Stocks Finish Lower, Pressured by Falling Energy Shares and Higher Long-Term Rates

Indices
S&P 500 1,278.26 -.70%
DJIA 10,958.59 -.57%
NASDAQ 2,286.03 -.72%
Russell 2000 731.16 -.99%
Wilshire 5000 12,888.41 -.73%
S&P Barra Growth 604.44 -.71%
S&P Barra Value 670.33 -.68%
Morgan Stanley Consumer 601.24 -.48%
Morgan Stanley Cyclical 782.29 -1.04%
Morgan Stanley Technology 535.86 -1.01%
Transports 4,470.19 -.87%
Utilities 400.91 -2.66%
Put/Call .90 +4.65%
NYSE Arms .96 +10.28%
Volatility(VIX) 12.74 +6.52%
ISE Sentiment 146.00 -13.61%
US Dollar 89.89 +.26%
CRB 325.25 -1.84%

Futures Spot Prices
Crude Oil 62.17 -.38%
Unleaded Gasoline 165.60 -5.0%
Natural Gas 6.55 +.05%
Heating Oil 175.46 -.18%
Gold 556.70 -.02%
Base Metals 167.33 -1.64%
Copper 220.35 +.34%
10-year US Treasury Yield 4.73% +1.24%

Leading Sectors
REITs +1.90%
Telecom +1.53%
Wireless +1.50%

Lagging Sectors
Energy -3.21%
Gold & Silver -3.34%
Oil Service -4.02%

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Afternoon Recommendations
Goldman Sachs:
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Fresh Del Monte Produce(FDP), which sells 40% of the world’s pineapples, said it will buy back as much as $300 million of its stock over the next three years.
- NBC Universal will buy iVillage(IVIL) for about $600 million, gaining a group of women’s Web sites and bolstering a push into the Internet.
- AT&T’s(T) $67 billion purchase of BellSouth(BLS) likely will sail through the FCC’s approval process, two former FCC chairman said.
- Cubist Pharmaceuticals’(CBST) Cubicin was unanimously recommended by a US advisory panel as a treatment for staph infections of the bloodstream.
- Texas Instruments(TXN) said 1Q sales will be $3.22 billion to $3.35 billion, compared with a prior forecast of $3.11 billion to $3.38 billion.
- US Treasuries fell today, pushing the benchmark 10-year note’s yield to the highest since June 2004.
- Carnival Corp.(CCL) will start offering cruises to Chinese travelers in July, its first expansion into the cruise industry in Asia.
- Biogen Idex(BIIB) and Elan’s(ELN) drug Tysabri is more effective than other multiple sclerosis therapies and needs a strict safety plan to control the risk of a fatal brain disease, US regulators said.
- Oil fell as ministers from OPEC signaled that they intended to keep production close to a 20-year high.

BOTTOM LINE: The Portfolio finished slightly lower today as losses in my technology longs more than offset gains in my energy-related shorts. I did not trade in the final hour, thus leaving the Portfolio 50% net long. The tone of the market was negative today as the advance/decline line finished lower, sector performance was mostly negative and volume was above average. Measures of investor anxiety were higher into the close. Overall, today's market performance was slightly bearish. At this point, with the 10-year Treasury note yield still historically low and 19 basis points below levels seen in 2004, it appears equity investors are overreacting. Energy-related stocks closed near session lows, down about 3%-4%. This could temporarily pressure the broad market, but is a big positive for the intermediate term.

Stocks Lower into Final Hour as Long-Term Rates Rise

BOTTOM LINE: The Portfolio is slightly lower into the final hour as losses in my technology longs are more than offsetting gains in my energy-related shorts. I added to my (IWM) and (QQQQ) shorts, thus leaving the Portfolio 50% net long. The tone of the market is negative as the advance/decline line is lower, sector performance is mostly negative and volume is above average. Oil tanker rates have plunged over 60% from their peaks in November 2004. They have dropped almost 50% in the last four months. OPEC production cuts later this year should further pressure rates as overcapacity becomes more exaggerated. I am still short OMI (OMM), among others. The Bloomberg Tanker Index has fallen 15.1% since November 2004 highs. I expect US stocks to trade modestly higher into the close from current levels as long-term rates stabilize and bargain-hunting commences.

