Weather, Gas Prices Pressure Retail Sales, Inventories Rise

- Advance Retail Sales for February rose .1% versus estimates of a .3% gain and unch. in January.
- Retail Sales Less Autos for February fell -.1% versus estimates of a .3% gain and a .2% rise in January.
- Business Inventories for January rose .2% versus estimates of a .2% gain and unch. in December.

BOTTOM LINE: Retail sales in the US rose less than forecast last month as winter storms and a surge in gas prices limited spending, Bloomberg said. The fact that it was the coldest February in 28 years with numerous winter storms played a large part in the weakness. The prior months’ milder-than-normal weather likely also played a part in February’s shortfall. As well, the recent surge in gasoline prices despite the fall in oil is temporary and unsustainable, in my opinion. Moreover, the Johnson Redbook weekly retail sales report today showed the largest weekly jump in sales in 11 months. Weekly sales rose an above-average 3.4% this week versus a 2.8% gain the prior week. I believe retail sales will surprise on the upside this spring as Americans’ net worth continues to hit records, wages continue to substantially outpace inflation, pent-up demand spurs spring clothing sales, energy prices fall, confidence rises, home sales stabilize at relatively high levels, interest rates remain low, unemployment remains historically low and stocks rise further.

Inventories at US businesses rose in January as sales declined, Bloomberg reported. At the current sales pace, the amount of goods on hand will last 1.3 months. Other recent data suggest inventory de-stocking may be slowing. The ISM said last week that its services inventory index for February rose to 50.5 from 47 in January. As well, the ISM manufacturing inventory index surged to 44.6 from 39.9 in January. I continue to believe substantial inventory liquidation this quarter will lead to below average GDP growth. However, inventory rebuilding should begin adding to growth during the second quarter.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- The UN Security Council may vote by the end of the week to ban loans by governments to Iran and bar the Islamic Republic from selling heavy weapons, the US envoy to the world body said.
- Santos Ltd., Australia’s third-biggest oil producer, said it’s preparing to resume production at the $346 million Mutineer-Exeter oil field off the northwestern coast after two tropical cyclones.
- Brazil’s sugar and ethanol industry has drawn $14 billion of investments for 80 new mills as demand grows for crop-based fuels, producer Maurilio Biagi Filho said.
- OPEC will probably refrain from lowering output at a meeting this week as mounting global tensions with Iran bolster prices.
- Asian real estate offers better value than property stocks because the region’s equity markets are still “vulnerable,” said Marc Faber, who oversees $300 million in assets at Hong Kong-based Marc Faber Ltd.
- Host Hotels & Resorts(HST), the owner of 124 hotels including Marriotts, Hyatts and Westins, will replace Phelps Dodge(PD) in the S&P 500 Index.

CNet News.com:
- Microsoft Corp.(MSFT) is close to buying Tellme Networks Inc., a maker of voice-recognition software for telecom companies.

AP:
- Hyundai Motor plans to invest $270 million to build an engine plant in Montgomery, Alabama. The plant will create 520 jobs.
- Texas Governor Rick Perry set a special election for May 12 for state residents to decide whether to approve a constitutional amendment, supported by the governor, to lower taxes. The measure would extend property-tax reductions for elderly and disabled Texans

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (ODP), target $54.
- Reiterated Buy on (DVA), target $68.
- Reiterated Buy on (TXN), target $36.

Night Trading
Asian Indices are -.25% to +.50% on average.
S&P 500 indicated +.01%.
NASDAQ 100 indicated -.03%.

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Earnings of Note
Company/EPS Estimate
- (DKS)/1.14
- (GS)/4.98
- (GYMB)/.72
- (HANS)/.34
- (JCG)/.29
- (KR)/.45

Upcoming Splits
- (WCN) 3-for-2

Economic Releases
8:30 am EST
- Advance Retail Sales for February are estimated to rise .3% versus unch. in January.
- Retail Sales Less Autos for February are estimated to rise .3% versus a .35 gain in January.

10:00 am EST
- Business Inventories for January are estimated to rise .2% versus unch. in December.

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

Stocks Finish Higher on Buyouts, Lower Energy Prices

Indices
S&P 500 1,406.60 +.27%
DJIA 12,318.62 +.34%
NASDAQ 2,402.29 +.62%
Russell 2000 789.00 +.49%
Wilshire 5000 14,196.82 +.30%
Russell 1000 Growth 555.55 +.40%
Russell 1000 Value 810.73 +.17%
Morgan Stanley Consumer 695.08 +.24%
Morgan Stanley Cyclical 943.70 +.28%
Morgan Stanley Technology 559.79 +.53%
Transports 4,855.23 +.51%
Utilities 481.02 +1.01%
MSCI Emerging Markets 112.81 +.94%

Sentiment/Internals
Total Put/Call 1.04 -9.57%
NYSE Arms 1.28 +10.60%
Volatility(VIX) 13.99 -.71%
ISE Sentiment 105.0 +54.41%

Futures Spot Prices
Crude Oil 58.90 –1.92%
Reformulated Gasoline 191.28 +.56%
Natural Gas 6.92 -2.30%
Heating Oil 168.45 -1.62%
Gold 651.40 -.11%
Base Metals 239.0 +.98%
Copper 284.80 +2.45%

Economy
10-year US Treasury Yield 4.55% - 4 basis points
US Dollar 83.84 -.47%
CRB Index 306.35 -.56%

