Trade Deficit Widens Even as US Exports Hit Another Record, Labor Market Still Healthy

- The Trade Deficit for January widened to -$68.5 billion versus estimates of -$66.5 billion and -$65.1 billion in December.
- Initial Jobless Claims for last week rose to 303K versus estimates of 290K and 295K the prior week.
- Continuing Claims rose to 2506K versus estimates of 2489K and 2477K prior.

BOTTOM LINE: The US trade deficit widened in January as the oil-import bill rose and purchases of inexpensive Chinese goods increased, Bloomberg reported. US exports rose 2.5% as record numbers of industrial supplies, vehicles and capital goods were shipped. However, imports rose 3.5% as the US economy remains stronger than most of its major trading partners. The deficit with OPEC countries widened 11.6% in January. I expect the trade deficit to improve only modestly over the intermediate-term as relatively strong US growth offsets most of the benefits from falling commodity prices.

First-time claims for US unemployment benefits unexpectedly rose last week while staying at a level that signals strength in the labor market, Bloomberg said. The four-week average of initial jobless claims rose to 293,500 versus 287,250 the prior week. According to a Bloomberg survey, payrolls in February probably rose by 210,000 up from 193,000 in January. I continue to believe the labor market will remain relatively healthy over the intermediate-term without generating substantial unit labor cost increases.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- United Technologies(UTX) named Pratt & Whitney head Louis Chenevert president and chief operating officer, putting him in line to replace CEO George David in about two years.
- Brazil’s central bank cut the benchmark lending rate to a 17-month low in a bid to fuel faster growth in Latin America’s biggest economy.
- The US and its European allies will take a gradual approach in the UN Security Council to building pressure on Iran to suspend uranium enrichment, envoys said after the UN’s nuclear agency cleared the way for council action on the issue.

Wall Street Journal:
- Delphi Corp.(DPHIQ) and General Motors(GM) are close to agreeing on the broad points of a potential deal with the UAW union.
- Cia. Vale do Rio Doce, the world’s largest iron-ore producer, may accept an increase in prices at the lower end of analyst forecasts.

ESPN:
- National Football League owners approved a new six-year collective bargaining agreement that keeps a salary cap.

USA Today:
- US military bases were ordered to reduce energy consumption by 2% a year by using sources such as wind and solar energy because of rising fuel costs.

China Daily:
- China, the world’s largest buyer of cotton, is expected to import 1.5 million tons of cotton this year, down from 2.57 million a year earlier, as domestic output rises.

AFP:
- Afghanistan’s government sent soldiers into the southern province of Helmand to begin destroying opium poppy fields in the world’s biggest opium producing country.

Hankyoreh:
- North Korea offered to exchange information with the US in an attempt to apprehend criminals involved in manufacturing counterfeit US currency.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on (USB), (XOM) and (GOOG).
- Reiterated Underperform on (INFA).

Night Trading
Asian Indices are unch. to +.75% on average.
S&P 500 indicated +.16%.
NASDAQ 100 indicated +.15%.

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Earnings of Note
Company/EPS Estimate
- (ARO)/.74
- (BBI)/.15
- (CLE)/.68
- (DWA)/.42
- (FMT)/1.20
- (HANS)/.62
- (IDCC)/.05
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- (RCI)/.53
- (SGY)/1.27
- (URBN)/.21
- (USM)/.39

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Trade Deficit for January is estimated to widen to -$66.5 billion versus -$65.7 billion in December.
- Initial Jobless Claims for last week are estimated to fall to 290K versus 294K the prior week.
- Continuing Claims are estimated to rise to 2492K versus 2486K prior.

BOTTOM LINE: Asian indices are higher, boosted by technology shares in the region. I expect US equities to open mixed and to rise modestly into the afternoon. The Portfolio is 75% net long heading into the day.

