Personal Incomes Jump, Spending Exceeds Estimates, Jobless Claims Rise Modetsly, Manufacturing Expands, Construction Falls

- Personal Income for January rose 1.0% versus estimates of a .3% increase and a .5% gain in December.
- Personal Spending for January rose .5% versus estimates of a .4% gain and a .7% increase in December.
- PCE Core for January rose .3% versus estimates of a .2% increase and a .1% gain in December.
- Initial Jobless Claims for last week rose to 338K versus estimates of 325K and 331K the prior week.
- Continuing Claims rose to 2640K versus estimates of 2520K and 2506K prior.
- ISM Manufacturing for February rose to 52.3 versus estimates of 50.0 and a reading of 49.3 in January.
- ISM Prices Paid for February rose to 59.0 versus estimates of 54.0 and a reading of 53.0 in January.
- Construction Spending for January fell -.8% versus estimates of a -.5% decline and an upwardly revised .6% increase in December.

BOTTOM LINE: Personal spending in the US increased more than forecast in January and incomes rose by the most since January 2006, Bloomberg reported. The surge in incomes may help to explain the Conference Board’s Consumer Confidence reading hitting cycle highs last month. The year-over-year PCE Core, the Fed’s favorite inflation gauge, rose 2.3%, well below last month’s Average Hourly Earnings’ increase of 4.0%. I expect personal spending and incomes to remain healthy over the intermediate-term as interest rates remain low, inflation decelerates, housing stabilizes at relatively high levels, stocks rise further, confidence increases and the job market remains healthy.

More Americans applied for state jobless benefits last week, and continuing claims rose, Bloomberg reported. The four-week moving-average of jobless claims rose to 335,250 from 327,750 the prior week. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, rose to 2% from 1.9% the prior week. While upcoming monthly job reports will likely weaken a bit, I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

Manufacturing in the US unexpectedly expanded by the most in five months in February, suggesting production is starting to stabilize, Bloomberg reported. The Orders to Be Filled Component surged to 51.5 from 43.5 the prior month. Manufactures have now pared inventories for seven straight months. Inventory de-stocking has been occurring at a very rapid rate. I expect manufacturing to improve meaningful over the course of the year as inventories are rebuilt and auto production rises.

Construction spending in the US fell by the most in three months in January, pulled lower by homebuilding and a jump the prior month, Bloomberg reported. Residential construction fell 19.1% at an annual rate during the fourth quarter as homebuilders sought to cut inventory. I continue to believe construction will remain muted throughout the year as homebuilders continue to slash inventory.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- US authorities arrested more than 400 people and seized 18 tons of illegal drugs over the course of a 20-month investigation into a Mexican smuggling cartel.
- Motorola Inc.(MOT) said billionaire investor Carl Icahn plans to buy as much as $2 billion in shares of the company’s stock.
- Pakistan’s President Pervez Musharraf said his government will force terrorists to leave the tribal region bordering Afghanistan and appealed to the Pakistani people to help the operations of security forces.
- Inpex Holdings Inc., Japan’s largest oil explorer, said it will spend more than $1.7 billion annually to search and develop oil and gas fields over the next three to four years.
- Former Fed Reserve Chairman Alan Greenspan said a recession in the US is possible, though not probable this year as inventory problems in the economy are being addressed quickly.
- Global semiconductor sales will rise 6.7% this year, according to Gartner Inc. Gartner had earlier forecast that 2007 semiconductor sales would rise 9.2%.
- Talks between the US and North Korea next week will start a process aimed at normalizing relations between the countries, US Secretary of State Christopher Hill said.

Wall Street Journal:
- MasterCard Inc.(MA), a credit- and debit-card company, in June will change the fees it charges merchants that accept its cards.

