Fewer Jobs Created Than Expected, Unemployment Rises, Average Hourly Earnings Very Healthy, ISM Non-Manufacturing Better Than Estimates

- The Change in Non-farm Payrolls for December was 18K versus estimates of 70K and an upwardly revised 115K in November.

- The Unemployment Rate in December rose to 5.0% versus estimates of 4.8% and a reading of 4.7% in November.

- Average Hourly Earnings for November rose .4% versus estimates of a .3% increase and a .4% gain in November.

- ISM Non-Manufacturing for December fell to 53.9 versus estimates of 53.5 and a reading of 54.1 in November.

BOTTOM LINE: Hiring in the US slowed more than forecast in December and unemployment rose to the highest level since 2006, Bloomberg reported. Service industries, which includes banks, insurance companies and restaurants, added 93,000 workers last month. Builders reduced payrolls by 49,000 versus a 37,000 decline in November. Unemployment, while rising, is still historically low. The average unemployment rate over the last 50 years is 5.9%. Moreover, non-farm payrolls are quite volatile and a 3-month average is more appropriate to gauge the health of the job market. Non-farm payrolls have seen average gains of 97,330 over the last three months, which isn’t too bad. Average Hourly Earnings are rising at a 3.7% rate year-over-year, which is very good by historic standards. The 12-month moving average of average hourly earnings is currently rising at a 3.9% rate year-over-year. The only period during the entire 90s expansion that saw a greater increase in Americans' hourly earnings was early 98-early 99. This has helped contribute to the all-time high in Americans’ net worth that was reached again last quarter. A calming of the credit markets should lead to better economic data later this quarter. It appears to me that investors are once again pricing in the worst case scenario and are overreacting to today’s data. Fed fund futures now imply a 54.0% chance for a 50 basis point rate cut at the upcoming Fed meeting, up from 34.0% yesterday and 0% one week ago. The odds of a recession beginning this year have barely budged today, according to Intrade.com. The 10-year yield is only 3 basis points lower on today's news. Current gauges of investor angst indicate we are very close to another meaningful bottom in US stocks. I expect non-farm payrolls to rise more next month and the unemployment rate to tick slightly lower.

US service industries expanded in December slightly more than economists expected, Bloomberg reported. The new orders component of the index rose to 53.5 versus 51.1 the prior month. The Employment Component of the index rose to 53.5 from 51.1 the prior month. The Inventories component was unchanged at 50.5. The Prices Paid component fell to 72.5 from 76.5 the prior month. This gauge of the health of the largest part of the US economy is still indicating expansion. I still expect US 4Q GDP growth of around 1% and growth to average around 2% for all of this year. I expect the ISM Non-Manufacturing Index to rise next month.

Bull Radar

Style Outperformer:

Large-cap Value(-1.0%)

Sector Outperformers:

HMOs (-.11%), Telecom (-.45%) and Drugs (-.48%)

Stocks Rising on Unusual Volume:

AHD, PZE, AZZ, JTX, PNM, OSIR, AKNS, SONC, OSIP, CRXL, HGSI, SHLM, PPDI, ITMN, DWSN, CREE, RJET, GENZ and KPN

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Friday Watch

Late-Night Headlines
Bloomberg:
- President Bush will meet with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke tomorrow as he considers whether to announce a new economic stimulus package.

Wall Street Journal:
- Cloned Livestock Poised To Receive FDA Clearance.
- Obama, Huckabee Emerge As Winners of Iowa Caucus.

MarketWatch.com:
- No need to worry. The oldest boomers are in better shape for retirement than thought.

IBD:
- Telecom Carrier Verizon Is Tuning Up Its FiOS TV Service.
- Financials Drag Down Large-Cap And Value Funds In December.

USA Today.com:
- Female CEOs Make More Gains in 2007.
- GPS gadget Spot can save your hide, for a price.
- iPhone’s future intrigues observers.
- Big restaurant chains are rushing into what could be the future of takeout and delivery food; text ordering.

Reuters:
- Bonds of US banks and brokers should turn around in 2008, helped by interest rate cuts and capital infusions, Bank of America strategists said on Thursday.
- Boeing Co.(BA) said on Thursday it delivered 441 commercial aircraft in 2007, its best performance in six years and up 11% from 2006.
- Top-20 selling vehicles in US through December.

Financial Times:
- Chinese state investor buys Australian bank stakes.

China Daily:
- The US encourages high-tech exports to China, US Commerce Secretary Carlos M. Gutierrez has said amid calls in his country for suspension of a program under which high-tech products are sold to China.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (DPZ), target $20.
- Reiterated Buy on (URBN), target $35.
- Reiterated Buy on (MON), raised target to $140.

Night Trading
Asian Indices are -.50% to +1.0% on average.
S&P 500 futures +.24%.
NASDAQ 100 futures +.28%.

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Earnings of Note
Company/EPS Estimate
- (TXI)/.88
- (AZZ)/.54
- (SHLM)/.26

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Change in Non-farm Payrolls for December is estimated at 70K versus 94K in November.
- The Unemployment Rate for December is estimated at 4.8% versus 4.7% in November.
- Average Hourly Earnings for December are estimated to rise .3% versus a .5% gain in November.

10:00 am EST
- ISM Non-Manufacturing for December is estimated to fall to 53.6 from 54.1.

Other Potential Market Movers
- The Fed’s Kohn speaking, weekly EIA natural gas inventory report and Morgan Stanley Pharmaceutical Conference could also impact trading today.

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

Stocks Finish Mostly Lower Ahead of Jobs Report

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In Play

Stocks Mostly Lower into Final Hour on Rising Anxiety Ahead of Tomorrow's Jobs Report

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Semi longs, Biotech longs and Medical longs. I have not traded today, thus leaving the Portfolio 75% net long. The overall tone of the market is negative today as the advance/decline line is lower, sector performance is mostly negative and volume is about average. Investor anxiety is high again. Today’s overall market action is mildly bearish. The total put/call hit a high 1.24 again this morning and the ISE Sentiment Index hit a depressed 82.0. For the sixth day in a row, the NYSE Arms is high, hitting an elevated 1.77. Fed funds futures now imply a 24.1% chance for a 50 basis point rate cut at the upcoming Fed meeting, up from a 7.8% chance last week. Trading has a very sloppy/choppy feel to it today. Retail stocks are under significant pressure, which is weighing on the broad market. It looks to me like there is a lot of beginning of the year profit-taking still going on in last year’s winners. As well, it seems new shorts are being placed on last year’s already heavily shorted losers. I still see few signs that large buyers are stepping up. I suspect we will see large buyers finally emerge next week. I expect US stocks to trade mixed into the close from current levels as more economic pessimism, increased shorting and rising anxiety ahead of tomorrow’s jobs report offsets bargain hunting, lower energy prices and seasonal strength.