Wednesday Watch

Late-Night Headlines
Bloomberg:
- A Bloomberg poll found that US residents approved of the way Ben Bernanke is handling his job as Fed Chairman by a margin of almost 5 to 1.
- Most managed futures funds lost money in February on speculation a slowing Chinese economy will reduce demand for commodities and cut global corporate profits, the Barclay Group said. Money invested with commodity futures trading advisers rose 30% to $170 billion at the end of 2006 compared with a year earlier, according to data on the Barclay Web site.
- China’s spending on factories, real estate and other fixed assets probably grew at a slower pace in the first two months of 2007 after the government curbed lending and project approvals.
- Chevron Corp.(CVX) expects to spend $7.5 billion more than planned on projects slated to begin in the next four years.
- Australian consumer confidence rose to a 19-month high in March as slowing inflation reduced expectations the central bank will raise interest rates.
- Shares of Benq Corp., Taiwan’s biggest maker of branded consumer electronics, fell by the daily limit after prosecutors searched its offices and detained two executives for questioning for alleged insider trading.
- Asian currencies fell, led by the Philippine peso, on concern investors will shun emerging market assets as the region’s stocks dropped.

Financial Times:
- Japanese companies could be shut out of European Union capital markets because of difficulties in harmonizing Japan’s accounting standards with EU rules in time to meet a deadline set by Brussels.

Chosun Ilbo:
- North Korea is showing signs it is preparing to shut down its Yongbyon nuclear reactor.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (TSCO), target $57.
- Reiterated Buy on (DKS), target $62.
- Reiterated Buy on (SMOD), target $15.50.
- We believe that concerns regarding the effects of subprime mortgages on broadline retail are overdone. Subprime borrowers only represent 4% of households and 2% of consumer spending, according to Citigroup economist Steven Wieting. The rise is subprime mortgage delinquencies is not expected to impact overall consumption trends.

Night Trading
Asian Indices are -2.75% to -1.75% on average.
S&P 500 indicated -.16%.
NASDAQ 100 indicated -.23%.

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Earnings of Note
Company/EPS Estimate
- (GM)/1.22
- (HIBB)/.38
- (HOTT)/.22
- (LEH)/1.95
- (PBY)/-.12
- (SSI)/.87
- (ZUMZ)/.36

Upcoming Splits
- (CBE) 2-for-1
- (JEC) 2-for-1

Economic Releases
8:30 am EST
- The 4Q Current Account Balance is estimated to shrink to -$203.5 billion versus -$225.6 billion in 3Q.
- The Import Price Index for February is estimated to rise .8% versus a -1.2% decline in January.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil build of 2,000,000 barrels versus a -4,848,000 barrel drawdown the prior week. Gasoline supplies are expected to decline by -2,375,000 barrels versus a -3,750,000 barrel fall the prior week. Distillate inventories are estimated to fall by -2,275,000 barrels versus a -1,331,000 barrel decline the prior week. Refinery Utilization is expected to rise by .5% versus a -.15% decline the prior week.

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

Stocks Finish Sharply Lower on Continuing Subprime Concerns

Indices
S&P 500 1,377.95 -2.04%
DJIA 12,075.96 -1.97%
NASDAQ 2,350.57 -2.15%
Russell 2000 769.12 -2.52%
Wilshire 5000 13,907.89 -2.04%
Russell 1000 Growth 544.79 -1.94%
Russell 1000 Value 793.64 -2.11%
Morgan Stanley Consumer 682.93 -1.75%
Morgan Stanley Cyclical 925.56 -1.92%
Morgan Stanley Technology 547.46 -2.20%
Transports 4,726.56 -2.65%
Utilities 473.87 -1.49%
MSCI Emerging Markets 110.76 -1.71%

Sentiment/Internals
Total Put/Call 1.40 +34.62%
NYSE Arms 2.80 +118.18%
Volatility(VIX) 18.13 +29.6%
ISE Sentiment 95.0 -9.52%

Futures Spot Prices
Crude Oil 58.07 -1.43%
Reformulated Gasoline 193.65 +1.36%
Natural Gas 6.92 +.20%
Heating Oil 169.90 +.99%
Gold 644.40 -.91%
Base Metals 242.55 +1.49%
Copper 279.70 -1.83%

Economy
10-year US Treasury Yield 4.49% - 6 basis points
US Dollar 83.72 -.19%
CRB Index 304.52 -.60%

Leading Sectors
Telecom -.50%
Hospitals -.64%
Wireless -.77%

Lagging Sectors
Homebuilders -3.42%
Gold & Silver -3.91%
I-Banks -4.42%

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Afternoon Recommendations
Citigroup:
- Reiterated Buy on (MCO).

