PPI Decelerates, Retail Sales Fall, NY Manufacturing Still Expanding, Business Inventories Hit New Record Low

- The Producer Price Index for December fell .1% versus estimates of a .2% rise and a 3.2% gain in November.

- The PPI Ex Food & Energy for December rose .2% versus estimates of a .2% gain and a .4% rise in November.

- Advance Retail Sales for December fell .4% versus estimates of unch. and a downwardly revised 1.0% increase in November.

- Retail Sales Less Autos for December fell .4% versus estimates of a .1% decline and a downwardly revised 1.7% gain in November.

- Empire Manufacturing for January fell to 9.0 versus estimates of 10.0 and 9.8 in December.

- Business Inventories for November rose .4% versus estimates of a .4% increase and a .1% gain in October.

BOTTOM LINE: Prices paid to US producers unexpectedly fell in December, pushed down by a decline in energy prices, Bloomberg reported. Core producer prices rose 2.0% for all of 2007, the same as the prior year. Energy costs fell 1.9% versus a 14% rise the prior month. Prices of gasoline fell 4.8% and diesel fuel costs dropped 3%. Costs of intermediate goods, such as steel used in earlier production stages, fell .2% versus a 3.7% increase the prior month. The 10-year TIPS spread, which is a good gauge of inflation expectations, is falling another basis point today to 2.24%, right near a multi-year low. I continue to believe inflation fears have peaked for this cycle and that inflation will continue to decelerate over the intermediate-term. The secular trend of disinflation remains firmly in tact, in my opinion.

Sales at US retailers unexpectedly fell in December, Bloomberg reported. For all of 2007, retail sales rose 4.2%. The drop in sales for the month was led by a 2.9% decline at building-material stores. Purchases at service stations fell 1.7%, reflecting lower gasoline prices. Excluding autos, gasoline and building materials, the figure the government uses to compute GDP, sales rose .1% for December. An early Thanksgiving boosted holiday shopping in November at the expense of December sales, economists said. As well, gift cards bought over the last two months won’t be reflected in the sales figures until they are redeemed this month or next. I expect retail sales to bounce back in January.

Inventories at US businesses increased as forecast in November, Bloomberg said. Sales rose 1.6%, the most since March of last year. The amount of inventory on hand fell to 1.24 months’ supply, the lowest in US history.

Manufacturing in NY state slowed slightly in January, Bloomberg reported. The Unfilled Orders component of the index rose to 1.2 from -10.0 the prior month. The Employment component fell to 2.4 from 5 the prior month. The Shipments component fell to 15.8 from 20.4 the prior month. The Inventories component rose to -4.9 from -10.0 the prior month. The Prices Paid component rose to 40.2 from 35 the prior month. I still expect manufacturing to help boost overall US economic growth over the intermediate-term as companies gain confidence in the sustainability of the current expansion and rebuild depleted inventories as a result of record exports.

Bull Radar

Style Outperformer:

Large-cap Growth (-1.9%)

Sector Outperformers:

Coal (+2.30%), Airlines (+2.18%) and Defense (+.04%)

Stocks Rising on Unusual Volume:

FAF, FRX, COIN, VIGN, POZN, UAUA, BLUD, PCLN, CWCO, VRUS, MEE, JRCC, EMC, GLBC and WAL

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Victor Shum, senior principal at Purvin & Gertz, says $100 Oil ‘Unsunstainable’ (video)
- Sales of gold scrap in India, the world’s biggest buyer of the precious metal, have increased as record prices prompt housewives and other consumers to recycle more old jewelry, curbing demand for new supplies of bullion. Purchases by India in the three months ended December, the traditional peak consumption season, slumped 77% from a year earlier to 40 tons, the Bombay Bullion Assoc. Ltd. said last week.
- Federal Reserve Chairman Ben Bernanke told US House Speaker Nancy Pelosi during a private meeting today that he agrees some economic stimulus is needed.
- Taiwan’s stocks surged, pushing the island’s benchmark to its biggest two-day rally in 3 ½ years, on speculation the opposition Kuomintang party’s landslide victory in parliamentary elections will ease curbs on Chinese investment.
- AT&T(T), Verizon Wirless(VZ) and Google Inc.(GOOG) won clearance to bid for airwaves next week in a US government auction that aims to spur innovation in the mobile-phone market and raise as much as $15 billion.
- Japan’s bonds may rise as investors start betting that the central bank will cut rather than raise interest rates, Fukoku Mutual Life Insurance said.
- Samsung Profit Beats Estimates on Display Earnings.
- LG.Philips Gains After Company Has Record Net Income.

