DJIA Hits Another All-Time High on Constructive Fed Comments, Falling Energy Prices, Declining Long-Term Rates

Indices
S&P 500 1,455.30 +.76%
DJIA 12,741.86 +.69%
NASDAQ 2,488.38 +1.16%
Russell 2000 813.99 +.18%
Wilshire 5000 14,659.09 +.70%
Russell 1000 Growth 573.20 +.94%
Russell 1000 Value 840.02 +.59%
Morgan Stanley Consumer 712.93 +.57%
Morgan Stanley Cyclical 959.92 +1.19%
Morgan Stanley Technology 583.59 +1.77%
Transports 5,117.27 +2.10%
Utilities 477.07 +.41%
MSCI Emerging Markets 116.67 +1.85%

Sentiment/Internals
Total Put/Call .97 +1.04%
NYSE Arms .67 +11.09%
Volatility(VIX) 10.23 -1.06%
ISE Sentiment 111.0 -17.78%

Futures Spot Prices
Crude Oil 57.99 -1.81%
Reformulated Gasoline 162.0 +.68%
Natural Gas 7.24 -1.62%
Heating Oil 164.0 -3.14%
Gold 673.80 +.79%
Base Metals 227.69 +2.16%
Copper 257.75 -.27%

Economy
10-year US Treasury Yield 4.73% -7 basis points
US Dollar 84.18 -.60%
CRB Index 301.92 -.84%

Leading Sectors
Semis +2.14%
I-Banks +1.99%
Networking +1.90%

Lagging Sectors
Energy +.20%
Oil Service -.07%
REITs -.64%

Evening Review
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Afternoon Recommendations
- None of note:

Afternoon/Evening Headlines
Bloomberg:
- Federal Reserve Chairman Ben Bernanke enabled the stock market to continue its steepest advance since September, as the DJIA hit another all-time high, with congressional testimony that brightened the outlook for inflation.
- Crude oil fell more than $1/bbl. as forecasts for milder weather and a small-than-expected drawdown in distillate supplies cut speculation by investment funds.
- Baidu.com(BIDU), owner of China’s most-used Internet search engine, said fourth-quarter profit rose 500% after it sold more online advertising.
- US treasuries rose, pushing yields on benchmark 10-year notes down the most since September, after Fed Chairman Bernanke said “inflation pressures are beginning to diminish.”
- Cotton prices in NY fell to the lowest in more than two months on speculation demand from China, the biggest consumer, will slide.
- Archer Daniels Midland(AMD), the world’s biggest grain processor, said it will offer $1 billion in convertible senior notes due in 2014 and use $400 of the proceeds to buy back stock.
- Ethanol will consume more than 30% of the US corn crop annually over the next decade.

BOTTOM LINE: The Portfolio finished higher today on gains in my Semi longs, Internet longs, Medical longs and Telecom longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, almost every sector gained and volume was about average. Measures of investor anxiety were mixed into the close. Today's overall market action was bullish as the major averages are finishing with solid gains on above-average volume. However, small-caps lagged throughout the day, leading to only modestly positive breadth. I expect breadth to expand over the coming days. Tech outperformed throughout the day, while energy underperformed. REITs also remained under pressure. I have heard that a number of very large funds placed substantial hedges on over the last 10 days in anticipation of a more substantial I-banking sub-prime blow-up. As this fails to materialize, I suspect the unwinding of these hedges will lead to further upside for stocks.

Stocks Sharply Higher into Final Hour on Constructive Fed Comments, Falling Oil and Declining Long-term Rates

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Medical longs, Semi longs and Telecom longs. I covered my (QQQQ)/(IWM) hedges this morning, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, every sector is rising and volume is above-average. I have heard many market bears pointing to the low VIX again of late as a reason that stocks must fall. I continue to believe the bears remain stunningly complacent given the macro backdrop for US stocks. I really don't believe a low VIX means anything other than that volatility is low and will rise at some point in the future. Strong bull markets are normally associated with low VIX readings. As well, many bears have been pointing to the "very poor" action in the Nasdaq. The Nasdaq is now outperforming the Dow and S&P 500 this year, rising 3.0% vs. a 2.7% gain for the S&P 500 and 2.3% rise for the DJIA. I suspect the Nasdaq's outperformance will gain steam throughout the year. Another couple of days like the last two, and performance anxiety will likely come back into play for many investors that were convinced a market top or at least a meaningful correction was in order. The ISE Sentiment Index is plunging 17%, to a low 112.0, into today's strength. As well, the CBOE total put/call has been at above-average levels all day. The 10-year yield is at session lows, falling another 8 basis points, to 4.73%. Oil is near session lows, declining $1.06 per barrel. I expect US stocks to trade mixed-to-higher into the close from current levels on falling energy prices, declining long-term rates, short-covering and bargain hunting.

