Today's Headlines

Bloomberg:
- OMV AG, central Europe’s biggest oil company, and Royal Dutch Shell Plc are among oil producers considering seeking licenses to explore for oil and gas off New Zealand’s southern-most coast.
- GM(GM), cutting costs after $8.55 billion in losses last year, will replace the current defined-benefits pension for many of its 36,000 US salaried workers with a less expensive defined-contribution plan starting next year.
- The US dollar strengthened the most against the euro in more than a month as expectations increased that the Fed will raise rate at least three more times.
- Gasoline futures fell for a second day on speculation that the number of refineries undergoing maintenance will begin to decrease around the middle of the month.

Wall Street Journal:
- AT&T’s(T) agreement to purchase BellSouth(BLS) poses a competitive threat to cable operators and may pressure them to cut high-speed Internet rates and slow price increases for television.
- Ford Motor(F) invested millions in marketing and incentives to sell more sport-utility vehicles with hybrid gas and electric engines, to compete with Toyota Motor(TM) and Honda Motor, which constitute 90% of the US hybrid market.
- US House opponents of Internet gambling are racing to co-sponsor a ban on Internet gambling after an earlier version failed following a campaign by lobbyist Jack Abramoff.
- The balance of power between Verizon Communications(VZ) and Vodafone Group(VOD) in their Verizon Wireless joint venture may have shifted in the British company’s favor as a result of AT&T’s(T) planned purchase of BellSouth(BLS).
- Researchers may be getting closer to developing effective treatments for type 1 diabetes, a disease that attacks insulin-producing cells and is fatal without regular insulin injections.

NY Post:
- Intercontinental Exchange(ICE) made a bid for a stake in the NYMEX last week, which might have scuttled plans by General Atlantic LLC to buy a 10% stake.

Broadcasting & Cable magazine:
- Walt Disney’s(DIS) Buena Vista Television unit is seeking to sell the cable television rights to its drama “Desperate Housewives” for as much as $1.2 million per episode.

NY Times:
- Whites may become a minority in the New York City metropolitan area within a few years, as non-Hispanic whites move to other US regions and amid an influx of immigrants, citing demographers.

Washington Post:
- Middle Eastern investment in the US has been growing since the Sept. 11 terrorist attacks, and while some transactions cause national security concerns, others are seen as a way to fuel the US economy.

Financial Times:
- Verizon Communications’(VZ) next moves in response to AT&T’s(T) plans to buy BellSouth Corp.(BLS) for $67 billion will highlight the differences between the two US phone companies.
- ASML Holding NV(ASML) is considering an expansion in semiconductor manufacturing and is weighing acquisitions, citing CEO Eric Meurice.

Arab News:
- Saudi Prince Alwaleed bin Talal, the world’s fifth-richest man, started a satellite tv channel designed to counter Middle East extremism by promoting more moderate Islam.

London-based Times:
- A Colorado High School geography teacher was suspended after a student recorded comments he made comparing President Bush with Adolf Hitler.

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%.

Links of Interest

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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.