Stocks Finish Slightly Lower on Profit-taking, Bond Insurer Worries

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Stocks Higher into Close on 50 Basis Point Fed Rate Cut

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Retail longs, Internet longs and Biotech longs. I added to my (GILD) long and took profits in a trading long today, thus leaving the Portfolio 75% net long. The overall tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is heavy. Investor anxiety is slightly above average. Today’s overall market action is very bullish. Technology and financial shares are especially strong. The financials ability to build on recent gains despite news that a bond insurer will be downgraded today is very impressive. I suspect this is mainly due to the fact that it is very likely the most heavily shorted sector in US history. I also suspect the many bears will begin to switch their arguments again to a focus on inflation and away from a recession over the coming months. We will also likely hear more stagflation talk even though data are no where near stagflation levels. There remain a very large number of investors still on the sidelines who believe a complete retest or new market lows are a certainty. I continue to believe this should keep pullbacks in the major averages relatively mild and short-term in nature. The VIX is falling 5.0% today, but remains high at 26.0. Nikkei futures indicate an +300 open in Japan and DAX futures indicate an +125 open in Germany. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, less economic pessimism and bargain-hunting.

Today's Headlines

Bloomberg:
- The Fed lowered its benchmark interest rate by half a percentage point to 3%, the second cut in as many weeks.
- David Dreman Sees ‘Major Opportunity’ in Financials.
- Fed Cuts May Prevent Subprime Shock, Analysts Say.
- Mortgage applications in the US increased last week, led by a surge in refinancing as borrowing costs hovered near two-year lows.
- Qatar Energy Minister Abdullah bin Hamad al-Attiyah says OPEC may consider an output cut.
- Yahoo! Inc.(YHOO) may be a takeover target following a 40% drop in its stock price.
- Ten-year Treasury notes fell a third day as a private report indicated US job growth accelerated this month, demonstrating strength in the job market.

Wall Street Journal:
- Big Investors Intrigued by Retail Stocks.
- US legislators may raise the amount of cash states can borrow to finance housing projects, as a way of helping homeowners who need refinancing.
- US Government Awards $114M To 4 Companies For Cellulosic Ethanol Projects.

NY Times:
- Rule Change to Help Smaller Companies Raise Funds.

Wired:
- One company looks particularly well-positioned to weather a potential economic downturn. Google’s(GOOG) focus on highly targeted, measurable advertising makes it more recession-proof than many other businesses in tech.

Barron’s:
- Investors Use Options to Hedge Before Fed Move.

USA Today:
- Nearly five years after the US-led invasion of Iraq, allied countries have paid 16% of what they pledged to help rebuild the war-torn country.

ZDNet:
- iPhone to Provide Access to Corporate Emails.

Washingtonpost.com:
- Sprint(S) Tries to Connect With Other Firms. Talks on National Network Includes Intel(INTC), Google(GOOG), Clearwire(CLWR).

Bear Radar

Style Underperformer:

Small-cap Growth (-.72%)

Sector Underperformers:

Oil Service (-2.07%), Homebuilders (-1.92%) and Drugs (-1.52%)

Stocks Falling on Unusual Volume:

STE, IFF, AMAG, HWAY, HTCH, NATI, CYMI, ALGN, YHOO, FDRY, MELI, CLWR, HANS, TRMB and STL

4Q GDP Rises Less-Than-Estimates, Mortgage Applications Surge Again, ADP Employment Above Estimates

- Advance 4Q GDP rose .6% versus estimates of a 1.2% gain and a 4.9% increase in 3Q.

- Advance 4Q Personal Consumption rose 2.6% versus estimates of a 2.0% gain and a 2.8% increase in 3Q.

- Advance 4Q GDP Price Index rose 2.6% versus estimates of a 2.6% increase and a 1.0% gain in 3Q.

- Advance 4Q Core PCE rose 2.7% versus estimates of a 2.5% increase and a 2.0% gain in 3Q.

BOTTOM LINE: The US economy grew less-than-expected in the fourth quarter, Bloomberg reported. Home construction fell 24% last quarter, the eighth consecutive drop, which subtracted 1.2 percentage points from growth. The GDP deflator rose 2.5% versus a 1.0% increase the prior quarter. Consumer spending contributed 1.4 percentage points to growth during the fourth quarter. Business spending rose at a 7.5% pace. An unexpected drop in inventories was one of the main reasons growth wasn’t stronger during the quarter. Inventories fell at a $3.4 billion annual rate, the largest drop in almost six years, which subtracted 1.3 percentage points from growth. For all of 2007, international trade contributed .55 percentage points to growth, the greatest since 1991. I expect GDP growth this quarter to accelerate modestly on inventory rebuilding and a smaller increase in the deflator.

MBA mortgage applications jumped another 7.5% this week, led by a 22.2% surge in re-financings. The four-week average of re-financings is at the highest level since April 2004 as mortgage rates continue to plunge. The ADP Employment change for January was +130,000 jobs versus estimates of +40,000 and +37,000 in December. I suspect this Friday’s January employment report will modestly exceed estimates of +65,000. According to Intrade.com, the odds the US enters recession this year have fallen from 77.5% to 59.9% over the last week. I continue to believe the overwhelming majority of investors have already priced a recession into most stocks, despite the fact that most datapoints indicate slow growth, not a recession. Fed fund futures now imply a 74.0% chance for a 50 basis point rate cut and 26.0% chance for a 25 basis point cut today.

Bull Radar

Style Outperformer:

Large-cap Growth (+.15%)

Sector Outperformers:

I-Banks (+1.36%), Airlines (+.77%) and Restaurants (+.43%)

Stocks Rising on Unusual Volume:

FPO, TUP, BCA, CGX, OPY, FTD, JLL, UDR, WBSN, EGLT, BBOX, NETL, KNSY, SLAB, ZINC, CYBS, INFA, FLEX, JBHT, HLIT, UTEK, QMAR, RMBS, JRJC, ERTS, CHRW, IBCP, GILD, DSPG, ACV, ESRX, MHS, BA, SU, CLWR, DCM and DLLR