Stocks Close Near Session Highs after Energy Prices Fell and Long-term Rates Stabilized

Indices
S&P 500 1,278.47 +.20%
DJIA 11,005.74 +.23%
NASDAQ 2,267.46 -.04%
Russell 2000 721.84 +.11%
Wilshire 5000 12,855.02 +.15%
S&P Barra Growth 605.43 +.33%
S&P Barra Value 669.44 +.07%
Morgan Stanley Consumer 604.62 +.42%
Morgan Stanley Cyclical 776.30 -34%
Morgan Stanley Technology 530.74 -.20%
Transports 4,420.21 -.33%
Utilities 400.26 +.24%
Put/Call .96 -5.88%
NYSE Arms .92 -.30%
Volatility(VIX) 12.32 -2.69%
ISE Sentiment 149.00 +7.19%
US Dollar 90.56 -.23%
CRB 317.87 -1.11%

Futures Spot Prices
Crude Oil 59.89 -.20%
Unleaded Gasoline 163.75 -.77%
Natural Gas 6.62 -.36%
Heating Oil 169.18 -.14%
Gold 544.70 +.04%
Base Metals 161.68 -.64%
Copper 217.60 -.05%
10-year US Treasury Yield 4.72% +.09%

Leading Sectors
Airlines +1.44%
Drugs +1.14%
Hospitals +1.13%

Lagging Sectors
Semis -1.39%
Gold & Silver -2.20%
Alternative Energy -2.64%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on (MYOG) and (COF).
- Reiterated Underperform on .

Afternoon/Evening Headlines
Bloomberg:
- North Korea launched two-short range missiles, a US official confirmed today, saying the test was a reminder of the threat posed by that country.
- President Bush promised residents of New Orleans that the levees protecting the Gulf Coast city will be rebuilt better than they were before Hurricane Katrina hit.
- Intel(INTC) became too relaxed about competition from Advanced Micro Devices(AMD), causing the company to scramble to introduce a fresh product design to reclaim market share, a top executive said.
- Merrill Lynch(MER) is sticking with its forecast that the Fed will stop raising rates when its target reaches 4.75%.
- New York City private sector jobs grew by a revised 1.8% over the 12 months ending in January, double the long-term average rate, as financial services companies added workers.
- Apple Computer(AAPL) created a monthly subscription service on iTunes for “The Daily Show with Jon Stewart” and “The Colbert Report” from the Comedy Central cable television network.
- Dell Inc.(DELL) will continue to undercut competitors on computer prices, limiting profit margins to revive revenue growth after its forecast trailed analysts’ projections, CEO Rollins said.
- JetBlue Airways(JBLU) may sell items on its flights to boost revenue after its first quarterly loss since the low-cost carrier went public in 2002.
- Shares of the NYSE(NYX) climbed as much as 22% in their trading debut, reflecting investor confidence in the transformation of the world’s largest equity market into a public company.
- A US House committee approved a measure to block a state-owned Dubai firm’s takeover of terminal operations at six US ports, defying a threat from President Bush to veto the legislation.
- Crude oil in NY traded near a three-week low after the US reported the largest stockpiles of crude since 1999 and OPEC left output near a 20-year high.
- Google(GOOG) said today it settled a “click-fraud” lawsuit filed in Arkansas for $90 million.

Wall Street Journal:
- The US Justice Dept. said it plans to seek civil-fraud charges against fund manager Mario Gabelli.

al-Sabah:
- Iraqi Prime Minister Ibrahim al-Jaafari said he’s confident the process of forming a new government will speed up.

BOTTOM LINE: The Portfolio finished higher today on gains in my Biotech longs, Retail longs, Networking longs and Commodity shorts. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was slightly positive today as the advance/decline line finished about even, sector performance was mostly positive and volume was above average. Measures of investor anxiety were lower into the close. Overall, today's market performance was bullish. The only thing missing today was a good dose of fear. If commodity prices fall as hard as I expect, we will likely get elevated anxiety readings over the coming weeks. I continue to believe falling commodity prices will prove to be a huge positive for the broad stock market over the longer-term.

