings Pessimism

Indices
S&P 500 1,273.83 +.72%
DJIA 10,809.47 +.93%
NASDAQ 2,283.00 +.99%
Russell 2000 728.48 +1.68%
S&P Barra Growth 605.99 +.49%
S&P Barra Value 663.88 +.96%
Morgan Stanley Consumer 596.35 -.03%
Morgan Stanley Cyclical 790.90 +.65%
Morgan Stanley Technology 536.70 +.62%
Transports 4,306.53 +1.55%
Utilities 414.77 -.92%
Put/Call .69 -17.86%
NYSE Arms .82 -19.13%
Volatility(VIX) 12.42 -3.50%
ISE Sentiment 194.00 +1.57%
US Dollar 88.63 +.34%
CRB 343.46 +.27%

Futures Spot Prices
Crude Oil 66.45 +.29%
Unleaded Gasoline 169.00 +.31%
Natural Gas 8.25 +.32%
Heating Oil 178.40 +.34%
Gold 560.70 +.14%
Base Metals 167.35 -.98%
Copper 220.05 -.05%
10-year US Treasury Yield 4.50% +.67%

Leading Sectors
Semis +2.88%
Defense +2.28%
I-Banks +2.45%

Lagging Sectors
Computer Hardware -.82%
Utilities -.92%
Networking -1.26%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on (ALK), (EL) and (HD).
- Reiterated Underperform on (UIS) and (MKL).

Afternoon/Evening Headlines
Bloomberg:
- Hamas, the radical Islamic movement that has attacked Israelis thousands of times with suicide bombers, wrested control of the Palestinian legislature from Fatah, winning 76 seats in yesterday’s voting, election officials said.
- Broadcom Corp.(BRCM) said fourth-quarter profit almost tripled as sales grew for consumer gadgets such as wireless headsets and Apple Computer’s video iPod.
- Microsoft(MSFT) said second-quarter profit rose 5.5%, buoyed by new server software. Revenue missed forecasts after shortages of its Xbox 360 console.

Wall Street Journal:
- Goldman Sachs(GS) will pay $2.58 billion for a stake in Industrial & Commercial Bank of China.

BOTTOM LINE: The Portfolio finished higher today on gains in my Medical longs, Semi long, Semi-equip. longs and Biotech longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was very positive today as the advance/decline line finished substantially higher, most sectors gained and volume was heavy. Measures of investor anxiety were mostly lower into the close. Overall, today's performance was very bullish as the major averages and breadth finished near session highs on heavy volume, notwithstanding higher long-term rates, rising oil prices, a big political win for Hamas, jitters over tomorrow's GDP report and earnings worries. I have the feeling that tomorrow's GDP report will be viewed positively by the market. We have heard for weeks how "bad" it is going to be. I expect it to exceed estimates of a 2.8% increase, which should calm fears that the economy is slowing too much. However, if I am wrong and GDP comes in below estimates, the recent rise in long-term rates should cease and traders will factor in an even greater chance that the Fed will "pause." Either way, I suspect stocks will build on today's gains tomorrow.

Stocks Sharply Higher as Natural Gas Plunges, Economic Data Exceeds Expectations and Earnings Remain Strong

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Semi Equipment longs, Medical longs and Biotech longs. I exited my IWM and QQQQ shorts and added to my AAPL and RACK longs, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, almost every sector is rising and volume is heavy. Measures of investor anxiety are mostly lower. As pundits continue to bash the best earnings streak since record keeping began in 1936, I am becoming more bullish. Earnings so far for this quarter are rising about 13%, almost double the long-term average. The S&P 500 will be even cheaper relative to earnings after all the reports are in. Moreover, the bar has been sufficiently lowered for next quarter without too much damage to the major averages. The S&P 500 is still up 2.0% this month and the Russell 2000 is up 7.5%. These are very good performances to start the year and come amid a decline in bullish sentiment, escalating fears over Iran, perceived "poor" earnings, weaker housing data, elevated oil prices, talk of an impending recession and rising long-term rates. This bodes very well for another push higher in U.S. stocks over the coming weeks. I expect US stocks to trade modestly higher into the close from current levels on short-covering, more optimism over US economic growth and collapsing natural gas prices.

Today's Headlines

Bloomberg:
- Google Inc.(GOOG), co-founder Sergey Brin said the World Economic Forum taking place this week in Davos, Switzerland, is a “remarkably efficient” way to seek out potential business partners.
- Sony Corp.(SNE) posted a record quarterly profit on sales of electronics such as flat-screen TVs, allowing it to drop a forecast for the first annual loss in 11 years.
- Caterpillar(CAT) said fourth-quarter profit rose 54%, helped by higher prices and mining-equipment sales and the company raised its earnings forecast for this year.
- First Data(FDC) said it plans to spin off Western Union, the world’s largest money-transfer business, in a transaction that may be valued at more than $20 billion.
- About 420 Iraqi detainees will be released by the US Army today and tomorrow.
- The US budget deficit will come in at $337 billion this year versus prior estimates of $400 billion. This would be 2.6% of GDP, right around the long-term average of 2.5%.
- Palestinian Prime Minister Ahmed Qureia resigned to clear the way for Hamas, an Islamic group that has thwarted Middle East peace efforts with squads of suicide bombers, to form the Palestinian Authority’s next government.
- Shares of Chipotle Mexican Grill(CMG) surged 104% in their first day of trading after the company raised $173 million in an IPO.
- US 10-year Treasuries are falling for the fourth straight day, the longest slump since the start of November, after the strong Durable Goods report.
- Natural gas dropped below $8, down 50% in six weeks, in NY for the first time in almost half a year as mild winter weather leaves supplies near record highs.

Wall Street Journal:
- The NYSE is increasingly losing new-company listings to exchanges in London and Luxembourg, partly because tougher US accounting and disclosure requirements are raising costs for the foreign companies.
- US identity-theft complaints to the FTC are rising more slowly, which may be an indication that antifraud measures are starting to work.
- Medtronic(MDT) and Johnson & Johnson(JNJ) have been approached by the holder of a patent for coronary stents seeking to find a company to but it or license rights to the invention.
- A Maryland law that requires employers with more than 10,000 workers to contribute 8% of payroll to employees’ health care will only hurt the state by driving Wal-Mart Stores away, two professors wrote.

NY Times:
- Some US school districts, strapped for cash, are seeking private money with sponsorships and naming rights.

Financial Times:
- Hedge funds specializing in currency trading probably had their “roughest year” in more than a decade in 2005 on bad bets against the US dollar.

AFP:
- Ali Larijani, the secretary of Iran’s Supreme National Security Council, arrived in China today as part of Iran’s diplomatic efforts to avoid a referral to the UN Security Council.

Interfax:
- China welcomed Russia’s offer to process uranium from Iran’s nuclear program on its territory, citing Chinese Foreign Ministry spokesman.