Trade Deficit Narrows as Oil Falls, Wholesale Inventories Rise as Sales Increase Most in 5 Months

- The Trade Deficit for November shrank to -$58.2 billion versus estimates of -$60.0 billion and -$58.8 billion in October.
- Wholesale Inventories rose 1.3% versus estimates of a .5% increase and a downwardly revised .4% gain in October.

BOTTOM LINE: The US trade deficit unexpectedly shrank in November to the smallest since July 2005 as exports reached a record and oil imports declined, Bloomberg reported. US imports of consumer goods rose to $39.1 billion from $38.2 billion on increased demand for toys, televisions and clothing. Oil imports fell to $21.5 billion, the lowest since July 2005. The average price of a barrel of crude in December was $62.09. Oil is trading at $54/bbl. this morning. I expect the trade deficit to improve only modestly over the intermediate-term as an accelerating in US economic growth back to around average levels mostly offsets the benefits from a continuing decline in commodity prices.

Inventories at US wholesalers piled up in November at the fastest pace in three months as companies restocked shelves in anticipation of faster growth, Bloomberg reported. Wholesale Sales rose 1.0%, the most in five months. The better-than-expected trade deficit and inventory rebuilding led economists at Morgan Stanley to increase their US 4Q GDP growth estimate to 2.9% from 2.5%. Sales of durable goods at wholesalers, which includes computers and imported autos, rose .5%, the largest increase since May 2006. Wholesale petroleum inventories rose 3.1% in November. I expect inventory rebuilding to remain muted until later this year as homebuilding and auto production cutbacks subside further.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Alaska pipeline regulators said the Trans-Alaska Pipeline System is gradually restarting after a shut down earlier today.
- Micron Technology said it cut previously reported first-quarter earnings by as much as $80 million to reflect a settlement resolving claims it conspired to fix chip prices.
- Australian consumer confidence jumped to a 17-month high in January, suggesting retail spending may strengthen and help drive growth in the Asia-Pacific region’s fifth-largest economy.
- The US dollar rose to an almost seven-week high against the euro on speculation Federal Reserve Bank of Chicago President Michael will reiterate that policy makers are concerned about inflation.
- Crude oil is little changed near an 18-month low in NY as mild weather in the US Northeast and rising fuel stockpiles continue to curb record speculation by investment funds.
- Eli Lilly(LLY), bidding to acquire partner Icos Corp.(ICOS), doesn’t intend to raise its $34-a-share offer, criticized by an Icos holder as too low, the drugmaker’s president said.
- The yen will weaken as a Bank of Japan interest-rate increase next week won’t be enough to deter investors from seeking bigger returns abroad, said Satoru Ogasawara, foreign exchange analyst at CSFB.
- Government officials of China and Israel will sign trade and investment agreements today to bolster economic ties between the two nations, according to schedule.
- Chevron Corp.(CVX) said fourth-quarter earnings will be “adversely affected” by lower oil prices and a decline in refining profits and processing caused by maintenance and construction worldwide.
- Shares of Nippon Oil Corp., Japan’s biggest petroleum refiner, fell as much as 5.2% after Morgan Stanley downgraded the company because of falling oil and fuel prices.
- Shares of Hon Hai Precision Industry Co., Catcher Technology and other makers of mobile handsets and components rose on optimism Apple Computer’s(AAPL) new cell phone modeled on its best-selling iPod device will boost earnings.
- CBS Corp.(CBS) agreed to air videos made by Google’s(GOOG) Youtube.com users in an attempt to capture the Internet’s appeal on traditional television. Short submissions will be eligible for broadcast on the network. The first 15-second video will air before the Super Bowl football game on Feb. 4, with at least one winner per quarter.
- Drought-causing El Nino weather conditions in the Pacific Ocean are weakening, improving the outlook for rain needed for wheat, barley and canola crops as well as pasture growth in Australia.
- A five-year boom in prices of industrial metals, such as copper and zinc, is set to end in 2007 as the pace of supply growth rises, analysts at ABN Amro Holding NV said in a report. “We are witnessing the definitive end of the commodity price boom that began late in 2001. Prepare for a down year for commodities as markets move towards increasing supply surplus,” the report said. The annual average prices of industrial metals are likely to fall between now and 2010.
- Shares of Nintendo Co., the world’s third-largest video-game maker, rose as the company’s plan to revise its earnings outlook prompted speculation its profit will be higher than some had expected.

AFP:
- UK Prime Minister Tony Blair has given backing to Japan’s Shinzo Abe call for a tougher approach on North Korea, citing a joint statement.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (CYN), target $76.
- Reiterated Buy on (GE), target $45.
- Reiterated Buy on (CELG), target $70.
- (GILD) - We continue to believe investors under appreciate the potential for the HIV franchise given the strong launch of Atripla and continued strength of Truvada.. We further believe Gilead’s maturing pipeline could provide upside to our and Street estimates beginning in 2008. Reiterated Buy, target $81.

Night Trading
Asian Indices are -2.0% to -.75% on average.
S&P 500 indicated -.28%.
NASDAQ 100 indicated -.41%.

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Economic Releases
8:30 am EST
- The Trade Deficit for November is estimated to widen to -$60.0 billion versus -$58.9 billion in October.
- Wholesale Inventories for November are estimated to rise .5% versus a .8% gain in October.

