MPAM Commentary

With oil prices continuing to skyrocket, as we move ever closer to the summer driving season, consumers should expect to see gas prices at the pump exceed $5 per gallon very shortly. I filled-up last Sunday for $4.12 per gallon, so we are well on our way to that $5 per gallon handle already. At this point, even if oil prices were to pull back significantly, say if, for example, Gaddafi were to leave Libya, it is too late. Refineries have already committed to pricing for their supplies and whatever they have been able to do with regard to hedging has already been done. Oil prices, in fact, has been elevated for such as extended time-period that, at this point, any possible benefit from hedging that the refiners could have gained will have long ago evaporated with the expiration of future contracts.

Even if refiners were able to successfully hedge away the dramatic price increases we have seen up to this point, they would still raise prices because they have no guarantee that they can continue to hedge away their increasing costs for crude. Add it all up and you have the makings of a very expensive summer driving season. So what does this mean for consumers and for the economy?

For drivers, we already know what the impact will be because we saw it in mid-2008 when oil prices spiked to almost $150 per barrel - cars were abandoned in large numbers across the country and especially in places like LA, when gas prices surpassed $5 per gallon, as commuters were unable to afford to purchase enough gasoline to get to work from paycheck to paycheck. We will see this same impact unfold as gas prices once again soar.

For local economies that depend on tourism, for places like Las Vegas and to a larger extent smaller communities like Santa Barbara that depend more heavily on vehicular traffic rather than air travel, higher gasoline prices will have a significant, negative impact on economic activity. We will not see as much travel this summer, as families find alternative ways to recreate that do not involve burning fuel.

Watch for fuel surcharges on deliveries, air travel, and even traffic tickets issued by police agencies, as fuel prices rise once again above $5. Fuel costs permeate our economy, which was built on the interstate highway system, which accelerated our expansion west. The U.S. is a very large country geographically speaking, and commerce depends on moving goods across large distances. As fuel prices rise, economic activity in general will be constricted.

Unlike the 2008 oil spike, we have had sustained, high oil prices and I believe they will stay elevated for quite some time to come. This will very likely mean that, unlike the mid-2008 spike in gas prices, the current pricing structure for fuel will remain in place at extremely high levels for much, much longer than in 2008. The implications of this are significant, for consumers and the economy.

Interest rates will likely have to push higher in the near-term, which will have a somewhat positive impact on commodity prices, pushing them down. However, higher rates will also negatively impact stocks and the economy, making it more expensive for companies and consumers to borrow money.

I remain cautious on the financial markets as a result, and have doubts as to the U.S. economic growth forecasts currently showing 3%+ projections for 2011.

Last year was a strong year for stock performance as well as commodity performance. Real estate obviously did not do as well. Asian markets did well overall, with Jakarta performing best and China performing worst. In Europe, Germany did best, while Spain was the laggard. The Pan Europe Stoxx 600 (the equivalent of the S&P 500 here in the States), gained 9% for the year.

For the U.S. markets, the NASDAQ performed best, gaining about 17%, while the S&P 500 increased about 13%, and the Dow trailed, adding 11%. Many stocks are at multi-year or all-time highs. Gold, Copper, and Platinum are all up well over 400% over the past 10 years, while silver is up well over 500% in the same time-period.

For sectors, interestingly, the tech sector only gained 9% (even though the NASDAQ was up almost twice that much), with the Consumer Discretionary sector leading, up almost 26% and Industrials up almost 24%. Healthcare was the worst performer, up only about 0.7%. Keep in mind that we started the year at pretty dismal valuations, and the Healthcare sector had performed relatively much better than the other sectors, so it didn’t have as far to rebound.

More real estate declines as more rate resets drive mortgage costs higher, banks continue their tight money lending practices, and interest rates begin to rise (the other shoe to drop). Stocks should experience some kind of significant pull-back/correction, as most investors have profits and may get nervous as well approach tax time. Commodities should correct, both because there is no inflation and because rates will begin to rise (and they are far overvalued on a purely supply/demand basis). Expect oil prices to remain relatively high, and more importantly gasoline prices will increase as hedges that have been keeping refiner crude costs down expire and their costs roll up. We should see gas prices pushing towards $5 a gallon by summer (if not before). This will have a significant impact on economic activity and consumer behavior as prices may hold high levels for an extended time-period.

I would expect to see only 2% to 3% GDP growth for the year – still a good year, but slower growth than stock and commodity valuations demand to justify their lofty levels. I also expect high volatility to continue indefinitely, so expect wide swings and trending markets to continue.

Overall, 2010 was a very good year for most markets and most investors across the globe. Unemployment remains high at 9.8%. This is typical however, as unemployment lags the economy. We could actually see unemployment tick higher, but it does not appear that my estimate of 11% unemployment will be correct. We could see levels push past 10% however, before it starts to fall.

General Motors priced their IPO at $33 per share this morning, and began trading again under the symbol, GM, on the NYSE (GMM in Canada). Just the common stock portion of the offering places GM in second spot in terms of largest IPOs in history (Visa is the largest, which came public in 2008 before the market crashed). GM raised almost $16 billion before overallotments and preferred shares. They could raise as much as $23 billion, if all overallotments are exercised.

The stock market loves the deal, with the Dow having 29 out of 30 components higher, and rising 170 points so far this morning. The NASDAQ and S&P 500 are also up nicely. GM, so far, is trading up about $2.50 a share, or about 7.5% on the day, as investors who could not get shares on the deal step-up to buy in the secondary market. Weekly jobless claims rose 2,000 last week, but that was below expectations. The Leading Indicators Index rose 0.5% in October, and the Philly Fed Index jumped to 22.5 in November, from 1 in October.

All in all we are having a very bullish day. I am looking ahead to Black Friday (the day of the year when historically retailers reached profitability (got into the black), to see how retail sales will shape up for the Christmas buying season. We are already seeing companies issuing huge discounts to drive traffic and sales, so we will need to watch profit margins for retailers closely.

I recently wrote an article about gold, and about why gold has been appreciating so rapidly. In fact, gold is up about 25% year to date, and has basically doubled since the end of 2008. Gold is going up because people are buying it, period. The story that commodities brokers are pushing is that inflation is coming, and therefore everyone should own a lot of gold to protect their assets from the negative impact of inflation. Here is the rub: I agree that inflation is coming, but the problem with gold at the current price level is that, as soon as inflation heats up, the Fed, and central banks around the globe, will aggressive raise interest rates. Like garlic to a vampire, rising rates will absolutely crush gold. It costs something like $450 to $500 per ounce to produce gold today. With the price above $1,300, those buying gold today, just as with any other item, commodity, product, etc, are paying a massive premium (nearly 3 times the cost of production). There is no value here.

