Durable Goods Orders Fall, Consumer Confidence Jumps to Cycle Highs, Existing Home Sales Surge

- Durable Goods Orders for January fell -7.8% versus estimates of a -3.0% decline and a 2.8% rise in December.
- Durables Ex Transports for January fell -3.1% versus estimates of a -.2% decline and a 2.6% increase in December.
- Consumer Confidence for February rose to 112.5 versus estimates of 108.5 and 110.2 in January.
- Existing Home Sales for January rose to 6.46M versus estimates of 6.24M and an upwardly revised 6.27M in December.

BOTTOM LINE: Orders placed with US factories for durable goods fell more than forecast in January, Bloomberg reported. Orders for non-defense capital goods excluding aircraft, a proxy for future business investment, fell 6%, the biggest decline since January 2004. I continue to believe manufacturing activity will improve from current levels as companies gain confidence in the sustainability of the current expansion and rebuild depleted inventories.

Confidence among US consumers unexpectedly rose to the highest in more than five years this month, lifted by rising wages and an expanding job market, Bloomberg said. The percentage of people who said jobs are hard to get declined to the lowest since August 2001. The Present Situation component of the index surged to 139.0 from 133.9 the prior month. The Expectations component rose to 94.8 versus 94.4 in December. The percentage of those saying jobs are hard to get fell to 17.5% in January versus 19.7% in December. Wages rose 4% in January, near the strongest in six years. As well, gas prices are down to $2.30/gallon from $3.03/gallon in August of last year. The S&P 500 has risen 18.2% in just over eight months. I expect the Univ. of Mich. Consumer Confidence reading to join this one in making cycle highs before year-end as gas prices fall further, stocks rise more, interest rates remain low, housing stabilizes at relatively high levels, inflation decelerates further and the job market remains healthy.

Sales of previously owned homes in the US rose more than forecast in January to a seven-month high as lower prices and warm weather brought out more buyers, Bloomberg said. The report suggests that housing may be less of a drag on growth this year, according to economists. The Case-Schiller Home Price Index showed the average home has increased in price by .5% over the last 12 months. I continue to believe that housing is in the process of stabilizing at relatively high levels.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Japan’s industrial production probably fell the most in almost three years in January, signaling growth may slow in the world’s second-largest economy.
- China Agri-Industries Holdings Ltd., the nation’s largest rice exporter, will invest $359 million to expand fuel ethanol production capacity 600% over two years as the government promotes cleaner energy sources.
- Honda Motor(HMC) raised production to a record for January as its sold more Civic and Fit compact cars in North America. Toyota Motor(TM) and Honda are increasing their production in the US, as their fuel-efficient compact cars win sales from General Motors(GM).
- China’s stocks fell 5% as some investors judged a key index’s climb to an all-time high was excessive relative to earnings potential. Citic Securities, the nation’s biggest publicly traded brokerage, fell 8%. However, the stock is almost 600% higher over the last 12 months.

Chronicle of Philanthropy:
- Warren Buffett’s $43.5 billion donation to the Bill & Melinda Gates Foundation last year led the largest-ever field of Americans giving $100 million or more to charity.

Economic Daily News:
- Acer Inc. expects personal-computer sales to rise as much as 40% this year from 2006, citing Chairman JT Wang. Low inventory levels at the company’s retail outlets and the introduction of Windows Vista, Microsoft’s(MSFT) new operating system, will help boost sales, the repot said, citing Wang.

South China Morning Post:
- EBay Inc.(EBAY) will invest $105 million for a 33% stake in a Chinese electronic payment venture.

Shanghai Securities News:
- PetroChina Daqing Oilfield Co., a unit of the nation’s largest oil company, discovered as much as 1 billion tons of oil reserves in Hailaer in northern China. The Tamuchage field in Inner Mongolia Autonomous Region may have 800 million tons to 1 billion tons of oil reserves.

Late Buy/Sell Recommendations
Citigroup:
- Upgraded (MCO) to Buy, target $77.
- Reiterated Buy on (WLP), target $99.
- Reiterated Buy on (ERTS), target $64.
- Reiterated Buy on (HON), target $52.

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Asian Indices are -1.0% to -.50% on average.
S&P 500 indicated -.06%.
NASDAQ 100 indicated -.07%.