Today's Headlines

Bloomberg:
- US stocks rallied as Federal Reserve Chairman Bernanke’s testimony that inflation may be slowing lifted banking shares, while rising orders for semiconductor equipment boosted the Nasdaq Composite Index the most in a month.
- Oil will drop more than 30% to $40/bbl. in March and may drop to $30 as rising prices for storing crude lead to a “breaking point” that forces speculators to sell, Sanford C. Bernstein said.
- President Bush said the Iraqi government is keeping its promise to deploy more of its forces in Baghdad and his strategy to help secure the Iraqi capital is “beginning to take shape.”
- Increased acreage will stabilize corn prices as use of ethanol increases over the next few years.
- Venezuelan President Hugo Chavez said he may nationalize supermarkets that sell meat above the government-set price.
- Crude oil fell on forecasts for warmer weather in the eastern US and an EIA Dept. report that showed some fuel supplies dropped less than expected.
- Treasuries are rising, pushing yields on benchmark 10-year notes down the most since September, after Fed Chairman Bernanke said “inflation pressures are beginning to diminish.”
- The world’s hedge fund industry must better disclose practices and move toward self-regulation, or it will find itself restricted by government action, said Jonathan Spalter, chairman and chief executive of Public Insight investment research and regulatory advisory firm.
- China National Coal Group, the nation’s second-biggest coal supplier by sales, said it produced 25% more of the fuel in January.

Wall Street Journal:
- Merrill Lynch(MER) hired former Tennessee Democrat representative Harold Ford as a vice chairman and senior policy adviser.
- Telstra Corp., AT&T Inc.(T) and other phone companies are boosting capacity to profit from a surge in spending for online Internet-based services.
- The demand by billionaire investor Carl Icahn that Motorola(MOT) should repurchase more of its shares is likely to put other makers of telecom equipment under pressure to do likewise.
- Investors’ returns from ETFs are being eroded by a tendency towards less liquid areas of the market and less well known proprietary indices.
- The FAA is expected to ask Congress for approval of a new $5 billion air traffic control system.
- US lawmakers from both parties will join President Bush today to back proposed legislation which will require securities brokers and mutual funds to report the original purchase price paid for stocks, bonds and other securities.
- Venture lenders, as distinct from venture capitalists that buy slices of equity, are playing a growing role in financing high-tech US start-ups.

NY Times:
- Dollar Thrifty Automotive Group is in early talks to merge with Vanguard Car Rental, the owner of National and Alamo, in a deal valued at more than $3 billion.

Washington Post:
- Senate Democrats including Christopher Dodd of Connecticut introduced a bill that would give all detainees in US custody more rights and provide a more narrow definition of who can be deemed an “enemy combatant.”

Manager Magazine:
- DaimlerChrysler(DCX) CEO Zetsche is in negotiations with General Motors’(GM) Wagoner about selling the Chrysler division to the world’s largest carmaker.

Financial Times:
- Nicolas Sarkozy, the French governing party’s presidential candidate, will press for a European Union tax on “speculative movements” by investors such as hedge funds.

Arab Oil and Gas:
- Total SA, Europe’s third-largest energy company, may spend $4 billion to $7 billion developing potential petroleum reserves in an area of southern Sudan.

Vancouver Sun:
- Al-Qaeda called on strikes on oil and natural gas installations in Canada as part of a campaign to target some of the major energy suppliers to the US, citing an online message from the group.

Haaretz:
- Oracle Corp.(ORCL) expects to triple its spending in Israeli technology start-ups in 2007.

Arab News:
- Iraq reopened its embassy in Saudi Arabia, as both countries move to strengthen diplomatic ties after Iraqi forces invaded Kuwait in 1990, leading to a break in ties.

Retail Sales Ex Autos Rise, Inventories Unchanged

- Advance Retail Sales for January were unch. versus estimates of a .3% gain and an upwardly revised 1.2% increase in December.
- Retail Sales Less Autos for January rose .3% versus estimates of a .4% increase and an upwardly revised 1.3% gain in December.
- Business Inventories for December were unch. versus estimates of unch. and a downwardly revised .2% gain in November.

BOTTOM LINE: Retail sales in the US stalled last month as cheaper gasoline limited service station receipts and dealerships sold few cars, Bloomberg reported. Consumers redeemed gift cards and used the savings from lower gas prices to buy winter clothing and home furnishings. Sales at department stores rose 1.4% in January, the most since Oct. 2005. Nationwide gas prices fell to $2.17/gallon the week ended Jan. 29, the lowest in more than a year. I continue to believe retail sales will accelerate back to above-average levels over the intermediate-term as energy prices fall further, long-term rates remain low, inflation decelerates more, housing stabilizes at relatively robust levels, stocks continue to rise and the job market remains very healthy.

