Producer Prices Bounce, TIC Flows Below Estimates, Industrial Production/Capacity Utilization Rise

- The Producer Price Index for December rose .9% versus estimates of a .5% increase and a 2.0% gain in November.
- The PPI Ex Food & Energy for December rose .2% versus estimates of a .1% gain and a 1.3% rise in November.
- Net Long-term TIC Flows for November fell to $68.4 billion versus estimates of $75.0 billion and $85.3 billion in October.
- Industrial Production for December rose .4% versus estimates of a .1% gain and a downwardly revised -.1% decline in November.
- Capacity Utilization for December rose to 81.8% versus estimates of 81.7% and a downwardly revised 81.6% in November.

BOTTOM LINE: Prices paid to US producers rose more than forecast in December, reflecting higher costs for crude oil and gasoline that have since reversed, Bloomberg said. Excluding Food & Energy, intermediate goods’ prices fell .1% after falling .3% in November. The price of US steel sheet, a product most commonly used in cars and appliances, fell 5.3% in December to a 13-month low, according to Purchasing Magazine. Falling demand, purchase delays and surging imports crimped pricing. Costs for passenger cars fell .2% after increasing 2.2% in November. I expect the Producer Price Index to begin another meaningful deceleration next month as the hugely positive effects of the current commodity bear take hold.

International investment in US long-term assets slowed in November as the dollar weakened. The US dollar has since turned higher. Including short-term securities, such as T-bills and so-called non-market transactions, foreigners purchased a net $74.9 billion versus $60.4 billion the prior month. As well, private investors bought a net $101 billion of long-term securities in November, compared with a net $78.9 billion the prior month. I expect foreigners’ appetite for US securities to increase over the intermediate-term as the commodity bear leads to slower growth in emerging economies, an acceleration in US growth to more average levels, stable long-term interest rates, a firmer US dollar and rising US stock prices.

Industrial Production in the US rose more than forecast in December, driven by demand for computers, home electronics and automobiles, Bloomberg reported. Manufacturing, which makes up about fourth-fifths of industrial production, rose .7% last month, the most since June, versus unch. the prior month. Computer production rose 3.1%, auto production rose 4% and home electronics rose 1.9%. I expect industrial production to bounce around current levels before another acceleration in the second-half of the year.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- States in the Persian Gulf backed US plans to tackle sectarian violence in Iraq and bring stability to the nation, following talks with Secretary of State Condoleezza Rice.
- The Bank of Japan faces a test of its credibility tomorrow after local media reported that policymakers will delay raising interest rates in response to government opposition.
- Cablevision Systems(CVC) rejected an $8.9 billion buyout offer from the company’s founding Dolan family.
- China National Petroleum Corp. and China Petrochemical Corp., the nation’s two biggest oil companies, will cooperate to speed up oil and gas exploration in the country’s western Tarim Basin.
- Copper futures in Shanghai hovered just above a nine-month low as rising global stockpiles of the industrial metal fueled speculation that supply will outpace demand.
- Dan Halutz, Israel’s chief of staff, resigned early today after he came under criticism for his handling of the Lebanon war last year.
- Intel(INTC) said fourth-quarter profit fell 39% after the company lowered prices to compete with Advanced Micro Devices(AMD). The shares fell 4% in after-hours trading.
- Crude oil was little changed near a 19-month low in NY on speculation above-average US fuel stockpiles will rise further after Saudi Arabia rejected calls for more OPEC production cuts.
- Buyout firms including Texas Pacific Group and Apollo Management LP have decided not to make takeover bids for Tribune Co.(TRB), owner of the Chicago Tribune and Los Angeles Times, said three people with knowledge of their plans.
- CVS Corp.(CVS) raised its offer for Caremark RX(CMX), adding a $2 per share dividend to its original plan.
- Venezuelan stocks plunged to an eight-week low, led by banking shares, as investors reacted to government plans to cap banks’ profits and dividends. The Caracas Stock Exchange Index fell 12% today and is down 33% since Jan. 8, when President Hugo Chavez announced plans to nationalize companies in the country’s telephone, power and oil industries as he moves Venezuela towards his goal of Socialism.
- Increased supply from non-OPEC producers, changing weather patterns, the easing of oil demand growth and high inventories may keep oil prices from rising this year, the National Development and Reform Commission, China’s top economic planner, said on its Web site yesterday.
- Hedge fund manager Boone Pickens said he is sticking to his forecast that oil will average $70/bbl. this year even as prices plunge to a 19-month low. In October, Pickens predicted oil prices would rise to $70 before January 1.
- Healthy and Human Services Secretary Michael Leavitt said five more US companies agreed to back his plan to improve health care and cut costs by supporting use of electronic medical records.
- US gasoline at the pump fell 7.7 cents to a nationwide average of $2.22/gallon the week ended yesterday, the biggest one-week decline since Sept. 25.

Nihon Keizai:
- Bio Ethanol Japan became the world’s first company to produce bio-fuel, used as a substitute for gasoline, from wood construction waste on a commercial basis.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (SYMC), target lowered to $22.

Night Trading
Asian Indices are -.25% to +.75% on average.
S&P 500 indicated -.03%.
NASDAQ 100 indicated -.24%.