Leading Sectors
HMOs +2.61%
Retail +1.42%
Airlines +1.28%

Lagging Sectors
Steel -.31%
Energy -.39%
Homebuilders -2.19%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Venezuelan President Hugo Chavez vowed to press Brazilian counterpart Luiz Inacio Lula da Silva to review an ethanol-development accord the Brazilian leader signed with US President Bush last week. Chavez warned that relying on ethanol instead of oil for energy poses technical and “ethical” challenges.
- Nymex Holdings(NMX), owner of the world’s largest energy market, plans to offer to sell 7 million shares in a secondary offering.
- Crude oil fell $1.14/bbl. to $58.91/bbl. on news that Russia would delay the construction of Iran’s first nuclear reactor indefinitely, milder weather, signs that OPEC won’t cut output further and speculation that demand from China is waning.
- Boeing(BA) won orders for passenger and cargo jets valued at about $4.6 billion.
- Texas Instruments(TXN) said first-quarter sales and earnings won’t reach its highest earlier forecasts. The stock fell .54 to $32.05 after hours.
- Jo-Ann Stores(JAS) said fourth quarter earnings exceeded forecasts and raised 2008 guidance. The stock soared 8% after hour.

NY Post:
- MySpace.com, News Corp.’s(NWS) social-networking Web site, plans to start a news service that will let users comment on and rate stories they post on their personal pages.

Interfax:
- Russia said it will delay construction of Iran’s first nuclear reactor indefinitely after the Middle Eastern country missed payments on the $1 billion contract.

BOTTOM LINE: The Portfolio finished higher today on gains in my Retail longs, Computer longs, Telecom longs and Semi longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, almost every sector gained and volume was about average. Measures of investor anxiety were above average into the close. Today's overall market action was modestly bullish. Steel stocks came under pressure in the last hour right after the release of the U.S. raw steel production data, however, I'm not sure how much this had to do with the group’s high-volume reversal lower. Considering that the Philadelphia Stock Exchange SIG Steel Producers Index (STQ) is 23.5% higher year-to-date, mostly on buyout speculation, a correction in the group has likely begun. I expect the major averages to build on today's gains tomorrow, led by the brokers.

Stocks Higher Into Final Hour on Lower Energy Prices, Buyout Activity and Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Telecom longs and Computer longs. I covered my remaining (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are gaining and volume is about average. Merrill Lynch put out its Hedge Fund Monitor Report today. Here is a summary:

1. Large specs sold S&P 500 futures to a net short position and raised shorts in Nasdaq and Russell 2000.
2. There is now potential notional buying power of about $38.5 billion.
3. The exposure of market neutral funds to the market moved to neutral from above average.
4. Macro funds decreased their exposure to the S&P 500, Nasdaq, U.S. Dollar and the 10-year Treasury note.
5. Overall hedge fund activity is similar to that witnessed during last year's mid-year pullback and is viewed as a source of liquidity for the equity markets.

Considering all the shorting and hedging that is going on, I suspect that unless there is concrete evidence of a meaningful consumer spending slowdown sometime soon, we will see a violent upside move in the major averages into the spring. I expect US stocks to trade mixed-to-higher into the close from current levels on falling energy prices, lower long-term rates, buyout speculation, short-covering and bargain hunting.

Today's Headlines

Bloomberg:
- Crude oil is falling below $59/bbl. in NY on signs that OPEC won’t reduce output at a meeting in Vienna this week.
- Natural gas is falling below $7 per million BTUs in NY for the first time since January as mild weather cut heating fuel consumption.
- Standard & Poor’s, compiler of the S&P 500 index of US stocks, started an index to track publicly traded private equity and venture capital funds.
- UnitedHealth Group(UNH) agreed to buy Sierra Health Services(SIE) for $2.6 billion, adding customers in the rapidly expanding American Southwest. SIE shares surged 16.0%.
- New Century Financial(NEW) said today it doesn’t have the cash to pay creditors who are demanding their money now, increasing speculation that the company will go bankrupt.
- Ford Motor(F) will sell its profitable Aston Martin luxury sports-car unit for $848 million to investors led by UK auto-racing champion David Richards.
- Dollar General(DG) agreed to be taken private by Kohlberg Kravis Roberts for about $6.9 billion in the biggest leveraged buyout of a retail company.
- Mortgage defaults over the next two years will not rise enough to be a drag on the US economy, according to debt strategists at Lehman Brothers(LEH).

Wall Street Journal:
- Las Vegas Sands(LVS), Wynn Resorts(WYNN) and other US gambling companies that operate in Asia have taken a beating recently.

USA Today:
- Congress is considering ways to lessen sentencing guidelines for crimes involving crack cocaine.

Financial Times:
- The US Chamber of Commerce wants changes in the country’s legal and regulatory framework in order to aid US capital markets and highlight their competitiveness.

Sueddeutsche Zeitung:
- Islamic extremists said they’d carry out terrorist attacks in Germany and kill two hostages held in Iraq unless German armed forces pulled out of Afghanistan.

Frankfurter Allgemeine Zeitung:
- Boeing Co.(BA) wants to increase its production rate at existing factories so it can sell more planes, CEO James McNerney said.

Iran newspaper:
- Russia shouldn’t “politicize” the construction of a nuclear plant it is building for Iran, citing the head of the country’s Atomic Energy Organization.