Productivity Surges, Unit Labor Costs Decelerate

- Preliminary 4Q Non-farm Productivity rose 3.0% versus estimates of a 2.0% gain and a -.1% decline in 3Q.
- Preliminary 4Q Unit Labor Costs rose 1.7% versus estimates of a 2.1% gain and an upwardly revised 3.2% increase in 3Q.

BOTTOM LINE: US worker productivity grew at the fastest rate in almost a year last quarter and labor costs rose at a slower pace, suggesting less of an inflation threat. Productivity is now above long-term average levels, while unit labor costs are rising around average rates. Output rose at a 4.2% rate in 4Q versus a 1.9% increase during 3Q. Compensation for each hour worked rose an annual rate of 4.8% in the fourth quarter versus a 3.1% gain in 3Q. Productivity at non-financial corporations, a gauge closely monitored by the Fed, rose at a 5.7% rate in the third quarter versus a 4.3% decline the prior three months. Non-financial productivity has averaged a 4.2% gain over the last 3 quarters, substantially above the 20-year average of 2.4%. I continue to believe the job market will remain healthy without generating substantial unit labor cost increases over the intermediate-term.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Saudi Arabia’s King Abdullah, hosting talks between Fatah and Hamas, told leaders of the movements to resolve disagreements over forming a unity government, saying their dispute threatens to destroy all Palestinian achievements.
- Natural rubber prices, which surged to records last year, may fall later this year as car production growth slows in China, the world’s biggest consumer of the commodity, Jingyi Futures Co. said. A government clampdown on vehicle production capacity and exports will slow rubber consumption growth. “The explosive growth in China’s appetite for rubber is over, and we will be in a period when supply slightly outstrips demand,” said Feng Zhengyu, rubber analyst at the firm.
- Jim Rogers, author of “Hot Commodities”, said he sees China’s water problem as a major risk to growth in the country.

AP:
- House Ways and Means Committee Chairman Charles Rangel said he would be willing to add some Senate-passed tax cuts for small business to legislation increasing the minimum wage.

Financial Times:
- The US may consider starting the process to remove North Korea from the list of sponsors of terrorism and ease restrictions on American companies dealing with the communist country should North Korea show progress on a broad agreement to dismantle its nuclear weapons program.

Independent:
- Las Vegas Sands(LVS) plans to bid for the license to run Britain’s first super-casino in Manchester.

Financial News:
- China needs to step up monetary policy measures to curb inflation and ease imbalances in international payments, citing Xiang Junbo, vice governor of the People’s Bank of China.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (URBN), target $29.

Night Trading
Asian Indices are -.50% to +.50% on average.
S&P 500 indicated +.01%.
NASDAQ 100 indicated +.26%.

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Earnings of Note
Company/EPS Estimate
- (APKT)/.09
- (AFFX)/.04
- (AKAM)/.26
- (ACL)/1.03
- (ALKS)/.00
- (AN)/.34
- (CENT)/-.13
- (CI)/2.27
- (CGX)/1.02
- (DF)/.61
- (DVN)/1.36
- (EDS)/.36
- (ICE)/.74
- (MANH)/.30
- (MXIM)/.31
- (MEDI)/.53
- (MCO)/.59
- (NWS/A)/.25
- (RL)/.92
- (PRU)/1.52
- (RVBD)/.01
- (ROL)/.14
- (SLE)/.16
- (SKYW)/.46
- (SINA)/.22
- (DIS)/.39
- (WHR)/1.44

Upcoming Splits
- (LMC) 3-for-1
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Economic Releases
8:30:
- Preliminary 4Q Non-farm Productivity is estimated to rise 2.0% versus a .2% increase in 3Q.
- Preliminary 4Q Unit Labor Costs are estimated to rise 2.1% versus a 2.3% gain in 3Q.

10:30:
- Bloomberg consensus estimates call for a weekly crude oil build of 2,000,000 barrels versus a 2,684,000 barrel increase the prior week. Gasoline supplies are estimated to rise by 1,750,000 barrels versus a 3,819,000 barrel increase the prior week. Distillate Inventories are expected to fall by -3,000,000 barrels versus a -2,648,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to remain unch. versus a -.32% decline the prior week.

3:00 pm EST:
- Consumer Credit for December is estimated to fall to $6.0 billion versus $12.3 billion in November.

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and commodity shares in the region. I expect US equities to open modestly higher and to maintain gains into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Slightly Higher as Long-term Rates Fall

Indices
S&P 500 1,448.0 +.07%
DJIA 12,666.31 +.04%
NASDAQ 2,471.49 +.04%
Russell 2000 810.03 +.41%
Wilshire 5000 14,589.26 +.13%
Russell 1000 Growth 570.57 +.08%
Russell 1000 Value 835.45 +.14%
Morgan Stanley Consumer 710.36 +.13%
Morgan Stanley Cyclical 944.97 +.20%
Morgan Stanley Technology 568.28 -.09%
Transports 4,963.84 +.02%
Utilities 469.64 +.77%
MSCI Emerging Markets 116.27 +.92%

Sentiment/Internals
Total Put/Call .85 +3.66%
NYSE Arms 1.27 +50.95%
Volatility(VIX) 10.65 +.95%
ISE Sentiment 141.0 -3.42%

Futures Spot Prices
Crude Oil 59.12 +.65%
Reformulated Gasoline 157.60 +1.03%
Natural Gas 7.72 +1.03%
Heating Oil 169.50 +1.16%
Gold 658.20 +.32%
Base Metals 220.23 -.60%
Copper 249.25 +3.15%

