Productivity/Labor Costs Above Estimates, Pending Home Sales Down, Factory Orders Fall

- Final 4Q Non-farm Productivity rose 1.6% versus estimates of a 1.5% gain and a prior estimate of a 3.0% increase.
- Final 4Q Unit Labor Costs rose 6.6% versus estimates of a 3.2% increase and a 1.7% prior estimate.
- Pending Home Sales for January fell -4.1% versus estimates of a -1.2% drop and a 4.5% gain in December.
- Factory Orders for January fell -5.6% versus estimates of a -4.5% decline and a 2.6% gain in December.

BOTTOM LINE: US worker productivity last quarter grew less than the government initially estimated, and labor costs accelerated more than forecast, Bloomberg reported. The 6.6% jump in unit labor costs reflected a one-time increase in bonuses and stock options. The rise in such costs “mostly reflects new assumptions about bonus and stock-option earnings in the fourth quarter,” Patrick Newport, an economist at Global Insight said. I expect unit labor costs to decelerate and productivity to accelerate later this year as economic growth rebounds back to average rates.

Fewer Americans signed contracts to buy previously owned homes in January, Bloomberg reported. “We had quite a significant bounce in December, so the pullback in January is offsetting that,” said Carolyn Kwan, an economist at Scotia Capital Markets. The Realtors’ group reported last week that sales of previously-owned homes, which account for about 85% of the market, rose more than forecast in January to a seven-month high. Pending home sales cover about 20% of the listings on the realtor’s multiple listing service. Pending re-sales fell 11.7% in the South and 2.4% in the Midwest. Pending re-sales rose 9.3% in the Northeast and .2% in the West. I continue to believe housing is in the process of stabilizing at relatively high levels.

Orders placed with US factories declined in January on lower demand for aircraft, computers and construction machinery, Bloomberg reported. Excluding transportation equipment, orders fell 2.9%, the most since September. However, unfilled orders of durable goods rose to the highest on record. I expect factory orders to rebound substantially later this year as auto production rebounds meaningfully and housing presents less of a drag.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Federal Reserve officials reiterated the US central bank’s confidence in the economic outlook today and played down last week’s decline in share prices.
- The yen snapped a three-day rally against the dollar and the euro as Japanese stock rebounded from five days of losses.
- People who eat less are more efficient at converting food into energy, which may help them live longer, a new study says.
- Democratic Representative Henry A. Waxman opened an investigation of drug and medical device research and marketing by Johnson & Johnson(JNJ), Boston Scientific(BSX), Eli Lilly(LLY), AstraZeneca Plc(AZN) and Cephalon Inc.(CEPH).
- Australian oil production is set to jump 15% this fiscal year and liquefied natural gas output may surge 22% as new projects start up, the Australian Bureau of Agricultural and Resource Economics said.

New York Times:
- Oil innovations pump new life into old wells. The Kern River oil field, discovered in 1899, was revived when Chevron(CVX) engineers here started injecting high-pressured steam to pump out more oil. The field, whose production had slumped to 10,000 barrels a day in the 1960s, now has a daily output of 85,000 barrels.

AP:
- The Privacy and Civil Liberties Board determined the Bush administration’s terrorism surveillance and financial tracking programs don’t violate Americans’ civil liberties. The programs have checks and reviews that prevent the violation of civil liberties, according to the board.
- Iran seems to have at least temporarily halted the uranium-enrichment program at the heart of its standoff with the UN Security Council, the head of the International Atomic Energy Agency said Monday.

Financial Times:
- Economic growth in the European Union is near to the level the US achieved 20 years ago, citing a report by Eurochambres, a European business group. The pace of progress is “insufficient” to “really compete on the world stage,” citing the study. The EU’s current level of gross domestic product per capita was reached by the US in 1985, citing the report that illustrates the development gap between the two blocs. The EU’s employment rate and level of investment in research and development were reached by the US in 1978, while its level of productivity was matched in the US in 1989.

Commericial Times:
- Taiwan’s government has no plan to activate the National Stabilization Fund to support the island’s stock markets after yesterday’s plunge, citing a finance ministry official.

