Wednesday Watch

Late-Night Headlines
Bloomberg:
- The number of elderly and disabled Americans enrolled in the US government’s prescription drug program rose to 23.9 million this year, a 6.2% increase from last year, Medicare said.
- President Bush said his warnings to Iran about its involvement in Iraq have no hidden message and no hint of a threat to invade the Islamic Republic.
- Japan’s wages unexpectedly fell at the fastest pace in 16 months as companies paid lower winter bonuses, signaling a slump in consumer spending may deepen and prevent the central bank from raising interest rates.
- Hynix Semiconductor, Asia’s second-largest maker of memory chips, posted record quarterly profit as the release of Microsoft’s(MSFT) Windows Vista operating system drove up chip demand and prices.
- Crude oil is falling in NY on speculation that yesterday’s advance was overdone as US supplies will be adequate to meet winter demand and OPEC will refrain from cutting production at a meeting in March.
- China National Petroleum, the nation’s biggest oil company, plans to drill 20% more high-yield horizontal wells this year to increases output.
- Japan’s 2006 gasoline demand fell 1.1%, the first decline in 32 years. Oil products demand fell 3.9%. Oil imports from Saudi Arabia fell 12.4%. Liquefied natural gas imports surged 38% to 5.78 million tons.

Financial Times:
- Bristol-Myers Squibb(BMY) hired Lehman Brothers(LEH) to help examine potential takeover bids from companies including Sanofi-Aventis SA.

Edmonton Journal:
- Peace River Oil, a closely held Canadian oil company, plans to spend $2.1 billion on an oil sands project in northwestern Alberta. The investment will double the processing capacity of the Red Deer, Alberta-based company’s Bluesky upgrader to 50,000 barrels of oil a day, including a refinery to make gasoline and diesel.

Xinhua News Agency:
- Chinese shipbuilders produced a record 14.52 million deadweight tons of vessels last year, about a fifth of the world’s total and 20% more than in 2005. More than half the vessels made were large oil tankers, the chairman of the China Assoc. of National Shipbuilding Industry said.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are -1.0% to unch. on average.
S&P 500 indicated -.05%.
NASDAQ 100 indicated -.08%.

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Earnings of Note
Company/EPS Estimate
- (AGN)/1.02
- (MO)/1.22
- (AH).97
- (AVB)/.64
- (BA)/.98
- (CEG)/.89
- (D)/.78
- (EG)/.55
- (LLY)/.82
- (EOG)/.98
- (EL)/.76
- (EFX)/.52
- (GILD)/.68
- (GOOG)/2.92
- (KFT)/.51
- (JDSU)/.10
- (IR)/.73
- (HLT)/.33
- (HES)/1.12
- (LLL)/1.36
- (MCHP)/.33
- (MUR)/.48
- (NMX)/.33
- (PHM)/-.01
- (SEE)/.90
- (SBUX)/.26
- (STN)/.45
- (STE)/.28
- (TWX)/.22
- (TSCO)/.71
- (VRSN)/.25
- (VMC)/1.02
- (WWW)/.39
- (XEL)/.22

Upcoming Splits
- (SSI) 3-for-2

Economic Releases
8:30 am EST
- Advance 4Q GDP is estimated to rise 3.0% versus a 2.0% rise in 3Q.
- Advance 4Q Personal Consumption is estimated to rise 4.4% versus a 2.8% gain in 3Q.
- Advance 4Q GDP Price Index is estimated to rise 1.5% versus a 1.9% gain in 3Q.
- The Employment Cost Index for 4Q is estimated to rise 1.0% versus a 1.0% gain in 3Q.

9:45 am EST
- The Chicago Purchasing Manager Index for January is estimated to rise to 52.0 versus a reading of 51.6 in December.

10:00 am EST
- Construction Spending for December is estimated unch. versus a -.2% decline in November.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil build of 1,500,000 barrels versus an in increase of 789,000 barrels the prior week. Gasoline supplies are expected to rise by 1,800,000 barrels versus a 4,009,000 barrel build the prior week. Distillate supplies are expected to fall by -2,100,000 barrels versus a 750,000 barrel increase the prior week. Refinery Utilization is expected to remain unch. versus a -.54% decline the prior week.

