Import Prices Rise, Housing Starts Increase, Labor Market Healthy, Natural Gas Supplies Still Soaring

- The Import Price Index for January rose 1.3% versus estimates of a 1.0% increase and a .1% decline in December.
- Housing Starts for January rose to 2276K versus estimates of 2020K and an upwardly revised 1988K in December.
- Building Permits for January rose to 2217K versus estimates of 2064K and 2075K in December.
- Initial Jobless Claims for last week rose to 297K versus estimates of 285K and 278K the prior week.
- Continuing Claims fell to 2511K versus estimates of 2520K and 2550K prior.
- The EIA reported weekly natural gas supplies fell 102 bcf versus estimates of a 110 bcf drawdown.

BOTTOM LINE: Prices of goods imported into the US increased in January for the first time in three months, led by higher costs for petroleum, metals and building materials, Bloomberg reported. Prices for all imported goods, excluding petroleum, rose 2.4% over the last 12 months. Prices for imported computer equipment and other office machinery declined 8.1% from year-ago levels. Import price increases have likely peaked for the year as falling commodity prices lead to a deceleration in the reading.

Builders took advantage of warm weather to start work on the most houses in almost 33 years, following the best year in US history for new home sales, Bloomberg reported. Housing starts rose 29% in the Northeast, 24% in the Midwest, 17% in the West and 8.7% in the South. I expect home building to decelerate for most of the remainder of the year as the housing market slows to more healthy sustainable levels.

The number of Americans filing first-time claims for unemployment benefits rose last week to a level that still points to a robust labor market, Bloomberg said. For the first time since the stock market bubble burst in 2000, initial claims for unemployment held below 300,000 for five straight weeks. The four-week moving average of claims ticked up to 283,000 from 276,750 the prior week. The unemployment rate among those eligible for jobless benefits, which tracks the unemployment rate, held at 2%. The labor market has recently tightened as a result of the unseasonably warm weather. Over the intermediate-term I expect the labor market to remain healthy without generating substantial unit labor cost increases.

Supplies of natural gas are now 44% above the 5-year average even as 16% of Gulf of Mexico production remains shut-in from the hurricanes. Fundamentals continue to weaken for the entire energy complex. I continue to expect oil to break down through long-term support at $56/bbl and head meaningfully lower over the intermediate-term.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- Crude oil was trading near a seven-week low in NY after yesterday falling below $58 for the first time this year as a report showed US stockpiles jumped almost five times estimates.
- Shares of United Microelectronics, the world’s second-biggest made-to-order chip supplier, posted their biggest jump in two years on the company’s plan to buy back 5% of its stock.

Wall Street Journal:
- More than $200 billion in credit derivatives are linked to General Motors(GM), which has about $30 billion in debt.
- Amazon.com(AMZN) is in discussions with four music companies, including Warner Music Corp. and EMI Group Plc, to obtain licensing for a digital-music service.

Financial Times:
- Merrill Lynch(MER) will start a unit to advise companies on how to address investors activism, citing an internal company memo.
- Knight Ridder’s(KRI) sale may be affected by its holding in the CareerBuilder.com Web site.

London-based Times:
- London house prices rose 2% in January, the biggest monthly gain for two years, citing UK real estate agents Haart and Knight Frank LLC.

Nikkei English News:
- Audible Inc.(ADBL) plans to offer in Japan a fee-based system to distribute and download copyright online music and video.

Xinhua News Agency:
- China’s pollution has become a “blasting fuse” for social instability, citing Zhou Shengxian, director of the State Environmental Protection Administration.

International Oil Daily:
- Saudi Aramco awarded the right to invest in a $5 billion oil refinery to Total SA.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on (MSFT) and (CMX).
- Reiterated Underperform on (AZR), (KEA) and (F).

Night Trading
Asian Indices are -.25% to +.75% on average.
S&P 500 indicated +.07%.
NASDAQ 100 indicated +.24%.

