Stocks Sharply Lower into Final Hour on Weakness in Homebuilders, Financials, Energy

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet longs, Computer longs, Semi longs, Retail longs and Medical longs. I added IWM/QQQQ hedges, was stopped out of my (UA) long and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The overall tone of the market is very negative today as the advance/decline line is substantially lower, almost every sector is declining and volume is above average. Investor anxiety is high. Today’s overall market action is very bearish. It is a big negative that the most beaten up and heavily shorted sectors with the most bad news already priced in are today’s worst performers. The fact that Alan Greenspan is going to work with the hedge fund that has arguably benefited more than any other from the destruction in housing likely means even more vocal and negative commentary from the former Fed chairman. The market’s biggest problem, in my opinion, is a lack of confidence in the future. Unfortunately, due to the explosion in popularity of low correlation/negative correlation investment funds and all the businesses that cater to them, there has never been a time in US history when this many market participants actually want to see a recession and bear market. This is the main reason for the deafeningly pessimistic rhetoric, in my opinion. The TED spread, a meaningful gauge of credit market angst, is dropping another 5 basis points today to 85 basis points. The TED spread is down 139 basis points in just over one month and is at its lowest level since August of last year. It appears as though a much larger positive catalyst than IBM’s report is needed to shake investors free the current malaise. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, bargain hunting, diminishing credit angst and lower energy prices.

Today's Headlines

Bloomberg:
- Crude oil is falling almost $3/bbl. after Saudi Arabia’s oil minister said OPEC is ready to increases production and on worries over global demand.
- Hedge-fund inflows declined by 33% in the fourth quarter as subprime-mortgage losses caused some investors to delay new deposits, according to data compiled by Hedge Fund Research Inc.
- Apple Inc.(AAPL) introduced a slim portable computer, an online movie-rental service and a revamped TV device as the maker of the iPod and iPhone seeks to extend a sales surge driven by new products.
- New Jersey’s pension fund will put $700 million into Citigroup Inc.(C) and Merrill Lynch(MER), the only US state retirement system to join investors in the Middle East and Asia in providing $21 billion to two to the biggest financial firms burned by mortgage-related losses.
- Soros Fund Management, the hedge-fund firm founded by billionaire George Soros, named BlackRock Inc. co-founder Keith Anderson as CIO, a post vacant since Soros’s son Robert stepped aside in July.
- A slump in the Baltic Dry Index, a measure of how much it costs to ship commodities, may herald a rally in the US dollar, according to Charles Diebel, head of European rates strategy at Nomura Intl. Plc in London.
- Saudi Oil Minister Ali al-Naimi said OPEC will raise supply if justified by increased demand when making its next output decision on Feb. 1.

Wall Street Journal:
- The US government should make strengthening the US dollar a priority, to boost liquidity, cut oil prices and fuel economic growth, said David Malpass, Bear Stearns Cos.’ chief economist. Leaving dollar policy to the marketplace is unwise because currency values often go to extremes and aren’t based on economic fundamentals, he said. The US president, the chairman of the Federal Reserve or the Treasury Secretary could do much to make a strong dollar happen by saying that the government wants one, Malpass said.

NY Times:
- Zynga Game Network Builds Online Games With MySpace.

AP:
- President Bush urged OPEC nations Tuesday to put more oil on world markets and warned that soaring prices could cause an economic slowdown in the US to intensify.

Reuters:
- Hedge fund manager John Paulson, who earned billions of dollars last year by betting against the housing market, said on Tuesday that former Federal Reserve board chairman Alan Greenspan will advise him.

Reforma:
- Mexico’s mining production will jump 20% to $11 billion in 2008 on record metal prices.

Iran Daily:
- Iran’s Darkhovin oilfield’s output has doubled, reaching 100,000 barrels a day.

Bear Radar

Style Underperformer:

Large-cap Value (-1.91%)

Sector Underperformers:

Homebuilders (-4.24%), Oil Service (-4.09%) and I-Banks (-3.56%)

Stocks Falling on Unusual Volume:

EDU, MRX, FIC, WSM, HAR, MTN, PXD, SCOR, HIBB, GIVEN, CERN, FCTR, BPFH, COGO, GEOY, ZRAN, NILE, CONN, TTES, PTR, C, CHL and SNP

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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