Gold spiked to $850 an ounce from $560 an ounce over three short weeks in January 1980. By the end of that year gold was back below $600 and headlong into a protracted bear market. The price didn’t cross $850 again until January 2008; 20 years later! A gold buyer who paid $560 an ounce at the start of 1980 would only now be breaking even on an inflation-adjusted basis, which is the proper way to value gold. Anyone who bought in the neighborhood of $850 back then would have to see gold’s price climb about 65% from current levels before coming out ahead of inflation.

There can be no doubt that we are in a speculative bubble for gold right now. This does not mean, however, that gold cannot go higher; much higher. Some believe that gold could go above $2,000 per ounce, and if rates stay low for an extended period of time, and further, if the Fed continues to print money through their quantitative easing operations, gold will go a lot higher. Three of the largest hedge funds, including one run by George Soros, own fully 10% of the total outstanding shares of the gold ETF symbol GLD, which now has $58 billion invested in gold through its shares. These three hedge funds are run by some of the smartest people on the street. The problem will come when they decide to bail out, and sell their shares. Just as with anything, a lot of selling that cannot be overcome with equal or stronger buying will mean price declines. For those using GLD, or any gold ETF, when these people bail, the prices will get crushed.

Some say owning 5% to 10% of investment portfolios in gold is a smart hedge against inflation, etc. That could be true if you can buy gold around the cost to produce it. But, at current prices, I do not believe putting money at risk in what is clearly a speculation (not a hedge) is appropriate for any investor (non-speculator). Therefore, I would strongly advise against buying gold.

Stocks opened down hard after inflationary data yesterday and down foreign markets overnight. We had additional economic data this morning, with Chicago PMI at 44.5, Personal Income rose 0.3%, Consumer spending flat for three out of the last four months, and the University of Michigan’s Consumer Sentiment Index at 70.8 for February, versus 78.4 in January. AIG also announced a multi-billion-dollar loss (it’s down 6%), and Dell forecast for business spending was disappointing.

Right now, we have about $3.4 trillion in cash balances and relatively attractive stock valuations when compared to virtually all other asset classes. We also have a weak dollar, which makes US securities look very cheap to foreign investors, which is why sovereign funds continue to make large investments in US companies.

I have been dead wrong on commodities prices over the past several months. I felt that prices would start to reverse, once investors understood that the US economy would be slowing, probably into a recession, but so far, the strong up-trends in commodity prices has continued, driving prices to levels far above what I expected. I haven’t changed my opinion that commodities are in a bubble, and the higher prices go, the more conviction I have (if I say it long enough, I will eventually be proven right). Seriously though, I don’t think anyone would argue that we have had extreme speculation in the commodities markets, and although global growth has been strong, the weakness in the US economy which accounts for ¼ of total global economic activity, must and will have a dramatic impact on global demand for commodities. I also continue to believe that commodity prices are being driven in large part, not by fundamental supply and demand, but by speculators. Unlike real estate, stocks, bonds, etc, commodities traders go short just as readily, if not more so, than go long, so once things turn negative, I believe the price declines we experience in commodities will be violent and of large magnitudes.

The Dow is off 170 so far, the S&P 500 is down 20 and the Nasdaq is giving up 32. Oil is down $1 or so at around $101.50, and the 10-year treasury is yielding 3.58% (down from 3.9% or so at the recent high), and natural gas, which was below $8 per mcf just a few weeks back, is not at $9.35 per mcf. The overhang of the muni bond insurers is still a key focus day-to-day, so we’ll have to keep an eye on MBIA and Ambac to see how that situation develops. The bailout plan that was announced last week should help, but there are still many questions to be answered before that situation is resolved. One positive consequence of the muni insurer problems is that muni bonds are relatively cheap compared with treasuries, so for muni buyers that understand that market, there are some bargains out there.

The 15-year and 30-year fixed rate mortgage rates, as well and 1-year and 5-year ARM rates moved higher this week. According to Freddie Mac, the 30-year fixed-rate mortgage averaged 6.24% for the week ending Feb. 28, up from 6.04% last week. The mortgage is now higher than it was a year ago; the 30-year averaged 6.18% at this time last year. Just three weeks ago the benchmark loan averaged 5.67%, meaning it has jumped more than half a percentage point since then, a significant move given that mortgage rates have not been volatile in the last few years and that the Federal Reserve has been cutting interest rates aggressively. The 15-year fixed-rate mortgage averaged 5.72% this week, up from last week's 5.64%. The mortgage averaged 5.92% a year ago. Meanwhile, 5-year Treasury-indexed hybrid adjustable-rate mortgages averaged 5.43% this week, up from last week's 5.37% average. The ARM averaged 5.93% a year ago. And 1-year Treasury-indexed ARMs averaged 5.11% this week, up from 4.98% last week. The ARM averaged 5.49% a year ago. To obtain the rates, the 30-year and 15-year fixed-rate mortgages required payment of an average 0.5 point. The 5-year ARM required payment of an average 0.4 point, and the 1-year ARM required an average 0.7 point. A point is 1% of the mortgage amount, charged as prepaid interest. The rise in rates will probably curtail the refinance activity seen in past weeks, said Frank Nothaft, Freddie Mac chief economist. "Refinancing activities, which had surged to a 12-month high in January, according to Freddie Mac's monthly refi share report, are likely to ebb following this recent rise in rates," he said. Indeed, evidence of a slowdown in refinance activity has been spotted already. The volume of refinance applications dropped 30.4% last week, the Mortgage Bankers Association reported on Wednesday.

What is interesting and concerning about the Thornburg margin calls, is that they are related to their Alt-A mortgage portfolio, not subprime. I have been writing for a long time about the fact that this mortgage debacle is not a subprime problem, but a mortgage and housing market problem. I feel that calling it a subprime problem lessens the perception of the size of the problem (even though I have started calling it a subprime problem like everyone else). It’s funny how people like simple descriptive names for things. I guess it makes us feel better if we can label it. Anyways, the subprime market is quite small; only about 8% of total mortgages outstanding, and destined to get much smaller as people default and no new subprime loans are issued. The Alt-A market is quite large, and was the mortgage structure of choice in many of the hottest and priciest markets, especially in California. To me, this is where the real risk lies, because these are the individuals who have large jumbo loans, and were buying the big $1 million+ homes. An Alt-A loan is typically issued to a person with good credit, but they pay an extra ¼ or ½ point above the prime mortgage rate so that they can avoid proving their income and assets. Some other names for these loans are ‘liar loans’ or ‘no-doc loans’. If you talk to any mortgage broker in the hot markets in California, they will tell you that they wrote a large percentage of their total loans as Alt-A loans. I know from mortgage brokers here locally that thousands were written here in town.

