Stocks Rise Most Since July on Heavy Volume

Indices
S&P 500 1,395.41 +1.55%
DJIA 12,207.59 +1.30%
NASDAQ 2,385.14 +1.90%
Russell 2000 778.88 +2.48%
Wilshire 5000 14,067.03 +1.63%
Russell 1000 Growth 550.68 +1.51%
Russell 1000 Value 804.08 +1.62%
Morgan Stanley Consumer 687.59 +1.05%
Morgan Stanley Cyclical 929.77 +1.55%
Morgan Stanley Technology 557.87 +1.94%
Transports 4,768.37 +.97%
Utilities 474.77 +1.29%
MSCI Emerging Markets 108.94 +2.40%

Sentiment/Internals
Total Put/Call 1.22 -27.38%
NYSE Arms .32 -85.70%
Volatility(VIX) 15.96 -18.70%
ISE Sentiment 95.0 +4.40

Futures Spot Prices
Crude Oil 60.69 +1.03%
Reformulated Gasoline 185.03 +.30%
Natural Gas 7.47 +2.98%
Heating Oil 174.80 +1.35%
Gold 649.20 +1.56%
Base Metals 234.16 +2.63%
Copper 274.40 +2.75%

Economy
10-year US Treasury Yield 4.52% + 2 basis points
US Dollar 84.03 -.17%
CRB Index 306.90 +.69%

Leading Sectors
Steel +3.84%
REITs +3.49%
I-Banks +2.59%

Lagging Sectors
Insurance +.88%
Foods +.71%
Hospitals +.49%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- US stocks broke a weeklong slump and posted their biggest gains since July after Treasury Secretary Henry Paulson eased concern that rising mortgage defaults will undermine the economy.
- Comerica Inc.(CMA), a financial services company with roots stretching back more than 150 years in Detroit and strong ties to the city’s slumping auto industry, will move its headquarters and about 200 jobs to Dallas.
- Soybean and corn prices in Chicago fell, erasing earlier gains, on speculation record crops in South America will reduce overseas demand for supplies in the US, the world’s largest grower and exporter.

Financial Times:
- Google Inc.(GOOG) said rivals’ criticism of it over copyright are being made “in the context of a business negotiation,” citing CEO Eric Schmidt. “I have learned that as part of being a player in the media industry, the way one negotiates is everything is leaked and you’re sued to death,” Schmidt said. So lawsuits “appear to be in the course of doing normal business.”

Nikkei English News:
- Sony Corp.(SNE) will delay reporting its earnings for the fiscal year ending March 31 because tougher US accounting rules require non-US companies to complete more paperwork.

BOTTOM LINE: The Portfolio finished higher today on gains in my Medical longs, Internet longs, Retail longs and Telecom longs. I covered the remainder of my (IWM)/(QQQQ) hedges and took some profits in my (EEM) short in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was very positive as the advance/decline line finished substantially higher, every sector rose and volume was heavy. Measures of investor anxiety were mixed into the close. Today's overall market action was very bullish. The Fed's Plosser spoke to reporters after his speech. He said that he doesn't see sub-prime problems spilling over to the rest of the economy. He reiterated that the Fed is monitoring the situation carefully. Finally, he said he doesn't see the signs of a liquidity crisis developing. My intraday gauge of investor angst finished at relatively high levels given today’s sharp rally. Nikkei futures are indicating about an 81-point move higher on the open in Japan. The gains in the Broker/Dealer Index today were a big positive, given their exposure to sub-prime and emerging markets, as the stocks finished near session highs. Moreover, the upside trading collars were in effect for most of the final hour of trading. I suspect we could see more strength in the U.S. tomorrow morning from further gains in Asia and short-covering.

Stocks Sharply Higher into Final Hour on Heavy Volume

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Retail longs, Medical longs and Telecom longs. I covered some of my (IWM) and (QQQQ) hedges today, thus leaving the Portfolio 75% net long. The tone of the market is very positive as the advance/decline line is substantially higher, every sector is higher and volume is heavy. The EIA just revised second- and third-quarter world oil demand growth lower by 400,000 barrels per day, according to Reuters. As well, total output by OPEC in February rose to 29.945 million barrels per day vs. January's 29.880 million barrels per day. I expect global oil demand growth to be revised even lower later this year. Oil is only $0.38 higher today despite the rebound in global equity stock markets. Take a look at this chart of odd lot short sales, a contrary indicator, which have soared the last four days. This indicator is just another example of the many showings of extreme anxiety by the herd. I continue to believe that the market has cleansed itself of weak hands at a very rapid rate and that the current pullback will be milder and less damaging than the vast majority expect. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain-hunting.

Today's Headlines

Bloomberg:
- Chinese markets are too big and complicated for China to be able to fix a market drop, so the government should concentrate instead on making them more flexible and independent, said Fang Xinghai, former deputy chief executive of the Shanghai Stock Exchange.
- JPMorgan Chase(JPM) plans to invest $1 billion to expand its investment-banking unit this year.
- Fannie Mae(FNM) and Freddie Mac(FRE) should sell most of their $1.4 trillion in assets to refocus on homeownership among low-income Americans, Fed Chairman Benanke said.
- Shares of New Century Financial(NEW) and rival mortgage lenders snapped back sharply today.
- Russian reporter Ivan Safronov was investigating state plans to sell advanced weapons to Iran and Syria when he fell to his death from a window in his Moscow apartment building March 2, his newspaper Kommersant said.
- US Treasury Secretary Henry Paulson moved to cool concern about the sub-prime mortgage market, saying the woes won’t spill over to banks that make less risky loans.
- Monsanto and DuPont, the world’s leading developers of genetically modified seeds, may win faster approval to sell their products in Brazil under new biotech regulations, analysts said.

Wall Street Journal:
- Honeywell Intl.(HON) is venturing into consumer electronics for the first time with a branding deal for a new flat-panel tv.
- UAL Corp. is using computerized flight mapping to cut navigational fees, citing Anthony Concil, a spokesman for the International Air Transport Association.
- US makers of orthopedic implants, such as Stryker(SYK) and Zimmer(ZMH), are a safe long-term investment as people live longer and more knees and hips wear out.
- The US government should lower tax rates and regulatory burdens to allow automakers to remain competitive in the global market, said Jack Kemp, former secretary of Housing and Urban Development.

NY Times:
- No solid evidence exists to prove the effectiveness of a common treatment to reform sexual offenders in the US. A California study conducted from 1985 to 2001 on the relapse prevention treatment found people were slightly more likely to have another sexual offense after going through the treatment than those who didn’t receive it.

La Tribune:
- France no longer opposes setting a fixed target for the use of renewable energies such as solar and wind power within the European Union.

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
- (BF/B)/.83
- (CNO)/.37
- (CPRT)/.32
- (PSS)/.11

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.