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Earnings of Note
Company/EPS Estimate
(ASF)/.26
(AAP)/.36
(BHI)/.73
(CNA)/.64
(DELL)/.41
(DDS)/.88
(FAF)/1.10
(GT)/.25
(INTU)/.95
(JCP)/1.63
(LH)/.65
(LTR)/2.09
(NVDA)/.49
(PCLN)/.27
(TGT)/1.05
(TK)/.179
(WPI)/.35
(WTW)/.37
(XMSR)/-.92

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- (CLDN) 3-for-2
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Economic Releases
8:30 am EST
- The Import Price Index for January is estimated to rise 1.0% versus a .2% decline in December.
- Housing Starts for January are estimated to rise to 2020K versus 1933K in December.
- Building Permits for January are estimated to fall to 2064K versus 2075K in December.
- Initial Jobless Claims for last week are estimated to rise to 285K versus 277K the prior week.
- Continuing Claims are estimated to fall to 2520K versus 2557K prior.

12:00 pm EST
- Philly Fed. for February is estimated to rise to 9.1 versus a reading of 3.3 in January.

BOTTOM LINE: Asian indices are mostly higher, boosted by exporters in the region after oil fell and US interest rates stabilized. I expect US equities to open mixed and to trade higher into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Dow Finishes at 4-Year High after Another Decline in Commodity Prices and Positive Economic Data

Indices
S&P 500 1,280.00 +.35%
DJIA 11,058.97 +.28%
NASDAQ 2,276.43 +.63%
Russell 2000 725.10 +.75%
S&P Barra Growth 607.10 +.43%
S&P Barra Value 669.17 +.27%
Morgan Stanley Consumer 601.08 +.52%
Morgan Stanley Cyclical 797.09 +.11%
Morgan Stanley Technology 534.27 +.36%
Transports 4,442.29 +.78%
Utilities 403.42 +.06%
Put/Call .70 -17.65%
NYSE Arms 1.02 +30.76%
Volatility(VIX) 12.31 +.49%
ISE Sentiment 126.00 +7.69%
US Dollar 90.69 +.17%
CRB 320.75 -1.32%

Futures Spot Prices
Crude Oil 57.88 +.40%
Unleaded Gasoline 139.28 +.58%
Natural Gas 7.12 +.76%
Heating Oil 161.30 +.34%
Gold 542.80 +.02%
Base Metals 161.55 -4.05%
Copper 219.10 unch.
10-year US Treasury Yield 4.59% -.30%

Leading Sectors
Biotech +1.68%
Hospitals +1.66%
Airlines +1.65%

Lagging Sectors
Steel -1.82%
Oil Service -2.34%
Gold & Silver -2.42%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Underperform on (HC).

Afternoon/Evening Headlines
Bloomberg:
- Bill Gross, chief investment officer at PIMCO told CNBC that his firm is investing in shorter-maturity debt in anticipation of the economy slowing and the Federal Reserve cutting interest rates.
- AT&T(T) CEO Whitacre and Verizon Communications(VZ) CEO Seidenberg urged US lawmakers to adopt a national rule making it easier for phone companies to sell television service.
- Vice President Cheney, in an interview with Fox News, took the blame for a hunting accident that left a friend hospitalized.
- Applied Materials(AMAT) said first-quarter profit fell after costs to close facilities. Sales rose for the first time in a year.
- Morgan Stanley(MWD), the No. 3 US securities firm, increased its holdings in General Motors(GM) to 5.1%, joining billionaire investor Kirk Kerkorian and other shareholders in buying stock as the automaker tries to end losses.
- Hewlett-Packard(HPQ) said first-quarter profit rose 30% as holiday demand drove sales. The earnings forecast for this quarter exceeded analysts’ estimates.

AFP:
- Afghanistan and Pakistan agreed to increase cooperation in fighting terrorists operating on their border.

Australian:
- Mills Corp.(MLS) appointed JP Morgan Chase(JPM) and Goldman Sachs Group(GS) as advisers with a mandate including the possible sale of its shopping centers.