Stocks Modestly Higher into Final Hour as Commodity Prices Fall and Interest Rates Stabilize

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Networking longs, Retail longs and Biotech longs. I covered some of my (IWM)/(QQQQ) shorts and added (CYMI) long, thus leaving the Portfolio 75% net long. The tone of the market is slightly positive as the advance/decline line is modestly higher, sector performance is mostly positive and volume is heavy. The CRB Index is breaking down convincingly through its 200-day moving average today for the fist time since June 2003. The Index has fallen almost 10% since late January. A weekly close below 310 on the CRB would put the entire uptrend in jeopardy that has been in place since Nov. 2001. I expect this to happen over the coming weeks. This will lead to decelerating inflation readings throughout most of the year. I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower energy prices and stabilizing long-term rates.

Today's Headlines

Bloomberg:
- The UNs’ nuclear agency cleared the way for the Security Council to weigh possible political or economic sanctions against Iran after 3 years of inspections failed to declare the Islamic Republic’s atomic work peaceful.
- Exxon Mobil(XOM) said it will raise capital spending 13% this year to about $20 billion to boost reserves and expand refineries.
- OPEC will maintain oil production near 20-year highs as violence in Nigeria and a dispute with Iran over nuclear research keep prices above $60/bbl.
- Shares of the NYSE(NYX) climbed as much as 12% in their trading debut, underlining investor confidence in the future of the world’s largest equity market as a public company.
- Micro Tech(MU) agreed to buy Lexar Media(LEXR) for about $680 million in stock to expand a push into the fastest-growing part of the flash-memory market.
- Biogen(BIIB) and Elan(ELN) won the backing of a US regulatory panel to resume sales of Tysabri, the MS drug withdrawn a year ago because it was linked to a rare, fatal brain infection.
- Copper, zinc, and nickel dropped in NY and London on speculation rising interest rates will slow economic growth, curbing demand for industrial metals.
- Oil is falling for a third day after a report showed a larger-than-expected gain in US stockpiles left inventories at 7-year high levels.
- Brazil’s currency, bonds and stocks tumbled, leading declines throughout Latin America, as rising interest rates in the US, Europe and Japan lured money from riskier developing country assets that are heavily dependent on commodities.

Wall Street Journal:
- A US federal grand jury is looking into possible price-fixing and collusion in the air-freight business, indicating that the Justice Department might seek criminal charges against some airlines.
- XM Satellite Radio Holdings(XMSR) will soon have to carry advertising on four of its stations, citing the company’s chairman.
- GM(GM) failed to follow US consumer trends and regional preferences, running ads in Miami showing cars driving in snow and starting Spanish-language advertising later than rivals.
- Verizon Communications(VZ) CEO Seidenberg is betting that high-speed lines will help the company win against rivals in the race to supply televisions, Internet and voice services.
- Prime brokers, which offer preferred-customer services for hedge funds that include financing trading, helping with paperwork and introducing potential clients, may have too free a rein.
- David Tepper, who heads Appaloosa Management LP, a hedge-fund firm, has acquired 14.8% of Dana Corp.(DCNAQ), a vehicle parts maker that went into Chapter 11 last week, but individual investors would be wise not to emulate him.


Market News Intl.:
- Fed Bank of Minneapolis President Gary Stern said he doesn’t see any “material” acceleration of inflation.

USA Today:
- The US government plans to test almost eight times as many wild birds this year as in the past decade in efforts to stave off the spread of the deadly H5N1 bird flu virus.

NY Times:
- Chinese Web sites are home to scam artists selling products from date rape drugs to stolen cars.
- New York State regularly sends patients from mental hospitals to nursing homes, where it illegally houses hundreds of patients without the required care and in conditions comparable to imprisonment.

Washington Post:
- Harold Ickes, an adviser to Senator Hillary Rodham Clinton, is leading a group of Democrats in raising millions of dollars to start a private firm named Data Warehouse that plans to gather data on Americans in an attempt to find Democratic voters.

Reuters:
- Boston Scientific(BSX) plans to appoint new management and may adopt another name for Guidant’s(GDT) heart-rhythm unit after closing its $27 billion acquisition of Guidant next month.

AP:
- Arizona Governor Janet Napolitano said she signed an executive order to put more of the state’s National Guard troops on the border with Mexico to assist federal efforts to curb illegal immigration.

BBC’s Brazilian News:
- Brazil may build as many as seven nuclear power plants in 15 years as part of a plan to diversify energy sources, citing Science and Technology Minister Rezende.