Personal Income Rises Almost Twice Inflation, Spending Slows, Inflation Decelerates, Manfuacturing Mixed

- Personal Income for February rose .3% versus estimates of a .4% increase and a .7% gain in January.
- Personal Spending for February rose .1% versus estimates of unchanged and a .8% rise in January.
- PCE Core for February rose .1% versus estimates of a .1% gain and a .2% rise in January.
- Final Univ. of Mich. Consumer Confidence for March rose to 88.9 versus estimates of 86.9 and a prior reading of 86.7.
- Chicago Purchasing Manager for March rose to 60.4 versus estimates of 57.0 and a reading of 54.9 in February.
- Factory Orders for February rose .2% versus estimates of a 1.3% gain and a 3.9% decline in January.

BOTTOM LINE: Consumer spending rose .1% in February, the smallest gain since August, as Americans took a breather after splurging a month earlier, Bloomberg said. The PCE core, the Fed’s favorite inflation gauge, rose 1.8% y-o-y, the same as the prior month. Incomes rose 5.6% y-o-y, almost twice most inflation measures. I expect incomes to remain healthy, spending to moderate and inflation to decelerate mostly through year-end.

Confidence among US consumers increased more than expected in March as higher wages and job creation left people with more money in their pockets, Bloomberg reported. The expectations index rose to 76 from 74.5 last month. Confidence remains irrationally low given the current economic backdrop. I expect this measure to rise to cycle highs before year’s end.

Manufacturing in the Chicago area accelerated in March, Bloomberg reported. Inventories at record lows and increased business spending are spurring companies to boost production. The employment component of the index rose to 55.6 from 54.9 in February. The prices paid component fell to 71.1 from 71.6 the prior month. I expect manufacturing to slow to average levels, but still add to economic growth over the coming months.

US factory orders rose less than expected in February, held back by falling demand for machinery and less expensive oil, Bloomberg said. Orders, excluding transportation, fell 2.0%.

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Friday Watch

Late-Night Headlines
Bloomberg:
- Asian central banks have “limited” room to add more euros to their reserves, after increasing the amount in that currency in the second half of last year, according to a Goldman Sachs research report.
- Citigroup(C) led Forbes magazine’s annual Global 2000 company list for a third consecutive year.
- Japan’s consumer prices rose in February for a fourth month, adding to prospects that the Bank of Japan may raise interest rates from near zero this year.
- China “regrets” the decision by the European Union and US to file a joint complaint at the World Trade Organization against that country’s tariffs on imports of car parts.

Daily Telegraph:
- UK Prime Minister Tony Blair, who 18 months ago said he would not serve a fourth term in office, will step down by the end of this year.

Financial Times:
- General Motors(GM) should “show resolve” and make a decision on the development of a mass-market hydrogen-powered car within 18 months to ensure it remains competitive, citing an interview with Larry Burns, the carmaker’s vice president in charge of strategic planning.

Late Buy/Sell Recommendations
JPMorgan:
- Raised NOVL to Buy, target $11.

Night Trading
Asian Indices are unch. to +1.0% on average.
S&P 500 indicated -.02%.
NASDAQ 100 indicated +.03%.

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Earnings of Note
Company/EPS Estimate
- (GY)/-.15
- (GPN)/.34

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- (DBRN) 2-for-1
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Economic Releases
8:30 am EST
- Personal Income for February is estimated to rise .4% versus a .7% increase in January.
- Personal Spending for February is estimated to remain unchanged versus a .9% increase in January.
- The PCE core for February is estimated to rise .1% versus a .2% increase in January.

9:45 am EST
- Final Univ. of Mich. Consumer Confidence for March is estimated to rise to 86.9 versus a prior estimate of 86.7.

10:00 am EST
- Chicago Purchasing Manager for March is estimated to rise to 57.0 versus a reading of 54.9 in February.
- Factory Orders for February are estimated to rise 1.3% versus a 4.5% decline in January.

BOTTOM LINE: Asian indices are mixed, as gains in commodity shares are offsetting losses in exporting stocks in the region. I expect US equities to open modestly lower and to trade modestly higher into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Finish Mostly Lower on Oil and Rate Worries

Indices
S&P 500 1,300.25 -.20%
DJIA 11,150.70 -.58%
NASDAQ 2,340.82 +.13%
Russell 2000 762.59 -.21%
Wilshire 5000 13,153.76 -.17%
S&P Barra Growth 612.98 -.09%
S&P Barra Value 683.96 -.31%
Morgan Stanley Consumer 610.65 -.51%
Morgan Stanley Cyclical 816.31 -.31%
Morgan Stanley Technology 550.06 +.89%
Transports 4,547.81 -.45%
Utilities 392.66 -1.11%
Put/Call .83 +2.47%
NYSE Arms .81 +23.33%
Volatility(VIX) 11.57 +5.66%
ISE Sentiment 111.00 -18.98%
US Dollar 89.36 -.94%
CRB 337.31 +1.32%

Futures Spot Prices
Crude Oil 67.03 -.18%
Unleaded Gasoline 199.57 +2.12%
Natural Gas 7.46 -.29%
Heating Oil 188.43 +1.74%
Gold 588.60 +.32%
Base Metals 179.83 +1.42%
Copper 248.90 +.18%
10-year US Treasury Yield 4.85% +1.06%

Leading Sectors
Gold & Silver +3.13%
Gaming +1.68%
Broadcasting +1.01%

Lagging Sectors
REITs -1.58%
Oil Tankers -1.92%
Airlines -2.03%

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Afternoon Recommendations
Deutsche Bank:
- Rated (NTAP) Buy, target $42.