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Earnings of Note
Company/EPS Estimate
- (ADSK)/.46
- (AZO)/1.45
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- (CBS)/.47
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- (HNZ)/.62
- (HGSI)/-.40
- (KCP)/.39
- (OSG)/2.41
- (PZZA)/.46
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- (RSH)/.43
- (RRI)/-.20
- (RDC)/.70
- (RRD)/.65
- (SAFM)/-.11
- (TGT)/1.27
- (THC)/-.04
- (TXU)/1.20
- (VNO)/1.18
- (WPI)/.29
- (WCI)/-1.11
- (WYNN)/.46

Upcoming Splits
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Economic Releases
8:30 am EST
- Durable Goods Orders for January are estimated to fall -3.0% versus a 2.9% gain in December.
- Durables Ex Transportation for January are estimated to fall -.2% versus a 2.7% gain in December.

10:00 am EST
- Consumer Confidence for February is estimated to fall to 108.5 versus 110.3 in January.
- Existing Home Sales for January are estimated to rise to 6.24M versus 6.22M in December.

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

Stocks Finish Only Slightly Lower on Another Afternoon Rebound

Indices
S&P 500 1,449.37 -.13%
DJIA 12,632.26 -.12%
NASDAQ 2,504.52 -.42%
Russell 2000 823.69 -.36%
Wilshire 5000 14,644.24 -.16%
Russell 1000 Growth 573.00 -.30%
Russell 1000 Value 835.38 -.03%
Morgan Stanley Consumer 709.49 +.04%
Morgan Stanley Cyclical 971.90 +.12%
Morgan Stanley Technology 585.07 -.63%
Transports 5,036.72 -2.37%
Utilities 493.71 +2.63%
MSCI Emerging Markets 117.43 -.46%

Sentiment/Internals
Total Put/Call 1.02 -28.17%
NYSE Arms .92 -29.62%
Volatility(VIX) 11.15 +5.39%
ISE Sentiment 96.0 -4.95%

Futures Spot Prices
Crude Oil 61.49 +.57%
Reformulated Gasoline 178.0 +.96%
Natural Gas 7.54 -2.68%
Heating Oil 175.55 +.29%
Gold 690.50 +.55%
Base Metals 245.22 +1.58%
Copper 286.80 +.60%

Economy
10-year US Treasury Yield 4.62% -5 basis points
US Dollar 83.94 -.13%
CRB Index 315.10 +.15%

Leading Sectors
Utilities +2.63%
Papers +2.06%
Homebuilders +1.48%

Lagging Sectors
Oil Tankers -1.03%
Airlines -1.20%
I-Banks -1.64%

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Afternoon Recommendations
Piper Jaffray:
- Rated (BLDR) and (HWCC) Outperform.

Afternoon/Evening Headlines
Bloomberg:
- Nordstrom(JWN) said fourth-quarter profit rose by 22%, less than analysts estimated, on increased sales of women’s clothing. The stock fell 3.2% after-hours.
- The Bush administration wants Congress to give it the authority to speed up the process for issuing power-consumption standards for items ranging from refrigerators to traffic lights, Energy Secretary Bodman said.
- Natural gas declined 2.3% today in New York on speculation that demand for the furnace fuel will ebb as winter’s chill eases and spring approaches with inventories at very high levels.
- Brocade Communications(BRCD), the world’s largest maker of switches for data-storage networks, said first-quarter profit more than tripled on increased demand for storage systems. The stock surged 6% after-hours.

CNBC:
- Sandy Weil, former Chairman and CEO of Citigroup(C), said the US sub-prime mortgage market is not big enough to hurt the overall economy.

AP:
- Iraqi Prime Minister Nuri al-Maliki said today his Cabinet endorsed a draft version of a long-awaited oil law and the measure will now be sent to parliament for approval.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Retail longs and Energy-related shorts. I did not trade this afternoon, thus leaving the Portfolio 100% net long. The tone of the market was mildly negative as the advance/decline line finished modestly lower, sector performance was mixed and volume was below average. Measures of investor anxiety were mostly higher into the close. Today's overall market action was just mildly bearish. REITs recouped about half of their morning losses, however the I-Banks finished near session lows. The fact that oil only rose .25 today despite many scary Iran headlines and snow storms is interesting. Apple (AAPL) just said it is delaying its Apple TV launch until mid-March. This stock is only a bit lower on the report. A number of "growth stocks" I follow rose today despite the mild losses in the major averages. The underlying tone of the overall market remains very constructive despite the many calls for a correction. As of mid-February, NYSE short interest stood at 9,600,000,000 shares. This is only 1.5% below the all-time high of 9,744,698,000 shares set in October of last year, despite the 20.1% gain in the S&P 500 since June 13. Moreover, since June of last year when the bull market began to pick up steam, short interest has actually risen by 5.6% or 512,690,000 shares. Finally, the S&P 500 has soared 96.6% since the October 2002 bottom, yet NYSE short interest has actually jumped 17.0% since then. It is also interesting to note that the second-largest overall short position on the NYSE as of mid-February was the iShares Russell 2000 Index Fund (IWM) at 158,547,715 shares, up from 130,408,917 shares in mid-January. Short-selling has been rising in the IWM this year notwithstanding the fact that it is one of the best-performing major averages, already gaining 5.1% year-to-date. I continue to believe the many bears remain stunningly complacent and that a meaningful short-covering rally will occur at some point later this year.

