Producer Price Index Historically Low, Housing Starts Fall, Confidence Declines

- The Producer Price Index for January fell -.6% versus estimates of a -.6% decline and a .9% increase in December.
- The PPI Ex Food & Energy for January rose .2% versus estimates of a .2% gain and a .2% rise in December.
- Housing Starts for January fell to 1408K versus estimates of 1600K and 1643K in December.
- Building Permits for January fell to 1568K versus estimates of 1590K and 1613K in December.
- Preliminary Univ. of Mich. Consumer Confidence for February fell to 93.3 versus estimates of 96.5 and 96.9 in January.

BOTTOM LINE: Prices paid to US producers declined in January, held down by lower petroleum costs and cheaper cars and trucks, Bloomberg said. Energy prices fell 4.6% for producers in January as the price of gasoline dropped 13% and natural gas fell 1.9%. As well, prices of light trucks declined 1.4%. Prices of intermediate goods, used in the early stages of production, fell .7%. Raw materials prices declined 6.3%. The PPI year-over-year rose a historically low .2%. I continue to believe inflation fears have peaked for this cycle and inflation will mostly decelerate throughout the year.

Homebuilders in the US started work last month on the smallest number of new houses since August 1997, Bloomberg reported. Some of January’s building weakness was related to the fact that December was so unseasonably warm. I continue to believe housing construction will remain muted throughout the year as builders dramatically cut inventory as sales remain relatively healthy.

Confidence among US consumers retreated from a two-year peak this month as unusually cold weather drove energy prices higher, Bloomberg reported. Gasoline prices are still 27% lower than last year’s peak of $3.04/gallon. Gas prices should head lower again as oil has since dipped. The Expectations component fell to 83.7 versus 87.6 in January. The Current Conditions component fell to 108.3 versus 111.3 in January. I continue to believe consumer confidence will make new cycle highs over the coming months as gas prices fall further, housing stabilizes at relatively high levels, stocks rise further, interest rates remain low, the job market remains healthy and wages continue to outpace inflation.

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Friday Watch

Late-Night Headlines
Bloomberg:
- Secretary of State Condoleezza Rice, having just clinched a six-nation agreement aimed at scrapping North Korea’s nuclear-bomb program, heads to Israel today to try to make progress on an even more intractable issue: the dispute between Israel and the Palestinians.
- The US and North Korea will discuss ending the communist country’s designation as a state sponsor of terrorism, as they build links after reaching an accord on dismantling North Korea’s nuclear program.
- Japan’s fastest economic growth in almost three years last quarter may help the central bank justify raising interest rates, the lowest among major economies, according to economists.
- Crude oil may fall next week as warmer weather moves into the eastern half of the US, curbing demand for heating oil and natural gas, according to a Bloomberg News survey of 42 analysts, traders sand brokers.
- Japan said it will impose sanctions on Iran for its refusal to abandon its nuclear program in line with measures taken by the UN in December.
- Pacific Hydro Ltd., an Australian-based renewable energy producer, plans to invest more than $392 million in “the coming years” to build plants in Brazil after acquiring SES Ltda., a wind energy company.
- Aluminum may fall 11% in 2007 as global demand slows and output gains in China, said Minmetals StarFutures Co., a unit of China’s largest metals trader. The market may have a surplus of as much as 300,000 tons. Prices of the metal have already declined 15% from May 2006 highs.

New York Times:
- Television watchers with digital video recorders such as those made by TiVo Inc.(TIVO) aren’t skipping commercials as much as advertisers feared, citing new data from Nielsen.

Business Week:
- Companies are trying to bring down medical insurance costs by implementing health wellness programs that encourage employees to get fit.
AMR Corp.(AMR) could be a buyout target for a group including Goldman Sachs(GS) and British Airways Plc. The proposed bid for the world’s largest carrier is between $46 a share and $52 a share, or $9.8 billion to $11.1 billion.

Kyodo News:
- President Bush congratulated Chinese President Hu Jintao on China’s role in the six-nation agreement on dismantling North Korea’s nuclear weapons program.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (GOOG), target $600, No.1 Internet stock pick. Current valuation implies a very attractive risk-reward outlook. Recent industry datapoints continue to indicate a very robust profile for search advertising. Review of underlying drivers of Google’s search revenue demonstrates growth that is more sustainable than the market realizes. Tracking suggests that Google continues to gain market share. Google’s option value is underappreciated, with updated worldwide traffic analysis as support. ROIC analysis highlights materially very high value creation by Google. The potential loss of the Ask affiliate deal is a manageable risk.
- Reiterated Buy on (NFLX), target $30.
- Reiterated Sell on (TBL), target $23.

Business Week:
- Microvision(MVIS), which in January showed a prototype high-resolution video projector small enough to put into a mobile phone, is attracting investor inerest. Joel Achramowicz, analyst at MDB Capital, rates the stock “buy” and said he expects the stock to double in a year.
- Shares of CytRx Corp.(CYTR), which rose to a six-year high today, may triple in two years, citing Rodman Renshaw analyst Elemer Piros. The company is scheduled in 12 to 18 months to test for humans its so-called RNAi technology that shuts down genes that cause diabetes, obesity and Lou Gehrig’s disease.