2:15 pm EST
- The FOMC is expected to leave the Fed Funds rate at 5.25%.

BOTTOM LINE: Asian indices are mostly lower on weakness in automaker and technology shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the day.

Stocks Finish Slightly Higher Ahead of Fed Announcement and Key Economic Data

Indices
S&P 500 1,428.82 +.58%
DJIA 12,523.31 +.26%
NASDAQ 2,448.64 +.31%
Russell 2000 797.97 +.61%
Wilshire 5000 14,379.32 +.58%
Russell 1000 Growth 563.14 +.40%
Russell 1000 Value 822.25 +.71%
Morgan Stanley Consumer 705.47 +.06%
Morgan Stanley Cyclical 921.60 +.47%
Morgan Stanley Technology 564.61 +.65%
Transports 4,788.24 +.51%
Utilities 453.59 +.53%
Put/Call .92 -4.17%
NYSE Arms .95 -26.09%
Volatility(VIX) 10.96 -4.28%
ISE Sentiment 165.0 +4.43%
US Dollar 84.99 -.12%
CRB 298.30 +2.54%

Futures Spot Prices
Crude Oil 56.84 +5.24%
Reformulated Gasoline 152.0 +5.48%
Natural Gas 7.67 +10.6%
Heating Oil 163.88 +5.8%
Gold 652.70 +.57%
Base Metals 226.75 -.16%
Copper 256.25 +.81%
10-year US Treasury Yield 4.87% -.38%

Leading Sectors
Oil Service +3.21%
Steel +2.18%
HMOs +1.52%

Lagging Sectors
Gaming -.05%
Tobacco -.30%
Airlines -2.09%

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Afternoon Recommendations
- None of note:

Afternoon/Evening Headlines
Bloomberg:
- Natural gas soared 12% as rampant investment fund speculation increased on colder weather despite record inventories.
- Citigroup Inc.(C) and closely held Relativity Media LLC agreed to finance 90 movies over the next five years in what may be the biggest ever film-production fund.
- The US EPA’s staff is recommending the government toughen its standards for ground-level ozone, or smog, for public health reasons.

BOTTOM LINE: The Portfolio finished about even today as gains in my Retail longs and Medical longs offset losses in my Commodity shorts. I added (IWM) and (QQQQ) hedges in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was slightly positive today as the advance/decline line finished modestly higher, almost every sector rose and volume was about average. Measures of investor anxiety were mostly lower into the close. Today's overall market action was bullish. The fact that the 10-year yield finished near session lows at 4.87% is a big positive considering the jump in energy prices and stronger-than-expected consumer confidence reading. Volatility will likely rise tomorrow. I would expect a strong stock market rally if the yield remains stable or falls on tomorrow’s economic reports and Fed statement. A sharp rise in the yield will likely result in initial stock market weakness. However, I continue to believe it would take a move above 5.25%, which I do not expect, in the 10-year yield before the Fed would even contemplate a hike.

Stocks Slightly Higher into Final Hour on More Economic Optimism, Stable Long-Term Rates

BOTTOM LINE: The Portfolio is about even into the final hour as gains in my Retail longs and Medical longs are offsetting losses in my Commodity shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly positive as the advance/decline line is modestly higher, almost every sector is rising and volume is about average. It is a positive that the 10-year yield is stable in the face of a jump in energy prices and a good consumer confidence reading. I will closely monitor the bond’s response to tomorrow’s likely above-expectations economic reports and the Fed’s likely upbeat commentary. I expect US stocks to trade mixed-to-higher into the close from current levels on more economic optimism and stable long-term rates.

Today's Headlines

Bloomberg:
- Carl Icahn, the billionaire shareholder activist, demanded a seat on the board of Motorola Inc.(MOT).
- Crude oil is surging above $56/bbl. as investment funds speculate that a strengthening economy and colder weather will boost consumption.
- France, the world’s biggest consumer of wine, will cede that spot to the US by 2010, a British survey showed.
- Natural gas is soaring 12%, the most in more than three months, on massive speculation by investment funds even as inventories are at record levels for this time of year and liquefied natural gas imports into the US are poised to soar.