Economy
10-year US Treasury Yield 4.77% -4 basis points
US Dollar 84.77 -.35%
CRB Index 301.07 -.04%

Leading Sectors
Airlines +1.47%
REITs +1.35%
Alternative Energy +.95%

Lagging Sectors
Semis -.54%
Gaming -.77%
Computer Hardware -.90%

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Afternoon Recommendations
None of note:

Afternoon/Evening Headlines
Bloomberg:
- The ability of statins to raise so-called good cholesterol, even just a little bit, can help strip plaque out of heart arteries, a study says.
- Cisco Systems(CSCO), the world’s biggest maker of computer-networking equipment, said second-quarter profit rose 40% as customers upgraded their communications systems for video. The stock is rising 4.5% after-hours.
- Apple Inc.(AAPL) CEO Jobs asked the four largest music companies to license songs for distribution on iTunes without copy protection software.
- The Ocean Course in Kiawah Island, South Carolina, is the most difficult US golf course, according to a study by Golf Digest magazine.
- US Treasuries rose for a third straight day after demand for the government’s quarterly auction of three-year notes outpaced dealer expectations.

Arizona Republic:
- US Airways Group, rejected in a $9.75 billion takeover bid for Delta Air, isn’t seeking another merger target, citing CEO Parker.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Internet longs, Medical longs and Retail longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was slightly positive today as the advance/decline line finished modestly higher, most sectors rose and volume was above average. Measures of investor anxiety were higher into the close. Today's overall market action was modestly bullish as the major averages and breadth recouped morning losses to finish around even. Instead of two steps forward and one 1 step back, the indices are moving one step forward and consolidating. This just allows for more “market top” calls, profit-taking and short re-loading without doing any real technical damage. Oil is trading toppy again, despite potential upside catalysts. As well, the 10-year yield looks poised to go lower. Cisco’s(CSCO) positive earnings’ report after the close should boost tech stocks tomorrow.

Stocks Slightly Higher into Final Hour on Lower Long-term Rates, Buyout Activity

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Internet longs, Retail longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly positive as the advance/decline line is slightly higher, sector performance is mostly positive and volume is above average. HedgeFund.net reported on Monday that emerging market hedge fund assets have risen from $40 billion at the end of 2003 to $175 billion at the end of 2006 or a 337% increase. Emerging market hedge funds "have been springing up like the proverbial mushroom in the rain" and "countries from Romania to Vietnam became the focus of huge sums of hedge fund inflows in 2006," according to the report. The column concludes that the "fundamentals and the potential of these markets seem to outweigh any fear of volatility" and that even though "smart money has been in this space for a while," it "does not imply it is time to exit." Considering the general public's shunning of U.S. stocks and overwhelming affinity for emerging market equities, I would argue that this is just more evidence of the extreme complacency engulfing emerging market investors. I expect US stocks to trade modestly higher into the close from current levels on lower long-term rates, short-covering and stable energy prices.

Today's Headlines

Bloomberg:
- Blackstone Group LP raised its cash offer for Equity Office Properties Trust(EOP) to $39 billion to thwart rival bidder Vornado Realty Trust(VNO) a day before shareholders vote on what would be the largest-ever leveraged buyout.
- Silver Lake Partners plans to raise as much as $10 billion for the biggest technology buyout fund after a record year of private-equity acquisitions.
- MGIC Investment Corp.(MGIC), the largest US mortgage insurer, agreed to buy Radian Group(RDN) for $4.9 billion in stock, following its biggest competitor into the bond insurance market.
- Mills Corp.(MLS) said it will begin talks with Simon Property Group and Farallon Capital Management LLC to consider their $1.56 billion bid for the company.
- The Chicago Merc(CME) can move forward with plans to offer the first exchange-traded credit derivative contacts, after the CFTC gave approval.
- Eastman Kodak(EK) for the first time plans to sell printers that use lower-cost ink cartridges to compete with Hewlett-Packard(HPQ).
- Investors should reduce holdings of telecom stocks in the emerging markets of Europe, the Middle East and Africa because gains in the past six months have left them expensive, Goldman Sachs(GS) said.

Wall Street Journal:
- DaimlerChrysler AG aims to revive Chrysler’s fortunes by integrating the unit with the luxury Mercedes-Benz brand, gambling that the latter’s exclusive image won’t be damaged.
- US utilities increased spending for electricity power lines to reduce choke points, improve reliability, and increase possibilities for using renewable energy.
- Compliance officers are in demand at US financial institutions as money is laundered by wrongdoers in increasingly sophisticated ways and regulators slap large fines
NY Times:
- Veterinarians who work on large food animals such as cows are in such short supply that the American Veterinary Medical Association predicts 4 in every 100 food-animal vet jobs will go unfilled by 2016.
- The SEC is examining whether employees at major financial institutions are tipping off preferred clients such as hedge funds to inside information about imminent large stock trades.
- Saudi Arabia is taking a more visible role in Middle East affairs to thwart Iran’s push to become a regional superpower, citing diplomats, analysts and officials throughout the Middle East.
- Wal-Mart Stores(WMT) is linking with six major Hollywood studios to sell digital movies and television shows on its Web site.

La Repubblica:
- Italian Industry Minister Pierluigi Bersani plans to introduce a series of measures to promote energy efficiency.

Frankfurter Allgemeine Zeitung:
- Alstom SA may purchase alternative energy companies this year, citing Philippe Joubert, president of the company’s Alstom Power unit.