Wall Street Journal:
- The Heritage Foundation ranked the United States as the world’s fourth most free economy.

MarketWatch.com:
- How bad is inflation, really? The bond market is not betting that inflation will get worse.

CNNMoney.com:
- Detroit’s ‘new’ idea: Cars Americans want.
- Countrywide bankruptcy ‘a malicious rumor’

Forbes.com:
- Banks’ Kitchen-Sink Quarter.

IBD:
- Google(GOOG), Microsoft(MSFT) Look To Connect In 411 Phone Busines.

USA Today.com:
- Toyota pursues alternative fuel-saving technology.

Reuters:
- Hedge fund Lone Pine reports American Eagle(AEO) stake.
- Citigroup(C) is likely to announce on Tuesday a significant dividend cut, at least $10 billion of new capital and a writedown of as much as $20 billion.

Financial Times:
- Britain will be told by the European Commission to increase its use of renewable energy from about 2% to as much as 14% by 2020, citing EC and UK officials.

Late Buy/Sell Recommendations
Citigroup:
- Maintained Buy on (FIC), target lowered to $37.
- Reiterated Buy on (AAPL), target $215.
- Reiterated Buy on (IBM), raised estimates, target $142.

Night Trading
Asian Indices are -1.0% to -.25% on average.
S&P 500 futures -.35%.
NASDAQ 100 futures -.15%.

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Earnings of Note
Company/EPS Estimate
- (USB)/.59
- (STT)/1.35
- (FRX)/.75
- (C)/-.97
- (MI)/.18
- (INTC)/.40
- (LLTC)/.41
- (FUL)/.52
- (CPKI)/.22
- (CBSH)/.77

Upcoming Splits
- (STAN) 2-for-1

Economic Releases
8:30 am EST
- The Producer Price Index for December is estimated to rise .2% versus a 3.2% gain in November.
- The PPI Ex Food & Energy for December is estimated to rise .2% versus a .4% gain in November.
- Advance Retail Sales for December are estimated unch. versus a 1.2% increase in November.
- Retail Sales Less Autos for December are estimated to fall .1% versus a 1.8% decline in November.
- Empire Manufacturing for January is estimated to fall to 10.0 versus 10.3 in December.

10:00 am EST
- Business Inventories for November are estimated to rise .4% versus a .1% gain in October.

Other Potential Market Movers
- The weekly retail sales reports, (SVR) Analyst Meeting, (RBA) Analyst Meeting, Cowen Consumer Conference and National Retail Federation Conference could also impact trading today.

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

Stocks Finish Near Session Highs on Above-Average Volume, Boosted by Economically Sensitive Shares

Indices
S&P 500 1,416.25 +1.09%
DJIA 12,778.15 +1.36%
NASDAQ 2,478.30 +1.57%
Russell 2000 712.48 +1.11%
Wilshire 5000 14,140.64 +1.03%
Russell 1000 Growth 585.98 +1.20%
Russell 1000 Value 768.30 +.91%
Morgan Stanley Consumer 711.63 -.27%
Morgan Stanley Cyclical 935.09 +2.24%
Morgan Stanley Technology 573.87 +2.59%
Transports 4,282.51 +2.27%
Utilities 545.70 +.41%
MSCI Emerging Markets 148.69 +.71%

Sentiment/Internals
Total Put/Call .85 -6.59%
NYSE Arms .83 -44.48%
Volatility(VIX) 22.90 -3.29%
ISE Sentiment 110.0 +23.60%