With Thornburg, they have received $300 million in margin calls so far, and they blame the calls on the deterioration of the Alt-A mortgage market just over the past few weeks. My hope is that the larger financial institutions have already anticipated the problems spilling-over into Alt-A, and that they have taken charges for their Alt-A securities. It is very difficult to know because these firms are not providing specific information on the structure of their mortgage-backed securities holdings, or on the reasoning behind charges they have taken to date. My hope is that the vast majority of write-downs and losses have already been taken, and that the financials can move forward with relatively clean balance sheets into an economic recovery in the second half of this year. Thornburg is a very small company, and a specialty lender, so I don’t think their issues are necessarily indicative of the industry as a whole. Also, they don’t have their own money, so they are not in a strong financial position to start with. But, we need to keep an eye on the Alt-A market for signs of continuing deterioration.

Many of you may be using Auction-rate Preferreds for short-term liquid investments. Recently, this market has had some problems with liquidity, and many of the auctions have failed. Here is the skinny:

The Auction-rate Securities market is roughly $300 billion and is comprised of long-term corporate and municipal securities that are issued on a short-term basis (7-days, 15-days, 30-days, etc), and are typically bought by large corporations for short-term liquid investments. Last August, several of these auctions failed, and liquidity has become a serious issue. It is not a credit quality problem, but simply a liquidity problem, but liquidity is exactly why corporations bought them in the first place.

The Auction-rate Preferreds market is about $30 billion. Individuals typically buy these preferreds (they are preferred stock shares and not bonds or notes) for safe ,short-term liquid investments, and that’s how brokers and banks have sold them. In the last several weeks, this market too, has experienced failed auctions. In the past, the investment banking firm holding the auctions would buy any left-over securities that were not bought during an auction, but lately they stopped taking up the slack, and auctions have failed. A failed auction means that the holder of the preferreds cannot get out. These securities are issued by closed-end bond fund companies like PIMCO, Blackrock, and Nuveen, so that they can leverage their bond portfolios to enhance returns. Auction-rate Preferreds are backed $2 to $1 by the underlying bond portfolios, so they are AAA rated, and there is little chance of credit risk. Again, it’s the liquidity risk that is the problem. If the Auction-rate Preferred is a 7-day maturity, it can only be auctioned once each 7-days. If the auction fails, the holder must wait for 7 more days to try to auction again. There is no guarantee that the next auction, or the one after that, will succeed, so holders can be stuck indefinitely. The holder will receive an illiquidity premium if they get stuck, so there is some incentive for the underlying company to eventually close the position, but it could take months, and the company is under no obligation to do it.

If you happen to be stuck in one of these positions and you need liquidity, I would suggest talking with the firm that sold it to you about your options. You may be able to establish a line of credit with them, or borrow against your investment portfolio (Auction-rate Preferreds are not marginable). My best advice if you own these is to have a contingency plan for liquidity if you need it, just in case you get stuck.

Stock futures turned lower after a slew of economic data were released this mornings. Here are the numbers we have seen so far this week:

4thQGDP +0.6% (not revised; not quite negative but close enough for government work)

Bernanke has been testifying to Congress (yesterday and today) and overall has stated that the Fed is more concerned about the economy than inflation and will continue on its rate cutting path. I expect the Fed to take the Fed Funds rate down to 2.5% on March 18th and the Discount rate down to 3%. All of the increasing data related to inflation is not surprising in the least because we have seen commodity prices skyrocketing for months and months. Sooner or later, higher energy and food prices must spill-over into virtually every product, and that is exactly what we are seeing. Because I believe commodity prices are in a bubble and that they will correct soon, I am not concerned about inflation or stagflation at the moment. The slowing economy evidenced by the low GDP number for the 4th quarter should take care of the rising commodity price problem and therefore inflation.

Dow futures are down about 80 points; S&P 500 futures are off 10; and Nasdaq futures are off 8. The 10-year treasury yield is down to 3.74% and oil is up $1.20 just below $101. And here’s a shock, Thornburg Mortgage is down over 20% in pre-market trading after they received a margin call. Their CEO Larry Goldstone has been on CNBC and Bloomberg repeatedly claiming that all is great and they are turning the corner. The new conforming loan limits, which are being raised through the stimulus package, put even great pressure on Thornburg as they are mainly a jumbo lender. Essentially higher conforming limits cut into their business. Regardless, they use other people’s money to make loans, and if they get margin calls, they are, in effect, out of business (I am still short).

We have had two days of strong stock performance despite some weak economic data, with the Dow gaining 189 yesterday and 114 today. The PPI came in up 1% for January and the core PPI was up 0.4%, above expectations and the highest in about a year. Consumer confidence was also announced today, with a reading of 75 for February, down at a 17-year low, and well below the consensus estimate of 82. January Consumer Confidence was also revised down slightly from 87.9 to 87.3.

U.S. home values in 2007 posted the first yearly decline in 16 years, according to two home-price indexes released Tuesday, and analysts said more price drops are still in the offing. Home prices fell 8.9% in 2007, the largest decline in the Case-Shiller home price index in at least 20 years, Standard & Poor's reported Tuesday. Meanwhile, a separate measure of home values reported Tuesday by the Office of Federal Housing Enterprise Oversight showed a 0.3% decline in home prices in 2007, the first annual decline recorded in the 16-year history of the OFHEO purchase-only price index. The Case-Shiller national home price index fell 5.4% in the fourth quarter alone, S&P said. The OFHEO purchase-only index fell 1.3% in the fourth quarter.

I see no end to falling home prices until late 2009 or early 2010, and even after we bottom, I see no return to price gains of any more than inflation or possibly a tick above. There will be no urgency to buy real estate, at least single family homes and condos, for many years.

I just returned from an investment management conference entitled, ‘2008 IMCA Mathematics of Investing’. I am in the process of writing a paper entitled, ‘Where is the Investment Management Industry headed, and why should you care’. After attending the conference, I gained some interesting insights into the current state of the industry, and I think there are some key takeaways that can help investors make better decisions. I hope this paper will be useful. I should have it completed within a day or so.