Financial Times:
- The UK will support a 20% mandatory target for renewable power by 2020 at a European Union summit next week. France yesterday indicated it may also drop its opposition to the mandatory targets.
- Sony Corp.(SNE) will increase supplies of PlayStation 3 consoles in the US to catch up with demand, citing Jack Tretton, chief executive of Sony Computer Entertainment’s US division.
- India, where elections can be won or lost on the price of onions, is trying to ensure that measures to control runaway inflation don’t derail economic growth. Higher incomes have increased consumer demand for wheat, sugar, cooking oil and other food staples, pushing India’s key inflation rate to 6.73% last month. A separate measure of consumer prices among farmers is at an eight-year high of 8.94%, and urban price gains are at the highest levels in six years.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Sell on (FRO), target $26.
- Reiterated Buy on (MRK), target $50.

Night Trading
Asian Indices are -1.50% to -.50% on average.
S&P 500 indicated -.36%.
NASDAQ 100 indicated -.21%.

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Earnings of Note
Company/EPS Estimate
- (AIG)/1.49
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Upcoming Splits
- (ALB) 2-for-1

Economic Releases
8:30 am EST
- Personal Income for January is estimated to rise .3% versus a .5% gain in December.
- Personal Spending for January is estimated to rise .4% versus a .7% gain in December.
- PCE Core for January is estimated to rise .2% versus a .1% gain in December.
- Initial Jobless Claims for last week are estimated to fall to 325K versus 332K prior.
- Continuing Claims are estimated to rise to 2513K versus 2509K prior.

10:00 am EST
- ISM Manufacturing for February is estimated to rise to 50.0 versus a reading of 49.3 in January.
- ISM Prices Paid for February is estimated to rise to 54.0 versus a reading of 53.0 in January.
- Construction Spending for January is estimated to fall by -.5% versus a -.4% decline in December.

Afternoon:
- Total Vehicle Sales for February are estimated to fall to 16.2 million versus 16.7 million in January.
- Domestic Vehicle Sales for February are estimated to fall to 12.4 million versus 12.7 million in January.

BOTTOM LINE: Asian indices are lower, weighed down by commodity and automaker shares in the region. I expect US equities to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

Stocks Finish Modestly Higher on Short-Covering, Bargain-Hunting

Indices
S&P 500 1,406.82 +.56%
DJIA 12,268.63 +.43%
NASDAQ 2,416.13 +.34%
Russell 2000 793.30 +.08%
Wilshire 5000 14,213.87 +.49%
Russell 1000 Growth 556.15 +.50%
Russell 1000 Value 811.61 +.58%
Morgan Stanley Consumer 693.52 +.58%
Morgan Stanley Cyclical 936.13 +.19%
Morgan Stanley Technology 564.47 +.43%
Transports 4,863.52 unch.
Utilities 479.19 -.06%
MSCI Emerging Markets 111.54 -.39%

Sentiment/Internals
Total Put/Call 1.10 -34.91%
NYSE Arms .95 -93.30%
Volatility(VIX) 15.42 -15.78%
ISE Sentiment 114.0 +2.70%

Futures Spot Prices
Crude Oil 61.72 +.42%
Reformulated Gasoline 184.76 +1.73%
Natural Gas 7.26 -3.50%
Heating Oil 178.04 +.06%
Gold 673.10 -2.05%
Base Metals 240.29 -1.02%
Copper 277.0 -1.95%

Economy
10-year US Treasury Yield 4.56% +5 basis points
US Dollar 83.56 +.12%
CRB Index 312.39 -.28%

Leading Sectors
Steel +8.3%
Telecom +1.97%
Computer Hardware +1.19%

Lagging Sectors
Airlines -.39%
Hospitals -.55%
Homebuilders -.69%

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Afternoon Recommendations

Raymond James:
- Upgraded (DLTR) to Outperform.