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Company/EPS Estimate
- (AMR)/-.13
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- (WM)/.88

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Producer Price Index for December is estimated to rise .5% versus a 2.0% gain in November.
- The PPI Ex Food & Energy for December is estimated to rise .1% versus a 1.3% gain in November.

9:00 am EST
- Net Long-term TIC Flows for November are estimated to fall to $75.0 billion versus $82.3 billion in October.

9:15 am EST
- Industrial Production for December is estimated to rise .1% versus a .2% gain in November.
- Capacity Utilization for December is estimated to fall to 81.7% versus 81.8% in November.

1:00 pm EST
- The NAHB Housing Market Index for January is estimated to rise to 33 versus 32 in December.

2:00 pm EST
- The Fed’s Beige Book

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

Stocks Finish Mixed as Another Plunge in Oil Offsets Profit-taking

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Stocks Mixed into Final Hour as Plunging Oil is Offsetting Profit-taking Ahead of Earnings Season

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Airline longs, Computer 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 modestly lower, sector performance is mostly positive and volume is above average. Oil is falling another $2.04, to $50.95. OPEC's recent actions and comments lead me to conclude that OPEC has come to the realization, which I have been pointing out for several months, that it needs lower oil prices to try and prevent any further long-term demand destruction and loss of market share. As well, The Guardian is reporting that Iran's President is facing increasing hostility toward his policies. In an unprecedented rebuke, 150 members of the Iranian parliament signed a letter criticizing his recent actions. I am not hearing many talk about this, but it could be another one of the many reasons for the extreme weakness in oil. Energy-related stocks were investors' favorite sector coming into the new year. This has likely resulted in even greater portfolio manager underperformance this year as most energy shares are down 7%-10% already. In my opinion, it is not too late to sell these shares as the recent plunge in prices and very likely further oil price declines are not factored into the stocks at current levels. As I cautioned many times last year, commodity stocks look the cheapest on a valuation basis when they are at their most dangerous. If I were substantially behind the major averages this year due to the decline in commodity stocks, I would cut that weighting now and add more growth stock exposure as I think that growth stock outperformance through year-end will be significant. I expect US stocks to trade modestly higher into the close from current levels on short-covering, more economic optimism and bargain-hunting.

Today's Headlines

Bloomberg:
- Crude oil is plunging another $2.14/bbl. to a 19-month low of $50.86/bbl. in NY after Saudi Arabia’s oil minister rejected calls for more production cuts.
- Benon Sevan, who ran the corruption-riddled UN/Iraq Oil-for-food program, was indicted in the US for allegedly accepting $160,000 in bribes to help former dictator Saddam Hussein’s regime, the 14th person charged in the oil-for-food scandal.
- Landry’s Restaurants(LNY) offered to buy Smith & Wollensky Restaurant Group for $64.4 million to increase the number of upscale locations it operates.
- Centex Corp.(CTX) and KB Home(KBH) said quarterly earnings were depressed by $800 million in costs to write off the value of land and abandon options to buy more property.
- Symantec(SYMC) said third-quarter profit and sales missed its forecast, citing its data management unit.
- Copper prices in NY fell for the third session in a row on speculation demand will lag behind supplies with global inventories of the metal close to the highest since July 2004.
- US railroads will get new rules by 2008 for redesigning tank cars to keep chemicals from leaking during an accident.
- Shares of OMI Inc.(OMM) and General Maritime(GMR), the second and third-biggest US oil tanker operators, were downgraded by Cantor Fitzgerald LP, which said lower OPEC shipments and growth in vessel fleets will hurt profit.

Wall Street Journal:
- Janus Friis and Niklas Zennstrom, founders of Skype Technologies SA, are supporting an online broadband video company called Joost that could let viewers watch professional video on personal computers with better quality.
- US retailers are encouraging customers to switch from credit cards to debit cards with lower processing fees.
- Smaller US companies with proven ability to make steady progress no matter what the state of the economy are attracting interest from mutual-fund managers.

NY Post:
- Google’s(GOOG) YouTube unit has started carrying commodities trading advice from a former New York Merc silver trader.

The Guardian:
- More than half of Iran’s parliament signed a letter criticizing President Mahmoud Ahmadinejad’s performance on the economy. The signatories also criticized Ahmadinejad’s stance on the international dispute over Iran’s nuclear program. Iran’s Supreme Leader Khamenei is losing patience with Ahmadinejad. “There is a probability that he cannot even finish his current four-year period,” said Eesa Scharkhiz, an Iranian political commentator.

Handelsblatt:
- Chemical makers worldwide may see slower earnings and sales growth and narrower profit margins this year, citing analysts at rating companies including S&P and Fitch.

Interfax:
- Russia has completed the delivery of new surface-to-air missile systems to Iran, citing Defense Minister Sergei Ivanov.

Expansion:
- Billionaire investor George Soros said it doesn’t make sense to imagine a future in which the euro replaces the US dollar as the global currency of reference.

Jerusalem Post:
- Intel Corp.(INTC), the word’s largest computer-chip maker, may enter a joint venture with STMicroelectronics NV and a private investor that will reorganize its flash memory division.