In terms of the overall stock market, I really like what I see. We have continued to receive some disturbing economic data, even though, if you’ve been reading my commentaries you know I have been expecting a recession since last August. It seems most economists are only now acknowledging the obvious; that we are in a recession. What is important is whether it will be a long-lived or short duration recession. Everything I see to date leads me to believe that the recession will only last for one to two quarters, and that it will be followed by a reasonably strong recovery. There are a lot of moving parts and making predictions about the overall economy can be especially tricky, but if I am right, stocks, particularly those within the sectors I have mentioned, make incredible sense right here, right now. Anyone whose risk tolerance allows for ownership of stocks should own the top companies in technology (Google, Apple, Research in Motion, Amazon, etc), the Financials, (Citi, B of A, Goldman Sachs, Lehman, etc.), Industrials, (too many to name) and Consumer Discretionary (Coach, Crocs, Deckers, eBAY, Starbucks, etc.) There are so many great companies at low prices that it’s hard to choose, but if you buy quality and stick with it, I believe you will make great returns over the next one to two years. You want to own the leaders in each sector, that have strong balance sheets, strong cash positions, pay above average dividends, derive a significant amount of revenues from foreign markets, and have innovative products. (This is the same story I have been telling for months, but I tend to repeat myself, sorry.)

U.S. stocks turned solidly higher in the final minutes of today's trading, with both the Dow industrials and S&P 500 tallying slight gains for the week. A report of a possible bailout for bond insurer AMBAC sparked the late rebound. The Dow Jones Industrial Average gained 96.72 points to 12,381.02, up 0.3% on the week. The S&P 500 climbed 10.58 points to 1,353.11, leaving it with a weekly advance of 0.2%, while the Nasdaq Composite climbed 3.57 points to 2,303.35, leaving it with a weekly loss of 0.8%.

Both yesterday and today, stocks have rallied off the open only to fade quickly and turn lower. The Dow ended down 142 yesterday, and was off as much as 75 so far this morning; now down about 55. The S&P 500 is off about 8, and is sitting, once again, right at that 1,333 level; the 50% retracement from the recent low to high run of 1,270 to 1,395. The weakness in stocks is mainly due to weak economic data, including the Phily Fed number, which was -24, the fourth month in a row of negative readings, and the leading indicators number of -0.1%, also the fourth month in a row of poor results. Oil has been at the forefront of market drivers, spiking above $101 before pulling back yesterday, and now trading around $97 and change. T Boone Pickens said yesterday that he expects oil to fall $10 to $15 per barrel in the second quarter and he is short. His fund made 32% last year before fees, but was down about 5% in January. He also thinks the second Q will be the worst this year, and expects a rebound in the economy and oil prices in the second half. I still feel that oil will fall back to the mid $70s by year end (even though I hate to disagree with Boone) partly due to speculation trends and mostly due to the weakening of the US economy.

Wednesday on the Commerce show, I was asked by Rob about the war and if it was a reason for oil prices being higher. My answer was that indirectly yes the war is causing higher oil prices, but only to the extent that it is giving speculators a reason to push oil prices up. Fundamentally, I do not feel that worldwide demand has increased enough to justify prices anywhere near current levels. As I have written, two years ago, oil prices were $50 per barrel, and worldwide demand was around 82 to 83 million barrels per day. Today, oil prices are double what they were two years ago, yet demand is virtually unchanged, at about 85 million per day (demand might have been as high as 85 million two years ago anyways). So, what that tells me is that speculators have been responsible, in large part, for the rise in oil prices. And in fact, they have been responsible for the rise in all of the major commodity prices. If you look at a ten-year chart on oil, platinum, wheat, corn, etc, etc, they all look the same. If you look at China, Latin American countries, India, etc, etc, they all look the same. There is a major bubble in the commodities markets, and it will deflate. It will deflate for the same reason it formed, which is that speculators will stop supporting the extreme prices, especially given the slowing in the US economy. We account for 25% of worldwide economic activity, and 25% of total daily oil consumption. There is no possibility of the world economy supporting commodity prices with the US economy slowing. We had the spike in oil prices this week because OPEC stated they will cut production based on the US economy slowing, to try and support the price of oil above $80 per barrel. Why would they say that?? If the US economy could slow without significantly impacting worldwide demand for oil, why would they need to cut production? The answer is obvious. Now, you could say that they are just trying to make as much money as possible, which is certainly true. But, there are tremendous political pressures on OPEC member countries, especially the Saudis, to be sensitive to US economic problems.

One issue that is key with commodities that sets it apart from other markets like real estate, the technology bubble, etc, is that commodities speculators go short just as easily as long. What this means is that, once the trend reverses to the downside, the intensity of the declines in these prices will dwarf the downside moves in real estate, tech stocks, etc. When you look at asset classes like real estate, bonds, and commodities, and compare their current valuations to stocks, it is clear to me that stocks represent, by far, the most attractive investment opportunity. I am not concerned about stagflation because as commodities turn negative, and as the US economy slows, upward pressure on inflation will subside, removing the inflation side of the stagflation equation. I think the Fed will drop rates to 2.5% on the Fed Funds, on March 18th, and that they will need to raise rates late this year or early next. I believe we will see stocks gain traction over the next few weeks and begin a strong sustained rally that will last well into the second half of this year, and possibly even into 2009 before it levels off. Stocks, especially in the Financials, Technology, Consumer Discretionary, and Industrials sectors are the place to be. Buy quality and stick with it—that’s what I have done.

Next week we have existing home sales and durable goods data. Those will be the focus for stocks next week and for the Fed as they evaluate their options. Enjoy your weekend!

We had a nice turn-around in stocks today, after the CPI data hammered stocks off the open sending the Dow down over 130 points. With the Fed minutes release mid-day, stocks turned positive and rallied strong, ending up across the board, with financials looking good and technology participating as well. Oil traded above $101 for the first time ever today, and closed above $100 per barrel. The Fed minutes indicated that the Fed is still concerned about the slowing economy and they stated that the cuts in January may not be enough to head-off the slowing, the implication being that they will cut again at the March 18th meeting. I expect a 50 basis point cut in both Fed Funds and the Discount rate, to 2.5% and 3% respectively. That should be enough, and my hope is that they will stop there and wait to see the impact of all the cuts to date, as well as the stimulus package check disbursements to come. It’s not so much the magnitude of the cuts that is important as it is the timing. It would have been much better to get the cuts into the system by late last year, rather than waiting until the end of the first Q to get rates down to these levels. It usually takes one to two quarters for the impact of a rate cut to be felt, so we will likely be waiting until Q3 before we get the full benefit of what the Fed has down in January and will do in March.