Late Buy/Sell Recommendations
Citgroup:
- Raised (MON) to Buy, raised target to $60.
- Cellulosic ethanol is right around the corner as several firms are already developing cellulosic ethanol at pilot plants, with the first commercialized production expected to come on line as early as 2009. Corn stover appears to be destined to be one of the first feedstocks used in commercial cellulosic ethanol production. Broin Companies will be spending $200 million to convert a 50 mgy traditional dry corn mill in Iowa to a 125 mgy corn stover fed cellulosic facility by 2009, with mgmt indicating that 25% of the corn stover can increase ethanol yields by approx. 30% over current technology. Importantly, members of Congress have indicated that increased support for cellulosic ethanol is expected to be featured in the new Farm Bill, with support on the “Hill” for cellulosic ethanol gaining steam as energy security is becoming a top priority.

Night Trading
Asian Indices are +1.0% to +1.25% on average.
S&P 500 indicated +.51%.
NASDAQ 100 indicated +.57%.

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Earnings of Note
Company/EPS Estimate
- (CTAC)/-.20
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- (CNO)/.37
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Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Final 4Q Non-farm Productivity is estimated to come in at 1.5% versus a 3.0% prior estimate.
- Final 4Q Unit Labor Costs are estimated to rise 3.2% versus a 1.7% prior estimate.

10:00 am EST
- Pending Home Sales for January are estimated to fall -1.2% versus a 4.9% gain in December.
- Factory Orders for January are estimated to fall -4.5% versus a 2.4% gain in December.

BOTTOM LINE: Asian indices are higher, boosted by technology and automaker shares in the region. I expect US equities to open modestly higher and to maintain gains into the afternoon. The Portfolio is 50% net long heading into the day.

Stocks Finish at Session Lows on Continuing Emerging Market and Sub-Prime Concerns

Indices
S&P 500 1,374.12 -.94%
DJIA 12,050.41 -.53%
NASDAQ 2,340.68 -1.15%
Russell 2000 760.06 -1.98%
Wilshire 5000 13,840.98 -1.14%
Russell 1000 Growth 542.51 -.89%
Russell 1000 Value 791.24 -1.22%
Morgan Stanley Consumer 680.43 -.57%
Morgan Stanley Cyclical 915.55 -.87%
Morgan Stanley Technology 547.27 -.97%
Transports 4,722.73 -1.24%
Utilities 468.71 -1.13%
MSCI Emerging Markets 105.85 -3.0%

Sentiment/Internals
Total Put/Call 1.68 +27.27%
NYSE Arms 2.26 -3.0%
Volatility(VIX) 19.63 +5.48%
ISE Sentiment 91.0 unch.

Futures Spot Prices
Crude Oil 59.90 -2.82%
Reformulated Gasoline 184.17 -3.16%
Natural Gas 7.28 +.51%
Heating Oil 172.20 -2.61%
Gold 637.10 -1.07%
Base Metals 228.15 -3.39%
Copper 266.0 -.89%

Economy
10-year US Treasury Yield 4.5% unch.
US Dollar 84.15 +.49%
CRB Index 304.80 -1.71%

Leading Sectors
Defense -.18%
Drugs -.41%
Internet -.57%

Lagging Sectors
Coal -2.69%
Homebuilders -2.99%
REITs -3.75%

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Afternoon Recommendations
Oppenheimer:
- Rated (EBAY) Buy, target $38.

Morgan Stanley:
- Downgraded (NCC) to Underweight, target $35.

