ISM Non-Manufacturing Declines, Prices Paid Falls

- ISM Non-Manufacturing for January fell to 44.6 versus estimates of 52.5 and a reading of 53.2 in December.

BOTTOM LINE: US service industries unexpectedly shrank in January, Bloomberg reported. The New Orders component fell to 43.5 versus 53.9 the prior month. New Export Orders rose to 52.0 from 50.0 in November. The Employment component fell to 43.9 from 51.8 the prior month. The Prices Paid component fell to 70.7 from 71.5 in December. Weekly retails sales rose a sluggish .5% this week. According to Intrade.com, the odds of a recession beginning this year are still down from 77.5% a couple of weeks ago to 68% today, notwithstanding this report. As well, the US dollar index is rising substantially. Fed fund futures now imply a 100% chance for another 50 basis point rate cut at the March 18 meeting, which is up from a 68.0% chance yesterday. I suspect this number will see a substantial snapback next month. I still expect overall US growth to accelerate meaningfully as the year progresses.

Bull Radar

Style Outperformer:

Small-cap Value (-.23%)

Sector Outperformers:

Airlines (+.93%), Gaming (+.78%) and Hospitals (+.14%)

Stocks Rising on Unusual Volume:

HEW, WHR, OMI, YTEC, ILMN, OSIS, PSYS, WYNN, BPHX, TZIX, GOOG, RCII, TNDM, MANT, PRGO, FOSL, ACOR, CVCO, AVTR, SNDK, ISRG, CBRL, LVS, HOT and MAR

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Moody’s Investors Service(MCO) is considering a new ratings system based on numbers for structured-finance securities that would abandon the letter grades created by founder John Moody about a century ago.
- Seagate Technology(STX), the world’s largest maker of hard-disk drives, raised its quarterly dividend by 20% and announced plans to buy back as much as $2.5 billion of stock over the next two years.
- Investors should sell the Australian dollar, according to BNP Paribas SA, France’s biggest bank. The currency, known as the Aussie, will fall to 77 US cents by year-end and 65 cents by the end of 2009, according to Hans-Guenter Redeker, global head of currency strategy at BNP.
- Billionaire real estate developer Sam Zell bought a 7.7% stake in Starwood Hotels & Resorts(HOT) to become the company’s second-biggest shareholder, causing the shares to rise 4.8%.
- Iran’s new space center built to send a research satellite into orbit is a “troubling development” because it employs the same technology used for producing long-range ballistic missiles, the US state Dept. said.
- Australia Raises Interest Rate to 7% to Curb Prices.

Wall Street Journal:
- If credible bidders don’t emerge to challenge Microsoft’s(MSFT) $44.6 billion offer for Yahoo!(YHOO), the Web titan will likely have to resort to a tried-and-true method for securing a higher price: playing hard to get.
- Issues Recede in ’08 Contest As Voters Focus on Character.
- Obama Closes In on Clinton As McCain Lengthens Lead.
- Actively Traded ETFs: A Step Closer to Reality.

BusinessWeek.com:
- The World’s Most Influential Headhunters.
- Teradyne(TER): A Tempting Tech Pick.

Forbes.com:
- Prominent new hedge funds pulled in slightly more money last year than in 2006 largely because savvy bets on the housing market pumped up assets at a small handful of funds.

IBD:
- Q4 Earnings Really Weren’t Too Bad – Except For Banking.

USA Today.com:
- Senate calls timeout on economic stimulus plan.

Reuters:
- News Corp.(NWS/A) lifts outlook, sees no ad slowdown.

Financial Times:
- China ‘on course for growth slowdown’.
- Microsoft(MSFT) hits back at Google(GOOG).

TimesOnline:
- The West’s biggest oil companies are in talks with the Government of Iraq to boost the country’s oil and gas output.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (RIMM), target $140.
- Rated (AKAM) Buy, target $51.
- Reiterated Buy on (ADM), target $52.
- Maintained Buy on (NWS/A), target $26.

Night Trading
Asian Indices are -1.25% to -.25% on average.
S&P 500 futures -.19%.
NASDAQ 100 futures -.21%.

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Earnings of Note
Company/EPS Estimate
- (CME)/3.58
- (AVP)/.29
- (EMR)/.64
- (LPX)/-.33
- (TYC)/.61
- (NYX)/.66
- (WHR)/2.15
- (DUK)/.24
- (DIS)/.52
- (THQI)/.35
- (JDSU)/.11
- (NBR)/.73
- (CBG)/.73
- (CAKE)/.26
- (INSP)/.24
- (FORM)/.40

Upcoming Splits
- (CJR) 2-for-1
- (JASO) 3-for-1

Economic Releases
10:00 am EST
- The ISM Non-Manufacturing Composite for January is estimated to fall to 52.4 versus 53.2 in December.

Other Potential Market Movers
- The Fed’s Lacker speaking, weekly retail sales report, (UAUA) analyst meeting, (STT) analyst meeting, (JAVA) analyst meeting, Cowen & Co. Aerospace/Defense Conference, Thomas Weisel Tech/Telecom/Internet Conference, Merrill Lynch Global Pharma/Biotech/Medical Device Conference and CSFB Energy Conference could also impact trading today.

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

Stocks Finished Lower, Weighed Down by Financial, Retail and Homebuilding Shares

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In Play

Stocks Lower into Final Hour on Profit-taking, Shorting

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Medical longs and Internet longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is mildly negative as the advance/decline line is slightly lower, most sectors are declining and volume is below average. Investor anxiety is above average. Today’s overall market action is just mildly bearish given recent gains. The most technically extended financial, homebuilding and retail shares are under the most pressure today. The VIX is rising 7.0% today to a high 26.0. The ISE Sentiment Index hit a depressed 77.0 and the total put/call hit an above average 1.13 this morning. Finally, the NYSE Arms has been running high all day at 1.55, which is a positive, especially given below average volume. Overall, today’s action looks like a healthy low-volume consolidation of recent gains. Many growth stocks are higher on the day despite ongoing weakness in some of the leaders. I continue to believe pullbacks will remain relatively mild and short-term in nature and should be bought. Nikkei futures indicate a -75 open in Japan and DAX futures indicate a -5 open in Germany. I expect US stocks to trade mixed-to-higher into the close from current levels on less economic pessimism and short-covering.