I continue to believe that commodities and real estate are in bubbles and will decline in price from current levels, over the next several quarters, and also that bonds are less attractive at current levels than stocks, although munis are looking slightly better due to the bond insurer problems with MBIA and Ambac. I think stocks should be overweight while commodities and real estate should be significantly underweight, and bonds should be underweight, except for investors with significant short-term current income needs. While each investor must establish his or her specific asset allocation, in general, stocks should be overweight compared to the investor’s long-term target asset allocation.

This week, Ben Bernanke told Congress that while he felt that the Fed had already done a fair bit of work to help avert a recession, it was ready to cut rates further if necessary. That was the good news.

Bernanke had some bad news, too. He said there was no way to tell if the bottom of the housing crisis was in sight and added that he expected that crisis would continue to hurt economic growth this year. Stock investors latched on to the bad news and drove stocks down, snapping our first three-day in a row streak of gains.

U.S. stocks eked out small gains for the week, even though they mostly lost ground on Thursday and Friday. The Dow Jones Industrial Average lost 28.77 points or 0.2% to close at 12,348.21 on Friday, but recorded a gain of 1.4%. The Standard & Poor's 500 Index rose 1.13 points on Friday to close at 1,349.99 and ended the week with a gain of 1.4%, and importantly staying above that 50% retracement level of 1,333, while the technology heavy Nasdaq lost 10.74 points on the day to close at 2,321.80 but rose 0.7% for the week.

Bold move for Buffett
While the mortgage-market crisis is nothing new, it's relatively uncharted territory for investor Warren Buffett. On Tuesday, Berkshire Hathaway came off the sidelines and unveiled a plan to reinsure $800 billion of municipal bonds now guaranteed by three of the world's largest bond insurers. It's his biggest and boldest foray into the $2.4 trillion bond insurance business to date. MBIA promptly rejected the offer as this is the one area for the insurers that is not causing them financial problems at the moment. The intense pressure on the bond insurers due to their mistakes in the subprime securities markets has put their AAA ratings in jeopardy, and Elliot Spitzer, Governor of New York, and the AG of New York, are calling for splitting the muni insurers (monoline insurers) into pieces to save the industry. Buffett also announced major investments in Kraft Foods and Glaxo Smith Klein. If you recall, I wrote that he would likely step-up and start spending cash because Berkshire has so much cash that they need to invest. It is times like these when stocks are at low relative price levels that the smart money, and Buffett is one of the smartest investors out there, steps up and buys. We will also see takeovers increase, which will help the strong get stronger and the investment banks like Goldman and Lehman make money. Delta and Northwest are in talks to merge right now, and Microsoft is trying to buy Yahoo. These are only a few of the potentially gigantic deals that will get done over the next few quarters.

Credit market's latest trap
Auction-rate securities, the latest minefield in the credit market, may soon claim a new victim: closed-end funds. J.P. Morgan analysts said they expect the costs from some of these funds, which had issued auction-rate securities as a source of cheap financing, could rise after the market for these securities nearly dried up. That, in turn, could weigh on returns. Liquidity is the problem, and even firms like PIMCO are unable to honor orders to liquidate auction rate preferreds that they issued.

You've got mail
The mega-deal between Microsoft Corp. and Yahoo Inc. would do more than make M&A bankers rich. It would also give the combined company a dominant share of the U.S. email market. Nearly three-fourths of American Internet users have either a Windows Live Hotmail or Yahoo email account. This could give Google ammunition for an anti-trust assault on the deal.

Tough road for GM
It's been a difficult year for the auto sector, and General Motors drove that point home with its latest report. It posted a full-year record loss of $38.7 billion, and it's been slammed by continued losses at GMAC and a brutal economic climate for its U.S. customers. The automaker also reached a deal with the United Auto Workers to offer buyouts to 74,000 workers.

Crimping the pipeline
Venezuela has halted oil supplies to Exxon Mobil in a move viewed as largely symbolic. Analysts don't believe the move will have an impact on the oil giant's bottom line. But oil has rallied big this week, moving back above $96 at one point and closing around $95.50 Friday.

Next week, with President’s Day on Monday, we only have four trading days. The big economic number to watch will be the CPI on Wednesday. We had mixed signals this week, with good retail sales but a poor Empire State Index and University of Michigan report. Commodity prices continued to rally, with many hitting new highs like platinum and wheat. I feel we have a bubble in commodities and real estate, and that once the stock market gets moving up, we will likely see money flow from commodities and cash accounts into stocks in a big way, further building upside momentum.

The Hope Now Alliance, a private sector-led group of six major mortgage lenders—Bank of America, Citigroup, JP Morgan, Countrywide, Wells Fargo, and Washington Mutual—representing 50% of the total mortgage lending volume, just announced Project Lifeline, an initiative that will freeze foreclosures for thirty days, during which Hope Now Alliance member lenders will offer individual help to borrowers who are at least 90 days delinquent. While some borrowers will not respond and will simply walk-away, especially those whose homes are worth less than they own, or who were speculators who own multiple properties and can’t afford them, many borrowers will be able to take advantage of freezes on their adjustable rates for five years, or will be offered an opportunity to refinance into a more affordable mortgage that will allow them to keep their home. Project Lifeline will offer assistance, not just to subprime borrowers, but to all borrowers at least 90 days late. Borrowers can call 888-995-HOPE, where they can get information about their options, etc.

Stocks have not reacted to this bailout plan, and remain strong, with the Dow still up over 200 points. Bond prices have continued to fall since the 10-year treasury hit a low yield of about 3.35% a few weeks ago, when I recommended trimming bond positions. The yield on the 10-year is now 3.71%, so prices have fallen quite a bit in the past two weeks or so. Oil is flat today after a strong performance yesterday, trading above $93.

Stocks are rocking today, with the Dow up over 200, the NASDAQ up 27, and the S&P 500 up 22, after Warren Buffett offered to reinsure up to $800 billion of tax-free bonds. Obviously the problems are not in the tax-free market, but at least Buffett is willing to step in and do something, even if it is in his own best interest. The Financials are especially strong, as are the Tech stocks. It’s still hard to say if we have set a bottom, but to me it feels that way. only take a little positive news, and maybe this Buffett news is the start, to get things running. Cash balances are huge right now, and investors, in my opinion, will not want to get left behind, once we begin a strong rally. More and more market pundits are forecasting a strong rally in the second half, as I have been for some time. If this forecast is accurate, the sectors I have focused upon will be the place to be, and those who have stepped-up and bought stocks now, will benefit most.