Australian Review:
- Commodity prices will fall this year as supplies increase, eroding export earnings for Australia, citing Steven Kennedy, general manager of the economy division of the Australian Treasury.

Bolivarian news agency:
- Iran and Venezuela, the second- and third-largest producers in OPEC, created a $200 million fund to spur investment in each other’s economies.

BOTTOM LINE: The Portfolio finished higher today on gains in my Biotech longs, Retail longs, Computer longs, Networking longs and Energy-related shorts. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, most sectors gained and volume was about average. Measures of investor anxiety were mixed into the close. Overall, today's market performance was bullish, given the declines in commodity stocks, Bernanke's mostly hawkish comments and the bears' inability to capitalize on morning weakness. Small caps were especially strong today and the Russell 2000 is up about 8% for the year.

Stocks Modestly Higher into Final Hour Despite Falling Commodity Stocks

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Computer longs, Retail longs, Networking longs and Energy-related shorts. I exited my (IWM)/(QQQQ)shorts, added a (VLO) short and exited an existing long today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are higher and volume is above average. Copper inventories at the London Metal Exchange (LME) are at the highest level since Sept. 2004 and have risen 313% since July. On an absolute basis, supplies are still historically low, but I expect this to change as the year progresses. I will look to short Phelps Dodge (PD) on any substantial bounce. I continue to believe that the declines in almost all commodities are not the result of any substantial U.S. economic slowdown. They are more a function of the end to the commodity mania. I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower long-term interest rates, lower commodity prices and bargain hunting.

Today's Headlines

Bloomberg:
- US Treasury officials are sounding out investors about the potential impact of naming China as a currency manipulator.
- Merrill Lynch will give up its fund management unit for a 49.8% stake in BlackRock(BLK).
- UK Prime Minister Tony Blair won the first of a series of votes on his Terrorism Bill, making it a crime to glorify or incite terrorism.
- Google(GOOG) and Yahoo!(YHOO) were among technology companies criticized by US lawmakers for agreeing to help Chinese authorities by censoring Internet searches nd handing over private data.
- Crude oil is falling below $59/bbl. in NY for the first time this year after the EIA reported US inventories soared.
- Federal Reserve Chairman Bernanke, in his first report to Congress, said the US economy is in a sustained expansion that may require additional interest rate increases to restrain inflation.

Wall Street Journal:
- United Technologies’(UTX) Pratt & Whitney unit is likely to announce today that it will make spare parts for the top-selling CFM56 jet engine supplied by its rival, General Electric(GE).
- British and American women are drinking more than they did a few years ago, a trend that is worrying health-care officials even as it boosts sales for the alcoholic drinks industry.
- Johnson & Johnson(JNJ) will cut the size of its sales operations for the anemia drug, Procrit, because it has lost business to a competitor.
- Two US labor unions representing construction workers plan to quit the AFL-CIO to set up a separate association and boost membership, citing union officials.
- Nike Inc.(NKE) has created a new line of fitness dance apparel in an effort to boost the company’s brand appeal among women.
- Bristol-Myers Squibb(BMY) plans to license its Reyataz drug for AIDS without charge to generic drugmakers Aspen Pharmacare Holdings of South Africa and Emcure Pharmaceuticals of India.

NY Times:
- General Electric(GE) expects that over the next five years alternate energy products will more than triple to account for more than a quarter of the sales of energy equipment, its largest industrial business.
- Two car dealerships will open next month in Harlem, the first in the neighborhood in more than 40 years, continuing economic expansion in what has long been one of Manhattan’s poorest communities.

AFP:
- Iran is ready to use offensive action to counter any US aggression, citing the Islamic Republic’s Revolutionary Guards.

Daily Telegraph:
- Batman, the superhero who has previously fought the Joker and the Penguin, is to turn his attention to fighting Osama bin Laden in a new graphic novel, citing the writer Frank Miller.