Trade Deficit Shrinks, Payrolls Rise, Unemployment Falls, Inventories Rise

- The Trade Deficit for January shrank to -$59.1 billion versus estimates of -$59.8 billion and -$61.5 billion.
- The Change in Non-farm Payrolls for February was 97K versus estimates of 95K and an upwardly revised 146K in January.
- The Unemployment Rate for February fell to 4.5% versus estimates of 4.6% and 4.6% in January.
- Average Hourly Earnings for February rose 4.1% versus estimates of a 3.9% gain and an upwardly revised 4.1% increase in January.
- Wholesale Inventories for January rose .7% versus estimates of a .1% gain and a -.5% decline in February.

BOTTOM LINE: The US trade deficit shrank in January as imports declined and demand for US products rose, Bloomberg reported. US exports rose 1.1% to a record. A smaller deficit this year would result in trade contributing to US growth for the first time in more than 10 years. I expect the trade deficit to only improve slightly this year.

The US unemployment rate unexpectedly fell last month and employers added 97,000 jobs, easing concern economic slowdown concerns, Bloomberg reported. The unemployment rate fell slightly and remains at historically low levels. Upward revisions for the prior two months showed employers added 55,000 more jobs than previously estimated. Builders cut 62,000 jobs after adding 28,000 the prior month, mainly due to bad weather. I continue to believe the labor market will remain healthy over the intermediate-term as the financial, technology and healthcare sectors add jobs, more than offsetting construction-related weakness.

Inventories at US wholesalers rose more than forecast in January, Bloomberg reported. Sales fell .9% after rising 1.6% the prior month. At the current sales pace, the amount of goods on hand is still a low 1.19 months worth. Petroleum sales fell 11.1% versus a 5.9% increase the prior month. I continue to believe inventory rebuilding will begin adding to overall economic growth next quarter.

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Friday Watch

Late-Night Headlines
Bloomberg:
- American Airlines parent AMR Corp.(AMR) will consider Boeing Co.(BA) 737-800s to replace its fleet of 300 MD-80 jets and expects an announcement “in the near future,” citing CFO Tom Horton.
- Microsoft Corp.(MSFT) Chairman Bill Gates’ net worth swelled to $56 billion, making him the world’s richest person, followed by Warren Buffett, at No. 2, according to Forbes magazine’s annual survey of billionaires.
- New Century Financial(NEW) halted new loans and lined up almost $1 billion in new funding to help it stay in business.
- Afghanistan’s economic growth will accelerate over the next two years, according to the International Monetary Fund, with increased production of wheat and fruit.
- PT Bumi Resources, Indonesia’s biggest coal exporter, plans to boost production of the fuel by 50% in the next three years.
- European Union governments plan to set binding targets for the use of renewable energies such as solar and wind power, overcoming an East-West rift, Swedish Prime Minister Fredrik Reinfeldt said.
- Corn prices fell in Chicago and soybeans rose on speculation that US farmers will shift a record number of acres to produce more grain for ethanol.
- China, the world’s biggest energy consumer after the US, may offer tax breaks to companies that support energy conservation, Finance Minister Jin Renqing said.
- National Semiconductor(NSM) said that profit fell less than analysts expected in the fiscal third quarter after the company recovered from an inventory glut. The stock surged 5% in after-hours trading.
- Cooper Companies, the maker of contact lenses, said it earned 60 cents a share in its first quarter versus estimates of .54. The stock jumped 8.44% in after-hours trading.
- Gmarket(GMKT), the South Korean online auctioneer, reported profit of .13/share in the fourth quarter, below analysts’ estimates of .15. The shares plunged 18% in after-hours trading.

bankstocks.com:
- The bulls on subprime mortgage lending learn what fun it can be to be a contrarian investor.

China Business News:
- China Development Bank, which funds the country’s biggest public works projects, may write off $2 billion in bad loans, citing the bank’s board of supervisors.

Nikkei:
- Sony’s(SNE) Sony Computer Entertainment, which loses money on each PlayStation 3 it sells, plans to use cheaper chips to make the games profitable.

JoongAng Ilbo:
- The US and North Korea agreed to remove the communist country from the list of countries that support terrorism, citing North Korean Vice Foreign Minister Kim Kye Gwan.

Late Buy/Sell Recommendations
RBC:
- Rated (CIEN) Outperform, target $33.
- Rated (FFIV) Outperform, target $90.

Citigroup:
- Upgraded (HST) to Buy, target $29.
- Reiterated Buy on (MCD), target $49.