Stocks opened higher, but quickly the Dow now off about 100 points, the NASDAQ is down 5, and the S&P 500 is off 7. The NASDAQ is resisting the downside a little better than the other two averages after Yahoo rejected the Microsoft bid stating that Microsoft’s offer “massively undervalues” Yahoo. AOL was also mentioned as a possible second suitor, and the talk is that Microsoft will offer as much as $40 per share for Yahoo. Yahoo is trading just under $30, up about $0.60 so far.

For the first time since 2004 changes are being made to the Dow 30, with Altria and Honeywell removed, and Bank of America and Chevron going in. Chevron was removed back in 1999. In general, Tech is up, while just about all other sectors are weak. Bernanke speaks to Congress Thursday, so observers will be watching for any indications of another rate cut, either inter-meeting, or on March 18th. Australia is looking to raise interest rates as their economic growth is fueling inflation concerns. Bush will likely sign the stimulus package bill Wednesday after Congress quickly pushed it through last Thursday. Hugo Chavez is threatening to cut-off oil shipments to the U.S. after Exxon and ConocoPhillips are pushing to have Venezuelan assets frozen in several countries after Chavez nationalized some multi-billion dollar projects last year. Venezuela is the fourth largest crude supplier to the U.S. and supplies about 1.3 million barrels per day.

One interesting tax change for 2007 is the Mortgage Forgiveness Debt Relief Act, which allows for the first $2 million of loans on homes that were foreclosed to be forgiven in terms of taxes owed. In the past, the value of the loan owed that was not repaid after the foreclosed home was sold would be a taxable gain to the original buyer. This exemption only applies to principal residences.

Finally, from now until April 15th, I am offering a comprehensive financial plan for $1,500, which includes person-to-person consultations, budgeting, tax analysis and planning, investment analysis and strategy, retirement planning, estate planning, and charitable giving.

Not too bad today considering how negative this week has been. We closed down 4 out of 5 days, except for the NASDAQ, which was up today by 12 points. The Dow lost 65 today and the S&P 500 lost about 6. The NASDAQ was helped today by Amazon’s announcement that they will buy-back up to $1 billion worth of their own stock within the next 24 months. Tech stocks led the NASDAQ higher, while the energy sector was the only other strong performer today. The transports, which have outperformed the market big so far this year, were also weak today. Next week we have some retail sales numbers, chain store sales, weekly jobless claims, consumer sentiment, and business inventories, among other economic data releases. Consumer spending is what everyone will be watching, so the retail sales, chain store sales, and consumer sentiment numbers will be a key focus next week. Janet Yellen, the San Fran Fed president, spoke in Hawaii today, and stated that she did not see us in recession but rather just slow growth…whatever, as long as the Fed is ready to act when needed, they can call it whatever they wish. She indicated that she does not feel inflation is a major concern, which many took to mean there were more rate cuts on the way. I think 2.5% is a good target, and I don’t expect the Fed will want to, or need to, go lower.

Congress on Thursday passed a $152 billion economic stimulus package designed to provide a timely, targeted and temporary boost to the flagging U.S. economy. One day after Republicans successfully filibustered a broader plan favored by the Senate Finance Committee, the Senate approved the Republican-backed measure, nearly identical to one passed by the House last week, on an 81-16 vote.

The House approved the measure hours later on a 380-34 vote. President Bush is expected to sign the legislation quickly. "This plan is robust, broad-based, timely, and it will be effective," Bush said in a statement released by the White House. "This bill will help to stimulate consumer spending and accelerate needed business investment." "None of us got exactly what we wanted, but we got a great deal for the American people," said House Speaker Nancy Pelosi, D-Calif. Passage came just two weeks after the House leadership and the White House reached an agreement in principle on a plan and three weeks after Federal Reserve Chairman Ben Bernanke told lawmakers that fiscal stimulus would be helpful. The bill amounts to about 1% of U.S. gross domestic product.

The plan would give tax rebates of up to $1,200 for households, with $300 more for each child. The full rebates would be sent to individuals with incomes under $75,000 and to families with incomes under $150,000, including seniors and disabled veterans. The rebate would be phased out for those earning more. The bill also has provisions to prevent undocumented immigrants from receiving tax rebates. The plan would also cut business investment taxes by $44 billion for one year. It would raise the caps on mortgages issued by the Federal Housing Administration or purchased by Fannie Mae and Freddie Mac.

Rebate checks would likely be mailed beginning in May. Taxpayers will not have to apply for the rebate; it would come automatically based on their 2007 tax return. In contrast to the defeated Senate Finance Committee bill, the measure does not include an extension of unemployment benefits that was in the defeated Senate plan, nor does it include assistance to pay the heating bills of poor families, nor does it give tax breaks for energy conservation.

Stocks were poised to open lower Friday in what would be the fourth loss in five sessions as investors awaited any clues about the economy's direction. Concerns about a recession were likely to again influence trading after Wall Street managed to rise Thursday for the first time this week. San Francisco Federal Reserve President Janet Yellen said Thursday that the possibility of such a contraction can't be ruled out, and other central bank officials are scheduled to speak Friday. Investors are also waiting for more economic data. U.S. wholesale trade inventories due at 10 a.m. EST might show distributors in December limited their stockpiles amid weak retail sales.

Dow Jones industrial average futures fell 78, or 0.61 percent, to 12,200. Standard & Poor's 500 index futures fell 10.70, or 0.80 percent, to 1,329.50, and Nasdaq 100 index futures fell 12.75, or 0.72 percent, to 1,754.25. The dollar was mixed against other major currencies, while gold prices rebounded. Light, sweet crude oil rose 55 cents to $88.66 a barrel in premarket trading on the New York Mercantile Exchange. OPEC will reportedly cut production to keep oil about $80, if demand continues to fall due to the U.S. economic slowdown.

In corporate news, McAfee Inc. was expected to move higher after the software maker reported better-than-expected fourth-quarter profit late Thursday. Alcatel-Lucent was expected to rise after the telecom equipment maker reported higher fourth-quarter revenue than forecast. However, it warned of a first-quarter operating loss and suspended its dividend. Weyerhaeuser Co. swung to a fourth-quarter loss as the deteriorating U.S. housing market cut into demand for lumber — a downturn the paper and wood products company expects will continue through 2008. Earnings are expected later in the session from Chevron Corp. and Beckman Coulter Inc. MacDonald’s reported same store sales for January, up 1.9% in the U.S. versus the estimated 1.5%. Bond insurer MBIA Inc., which has been trying to raise capital to maintain its crucial "AAA" financial strength rating, said late Thursday it has boosted the size of a public stock offering to $1 billion from the $750 million it announced one day earlier.

