Stocks Slightly Higher into Final Hour on Lower Long-term Rates, Positive Housing Data

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semiconductor longs, Biotech longs and Telecom 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 about even, most sectors are rising and volume is above-average. The Import Price Index for January fell -1.2% month-over-month. Moreover, the five-month average of month-over-month import price declines is -0.86%. It has only been lower during three other periods since tracking began in the 1980s. It was lower in November-December 2001, March 1998 and March-April-May 1991. Think about those periods and then think about the global economy now. I continue to believe problematic inflation in today's macro environment is a myth and that deflation from Asia will return during the next meaningful global downturn in economic activity. Those focused solely on gold, in my opinion, are completely ignoring the fact that many commodities are still in the grips of a historic mania. I expect US stocks to trade mixed-to-higher into the close from current levels on declining long-term rates, positive housing data and short-covering.

Jobless Claims Rise, Import Prices Fall, Manufacturing Mixed, TIC Flows Decline, Housing Index Jumps

- Initial Jobless Claims for last week rose to 357K versus estimates of 314K and 313K the prior week.
- Continuing Claims rose to 2560K versus estimates of 2500K and 2489K prior.
- The Import Price Index for January fell -1.2% versus estimates of a -1.1% decline and a 1.1% increase in December.
- Empire Manufacturing for February rose to 24.4 versus estimates of 10.6 and 9.1 in January.
- Net Long-term TIC Flows for December fell to $15.6 billion versus estimates of $60.0 billion and an upwardly revised $84.9 billion in November.
- Industrial Production for January fell -.5% versus estimates of unch. and a .5% increase in December.
- Capacity Utilization for January fell to 81.2% versus estimates of 81.7% and 81.8% in December.
- The Philly Fed for January fell to .6 versus estimates of 4.1 and a reading of 8.3 in January.
- The NAHB Housing Market Index rose to 40 in February versus estimates of 35 and a reading of 35 in January.

BOTTOM LINE: The number of Americans filing first-time claims for state unemployment benefits rose last week by the most since September 2005, partly a reflection of winter storms that gripped portions of the nation, Bloomberg reported. The four-week moving-average rose to 326,250 versus 308,750 the prior week. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, rose to 2% versus 1.9% the prior week. I continue to believe the labor market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

Prices of goods imported into the US fell in January by the most in three months, reflecting lower crude oil and natural gas costs, Bloomberg reported. Prices of goods from newly industrialized Asian countries including Singapore and South Korea fell .4%. Prices of US products exported to other countries rose .3% versus a .7% gain the prior month. I continue to believe inflation fears have peaked for this cycle and that inflation will decelerate further from below-average levels over the intermediate-term.

Manufacturing growth in NY stated accelerated more than forecast this month as orders and shipments rose, Bloomberg said. The Six-month Outlook component of the index surged to 38.5 versus 32.5 the prior month. The New Orders component rose to 18.9 from 10.3 prior. The Inventory component rose to -7.5 from -19.2 the prior month. A negative number indicates stockpiles are contracting. I continue to expect manufacturing to improve modestly over the coming months as inventories are rebuilt as companies gain confidence in the sustainability of the current expansion.

The US attracted less investment from overseas investors in December, Bloomberg reported. Americans bought more emerging market debt in the 4th quarter than in over a year, JPMorgan reported. As well, US investors purchased the largest amount of overseas debt in December in history, while cutting back on equities purchases. China, Japan and the UK increased their holdings of US government debt, while Caribbean-based investors sold some of their holdings. I expect net long-term TIC flows to rebound sharply next month.

Industrial Production in the US fell last month as companies delayed orders and makers of autos and building materials reduced stockpiles, Bloomberg reported. Capacity Utilization, which is closely monitored by the Fed, fell to the lowest in almost a year. I expect industrial production will bounce back over the coming months, while capacity utilization remains below rates that would worry the Fed.
Manufacturing in the Philly region stalled this month as orders declined and shipments weakened, Bloomberg said. The Expectations component of the index slipped to 20.3 versus 22.4 the prior month. As I said above, I expect manufacturing to rebound over the coming months as companies gain confidence in the sustainability of the current expansion and rebuild depleted inventories.