Afternoon/Evening Headlines
Bloomberg:
- Legg Mason(LM) said it named Bill Miller chairman of its Legg Mason Capital Management mutual-fund unit and promoted four other executives.

Wall Street Journal:
- Colony Capital LLC offered $41 a share for Aztar Corp.(AZR), topping a bid from Pinnacle Entertainment.

Financial Times:
- Thirty-eight unsolicited takeover bids worth a total of $234 billion were made in the first quarter of 2006, citing Dealogic Holdings Plc.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Semi longs and Internet longs. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was mixed today as the advance/decline line finished about even, sector performance was mixed and volume was above-average. Measures of investor anxiety were higher into the close. Overall, today's market performance was neutral. However, the Nasdaq displayed exceptional resilience. The ISE Sentiment Index finished down 19% to a below-average 111, which is a positive. Even with the recent rise in commodities, the CRB is still 14 points below January highs. This was the type of healthy consolidation I am happy to see in the major average after yesterday’s sharp rise.

Stocks Mostly Lower into Final Hour on Continuing Worries Over Rates and Oil

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Internet longs and Semi longs. I added (IWM) and (QQQQ) shorts today, thus leaving the Portfolio 75% net long. The tone of the market is mixed as the advance/decline line is slightly lower, sector performance is mixed and volume is above-average. The average 30-year mortgage rate rose to 6.35% this week from 6.32% the prior week. This is still lower than the 6.37% three weeks ago. Mortgage rates are now 114 basis points away from record lows set in June 2003. The yield on the 10-year Treasury note is still below levels seen in June 2004. I continue to expect mortgage rates to remain relatively low by historic standards this year as U.S. growth slows to average levels, demand for U.S. assets increases, inflation readings decelerate and the dollar remains stable. I expect US stocks to trade mixed into the close from current levels as short-covering offsets profit-taking.

Today's Headlines

Bloomberg:
- The cost of hiring tankers may fall 25% this year on excess ship supply, Clarkson Plc, the world’s largest shipbroker, said.
- Nokia(NOK), the world’s biggest maker of mobile phones, raised its forecast for growth in the global handset market to 15%.
- Emerging markets are becoming vulnerable to imbalances in the global economy and investors aren’t paying enough attention to the risks in some of those economies, a group of the world’s largest banks said.
- Apple Computer(AAPL) today denied its iTunes store breaches a trademark agreement with the Beatles’ company, saying that it doesn’t own the rights to music sold through the site.
- Crude oil is rising to an eight-week high and gasoline surged as US fuel supplies declined and the UN Security Council asked Iran to curb its nuclear program.
- US Treasuries fell, pushing 10-year yields to the highest since May 2004 on more signs the US economy remains strong.

Wall Street Journal:
- Some US small-cap mutual funds have been closing to new investors, making it difficult to tap into the strong growth shown by companies with market values of less than $500 million.
- The bankruptcy-court case of Foamex International, a maker of foam for mattresses, carpet cushions and car seats, shows how hedge funds are playing a larger role in financing troubled companies.
- Lottery commissions in several US states are turning to slot machines in efforts to boost revenue.
- General Electric(GE) and other companies are restricting employees’ use of the Internet because of concern with viruses, communications blockages and possible regulatory violations.
- A group of private-equity and hedge-fund managers seems to be leading the bidding for Enron’s international assets.
- General Motors(GM) is closer to an agreement to sell 51% of its finance arm, General Motors Acceptance Corp., to a group led by Cerberus Capital for $11 billion.
- The US House of Representatives is expected to pass a bill this week that would require financial reports from colleges and universities as a way to curb tuition increases.
- The US Environmental Protection Agency plans to impose new emissions standards for lawn equipment to reduce air pollution and gas consumption.

AP:
- TiVo Inc.(TIVO) shared technology know-how with EchoStar Communications’(DISH), which used the details in its own boxes for pausing and rewinding live television programs, TiVo’s co-founder, Michael Ramsey said in court yesterday.

NY Times:
- US House Speaker Dennis Hastert said that he and other House Republicans support a guest-worker program.

Interfax
- Oil and condensate production from Kazakhstan’s Karachaganak field could triple if $10 billion is invested during the next six to eight years, citing the CEO of BG Group.