Productivity Falls, Unit Labor Costs Rise

- Final 4Q Non-farm Productivity fell .5% versus estimates of a .1% decline and a prior estimate of a .6% fall.
- Final 4Q Unit Labor Costs rose 3.3% versus estimates of a 3.0% increase and a prior estimate of a 3.5% gain.

BOTTOM LINE: The productivity of US workers fell last quarter for the first time in almost five years, Bloomberg reported. Productivity rose 2.9% for all of 2005, still higher than the 2.0% average of the 90s. I expect unit labor cost and productivity readings to return back to very healthy levels in 1Q as GDP growth comes in at a brisk 4-4.5%.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- US law enforcement actions that are hobbling North Korea’s financial system may be as important as diplomacy in persuading the country to give up its nuclear weapons program.
- Crude oil traded near a three-day low in NY as ministers from OPEC signaled they intend to keep production close to the highest in more than 20 years and fear over production disruptions subsided.

Wall Street Journal:
- Venture-capital investments in US energy-technology companies increased last year because of greater demand for more reliable and affordable alternatives to fossil fuels, citing a survey.

Financial Times:
- Kuwait has made a large oil and gas find that, if confirmed, could make it a significant gas producer for the first time, citing energy minister Sheikh Ahmad al-Fahd al-Sabah.
- The NYMEX, which started its pit-trading floor for energy futures in London six months ago, plans to close the floor and move over to electronic trade.

ABC News:
- Iranian-made bombs are being brought across the border into Iraq and put into the hands of insurgents fighting coalition forces.

Reuters:
- The US economy has “a great deal of momentum” and more interest rate increases may be needed, especially if growth exceeds expectations, St. Louis Fed Reserve President Poole said. Poole said he doubted a cooling housing market could undermine the economy’s expansion, adding that the Fed would take appropriate steps should growth slow unexpectedly.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on (TXU), (EBAY), (CRL) and (ETR).

Night Trading
Asian Indices are -1.0% to -.50% on average.
S&P 500 indicated -.09%.
NASDAQ 100 indicated -.09%.

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Earnings of Note
Company/EPS Estimate
- (ABS)/.45
- (ILA)/-.08
- (CNT)/.57
- (COO)/.63
- (CPRT)/.27
- (DKS)/.98
- (DBRN)/.39
- (EIX)/.46
- (KFY)/.27
- (KR)/.36
- (MATK)/.13
- (OSIP)/-.40
- (PIXR)/.18
- (TSA)/1.08
- (SRZ)/.30

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Final 4Q Non-farm Productivity is estimated to fall .1% versus a prior estimate of a .6% decline.
- Final 4Q Unit Labor Costs are estimated to rise 3.0% versus a prior estimate of a 3.5% increase.

3:00 pm EST
- Consumer Credit for January is estimated to rise to $5.0 billion versus $3.3 billion in December.

BOTTOM LINE: Asian indices are lower, led down by technology and energy shares in the region. I expect US equities to open lower and to rally modestly into the afternoon, finishing slightly lower. The Portfolio is 50% net long heading into the day.

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.