Inventories at US businesses were unch. as sales rose and companies maintained efforts to keep goods from piling up on shelves, Bloomberg said. Sales surged 1.4%, the largest gain since May. The inventory-to-sales ratio fell to 1.28 months’ supply of goods, the lowest since August, versus 1.3 months’ worth in November. I suspect a larger-than-expected trade deficit and inventory de-stocking will result in 4Q GDP growth being revised down to about 3.0% from 3.5%. As well, substantial inventory de-stocking in the first part of the year will likely lead to growth of around 2.5% for 1Q. I still expect growth to average around 3% for the year.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- The deterioration of the subprime mortgage market will have limited impact on Lehman Brothers(LEH), Bear Stearns(BSC), Citigroup(C) and JPMorgan Chase(JPM), according to Merrill Lynch(MER). “We just don’t think the losses in these will really create any systemic risk at all,” said Scott Simon, head of mortgage- and asset-backed securities investments at Pacific Investment Management.
- JPMorgan Securities Japan, the most bearish among Japan’s primary bond dealers in December, trimmed its forecast for declines as the chance of a central bank interest-rate increase next week faded.
- Moqtada al-Sadr, the anti-US Shiite Muslim cleric, has fled Iraq for Iran. Bush administration officials said there were fractures within al-Sadr’s militia and that he feared for his life.
- Nine US-built vehicles made by General Motors(GM), Ford Motor(F) and DaimlerChrysler AG(DCX) topped US government crash safety tests this year.
- Applied Materials(AMAT), the world’s largest maker of semiconductor equipment, said first-quarter profit more than doubled after it delivered more machines to memory-chip companies. The shares surged 4.6% after-hours.
- Shares of Sony Corp.(SNE) rose after the company said it will scale back spending on semiconductors to help the chip business turn profitable next fiscal year.
- Ilaria Capua, a virologist, and other health experts say the alarmist headlines on bird flu killing some turkeys in the UK last week was just a lot of gobble. “Many more people have been struck by lighting” than killed by the deadly H5N1 strain of avian influenza, say Capua, whose laboratory in Padua, Italy, handles some flu screening for the Paris-based World Organization for Animal Health. “The public should be well informed but not prepared for the worst.”
- Hindustan Copper Ltd., the biggest state-owned producer of the metal in India, may spend as much as $300 million extending a mine underground to take advantage elevated copper prices.
- Oil refiners including Chevron Corp.(CVX) and Marathon Oil Corp.(MRO) share a common vision with DaimlerChrysler AG(DCX), one of increasing US demand for diesel as drivers opt for more fuel-efficient vehicles.
- Consumer inflation in China slowed to 2.2% in January versus estimates of a 2.6% rise and a 2.8% gain in December.

Wall Street Journal:
- Jones Lang LaSalle Inc.(JLL) is closing its residential agency business in Shanghai after 12 years of operations because of intense competition in China, citing Managing Director Anthony Couse.

Financial Times:
- China regulations introduced in September on takeovers of domestic firms by overseas investors may hinder venture capital investment, citing accountant Ernst & Young.

Korea Economic Daily:
- Matsushita Electric Industrial may buy new or existing shares in LG.Philips LCD to seek an alliance in production of liquid-crystal displays.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (BBY), target $63. BBY is likely seeing better than expected sales of Vista-based PC’s since their introduction on January 31st. Due to the overwhelming demand for the Nintendo Wii, BBY is struggling to keep them in stock.

Night Trading
Asian Indices are +.50% to +1.25% on average.
S&P 500 indicated +.01%.
NASDAQ 100 indicated +.06%.

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Earnings of Note
Company/EPS Estimate
- (AGP)/.34
- (APPB)/.23
- (BIDU)/.35
- (CMG)/.27
- (KO)/.50
- (DE)/.81
- (ESLR)/-.08
- (GRMN)/.58
- (GENZ)/.75
- (GES)/.90
- (JNY)/.46
- (MAS)/.37
- (MDCO)/.09
- (MGM)/.48
- (NTAP)/.28
- (NTRI)/.51
- (ODP)/.52
- (OSI)/.29
- (PFCB)/.26
- (PGN)/.53
- (RIG)/1.18

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Advance Retail Sales for January are estimated to rise .3% versus a .9% gain in December.
- Retail Sales Less Autos for January are estimated to rise .4% versus a 1.0% gain in December.

10:00 am EST
- Business Inventories for December are estimated to remain unch. versus a .4% gain in November.

10:30 am EST
- Bloomberg consensus estimates call for a crude oil build of 1,000,000 barrels versus a -449,000 barrel drawdown the prior week. Gasoline supplies are expected to rise by 2,000,000 barrels versus a 2,600,000 barrel increase the prior week. Distillate Inventories are expected fall by -4,000,000 barrels versus a -3,632,000 barrel decline the prior week. Refinery Utilization is estimated to rise .25% versus a .28% increase the prior week.

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