Overseas, Japan's Nikkei average closed down 1.44 percent. In Europe, Britain's FTSE 100 fell 0.10 percent, Germany's DAX index rose 0.17 percent, and France's CAC-40 fell 0.16 percent.

The Dow is up around 100 points now; the NASDAQ is up 35 and the S&P up 17, so we’ve had a fantastic turnaround after the negative open on the Cisco and Wal-Mart news. The S&P is at 1,342, so it’s trying to hold above that 1,333, 50% retracement level. Tomorrow is Friday, so we’ll have to see if we can hold the gains today, and get through tomorrow without more selling, but I have to say, those who are selling this week, I think will be very disappointed when they have to chase stocks at higher prices, once the rally really gets underway. Their mistakes this week will translate to a building of upward momentum as they scurry to get back in the game. I think we could see as much as a 15% to 20% gain from the recent lows set on January 22nd / 23rd, by the end of this year. HSBC, a major European bank, which was feared to have additional large write-downs pending, reported relatively small losses from subprime and indicated they are out of the woods. While I expect other large banks to still have further write-downs, specifically UBS and probably Bear Sterns, overall I think we are past the worst of it. The steep yield curve and low short rates are a bankers best possible lending environment as they borrow short and lend long, making their profit spread very attractive. I like what I see both economically and within the financial markets. It’s likely to continue to be choppy, but I believe we have put-in a major bottom.

The Bank of England cut their key rate by ¼ point to 5 1/4% overnight, and jobless claims were down 22,000 to 356,000. The ECB is expected to leave their key rate unchanged at 4%. Jobless claims are still the highest since October 2005. JC Penny had better than expected numbers. Wal-Mart’s January sales were soft and full-year sales were $375 billion. Stock futures are weak, with Dow futures down almost 100 points, NASDAQ futures off 31, and S&P 500 futures are down 12.

So here’s the big negative news: Cisco, for the second quarter in a row, warned about economic conditions deteriorating, even though for their second quarter ended January 26th, Cisco reported net income of $2.1 billion, or 33 cents per share, compared with net income of $1.9 billion, or 31 cents per share, for the same period last year. On a pro-forma basis, the company said it would have earned $2.4 billion, or 38 cents per share, meeting estimates set by Wall Street analysts, according to Thomson Financial. CEO John Chambers warned of a slowing economy weighing on corporate technology spending, but this time at least, he stated that he only expects a very short-term impact, lasting only a few months. Nevertheless, Cisco shares were down 8% in after-hours trading, leading to the slide in stock futures. "I'm personally very optimistic that this market transition provides opportunities for us and will be relatively short-term in is implications," Chambers said on a conference call late Wednesday, adding that the company planned to use the slowdown as an opportunity "to be aggressive about moving into new market adjacencies," implying a potential upswing in acquisition activity.

I’ve been writing for six months that we were going to have a recession, and it seems over the past month or so, just about everyone, even the most optimistic, have acknowledged the same. So, I am not sure why individual stocks and the markets in general are reacting so negatively and so sharply to any news that confirms the obvious. I can only reiterate that investors who are looking out more than a few trading sessions should be buying quality, large-cap Financials, Technology, Industrials, Biotech, and Consumer Discretionary companies. Buy quality and hold onto it. Last year was a trading market with the three 10% corrections. This year, once we establish the bottom, which we are in the process of doing right now, I believe, will be a strong trending market environment, so we will want to own good companies and hold them.

The major stock market indices have continued their slide today, with the Dow down over 300 points, the S&P 500 down almost 40, and the NASDAQ down 62. Tech stocks and Financials look particularly attractive and I would advise that if you have been waiting to buy, this may be the best opportunity to pickup some of the top companies in these sectors at good prices. Stocks like Apple, Google, Research in Motion, Amazon, Citigroup, Bank of America, JP Morgan, Goldman Sachs, Lehman Brothers, etc, make sense here. I also like, on a local basis, Venoco (VQ) below $15 and Deckers (DECK) below $120. Cisco reports today after the bell. Merrill just announced that they feel there is a high likelihood of an inter-meeting rate cut by the Fed. I’m not sure how likely that is, but given the ISM number this morning, and the negative reaction of the markets, we may very well get one.

Looking at the technicals for the S&P 500, we hit a low of 1,270 on January 23rd, and a recent high of 1,396 yesterday. Normally, you will have a 50% retracement from the high as a test of the validity of the rally. We have had a 126 point rally from the January 23rd low, so that would bring the S&P 500 down to roughly 1,333. We are close to that now, trading around 1,350 right now. If we hold technically, and especially if we get an inter-meeting cut, stocks should be off to the races.

Stocks opened down a bit this morning and have remained negative all day. The Dow is off 90, the NASDAQ 23, and the S&P 500 about 12 so far. About half of all S&P 500 stocks have reported and earnings overall are down 22%. That sounds horrid, but if you dig a little deeper, it’s actually not nearly as bad as it sounds. In fact, if you take the banks and brokers out, earnings are up over 11%. That shows just where the pain lies. Technology earnings are up 26%, even though those stocks have been hammered lately. I continue to buy Financials and Technology shares.

Speaking of Technology, the Microsoft buyout of Yahoo is the top story once again this morning, as Google is claiming that the deal would reduce competition. Reduce competition??? Microsoft’s deep pockets would increase Yahoo’s position against Google, which is exactly why Google is fighting it. Google reportedly even contacted Yahoo to discuss some kind of assistance package for Yahoo if they refused the Microsoft bid. Google controls over 75% of the search market right now, so they have no competition.

I believe this deal will get done, and probably at slightly higher than the $31 current offer by Microsoft. I will accept cash for my shares, and will continue to buy Google, as I believe that although Yahoo will be in better shape with Microsoft on board, Google is still the dominant player in search, has better management, is more creative, and has made better decisions with regard to its acquisitions. It’s hard to buy Google because it is approximately $500 per share. It’s a bit easier to handle if you just move the decimal point one place to the left and pretend it is $50 per share instead of $500. I believe that the Microsoft / Yahoo deal will be good for competition and will force Google, among other things, to split their stock. Google is down from almost $750 per share, so it has fallen about 30% or so. Again, think of it like it fell from a high of $75 to about $50.

In other news, UBS downgraded American Express, Wachovia and Wells Fargo to sell based on subprime. Bristol Myers took a write-down for its investments in subprime (no company is immune).