BOTTOM LINE: Asian indices are sharply lower, weighed down by commodity-related shares in the region. I expect US equities to open modestly lower and to rise into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.

Stocks Finish Mixed as Falling Commodity and Emerging Market Shares Offset Gains Elsewhere

Indices
S&P 500 1,412.11 -.05%
DJIA 12,416.60 -.06%
NASDAQ 2,443.83 +.23%
Russell 2000 778.33 +.17%
Wilshire 5000 14,153.46 +.02%
Russell 1000 Growth 557.37 +.22%
Russell 1000 Value 807.60 -.22%
Morgan Stanley Consumer 698.31 +.25%
Morgan Stanley Cyclical 891.07 +.24%
Morgan Stanley Technology 576.51 +.31%
Transports 4,632.66 +.18%
Utilities 448.28 +.26%
Put/Call .78 -10.34%
NYSE Arms 1.57 +56.21%
Volatility(VIX) 11.91 -.75%
ISE Sentiment 160.0 +11.11%
US Dollar 84.75 +.21%
CRB 289.51 -.42%

Futures Spot Prices
Crude Oil 55.82 -.48%
Reformulated Gasoline 147.50 +.44%
Natural Gas 6.69 +5.0%
Heating Oil 156.10 +.25%
Gold 614.50 +.84%
Base Metals 214.78 -1.73%
Copper 255.0 +.87%
10-year US Treasury Yield 4.65% +.04%

Leading Sectors
REITs +1.21%
Retail +1.15%
Computer Hardware +.78%

Lagging Sectors
Energy -1.11%
Oil Tankers -1.15%
Wireless -2.46%

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Afternoon Recommendations
Bank of America:
- Rated (BTU) Buy, target $53.

Afternoon/Evening Headlines
Bloomberg:
- Apple Computer’s Steve Jobs reiterated that Apple’s internal review found no wrongdoing by current members of the management board. He told CNBC that media coverage of the issue has been “a little frustrating” at times.
- Venezuelan stocks had their biggest drop on record, crashing 19%, and bonds tumbled after President Hugo Chavez pledged to nationalize the country’s largest phone company and utilities.
- Alcoa Inc.(AA) said profit jumped 60% in the fourth quarter. The stock surged 5% in after-hours trading.
- Sales at US retailers climbed 3.4% last week, the largest gain since mid-October, as shoppers redeemed holiday gift cards after Christmas.
- Apple Computer CEO Jobs introduced a mobile phone based on its best-selling iPod device and changed the company’s name to Apple Inc., highlighting its reliance on consumer electronics.
- General Motors(GM), which sold $17 billion in assets in the past 15 months, may sell more this year because the company still isn’t generating cash from operations, CFO Henderson said.
- William-Sonoma(WSM) reported holiday sales that exceeded analysts’ estimates as all but one of its chains recorded gains.
- David Kirsch, manager of the oil markets group at PFC Energy, said oil prices could drop to $50/bbl.
- Latin American stocks fell to their lowest levels in a month as Venezuela’s plan to nationalize of telephone and electric companies rekindled concerns that the region’s markets are prone to political risk.
- Crude oil fell to the lowest in 18 months as mild weather in the eastern US continues to curb record speculation by investment funds.
- Ben Dell, an analyst at Sanford C. Bernstein sees more “downward pressure” on crude oil prices.
- Corn prices in Chicago fell to a nine-week low and soybeans declined to the lowest in two weeks on speculation demand for alternative fuels made from crops will decline after a drop in crude oil prices.

BOTTOM LINE: The Portfolio finished higher today on gains in my Semi longs, Medical longs, Computer longs and Commodity shorts. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was modestly 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 mostly higher into the close. Today's overall market action was neutral. The recent plunge in commodity prices will result in another round of excellent inflation data over the coming months. Inflation expectations, a key component of inflation, are diminishing rapidly. Investors are withdrawing money from Treasury bond mutual funds that protect against inflation for the first time since they began trading in 1997. The 10-year yield has been stable of late despite the fall in commodity prices. This is likely the result of economic data pointing to a modest acceleration in economic activity. I suspect the 10-year yield will head modestly lower from current levels through year-end as U.S. economic growth fails to exceed average rates and inflation continues to decelerate meaningfully.

Stocks Mixed into Final Hour as Technology Share Strength Offsets Emerging Market and Commodity Weakness

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Semi longs, Medical longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mixed as the advance/decline line is about even, most sectors are rising and volume is above average. Measures of investor anxiety are mostly higher. I have been studying the specs for Apple's (AAPL) new iPhone. Cingular is offering the Palm Treo and HTC 8525 for $399. The BlackBerry Pearl and Samsung BlackJack are $199. I am very familiar with all these products. I do not think that Apple's initial price of $499 is too high. In my opinion, the iPhone will decimate the high-end consumer phone competition. Apple's stock was already undervalued before today's releases. The 7% gain is an underreaction, in my opinion. I now view Apple's stock as severely undervalued. Apple remains my second largest long position behind Google(GOOG). I expect stocks to trade modestly higher into the close on short-covering, bargain hunting, more economic optimism and lower energy prices.

Economic Releases

- None of note