Confidence among US homebuilders unexpectedly surged this month to the highest since June, Bloomberg said. This was the largest jump since September 2002, even as sub-prime worries intensified and weather turned colder. The Sales Expectations component for the next six month surged to 55 versus 48 in January. This component is 49% higher from September cycle lows of 37 and only 9 points away from the long-term average of 64. The Buyer Traffic component rose to 31 from 26 the prior month. I continue to believe housing is in the process of stabilizing at relatively high levels of activity.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- The Indian central bank may raise interest rates until there is evidence of a slowdown in lending and inflation, ICICI Securities Ltd. said.
- RealNetworks(RNWK) CEO Glaser said the four largest music companies are “receptive” to selling music online without copy-protection software and will begin doing so within the next year or two. Currently music sold by RealNetworks’ Rhapsody service and Apple Inc.’s iTunes store, the biggest online seller of music, comes with so-called digital rights management software.
- MedImmune’s(MEDI) FluMist was more effective than traditional shots in young children and may help increase immunization rates, according to a study.
- Congress approved increased funding for education grants, veterans’ health care, law enforcement and international AIDS relief as part of a $463.5 billion spending measure, completing work on the 2007 budget more than four months late.
- General Motors(GM) is in talks with DaimlerChrysler’s(DCX) Chrysler unit about an alliance that may result in the companies designing models together.
- Equifax Inc.(EFX), a provider of consumer-credit information, agreed to purchase Talx Corp.(TALX) for about $1.4 billion to expand in the payroll-services market.
- Merck(MRK) cut the price of its AIDS drug Stocrin by 14% to make it more affordable for people in the world’s poorest countries.
- China and Russia are fighting US efforts at the UN to prevent Iran from building nuclear bombs while working to strip North Korea of the same weapons.
- Japan’s economy grew at the fastest pace in almost three years as consumer spending rebounded and business investment jumped. The yen rose on speculation the central bank may raise interest rates.
- China Guangdong Nuclear Power Group, the nation’s second-biggest nuclear reactor builder, plans to build a wind farm and a hydro-power plant in western China.
- Woodside Petroleum Ltd., Australia’s second-largest oil and gas producer, said global trade in liquefied natural gas may rise 300% in 10 years.
- Berkshire Hathaway(BRK/A) has built an $843 million stake in US Bancorp(USB).
- Baidu.com(BIDU), China’s most-used Internet search engine, forecast first-quarter sales will grow at the slowest pace since the company listed as competition from Google Inc.(GOOG) increases.

AP:
- Thousands of US soldiers searched house-to-house for insurgents or weapons in Shiite areas of the Iraqi capital, Baghdad, in the first-phase of a long-awaited security crackdown.

Automotive News:
- Ford Motor(F) is offering US dealers a $500 incentive to lift sales of the base model of its new Edge crossover wagon, the first such discount for the model.

Chosun Ilbo:
- North Korean top negotiator Kim Kye Gwan may visit the US as early as March as six-nation talks to end the communist country’s nuclear program led to an agreement.

Late Buy/Sell Recommendations
Citigroup:
- Investors should be taking profits into the recent rally in the E&P sector as cold weather has hit the US. Spring is around the corner and we believe that a significant inventory overhang combined with typical seasonal weakness will lead to a ~10% correction in coming weeks. Our concerns focus on an excess inventory of ~450 Bcf coming out of the winter, growing LNG and Canadian imports, growing production and active rig count, new supply from the Independence Hub, poor industrial demand and the potential for liquids stripping to dissipate.

Night Trading
Asian Indices are +.75% to +1.25% on average.
S&P 500 indicated -.02%.
NASDAQ 100 indicated unch.

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Earnings of Note
Company/EPS Estimate
- (AAP)/.34
- (A)/.38
- (AQNT)/.17
- (BHI)/1.19
- (B)/.29
- (BIIB)/.55
- (BOBE)/.39
- (CECO)/.40
- (CSK)/.10
- (EXPE)/.24
- (FST)/.48
- (FCL)/.23
- (HC)/.14
- (IM)/.54
- (LH)/.72
- (ONXX)/-.61
- (POOL)/-.09
- (PSYS)/.30
- (RS)/1.22
- (STMP)/.20
- (ELOS)/.46

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Initial Jobless Claims are estimated to rise to 314K versus 311K the prior week.
- Continuing Claims are estimated to rise to 2500K versus 2490K prior.
- The Import Price Index for January is estimated to fall -1.1% versus a 1.1% increase in December.
- Empire Manufacturing for February is estimated to rise to 10.6 versus 9.1 in January.

9:00 am EST
- Net long-term TIC Flows for December are estimated to fall to $60.0 billion versus $68.4 billion in November.

9:15 am EST
- Industrial Production for January is estimated to remain unch. versus a .4% gain December.
- Capacity Utilization for January is estimated to fall to 81.7% versus 81.8% in December.

12:00 pm EST
- The Philly Fed for February is estimated to fall to 4.1 versus a reading of 8.3 in January.

1:00 pm EST
- The NAHB Housing Market Index for February is estimated at 35 versus 35 in January.

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

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%

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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.