Futures Spot Prices
Crude Oil $94.15 +1.58%
Reformulated Gasoline 237.25 +2.25%
Natural Gas 8.34 +1.64%
Heating Oil 258.95 +2.11%
Gold 906.90 +1.02%
Base Metals 228.63 +2.53%
Copper 335.30 +1.48%

Economy
10-year US Treasury Yield 3.78% -1 basis point
US Dollar 75.61 -.48%
CRB Index 370.22 +1.39%

Leading Sectors
Computer Services +3.92%
Steel +3.12%
Computer Hardware +2.94%

Lagging Sectors
Gaming -.54%
Drugs -.71%
Foods -.75%

Evening Review
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Afternoon Recommendations
Deutsche Bank:
- Rated (MGM) Buy.

Afternoon/Evening Headlines
Bloomberg:
- Goldman Sachs Group(GS) said it bet on declines in the subprime mortgage market for most of 2007, as many of its competitors suffered record losses from the market’s collapse.
- Yamana Gold Inc., the miner that bought Meridian Gold Inc. last year, said it will increase output by as much as 39% this year as it develops new mines in South America to gain from rising precious-metal prices.
- CIBC plans to sell more than $2.7 billion in stock to investors including Hong Kong billionaire Li Ka-Shing and Manulife Financial to rebuild its balance sheet after taking writedowns tied to the US mortgage market.
- Genetech Inc.(DNA) said profit climbed 6.4%. Sales of its top product, the cancer drug Avastin, fell short of analysts’ expectations and shares declined $1.22 in extended trading.

Wall Street Journal:
- Will Hedge Funds Get Active…on Themselves?

BOTTOM LINE: The Portfolio finished higher today on gains in my Retail longs, Medical longs, Semi longs, Computer longs and Internet 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, most sectors rose and volume was above average. Measures of investor anxiety were about average into the close. Today's overall market action was bullish as the major averages and breadth closed near session highs. The (XLF) and (RTH) both finished near session highs, as well, which was a big positive considering tomorrow’s likely bad news from (C) and weak Advance Retail Sales report. The total put/call finished slightly below average at .85, however this was mainly the result of the very low OEX put/call(smart money) reading of .75. Moreover, the 10-day OEX put/call is a low .96 versus an average reading of 1.49. According to Bloomberg data, this is the lowest the 10-day OEX put/call has been since August 2004, right before the S&P 500 tacked on a total return of almost 20% in a little over a year. Nikkei futures are indicating a +100 open in Japan.

Stocks Surging into Final Hour on IBM Earnings Report, Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on Gains in my Medical longs, Computer longs, Semi longs, Retail longs and Internet longs. I covered all of my IWM/QQQQ hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The overall tone of the market is positive today as the advance/decline line is higher, sector performance is mostly positive and volume is above average. Investor anxiety is about average. Today’s overall market action is bullish. Economically sensitive and "growth" shares are especially strong today. The TED spread, a meaningful gauge of credit market angst, is plunging another 26 basis points today to 90 basis points. The TED spread is down 134 basis points in just over one month and is at its lowest level since August of last year. As well, the 30-day asset backed commercial paper yield is plunging another 26 basis points to 4.10%. This is down 223 basis points since September of last year and is now at the lowest level since November 2005. I continue to believe bear complacency remains extraordinarily high given how much bad news is already factored into stock prices at current levels and the real potential for significant positive near-term catalysts. I am finally seeing signs that size buyers are stepping in at current levels. Last week, I said a significant confidence-boosting near-term catalyst needed to materialize soon to prevent the major averages from taking out recent lows. It looks like the (IBM) report was that catalyst. As well, (SAP) is rising 4.1% on its report. These reports should quell global economic slowdown concerns and investor reaction to them should greatly worry the many bears, specifically the tech bears. Today’s action makes me more confident that a durable bottom is now in place, especially given the “off-the-charts pessimism” in the investment community, media and the general public. I want to see a follow-through rally on good breadth and volume materialize over the coming days and more stocks ignore bad news before getting more aggressive on the long side. Better economic data, more buyouts/capital infusions, constructive Fed commentary or earnings reports could provide further upside catalysts in the near-term. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, bargain hunting, diminishing credit angst and less economic pessimism.