Afternoon/Evening Headlines
Bloomberg:
- US stocks fell today, erasing three days of gains on continuing subprime mortgage worries.
- Treasury Secretary Henry Paulson, seeking a consensus among financial luminaries, pledged swift action to ensure the US remains the world’s dominant capital market.
- House Financial Services Committee Chairman Barney Frank asked whether pension-fund investment in hedge funds poses risks to the financial system and individual investors, and if so, what Congress should do about it.
- OPEC may increase production if demand for crude increases, the group’s president said.
- Crude oil fell over $2/bbl. from session highs below $58/bbl. on comments from OPEC and worries over slowing global demand.
- Gold fell in NY for the third session in a row on worries over slowing global demand for the inflation hedge.
- Countrywide Financial Corp.(CFC) CEO Angelo Mozilo said concern that subprime mortgage defaults will continue to surge are keeping qualified borrowers from buying homes, and amount to an “overreaction.” “There’s been a rush to judgment, an overreaction, a baby being thrown out with the bathwater,” he said.

Business Week:
- American Online founder Stephen M. Case’s latest venture is a new payment system for credit cards that seeks to use the Internet to reduce transaction costs for retailers.

BOTTOM LINE: The Portfolio finished lower today on losses in my Retail longs, Internet longs, Biotech longs and Telecom longs. I added back (IWM)/(QQQQ) hedges in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was very negative today as the advance/decline line finished substantially lower, every sector fell and volume was above average. Measures of investor anxiety were elevated into the close. Today's overall market action was very bearish. I think the fact that oil is breaking down again gives the Fed a bit more leeway to cut rates if necessary. However, I still do not expect a cut and expect economic data to begin improving very soon. Nikkei futures are indicating a 400-point drop on the open in Japan. The fact that the major averages were unable to bounce into the close likely indicates more weakness tomorrow morning. I still believe, based on the action today, that sellers are beginning to use up their firepower. Today’s losses were likely exaggerated by this week’s option expiration.

Stocks Sharply Lower into Final Hour on Weakness in Financials

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet longs, Telecom longs, Biotech longs and Retail longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is very negative as the advance/decline line is substantially lower, every sector is declining and volume is only modestly above average. Today's sell-off, while painful for the bulls, is on much lower volume than that of the one 10 days ago. As well, the latest push lower over the last hour, which seemed to be spurred by the announcement that Massachusetts is going to subpoena UBS (UBS) and Bear Stearns (BSC) over subprime research, is on lower volume than that of the decline earlier in the day. Oil is now coming under significant pressure, falling over $2 per barrel from session highs and breaking convincingly lower through its recent uptrend. A number of market-leading stocks also made higher lows during this last push lower. The NYSE Arms is soaring to very elevated levels of 3.73, despite only a modest up-tick in volume. This may indicate the sellers are running out of firepower. The VIX is rocketing 30%. I expect US stocks to trade modestly higher into the close from current levels on falling energy prices, bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- A three-day rally in US stocks faltered after the second home lender this week said it may default on payments to creditors.
- Manpower Inc. said a net 18% of employers plan to add jobs next quarter versus 19% last quarter.
- Crude oil is falling more than $2/bbl. from session highs to $57.99/bbl. and breaking convincingly lower through its recent uptrend after OPEC said they may increase production in future months.
- US lawmakers will have to consider providing aid to about 2.2 million subprime mortgage borrowers who are at risk of defaulting and losing their homes, Senate Banking Committee Chairman Christopher Dodd said.
- Goldman Sachs(GS) said first-quarter profit rose 29% to a record, exceeding analysts’ highest estimates, on trading gains and investment-banking fees.
- Lehman Brothers(LEH) bought 20% of DE Shaw, the fourth-largest hedge fund company, to gain a larger foothold in the fastest-growing part of the asset-management industry.
- Billionaire investor Carl Icahn bid $955.9 million for WCI Communities(WCI) after saying he wanted to oust the board of the Florida condominium and single-family homebuilder because the stock was undervalued.
- Subprime delinquencies rose to 13.3% from 12.56% in the third quarter.

Wall Street Journal:
- OPEC may soon start boosting output of oil to keep world supplies from getting too tight and head off a potential surge in prices that could hurt the global economy.
- President Bush’s administration wants to switch as much as $3.2 billion in defense expenditures to the purchase of military vehicles and equipment, money that would be diverted from weapons systems programs.
- An unusual array of academics, mutual-fund trustees, institutional investors, union leaders and politicians have joined forces to limit executive pay and protect Connecticut’s $24 billion public-employee pension fund.
- Dole Food, the world’s largest producer of fresh vegetables, and Western Growers, whose members grow, pack and ship half the US fresh produce, have started using radio frequency tags and global positioning systems to contain possible contamination.

NY Times:
- Ronald Neumann, the outgoing US ambassador to Afghanistan, is “reasonably optimistic” about the country’s future and said the Taliban isn’t as large a threat as previously thought.
- Senator Edward Kennedy said he plans to promote an immigration bill a Republican-controlled committee introduced last year rather than write his own legislation.
- Protesters from Code Pink, a women’s antiwar group, are camping in front of Democratic House Speaker Nancy Pelosi’s San Francisco mansion to demand American troops’ return from Iraq.

Ma’ariv:
- Orckit Communications(ORCT) is close to signing a contract worth tens of millions of dollars with an unidentified company.

Energy Intelligence Group:
- Kuwait plans to make agreements with BP Plc(BP) and Chevron Corp.(CVX) next month that will give the companies additional scope in developing Kuwaiti oil fields.

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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