This week we have initial jobless claims, he Bank of England decides on their rates, and the ISM non-manufacturing number will be released. We already had the December Factor Orders number this morning, which was Okay, up 2.3%.

Last week was the best performing week for the major indices in five years, but as I wrote this weekend, the S&P 500 is still down about 5% year-to-date. We still have the other half of the earnings reports for the S&P 500 to come, so we need to keep an eye on those reports as they filter in. It seems normal that stocks would pull-back a bit today with some profit taking after such a strong week last week. The homebuilders are down big today, around 7% to 8% across the board. I mentioned that I would not buy these as they will have several more years of problematic numbers and some will likely go away. I recommend sticking with the highest quality, largest companies with international revenue sources, higher than average dividends, and that are leaders in their markets with dominant market share, products, management, etc.

This was a busy week for both economic data and earnings, with 120 of the S&P 500 companies reporting and 9 of the Dow components. Very few of the earnings announcements were negative, and if you throw out the Financials, (which we cannot), earnings overall will probably grow by something like 12% for the fourth quarter 2007. Unfortunately, many of the earnings announcements that were good were coupled with either negative or unclear forward guidance, and these individual stocks reacted as one would expect.

The Fed stepped-up and cut by 50 basis points, for a total of 125 basis points in only a little over a week. The have never cut by that much in such a short time in the modern era, after they began targeting the Fed Funds rate in the 1980s. Fed Funds stands at 3.00% while the Discount rate is at a 3.5% yield. I was leaning towards only a 25 basis point cut, both because they have never cut by so much in such a short time, and because I felt that they were duped by the Societe Generale trading activity. However, once the employment data was released showing that we lost 17,000 jobs instead of adding the 85,000 that was expected, I understood why they acted so aggressively. I had hoped to see Fed Funds down to a range of 3% to 3.5% by the end of the first quarter, and we are at the lower end of that range now. The next Fed meeting is on March 18th, so we have some time for more data, more earnings, and more losses and write-downs to provide guidance for the Fed. The yield curve is still indicating lower short-term rates, and futures spiked as high as 84% for a 50 basis point cut in the Fed Funds rate just after the employment data was released. It looks like we will bottom at around 2.5% on Fed Funds. I feel 3% is probably low enough to turn things, but the Fed will want to do all it can to try to avert a deep recession.

GDP was also reported this week, coming-in at 0.6% growth for the fourth quarter, which was half what economists expected. That number will be revised in a month or so, and could come down even further. If it goes negative, it could have a negative impact on markets, at least in the very near term. The technical definition of a recession is at least two quarters in a row of negative GDP growth. So, if we get the fourth Q revision and it is negative, that will be the first step towards an official recession. I really don’t much care if we get an official recession or not. It is clear that the economy is slowing rapidly, and that is enough. What I do care about is that the Fed has acted, and that the yield curve is indicating a recovery within the next few quarters. You can also see the economically sensitive sectors, especially Financials and Consumer Discretionary, leading the overall stock market higher, which is a clear indication of a recovery coming soon.

I would caution about buying things like the homebuilders, which were hot this week. With a quickly rising market, most stocks will initially rally as well (a high tide raises all boats). But, the quality companies will sustain the rally, while other groups will make a quick run, and then sell-off again, as they become a source for cash for other, better investments. The homebuilders will not make any money for many years, and at least some of them will not survive. While some weaker names may become buyout targets, in my opinion it is not worth the risk to own them. If you stick with the highest quality, large-cap companies that are leaders in their areas, and to the sectors that I have emphasized, you should do quite well over the next several quarters.

The Dow Jones Industrial Average gained 92.83 points to close at 12,743.2 on Friday, for a 4.4% gain on the week. The technology heavy Nasdaq climbed 23.5 points to 2,413.36 on Friday, marking a 3.7% gain for the week. The Standard & Poor's 500 Index rose 16.87 points to close at 1,395.42 a gain of 4.9% for the week. Year-to-date, the S&P 500 is down 4.97%, while the Financials sector is up 2.6%. As I have been writing, I feel that the Financials will lead the overall market into recovery, starting in the second half of 2008, and we are seeing the first signs of that leadership developing. Volatility will likely continue, so I don’t expect it to be a straight shot up, but I like what I see in the Financials, Consumer Discretionary, and Technology sectors.

Finally I wanted to mention the Yahoo buyout by Microsoft. I mentioned before that merger and acquisition activity would increase as weaker companies get bought by the strong. This activity will increase as we move forward, as companies with the buying power and strong balance sheets take advantage of the weaker companies. I have already benefited from Yahoo, Ambac and MBIA and Countrywide. It is very tricky to buy companies simply on a buyout possibility, so again I would caution against it unless the underlying company has some other positive reason to buy it, or you really understand the underlying situation. If you buy quality companies, you will benefit in the longer-run as they buy other competitors and reduce their competition and increase their market share and product offerings.

Stock futures point to a higher open after the unemployment rate for January ticked down from 5% to 4.9%. Non-farm payrolls actually fell 17,000 in January, versus the estimate of an increase of 85,000. That’s the first monthly decline in 4½ years. The 2007 average monthly job growth was revised down to 95,000 per month. Microsoft announced they will buy Yahoo for $44.6 billion in cash and stock, or $31 per share. I was lucky enough to buy some recently. Alcoa, along with Chinalco, bought a 12% stake in Rio Tinto. There are many earnings reports on deck today, including ExxonMobil (posted the largest annual and quarterly profit of any company in history: $40.6 billion and $11.7 billion respectively; $2.13 per share for the quarter versus a $1.95 consensus, and Chevron reported $2.44 per share versus a $2.30 estimate.

There is some talk of restructuring the members of the Dow also. Exxon is the only oil company, so the talk is that they will add another oil company, possibly an oil service company like Schlumberger. Dow futures are up 46 points (they were up 140 right after the Yahoo news was announced, and before the jobs number). Amgen on Friday said results of a recent study show Enbrel reduced C-reactive protein, a marker of inflammation, in patients with moderate to severe plaque psoriasis following 12 weeks of treatment. Psoriasis is a non-contagious, chronic disease in which the immune system causes skin cells to grow at an accelerated rate. About 80% of psoriasis patients have plaque psoriasis, which is characterized by painful and itchy, red, scaly patches, the company said. Amgen and Wyeth Pharmaceuticals, a division of Wyeth market Enbrel in North America. Wyeth markets the drug outside of North America. Immunex Corp., a unit of Amgen, manufactures Enbrel. Oil is down about $05.0 per barrel, but still above $91 and the 10-year treasury is yielding 3.58%.