Today's Headlines

Bloomberg:
- Russian President Vladimir Putin’s “increasingly authoritarian rule” is hurting relations with the US and fostering doubt about whether Russia will play a constructive role in the world.
- Alabama job opportunities are surging as Toyota, Hyundai and Daimler expand their plants in the state.
- Blackstone Group agreed to acquire CarrAmerica Realty for $5.6 billion, adding an office developer to real estate holdings that include hotels and resorts.
- Oil is falling more than $1/bbl. as ministers from OPEC signal that they intend to keep production close to the highest in two decades.

Wall Street Journal:
- Infinity Pharmaceuticals, a closely held Cambridge, Massachusetts-based biotechnology firm, will get up to $400 million from Switzerland’s Novartis AG to develop drugs to fight a protein that helps many kinds of cancer cells survive.
- Education Management Corp.(EMNC), which runs 72 primary campuses across the US and Canada, is likely to be acquired for $3.4 billion by Providence Equity Partners and Goldman Sachs’(GS) investment unit.
- Two Portland, Oregon-based private-equity firms are offering about $1.3 billion for Longview Fibre(LFB).
- The French town of Saint-Genis-Pouilly near the Swiss border rejected a request by Muslims to cancel a play by Voltaire because it used the prophet Muhammad to lampoon religious intolerance.
- AT&T’s(T) agreement to purchase BellSouth(BLS) for about $67 billion is gambling on the assumption that the Bush administration’s pro-business position will allay regulatory concerns.
- Public Storage(PSA) is close to buying rival self-storage company Shurgard Storage Centers(SHU) for about $3.2 billion.
- AT&T’s(T) agreement to buy BellSouth(BLS) will help the combined company push ahead with plans to offer customers the ability to make Internet calls using cellphones.

NY Times:
- US Democrats haven’t agreed on a common theme to use against Republicans ahead of the mid-term elections scheduled for later this year.

Financial Times:
- Verizon Communications(VZ) Chairman and CEO Seidenberg will fell pressure to take full control of Verizon Wireless mobile-phone service now that AT&T is buying BellSouth(BLS).
- A French and US move toward protectionism is not being resisted by investors, a move that they may regret in the long-run.

AFP:
- OPEC should leave production quotas unchanged to lower crude oil prices, Kuwaiti Energy Minister Fahd al-Sabah said.

Factory Orders Decline, Pending Homes Sales Fall Slightly

- Factory Orders for January fell 4.5% versus estimates of a 5.4% decline and an upwardly revised 1.6% increase in December.
- Pending Home Sales for January fell 1.1% versus estimates of a .3% increase and an upwardly revised 2.6% decline in December.

BOTTOM LINE: US factory orders fell in January as bookings for Boeing(BA) aircraft declined. Orders, excluding transportation equipment, rose 1.6%, Bloomberg reported. Orders for household appliances jumped 16% in January and orders for industrial machinery soared 55%. Orders for non-defense capital goods excluding aircraft, a gauge of future business spending, rose .1%. The inventory-to-shipments ratio was unchanged at 1.15 months in January. I expect factory orders to rebound nicely in February on a jump in aircraft production.

Contracts to purchase previously owned US homes fell for a fifth straight month in January as higher prices and mortgage rates discouraged buyers, Bloomberg said. Pending home sales rose 6% in the Midwest and .4% in the Northeast. Sales fell 1.9% in the West and 5.1% in the South. I continue to believe housing is slowing to more healthy sustainable levels.

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Monday Watch

Weekend Headlines
Bloomberg:
- China announced the biggest increase in its defense budget in four years as the economy grows and tensions flare with political foe Taiwan, regarded as a renegade province by the mainland government.
- President Bush said the US and Pakistan are putting together a trade agreement to spur economic growth in the South Asian nation.
- Warren Buffett, Berkshire Hathaway’s 75-year-old chairman, said his board has selected an executive to eventually succeed him.
- Berkshire Hathaway(BRK/A) said fourth-quarter earnings were little changed because of claims from a record hurricane season.
- Talks between NFL owners and players broke off less than 36 hours before a deadline for a new collective-bargaining agreement that could maintain stability in the nation’s most-popular sports league.
- Iran’s top nuclear negotiator Ali Larijani said his nation won’t renounce its right to enrich uranium on its soil, paving the way for it to be referred to the UN Security Council this week.
- US Joint Chiefs of Staff chairman Peter Pace said Iraq isn’t on the brink of civil war and that there isn’t any deadline for withdrawing American and coalition troops from the country.
- OPEC members will probably keep production close to a two-decade high as a disruption to Nigerian supply and possible sanctions against Iran keep prices above $60 a barrel.