Stocks Lower into Final Hour on Lingering Sub-Prime, Iran Concerns

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Retail longs and Energy-related shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is modestly lower, most sectors are declining and volume is below average. My intraday gauge of investor angst is now elevated for the fourth consecutive day considering the mixed performance in the major averages. If this week's economic data somehow come in around or above estimates, I wouldn't be surprised to see some upside fireworks in the averages. I think most investors believe economic data will come in below consensus estimates. The 10-year yield is near session lows, falling another 5 basis points. I expect US stocks to trade mixed-to-higher into the close from current levels as lower long-term rates, stable energy prices and buyout speculation offsets lingering sub-prime and Iran concerns.

Today's Headlines

Bloomberg:
- Morgan Stanley and Apax Partners Worldwide LLP agreed to buy Chicago-based Hub Intl. Ltd. for $1.8 billion in the second buyout of a US insurance brokerage in six weeks.
- Mirant Corp.(MIR) and Dynegy Inc.(DYN) are among power producers that may lure private equity firms after KKR agreed to buy TXU Corp.(TXU) in the biggest-ever leveraged buyout, Stephan Truffer of EIC Partners AG said.
- Temple-Inland(TIN), pressured by billionaire investor Carl Icahn, will spin off its real-estate and financial-serves units and sell timberlands to focus on packaging and building products. The shares jumped 16%.

Wall Street Journal:
- France’s state-run postal service is replacing the bulk of its 48,000-vehicle fleet of mail-delivery vans with electric cars.
- The US strategy to quell sectarian violence in Baghdad and help Iraqi forces set up permanent bases in Sunni and Shiite neighborhoods is starting to take hold, Senator Joe Lieberman wrote. Though time will be needed to see if the strategy proves a success over the longer term, many Congressional opponents of the war aren’t interested in giving it a chance, he wrote. “Cutting off support for further US troop deployment in Iraq, however, would be a “terrible mistake” and would have “devastating consequences,” Lieberman said.
- Governors of California, Arizona, New Mexico, Oregon and Washington today plan to propose a regional strategy to reduce greenhouse-gas emissions.
- US mutual funds that concentrate of growth stocks are ahead of value funds so far this year, citing Morningstar Inc.
- Advanced Micro Devices(AMD), Intel Corp.(INTC), Microsoft Corp.(MSFT), Intl. Business Machines(IBM) and rivals have joined to mitigate the rising cost of energy of server systems and data centers. A technology-industry group, comprised of 11 companies sand known as the Green Grid, plans to disclose its program today.

NY Times:
- Google Inc.(GOOG) plans to distribute content from Dow Jones, Sony BMG Music Entertainment, Conde Nast and other large content media companies to strengthen its position as an advertising platform.
- Hollywood studios are using digital downloading pioneer BitTorrent to help make movies and television shows legally available through the Internet.

NY Daily News:
- Fidelity Investments is planning to expand its program of charging higher management fees for better-performing funds to 19 more mutual funds.

USA Today:
- Lawmakers have continued to take trips funded by outside sources after new congressional travel restrictions were approved aimed at restricting such travel.

CNBC:
- The National Basketball Assoc. will show game highlights on Google’s(GOOG) YouTube Web site in a deal to be announced today.

Financial Times:
- Beer drinkers may find prices rising as a worldwide expansion in growth of corn, soybeans and rapeseed for renewable fuel production is crowding out barley farming.
- The number of hedge funds grew by more than two-thirds last year as the amount of new starters rose and more funds registered information publicly, citing a survey by Pertrac Financial Solutions. The NYC-based firm found more than 13,600 firms in 2006.

Valor Economico:
- Mitsui, Japan’s second-largest trading company, and Petroleo Brazileiro SA plan to invest in at least 3 ethanol mills in Brazil to supply the biofuel to the Asian country.

Nikkei English News:
- Toyota Motor(TM) is building a factory in Mississippi to assemble sport-utility vehicles, a facility that will cost $829 million.