Some points of interest for the week, 
Equity Market Update 
There is a tug-o-war in the market between the crisis in confidence caused by the Enron debacle and the increasingly positive nature of the economic data. First, let's chat about the Enron fall-out.
The market seems to be suffering from a nasty case of Enron-itis, as some of the talking heads have called the recent negative sentiment in the market. Clearly something changed with the bankruptcy of Enron. It is the largest US bankruptcy ever. There are not one, but two official governmental investigations of the company and further investigations are likely. The bankers, accountants and the lawyers are also going to get a hard look. What has the market particularly bothered is the glaring oversight by Arthur Anderson (AA), one of the big five accounting firms. Delta Airlines has been using AA for over 50 years and they are looking for a new auditor. Also, the credit rating agencies dropped the ball too. One of them actually upgraded Enron's debt a few weeks before its demise. What is the investing public to think? Who can you trust? Generally, investors understand that the Street's advice needs to be viewed with a critical eye, but the accountants were supposed to be looking out for investors. It certainly makes you say hmmmmm...
The market hates uncertainty and the level of uncertainty has increased greatly and it is not likely to dissipate for some time. Imagine the discussions at the other accounting firms. Companies are not going to be able to slip anything by their accountants from now on. Standards are going to be toughened up and that may cause some pain for companies that have pushed the envelope in the past. In addition, the market is going to search and destroy every company that has Enron-like qualities. Off-balance sheet partnerships or structures, complicated financial statements and foreign domiciled tax structures. It started almost right away with the decimation of Enron's competitors, Williams (WMB), El Paso (EP), Mirant (MIR) and Calpine (CPN), who have had to sell assets and issue stock in order to repair their balance sheets. Some of those companies are trading as if we will never need power or natural gas again (EP is my favourite among these companies, as you know). Next, the market had its day or so with the asbestos-infected companies and then more recently proceeded to anyone with off-balance sheet assets or a history of accounting indiscretions. We had better get used to this sort of roller-coaster existence. With over 6,000 hedge funds, a hyper-active media and market information available 24/7, the witch hunts will continue. Still, it is important to note a few things: 
First, not all companies with off-balance sheet items are guilty of transgressions and not every company that acquires others for a living (a la Tyco) violates standard accounting principles. In fact, nobody has proven (yet) that Tyco has done anything improper. The risk of impropriety makes people sell, not the fact.
Second, regardless of whether your company is guilty of doing anything nasty, if it plays in the same sand-box as a company that attracts the ire of investors, it is going down. Period. Full stop. No matter if it is guilty of anything or not. These are market events not business events. Consider the pain and suffering experienced by El Paso (EP) thanks to Enron or Viacom (VIA.b) thanks to Haliburton (HAL) and its asbestos exposure. Viacom bought CBS which owned Westinghouse once upon a time, but that did not stop the stock from getting pasted even though it is insured and reserved up the wazoo ('up the wazoo' is a technical term signifying a significant amount).
Third, emotions and sentiment can push stock prices around a great deal in the short term, but over the long term, stock prices are determined by a company's ability to generate cash. The best opportunities are likely to come from buying companies with low debt levels that are relatively free of controversy, but have been beaten up because they resemble another company with a real problem. Biovail (BVF), Viacom (VIA.b), El Paso (EP), etc. However, each of these names also comes with an increased risk profile as a result of the market's heightened sensitivity to 'issues' (accounting, asbestos, debt levels, litigation, etc.). 
On the economic front, the data seems to be point to an economic recovery that is already underway. 
Consumer confidence rose from 94.6 to 97.3 in January and was up for the second straight month. The index is now above the pre-September 11 level. Also the expectations component of the index was the highest in over a year, suggesting that consumer spending should continue to hold up well. 
Durable Goods orders rose in December and importantly the ex-transportation orders rose for a third month in a row, the longest streak of gains in 4 years. 
New home sales rose stronger than expected and taken together with last week's existing home sales, total home sales were above 6.1 million (annualized) and stable. 
Today, the unemployment rate fell to 5.6% and the 4-week moving average of jobless claims fell to its lowest level since August; and the ISM (NAPM) index came in at 49.9 vs. 50.0 expected and new orders remained above 50, indicating order volume is expanding. 
Finally, on the international front, the German Business Confidence index rose and is now close to its pre-September 11 level. 