Wall Street Journal:
- The SEC gave a provisional go-ahead to a market-based method of valuing employee stock options devised by Zions Bancorp.
- Delta Air agreed to consider a merger with another airline if it wards off a takeover bid from US Air.
- Iran’s President Mahmoud Ahmadinejad faces mounting criticism from politicians and clerics concerned about his nuclear policies, denunciations of Israel, rising inflation and higher government spending. Ahmadinejad-backed candidates failed to win in many contests for local posts and lost control of Tehran’s city council late last year. The president’s declining popularity may herald a broader attempt to curb his policies before a UN Security Council resolution ordering Iran to halt uranium enrichment takes effect Feb. 20.
- Amaranth Advisors, the hedge fund that imploded because of speculation in natural gas, paid Merrill Lynch(MER) about $250 million to take on some of its trading positions as the hedge fund collapsed in September.
- Exxon Mobil(XOM) plans to extract gas from the Barnett Shale field, the fastest-growing in the US, under an agreement with Harding Co. of Dallas.

NY Times:
- Individual investors in China are buying stocks in record numbers, driving up the Shanghai Composite Index, creating a market for day trading and providing capital for mutual funds. About 2.7 million investment accounts were opened last year, more than 300% higher than in 2005. One mutual fund raised $5 billion in a day.
- Bush administration efforts to get European governments to hold back support for exports to Iran and block financial transactions are being resisted. European governments provided $18 billion in loan guarantees for Iran in 2005.

NY Post:
- CNBC host Maria Bartiromo is in talks with the network to have her own show, using a format similar to that of Charlie Rose and Bill Moyers. Bartiromo filed at least eight applications to trademark her Wall Street nickname, the “Money Honey.”

USA Today:
- US Attorney General Alberto Gonzales plans to brief law enforcement agencies on a proposed $200 million federal grant program to fight violent crime in the US.
- Programs targeting reckless driving helped cut traffic deaths by at least 5% in 16 states last year.

Boston Globe:
- Kenneth Heebner bought shares of Goldman Sachs(GS), Morgan Stanley(MS), Lehman Brothers(LEH) and Merrill Lynch for his top-performing CGM Focus Fund.

Washington Times:
- Iran and North Korea are working together to develop long-range missiles.

Financial Times:
- Risks to the global economy have receded so much that the world has the “luxury” of worrying about mispriced financial markets, John Lipsky, new first deputy managing director of the IMF said. Lower fuel prices and a more steady US housing market have lowered risk.

La Tribune:
- Arcelor Mittal, the world’s biggest steel company, says European steel prices could drop 15 to 20%. Prices are under pressure in southern Europe from cheaper steel imports from China. Global steel production rose 8.8% last year and prices fell 10% on average in the fourth quarter.

Interfax:
- OAO Transneft, Russia’s oil pipeline operator, is looking at doubling the capacity of a link to the Primorsk port on the Gulf of Finland, citing Grigory Dvas, vice governor of the Leningrad region. The state-owned company may expand the Baltic pipeline system to carry 150 million tons a year.

Consumer Confidence Near 5-Year High

- Consumer Confidence for January rose to 110.3 versus estimates of 110.0 and an upwardly revised 110.0 in December.

BOTTOM LINE: Confidence among US consumers approached the highest level since May 2002 this month as an expanding job market, rising wages, a strong stock market and falling energy prices gave Americans more money to spend, Bloomberg reported. The Present Situation Component of the index rose to 133.9 versus 130.5 the prior month. The Jobs Are Plentiful component rose to 29.9% versus 27.6% the prior month. The proportion of consumers planning to buy a car rose to 6.2% versus 5.4% the prior month. Those planning to buy a home rose to 3.3%, the highest since August, versus 2.9% the prior month. Gasoline prices fell to $2.23/gallon nationwide during January from $2.29/gallon in December. Sentiment in the central northeast remains depressed at 79.1. Sentiment in the south atlantic, central southwest, mountain and pacific regions remains robust at 120.2, 128.0, 132.8 and 128.3, respectively. I continue to believe both main measures of consumer confidence will make new cycle highs over the coming months as stocks rise further, housing continues to improve, wages continue to outpace inflation as unemployment remains low and gas prices fall further.

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