Afternoon/Evening Headlines
Bloomberg:
- More Australians support the use of nuclear power than oppose it for the first time, according to a Newspoll.
- Shares of New Century Financial suffered their largest drop ever, leading to a decline in subprime mortgage companies and less-risky lenders.
- Oil, nickel, zinc and sugar led a global slump in commodities as China said it sought to slow its economic growth to 8.0% from 10.7%.
- Intermune Inc.(ITMN) halted a final-stage clinical trial of its Actimune drug for a fatal lung disease, after it failed to help patients live longer than a placebo. The shares fell 18% in after-hours trading.
- Children with bone bruises, breaks and sprains can get better relief from ibuprofren pills than from drugs containing acetaminophen or codeine, according to a Canadian study.
- Brooklyn apartment and townhouse prices jumped 16% in 2006 to a median of $570,000, driven by a wave of new construction in NY’s most populous borough.
- Anchor Point Capital LLC hedge fund manager Albert Hsu of New Canaan, Connecticut was charged with attempted kidnapping and attempted sexual assault for an Internet posting that fabricated an ex-girlfriend’s fantasy of being abducted and raped.
- Microchip Tech(MCHP), which makes microcontrollers and analog chips, forecast today that fiscal fourth-quarter sales will be flat to slightly higher than the $251 million the company reported in its third-quarter. The shares rose .90 after-hours to $36.15.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Medical longs and Telecom longs. I was stopped out of my (ILMN) long and added to my (IWM)/(QQQQ) hedges in the final hour, thus leaving the Portfolio 50% net long. The tone of the market was very negative as the advance/decline line finished substantially lower, every sector fell and volume was heavy. Measures of investor anxiety were sharply higher into the close. Today's overall market action was bearish. The U.S. Dollar Index finished at session highs, up 0.53%, while oil is at session lows, down $1.68 per barrel, to $59.96. A clear break below $60 per barrel would end oil's recent uptrend. I suspect that will occur later this week. As well, the Bloomberg Base Metals Spot Index is breaking back below its 200-day moving average and looks to be resuming its downtrend. The Fed's Kroszner said late this afternoon that community banks are healthy and profitable due to their good loan quality and capital ratios. My intraday gauge of investor angst finished again at very elevated levels given the relatively routine magnitude of the current pullback. However, The Broker/Dealer Index (XBD) gave up all its morning bounce and finished at session lows, down 2.60%. While Asian markets are very oversold and could bounce substantially at any time, today's weak U.S. finish and falling commodities prices don't bode well for a rally tonight. The Nikkei 225 futures are currently down about 122 points.

Stocks Lower into Finaly Hour on Continuing Emerging Market and Sup-prime Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Medical longs and Telecom longs. I covered some of my (IWM) and (QQQQ) hedges this morning, thus leaving the Portfolio 75% net long. The tone of the market is very negative as the advance/decline line is substantially lower, almost every sector is lower and volume is heavy. US stocks are performing relatively well versus other major global indices.

Here are the five major global indices with the smallest losses from their 52-week highs:

1. U.S.: S&P 500, -5.2%
2. Canada: S&P/TSX Composite, -5.3%
3. U.K.: FTSE 100, -6.1%
4. Israel: Tel Aviv 100, -6.0%
5. Italy: MIB 30, -6.5%

Here are the five major global indices with the worst losses from their 52-week highs:

1. Thailand: Bangkok SET Index, -13.8%
2. India: Sensex, -15.7%
3. Turkey: ISE National 100, -15.8%
4. Venezuela: Caracas Stock Exchange, -17.0%
5. Ukraine: PFTS Index, -19.5%

I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain-hunting.

Today's Headlines

- JPMorgan Chase(JPM) overtook Goldman Sachs Group(GS) as the largest US hedge-fund manager, according to a survey released today.
- Crude oil is falling $1.50/bbl. as speculator cut long positions on signs of slowing global growth.
- Crude oil production by members of OPEC dropped 85,000 bpd in February, a Bloomberg survey showed.
- Gold is falling another $4/oz. and has declined over $50/oz. over the last five days and speculators continue to cut long positions as the US dollar stabilizes and inflation worries diminish.
- Motorola(MOT) may be preparing for a fight to keep billionaire activist Carl Icahn off its board.
- Emerging market stocks fell the most in more than eight months, led by Russian natural-gas producer OAO Gazprom.

Wall Street Journal:
- Palm Inc.(PALM) is working with Morgan Stanley(MS) to evaluate strategic options including a sale, private equity investment or acquisition.
- Iraq’s draft oil law, endorsed last month, lists dozens of intact oil fields with proven reserves and other spots for exploration. The draft legislation, expected to be approved this month, may open the country’s 115 billion barrels of proven oil reserves to overseas investors.
- Mutual funds that focus on emerging-market stocks are biding their time, hoping to pick up shares more cheaply, and that’s caused markets to fall.

NY Times:
- Chevron Corp.(CVX), Exxon Mobil(XOM) and other major oil companies are injecting high-pressure steam and carbon dioxide to increase output of oil fields. Technological advances have increased recoverable reserves to 4.8 trillion barrels today from 3.3 trillion in 2000, citing Cambridge Energy Research.

Kommersant:
- Russian billionaire Viktor Vekselberg plans to invest $1 billion in developing wind and solar power.

O Estado de S. Paulo:
- Brazil, the word’s only major exporter of ethanol, will seek to end tariffs limiting its sales of the biofuel to the US and other countries during talks with the World Trade Organization.