Unfortunately, Japan continues to struggle. The Japanese unemployment rate rose to a record high 5.6% and real wage-earning household spending fell 4.4% compared to last year. Both figures were worse than expected and the drop in household spending does not bode well the prospects of an economic recovery. Also, the yen continues to slide as confidence in the government and the economy wanes. The Japanese fiscal year ends on March 31st and there is widespread concern that the country's banks will have to mark down the value of more loans and investments, potentially pushing some of them into bankruptcy. Of course, a number of bankruptcies would be a good thing much like the S&L crisis was for the US in the early 1990s. A cathartic cleansing followed by an audible flush could lead to a great buying opportunity. Stay tuned.

Financials - The US banks are trading very poorly - no wonder. Credit quality, which everybody knew was bad, has turned out to be at least as nasty as expected or worse. PNC Financial (PNC) had to restate its earnings when the SEC forced the company to consolidate 3 subsidiaries, K-Mart (KM) filed for chapter 11, Global Crossings (GX) shuts its doors, and today, the 2nd biggest European cable company defaulted on $6.4 billion in debt and preferred stock. When you add these events on to the Enron scenario, it makes investors of all kinds hold a bit more cash, a few more government bonds and a little less equity. This is the kind of pain that is quite typical for the trough of the credit cycle. As you know, JP Morgan (JPM) has been a recommended stock for many quarters, however it looks like it will be removed from the US Focus List as it has broken our technical screen. The stock remains buy or strong buy rated around the Street and a great deal of bad news would seem to be already priced into the stock. However, the risk of further negative credit events seems quite high, and as a result, we suggest that new money go into Citigroup (C), which is trading at just under 14x 2002 EPS vs. its historical range of about 12x to 20x. Out anlayst's comments on Sun Life (SLC) suggest this is a name we should continue to accumulate.
Sun Microsystems (SUNW) is under pressure following negative comments by Merrill. According to Merrill, recent comments by ORCL's Larry Ellison give cause for concern about SUNW's high-margin Unix server mkt; ORCL is replacing 3 Unix servers with a cluster of INTC servers running Linux; concern is that SUNW's Unix biz will be attacked from below by INTC servers running NT or Linux (particularly Linux, as it's easier to learn than SUNW's Solaris operating system). Microsoft (MSFT) was added to Goldman Sachs portfolio and Oracle (ORCL) was removed. 
Calpine (CPN) was downgraded to Deutche Bank to BUY from Strong Buy due to a lack of near-term catalysts in the stock; current risks include: continued weakness in power prices and spark spreads, the California DWR contract renegotiations, a highly leveraged balance sheet, and a tight cash flow situation. Price target is $20. We should get used to reading recommendations like this one. The list of risks is large and imposing and yet many of you will notice that the target is $20 suggesting a 72% return is possible over the next 12 months. We would encourage investors to focus on the risks and the likelihood of them happening rather than a highly subjective target.
In Canada, focus on Focus List names Sun Life (SLC) and Shaw Communications (SJR.b). Suitability is everything, never more so than in the current market environment.
Interest Rate Update 
The big, but not so surprising news yesterday was the decision by the FOMC to keep the Fed funds rate steady at 1.75%, while the discount rate remained at 1.25%.  also as expected, the Fed maintained their easing bias.  This was the first "no change" following an FOMC meeting since Dec/00, after 4.75%  of cuts in 11 steps through 2001.  The committee noted that there are "signs that weakness in demand is abating and economic activity is beginning to firm have become more prevalent".  This is different from the last comment on Dec 11 when they stated "weakness in demand shows signs of abating, but those signs are preliminary and tentative".  The easing bias was justified due to the uncertainty of the strength in business capital and consumer spending.  RBC CM Economics believe that this statement will be a sign of things to come, with rates in a holding pattern, and an easing bias remaining, until the recovery is firmly and sustainably in place.  They are calling for the first hike to occur no earlier than September. - Fed funds futures are pricing in earlier expectations - the July contract is indicating a 100% chance of a 25 bps hike.
Stocks are the bigger news with Nasdaq stock futures up 10.50 pts after an upgrade to Intel by Merrill Lynch, gains in Oracle after the company reaffirmed its profit target, and Applied Materials stating that a bottom has come and gone for the industry. 
Have a good weekend and be good, 
Rod.