Wall Street Journal:
- Cablevision Systems(CVC) will build a replacement for NYC’s Madison Square Garden arena a block west of the current site.
- AT&T(T) is nearing the acquisition of BellSouth(BLS) for about $65 billion.

Barron’s:
- Companies spun-off from their parents beat the S&P 500 by 45% in their first two years, according to a study conducted by Lehman Brothers’ Chip Dickson.

AP:
- Iraqi President Talabani said he has been assured that US armed forces will remain in Iraq as long as needed.

NY Times:
- Cingular Wireless, owned by AT&T(T) and Bellsouth(BLS), and other US mobile phone providers are working to improve their customer service and keep subscribers from switching carriers.
- DaimlerChrysler’s Chrysler Group says new models to be introduced this year will help the company avoid a sales slump, while a focus on style may allow it to reduce rebates in the longer-term, citing an interview with CEO LaSorda.
- Vermont, which as a population of about 620,000, is faced with the dilemma of convincing young people to stay in the state with few opportunities for jobs and housing.
- Research In Motion(RIMM) reached its $612.5 million settlement with licensing company NTP Inc. after a three-day negotiation session at Citigroup Inc.(C).
- Iran’s ambition to develop nuclear weapons still faces several technical hurdles including converting uranium ore to a gas and then turning the gas into enriched nuclear fuel.

Washington Post:
- Democratic congressional leaders Harry Reid and Nancy Pelosi complained in a private meeting with Democratic National Committee Chairman Howard Dean that he isn’t directing the party’s money to states with key races.

San Francisco Chronicle:
- California officials proposed changes to the state’s method of execution in an attempt to satisfy a judge who blocked the injection of lethal drugs into a convicted murderer last month.

Financial Times:
- The NYSE may offer derivatives trading and may combine with European exchanges as it tries to diversify its product mix, citing CEO Thain.
- Microsoft(MSFT) may reveal details this week for a portable computer sized between a mobile phone and a laptop.

London-based Times:
- The NYSE’s chief executive officer, John Thain, wants to “share out” contracts with investment banks, citing Thain.

Sunday Telegraph:
- Britain and the US will withdraw all their troops from Iraq next year as they seek to bring peace to the nation, citing a senior defense source.

Sunday Times:
- National Grid Plc, the British owner of electric utilities in NY and Massachusetts, was interested in making another purchase in the northeastern US, citing CEO Urwin.

AFP:
- Ayman al-Zawahiri, the deputy leader of al-Qaeda, has urged Islamist movement Hamas to carry on its fight and not accept agreements between the Palestinian government and Israel

Reuters:
- The investment show Mad Money, hosted by Jim Cramer, has drawn a loyal following since it began nearly a year ago.

China Securities Journal:
- China will cut duties on certain products to spur imports this year, part of efforts to seek balanced trade.

Weekend Recommendations
Barron's:
- Had positive comments on (AIG), (ATPG), (PFE), (CMCSK), (BSX), (FLR) and (SU).
- Had negative comments on (ARXT).

Goldman Sachs:
- Reiterated Outperform on (MDT).

Night Trading
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S&P 500 indicated +.09%.
NASDAQ 100 indicated +.09%.

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Earnings of Note
Company/Estimate
(ALD)/.34
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(MEDX)-.36
(SMTC)/.17

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Economic Releases
10:00 am EST
- Factory Orders for January are estimated to fall 5.4% versus a 1.1% rise in December.
- Pending Home Sales for January are estimated to rise .5% versus a 3.0% decline in December.

BOTTOM LINE: Asian Indices are mostly higher, boosted by gains in financial shares in the region. I expect US stocks to open mixed and to rally modestly into the afternoon. The Portfolio is 75% net long heading into the week.