Afternoon/Evening Headlines
Bloomberg:
- Treasuries fell for the first time in four days as Federal Reserve Chairman Ben S. Bernanke said the economy may strengthen by mid-year.
- The House of Representatives voted today to revise rules for foreign investments in the US.
- DuPont Co., the third-largest US chemical maker, said a federal grant of as much as $80 million awarded to partner Broin Cos. will speed up the opening of a plant for making ethanol from corn waste by three years.
- Mitsui, Japan’s second-largest trading company, agreed to acquire US metals producer Steel Technologies(STTX) in a transaction valued at about $396 million in cash.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Retail longs, Computer longs and Telecom longs. I did not trade today, thus leaving the Portfolio 50% net long. The tone of the market was mildly positive as the advance/decline line finished modestly higher, most sectors rose and volume was heavy. Measures of investor anxiety were mostly lower into the close. Today's overall market action was just mildly bullish. considering yesterday's losses. Breadth was only modestly positive. Several sectors declined further. Mid- caps continue to be this year's star performers and are still up about 3.5% on average this year, despite yesterday's losses. While I suspect emerging market declines will lead to more choppiness in U.S. stocks in the near-term, I continue to believe any meaningful pullback in U.S. shares will present investors with excellent long entry points. This will likely coincide with a spike in "bear market" calls by the herd.

Stocks Higher into Final Hour on Bargain-Hunting and Short-Covering

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Retail longs, Computer longs and Telecom longs. I have not traded today, thus leaving the Portfolio 50% net long. The tone of the market is modestly positive as the advance/decline line is modestly higher, most sectors are rising and volume is heavy. Much has been made over the Shanghai Composite's almost 10% plunge two days ago. However, India's Sensex Index is the BRIC that began to crack before shanghai. It began rolling over a couple of weeks ago. The Sensex is down 9% over the last five days, finishing last night down 4% at session lows. It is now down 11% in about three weeks and down 6.1% year to date, which is the worst performance of any major country index I follow. I continue to believe the mania for emerging market stocks is in the process of ending and that developed markets will substantially outperform them this year. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering and bargain-hunting.

Today's Headlines

Bloomberg:
- Treasuries are declining for the first time in four days as Federal Reserve Chairman Ben Bernanke said the economy may strengthen by mid-year.
- Shares of Fremont General Corp., the third-largest provider of sub-prime US mortgages through brokers, slumped to a three-year low after the company postponed the release of fourth-quarter earnings.
- Pfizer Inc.(PFE) and Merck & Co.(MRK) reported positive findings on experimental drugs that promise to spur a change in HIV treatment, helping thousands of patients who have stopped responding to older medicines.
- The perceived risk of owning low-rated sub-prime mortgage bonds lessons for the first time in nine days, derivatives suggest, after Fed Reserve Chairman Ben S. Bernanke said the overall home loan market is healthy.
- Yesterday’s sell-off in US equities presents a “good buying opportunity” given the outlook for economic and earnings growth, according to UBS AG strategists.
- Copper prices fell the most in more than three weeks on the London Metal Exchange and zinc posted the largest drop since Feb. 2, on concerns over a further slowing of demand.
- Gold is falling another $14.50/oz. as speculators anticipate slowing demand from emerging economies and lower inflation.

Wall Street Journal:
- American Family Mutual Insurance Co., the nation’s 10th largest car insurer, plans to offer some of its customers camera that can record driving by teenagers.
- Exchange-traded funds following stocks in Asia were hurt yesterday after Chinese markets lost about 9% on concerns about slower economic growth.
- The US FDA advisory panel may approve a heart monitor capable of being checked by the Internet, the first in a coming wave of implantable sensors.

NY Times:
- A scientific study on stem cells that concluded cells taken from an adult could change into any of the body’s major tissue types is being re-evaluated after inconsistent data was discovered.

News-Press of Fort Myers:
- A Florida legislator has proposed a bill that would prohibit government agencies and officials from using the phrase “illegal alien” when referring to a person that broke the law to gain entrance into the US. Senator Frederica Wilson, a Democrat who represents Miami, said she considers an alien to be from outer space.

Etemaad:
- Several Iranian parliamentary members criticized a recent comment by President Mahmoud Ahmadinejad comparing the country’s nuclear program to a “train with no brakes,” citing lawmakers.

El Universal:
- Shortages in Venezuela of antibiotics and medicines for diabetes and high blood pressure are growing because of government delays in approving requests for dollars to pay for imports, citing Edgard Salas, president of the Venezuelan Pharmaceutical Assoc.