Business Week:
- Hythiam Inc.(HYTM), maker of the Prometa outpatient system to treat drug and alcohol addiction, may have its stock rise as more centers use the treatment. The treatment, which Hythiam licenses to treatment centers, managed-care providers and government agencies, remains controversial and the early results have been “overwhelmingly successful,” citing Ryan Daniels, an analyst at William Blair.
- Mosaic Co.9MOS) shares may rise 55% in a year because rising demand for corn will lead to higher sales of products from the fertilizer producer. “Huge” demand for corn will continue for years, forcing farmers to buy fertilizer to try to increase their yield, citing William Harnisch, president of Peconic Partners.
- Home Depot(HD) is undervalued and may have its shares rise 19% in the next year, citing Douglas Davenport, President of Atlanta Investment Counsel.

Night Trading
Asian Indices are unch. to +25% on average.
S&P 500 indicated -.05%.
NASDAQ 100 indicated +.01%.

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Economic Releases
8:30 am EST
- The Trade Deficit for January is estimated to shrink to -$59.8 billion versus -$61.2 billion in December.
- The Change in Non-farm Payrolls for February is estimated at 95K versus 111K in January.
- The Unemployment Rate for February is estimated at 4.6% versus a reading of 4.6% in January.
- Average Hourly Earnings for February are estimated to rise .3% versus a .2% gain in January.

10:00 am EST
- Wholesale Inventories for January are estimated to rise .1% versus a -.5% decline in December.

BOTTOM LINE: Asian indices are slightly higher, boosted by automaker and technology shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Finish Higher, Led by Tech

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Stocks Higher into Final Hour Even as Apprehension Remains High

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Retail longs and Medical longs. I have not traded 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 rising and volume is above average. Dow Jones is reporting that U.S. household net worth rose for the 17th consecutive quarter and hit another all-time record in the fourth quarter while consumer borrowing rose by the slowest pace in eight years, Federal Reserve figures showed today. The $1.4 trillion increase in household net worth last quarter followed an $839 billion gain in the third quarter and reflected a surge in stocks. Net worth related to real estate rose $246 billion for the quarter, which is very surprising. I am quite certain there will be very few stories in the financial or mainstream press regarding this very positive news. The ISE Sentiment Index plunged 30.3% to an extraordinarily depressed 46.0 this morning. It has been lower only three other days since the index began in October 2002. Its all-time low was 36.0 in July of last year. Moreover, its 10-day moving average is hitting an all-time record low of 91.80. While a test of the recent lows is possible, the historic intensity of recent selling likely presents longer-term investors another excellent entry point for long positions. I expect US stocks to trade mixed-to-lower into the close from current levels on rising apprehension ahead of tomorrow’s jobs report and sub-prime worries.

Today's Headlines

Bloomberg:
- US household net worth rose to an all-time record in the fourth quarter and consumer borrowing rose by the slowest pace in eight years, Federal Reserve figures showed today. The $1.4 trillion increase in household net worth last quarter followed an $839 billion gain in the third quarter and reflected a pickup in stock and mutual-fund values. Net worth related to real estate rose $246 billion for the quarter.
- Greenlight Capital LLC founder David Einhorn resigned form the board of New Century Financial Corp.(NEW), the subprime lender facing a criminal accounting probe and a credit crisis.
- Crude oil fell, pulled lower by natural gas and heating oil, on speculation that US supplies of heating fuels will be adequate to meet demand during the last weeks of winter.
- The coldest February since 1979 caused US retailers’ sales to grow 2.5%, the slowest pace in three months, as consumers delayed purchases of spring merchandise.
- CBS News replaced the executive producer of Katie Couric’s evening newscast after the show failed to rise from last place among the three largest US broadcasting networks.
- Ford Motor(F) shares gained the most in four months after Credit Suisse Group raised its rating and forecast a narrower loss for the second-biggest US automakers.
- The US SEC froze the shares of 35 companies whose stocks trade over the counter as it examines whether promoters used e-mails to mislead investors and inflate stock prices.
- The US economy will strengthen during the year, overcoming hurdles, a survey of economists showed.

Wall Street Journal:
- A new group of drug-coated stents used to prop clogged cardiac arteries open is nearing filing at the FDA.

Reuters:
- BP Plc(BP) restarted Alaska’s Northstar oil field yesterday, almost three weeks after the field closed because of a pipeline leak.
- A key Nigerian oil pipeline ruptured by militant attacks will reopen in three months time.

AP:
- Top Democrats in the US House of Representatives plan to add a rule to a new funding bill to pull the country’s combat troops from Iraq by the fall of 2008.

Chronicle of Higher Education:
- State and local appropriations for public colleges in the 2005-2006 academic year rose faster than tuition rates did.

NY Post:
- The Carlyle Group will invest $100 million to build luxury homes in the Hamptons on NY’s Long Island in a partnership with Farrell Building.

Angola Press:
- Angola will invest $50 billion in its oil industry by 2013, citing Manuel Vicente, the chairman of state-owned Sonangol SA. The investment will help the country achieve daily production of 2 million barrels of oil per day.