Construction Spending Strong, Home Sales Slowing, Manufacturing Healthy, Prices Paid Stable

- Construction Spending for December rose 1.0% versus estimates of a .2% increase and an upwardly revised .5% gain in November.
- Pending Home Sales for December fell 3.0% versus estimates of a .5% decline and a 3.0% fall in November.
- ISM Manufacturing for January fell to 54.8 versus estimates of 55.5 and a reading of 55.6 in December.
- ISM Prices Paid for January rose to 65.0 versus estimates of 64.0 and a reading of 63.0 in December.

BOTTOM LINE: US construction spending rose more than forecast in December as homebuilding rebounded and office3 and commercial investment increased, Bloomberg reported. Construction spending rose 8.9% for all of 2005 to an all-time record. Construction Spending should remain healthy as hurricane rebuilding continues and commercial construction rises.

Contracts to buy previously owned US homes declined for a fourth consecutive month in December as high home prices proved too rich for some buyers, Bloomberg reported. The pending re-sales index rose 2.3% in the South and 1.5% in the Northeast. Signing fell 8.1% in the West and 9.3% in the Midwest. I continue to believe home sales are slowing to more healthy and sustainable levels.

US manufacturing expanded in January at about the same pace as a month earlier, propelled by orders for business equipment that will drive the economy, Bloomberg said. The order backlogs component of the index rose to 53.5 from 49.5 in December. As well, the new exporter orders component of the index rose to 58.5 from 54.3 in December. According to Chief Executive magazine, a recent monthly survey showed the most confidence by CEOs in the US economy since the survey was started in 2002. This likely means increased corporate spending and hiring. I continue to believe manufacturing will add to US economic growth over the intermediate-term.

Links of Interest

Market Snapshot
Detailed Market Summary
Market Internals
Economic Commentary
Movers & Shakers
Today in IBD
NYSE OrderTrac
I-Watch Sector Overview
NYSE Unusual Volume
NASDAQ Unusual Volume
Hot Spots
NASDAQ 100 Heatmap
DJIA Quick Charts
Chart Toppers
Option Dragon
Real-time Intraday Chart/Quote

Wednesday Watch

Late-Night Headlines
Bloomberg:
- President Bush, in his State of the Union address, asked Americans to support the war on terrorism abroad and his plans at home for improving health care and breaking an “addiction” to foreign sources of energy.
- Federal appeals courts in California and New York said today a federal law banning “partial birth” abortions is illegal.
- Oil is falling for a second day after Iran said it won’t halt exports because of a dispute over its nuclear program, reducing concerns about possible supply shortages.
- Left-wing antiwar protester Cindy Sheehan, who was invited by Democrats to the Capitol to attend President Bush’s State of the Union address this evening, was arrested after she unfurled an anti-war banner in the gallery.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on (ALL), (VLO) and (X).
- Reiterated Underperform on (ISE) and (SIE).

Night Trading
Asian Indices are -.50% to +.25% on average.
S&P 500 indicated -.35%.
NASDAQ 100 indicated -1.05%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Before the Bell CNBC Video(bottom right)
Global Commentary
Asian Indices
European Indices
Top 20 Business Stories
In Play
Bond Ticker
Daily Stock Events
Macro Calls
Rasmussen Consumer/Investor Daily Indices
CNBC Guest Schedule

Earnings of Note
Company/EPS Estimate
(ADS)/.61
(AEP)/.25
(BUD)/.27
(BA)/.44
(BOBJ)/.31
(CBG)/1.11
(DVN)/2.29
(DUK)/.36
(HCA)/.69
(JDSU).00
(LM)/1.03
(MBI)/1.38
(MGM)/.32
(MNST)/.28
(MUR)/.79
(OI)/.11
(PBI)/.74
(PHM)/1.97
(SBUX)/.20
(SUN)/2.15
(TWX)/.22
(TRB)/.56
(XEL)/.25

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- Construction Spending for December is estimated to rise .2% versus a .2% increase in November.
- Pending Home Sales for December are estimated to fall .5% versus a 3.2% decline in November.
- ISM Manufacturing for January is estimated to rise to 55.8 versus a reading of 55.6 in December.
- ISM Prices Paid for January is estimated to rise to 64.0 versus a reading of 63.0 in December.

Afternoon
- Total Vehicle Sales for January are estimated to fall to 16.4M versus 17.2M in December.
- Domestic Vehicle Sales for January are estimated to fall to 13.1M versus 13.5M in December.

BOTTOM LINE: Asian indices are mostly lower, weighed down by telecom and financial shares in the region. I expect US equities to open lower and to rally later in the afternoon, fishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Modestly Lower after Fed Rate Hike

Indices
S&P 500 1,280.08 -.40%
DJIA 10,864.86 -.32%
NASDAQ 2,305.82 -.04%
Russell 2000 733.20 +.32%
S&P Barra Growth 610.08 -.44%
S&P Barra Value 665.89 -.35%
Morgan Stanley Consumer 592.50 -.79%
Morgan Stanley Cyclical 793.05 -.73%
Morgan Stanley Technology 541.11 -.60%
Transports 4,367.54 +.30%
Utilities 413.84 +.03%
Put/Call .77 +18.46%
NYSE Arms 1.51 +79.77%
Volatility(VIX) 12.95 +4.52%
ISE Sentiment 148.00 -36.21%
US Dollar 88.92 -.56%
CRB 348.66 -.40%

Futures Spot Prices
Crude Oil 67.68 -.35%
Unleaded Gasoline 179.50 -.56%
Natural Gas 9.34 +.27%
Heating Oil 183.90 -.48%
Gold 573.10 -.42%
Base Metals 169.87 +.15%
Copper 222.20 -.29%
10-year US Treasury Yield 4.51% -.22%