Night Trading
Asian Indices are -.25% to unch. on average.
S&P 500 indicated -.22%.
NASDAQ 100 indicated -.30%.

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Company/EPS Estimate
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Economic Releases
8:30 am EST
- The Producer Price Index for January is estimated to decline -.6% versus a .9% gain in December.
- The PPI Ex Food & Energy for January is estimated to rise .2% versus a .2% gain in December.
- Housing Starts for January are estimated to fall to 1600K versus 1642K in December.
- Building Permits for January are estimated to fall to 1590K versus 1613K in December.

10:00 am EST
- The preliminary Univ. of Mich. Consumer Confidence for February is estimated to fall to 96.5 versus 96.9 in January.

BOTTOM LINE: Asian indices are slightly lower, weighed down by technology and automaker shares in the region. I expect US equities to open modestly lower 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 Positive Housing Report, Lower Long-Term Rates

Indices
S&P 500 1,456.81 +.10%
DJIA 12,765.01 +.18%
NASDAQ 2,497.10 +.35%
Russell 2000 815.43 +.18%
Wilshire 5000 14,677.58 +.13%
Russell 1000 Growth 575.0 +.31%
Russell 1000 Value 839.63 -.05%
Morgan Stanley Consumer 714.27 +.20%
Morgan Stanley Cyclical 965.18 +.54%
Morgan Stanley Technology 586.86 +.57%
Transports 5,099.65 -.34%
Utilities 475.04 -.43%
MSCI Emerging Markets 117.27 +.51%

Sentiment/Internals
Total Put/Call .76 -21.65%
NYSE Arms 1.09 +63.59%
Volatility(VIX) 10.22 -.10%
ISE Sentiment 135.0 +21.62%

Futures Spot Prices
Crude Oil 57.91 -.16%
Reformulated Gasoline 159.67 -1.21%
Natural Gas 7.36 +1.70%
Heating Oil 162.80 -.63%
Gold 673.90 +.28%
Base Metals 233.56 +2.58%
Copper 267.20 +3.11%

Economy
10-year US Treasury Yield 4.70% -3 basis points
US Dollar 84.03 -.18%
CRB Index 303.80 +.62%

Leading Sectors
Steel +2.88%
HMOs +1.92%
Hospitals +1.88%

Lagging Sectors
Utilities -.43%
Energy -1.11%
Oil Service -1.68%

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Afternoon Recommendations
- Goldman Sachs:
- Downgraded (ABB) to Sell.

Afternoon/Evening Headlines
Bloomberg:
- The Dow Jones Industrial Average hit another all-time high on decelerating inflation readings and a positive housing report.
- Shares of InBev NV, the brewer of Beck’s and Stella Artois, surged the most ever and Anheuser-Busch(BUD) stock had its biggest gain in 10 months on merger rumors.
- Microsoft Corp.(MSFT) expects a “small drop” in the growth in operating expenses in the year that starts in July.
- Northwest Airlines said it will be valued at $7 billion when it leaves bankruptcy and proposed repaying as much as 83% of creditors’ claims.
- Chipotle Mexican Grill(CMG) said fourth-quarter profit more than doubled as it opened new restaurants. The stock is 5.5% higher after-hours.
- Baker Hughes(BHI), the world’s third-largest oilfield contractor, said profit rose less than predicted in the fourth quarter and will miss analyst estimates in the current quarter on slowing sales growth. The shares plunged 9.4%, the biggest single day decline since 2001.
- Shares of Palm Inc.(PALM) had their biggest jump in eight months on speculation the company will be acquired.
- General Electric(GE) agreed to pay $270 million for a stake in wind farms owned by Babcock & Brown in California, Illinois, New Mexico and Pennsylvania.
- Exxon Mobil(XOM) said its reserves of oil and natural gas rose by the equivalent of 2 billion barrels in 2006 on new fields in West Africa and the Middle East. Exxon replace 125% of the oil and gas it produced during the year.
- Chevron Corp.(CVX) and closely held Gulf LNG Energy LLC won approval by US regulators today to build liquefied natural-gas import terminals at Pascagoula, Mississippi.

BOTTOM LINE: The Portfolio finished higher today on gains in my Semi longs, Telecom longs and Energy-related shorts. 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 about even, almost every sector gained and volume was above average. Measures of investor anxiety were mostly lower into the close. Today's overall market action was mildly bullish as the major averages finished near session highs. Energy-related shares saw the only meaningful weakness. It is interesting that for the first time in a very long time energy stocks are finishing near session lows despite oil finishing near session highs. I see few signs that the recent substantial hedges that have been put out are being taken off. I still expect a more meaningful surge higher over the coming weeks as shorts scramble and underinvested bulls grow impatient. I have heard or read 5 different pundits talk about U.S. economic collapse and depression in the last 24 hours, which bodes well for a continuation of stocks “climbing the wall of worry.”

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.