Leading Sectors
Gold & Silver +3.01%
Airlines +1.95%
HMOs +1.92%

Lagging Sectors
Homebuilders -.94%
Insurance -1.0%
Semis -1.44%

Evening Review
Detailed Market Summary
Market Gauges
Daily ETF Performance
Style Performance
Market Wrap CNBC Video(bottom right)
S&P 500 Gallery View
Economic Calendar
Timely Economic Charts
GuruFocus.com
PM Market Call
After-hours Movers
Real-time/After-hours Stock Quote
In Play

Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on (GOOG), expects tax rate that caused shortfall to go back to 30% for 06, 06/07 EPS estimates and $500 implied value in tact.
- Reiterated Outperform on (STN), (SEPR), (SYMC) and (BXP).
- Reiterated Underperform on (KFT), (MRK) and (PFGC).

Afternoon/Evening Headlines
Bloomberg:
- Federal Reserve policy makers, meeting for the final time under Chairman Alan Greenspan, raised the main US interest rate to 4.5% and suggested the run of increases is still not finished.
- Robert McTeer, the former president of the Federal Reserve Bank of Dallas, told CNBC that Federal Reserve policy makers should “stop right now and hold” to give the economy a chance to catch up with recent rate increases.
- Google(GOOG) posted fourth-quarter net income growth of 82% and revenue growth of 86%, but missed profit estimates due to a higher-than-expected tax rate.

BOTTOM LINE: The Portfolio finished higher today on gains in my Medical Information Systems longs, Retail longs, Internet longs, Biotech longs and Computer longs. I added to my Google(GOOG) long down 70 after-hours and took profits in an existing long, thus leaving the Portfolio 100% net long. The tone of the market was mixed today as the advance/decline line finished neutral, sector performance was mixed and volume was above average. Measures of investor anxiety were higher into the close. Overall, today’s performance was mixed. After recouping all its earlier morning losses, Gilead Sciences (GILD), one of my biotech longs, traded 5.1% higher to an all-time high. Gilead remains my favorite biotech stock.

Stocks Modestly Lower into Final Hour after Fed Hikes Rates 25 Basis Points

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Medical Information Systems longs, Internet longs, Biotech longs and Computer longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly negative as the advance/decline line is modestly lower, sector performance is mixed and volume is above average. Measures of investor anxiety are higher. The Johnson Redbook same-store sales index rose 3.5% year-over-year last week vs. a 3.3% rise the prior week. This week's gain is up from a 1.5% increase in late April 2005, and it's the 39th week in a row that the index has risen 3% or more. The long-term average is a gain of around 2.5%. Retail sales remain healthy, despite higher oil prices. I continue to believe a healthy labor market, low long-term interest rates, falling energy prices, improving sentiment and rising stock prices will cushion any weakness this year related to a slowing housing market. My two favorite retailers remain Abercrombie & Fitch (ANF) and Best Buy (BBY). I expect US stocks to trade higher into the close from current levels on lower energy prices, positive economic data, more dovish Fed comments and stable long-term rates.

Today's Headlines

Bloomberg:
- Coretta Scott King, the widow of civil rights leader the Reverend Martin Luther King Jr. who took up his fight for racial equality after his assassination, has died at the age of 78.
- Iran won’t halt oil exports because of the dispute over its nuclear program, which may be referred to the UN for sanctions, the country’s oil minister said.
- “Brokeback Mountain” led Academy Award nominations with eight nods, including best picture and best director.

Wall Street Journal:
- Huntsman Corp.(HUN), the fourth largest US chemical maker, is in talks to be acquired by an unidentified buyer.
- American Electric Power(AEP) will build a $3 billion electricity line from West Virginia to New Jersey, the first big venture to use a new US law that promotes the building of projects needed to alleviate a congested power grid.
- Liberty Media(L) and EchoStar Communications(DIS) are investing in a company with a product that lets people watch television on their computers while away from home.
- Shares of Diebold(DBD) have dropped 30% in 12 months, a period that’s seen the departure of the CEO, the finance chief and the COO, but investors who stick with the company could reap rewards.
- General Motors(GM), Anheuser-Busch(AB) and Nintendo are developing ways to attach ads to video files downloaded from the Internet.

NY Times:
- Many US states have passed laws that inch toward regulation of the drug industry.
- The number of US and other foreign troops in Iraq probably will drop to below 100,000 by the end of the year and a majority could be out in two years.

USA Today:
- Indian tribes, which can make unlimited political contributions, get that status through treaties negotiated with the US in the 1700s.
- FEMA may provide displaced New Orleans residents free apartments for as long as 18 months while they recover from last year’s hurricane.

NY Post:
- Pier 1 Imports may be looking for a successor to Chairman and CEO Girouard, and has hired an executive search firm to seek candidates.
- NY’s Metropolitan Transportation Authority plans to run a six-month program to test “smart cards” on the 4, 5 and 6 subway lines in Manhattan to speed up passenger entry.

Atlanta Business Chronicle:
- Coca-Cola has been looking into ways, over the past two years, to offer hot coffee, espresso and tea quickly in individual servings, citing patent and trademark applications.

Nihon Keizai:
- Sanyo Electric and Volkswagen AG will jointly develop rechargeable batteries for gasoline-electric hybrid vehicles.

Arab News:
- Saudi Arabia urged western countries to respect the decision of the Palestinian people to elect Hamas, classified by many as a terrorist organization.

Tehran Times:
- Iran plans to invest $14 billion to expand its refining capacity by more than 50%.

Reuters:
- Google(GOOG) denied a report in today’s NY Post that the company is in talks with Napster(NAPS) to form an alliance that may lead to Google acquiring the Internet music service.