Stocks Higher into Final Hour on Less Economic Pessimism, Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is mixed into the final hour as gains in my Medical longs and Alternative Energy longs are offsetting losses in my Commodity shorts and Software longs. I have not traded today, thus leaving the Portfolio 75% net long. The overall tone of the market is neutral as the advance/decline line is mixed, sector performance is mixed and volume is heavy. Investor anxiety is above-average. Today’s overall market action is mildly bearish. The VIX is falling 1.25% today, but remains high at 25.2. The ISE Sentiment Index is a very low 85.0 and the total put/call is a high 1.22 again today. Finally, the NYSE Arms is around average at 1.0. The 10-year swap spread is rising another 1.7 basis points today to 80.0 basis points over Treasuries. It is still near levels seen near prior peaks in credit market angst in August and November of last year. Moreover, the TED spread is rising again to an elevated 148 basis points. Considering the (ABK) news, these are negatives. Moreover, the $5 surge in oil makes it less likely we will see a cut before the March 18^th meeting. On the positive side, the bears have been unable to gain downside traction today despite these potential catalysts. Nikkei futures indicate an +43 open in Japan and DAX futures indicate a -37 open in Germany tomorrow. I expect US stocks to trade mixed into the close from current levels as short covering, less economic pessimism and bargain hunting offsets rising credit market angst, falling Fed rate cut odds and higher energy prices.

Productivity/Unit Labor Costs Above Estimates, Factory Orders Decline for First Time in 5 Months, Service Sector Bounces Back

- Final 4Q Non-farm Productivity rose 1.9% versus estimates of a 1.8% gain and prior estimates of a 1.8% increase.

- Final 4Q Unit Labor Costs rose 2.6% versus estimates of a 2.1% gain and prior estimates of a 2.1% increase.

- Factory Orders for January fell 2.5% versus estimates of a 2.5% decline and a 2.0% increase in December.

- ISM Non-Manufacturing for February rose to 49.3 versus estimates of 47.3 and 44.6 in January.

BOTTOM LINE: Productivity in the US grew faster than the economy in the fourth quarter, Bloomberg reported. For all of 2007, productivity rose 1.8% versus a 1.0% gain the prior year. Productivity at non-financial corporations, which is reported with a one quarter lag and a gauge closely watched by Greenspan, rose 2.9% in the third quarter. I continue to expect productivity to remain above long-term average rates and unit labor cost increases, which make up two-thirds of the costs of goods and services, to remain subdued over the intermediate-term.

A gauge of the health of the service sector came in above estimates, Bloomberg reported. The Employment component of the index rose to 46.9 versus 43.9 the prior month. The New Orders component of the index rose to 49.6 from 43.5 the prior month. The Prices Paid component fell to 67.9 from 70.7 in January. I expect this gauge to move back above 50.0 over the next few months on pent-up demand as the stimulus hits, which will indicate expansion.

Orders to US factories fell in January for the first time in five months, Bloomberg reported. Excluding orders for transportation equipment, demand fell .4%. Orders for non-durable goods actually rose .3% versus a .4% decline in December. Orders for military gear fell 20%. Demand for automobiles fell 1.7% versus a 4.4% decline in December. Manufacturers had enough goods on hand to last 1.24 months, the same as December. According to Intrade.com, the odds the US slips into recession this year have fallen to 60.2% from 77.5% in January. Given today's better economic data and the sharp rise in commodities, the odds for a 75 basis point rate cut at the upcoming March meeting are falling to 50.0% today from 78.0% yesterday. Factory Orders should bounce back in February on inventory rebuilding.

Bull Radar

Style Outperformer:

Large-cap Growth (+1.23%)

Sector Outperformers:

Oil Service (+2.44%), Steel (+2.03%) and Retail (+1.82%)

Stocks Rising on Unusual Volume:

ELON, DIVX, CN, CHU, IVN, E, SU, NBG, SJW, OMPI, CEDC, CSIQ, BLOG, OMTR, SMTC, LBTYK, HURC, JRCC, RRGB, FARO, LOGI, SAFM, AMCN, ORCL, XIDE, BEAV, AMSC, OME, BIG, SRI, CT, ARL, BJ and MFB

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Oil Speculative Long Futures Contracts +112.9%, Global Oil Demand +2.0% Since 11/1/2005

(click on image to enlarge)

BOTTOM LINE: According to the latest commitment of traders report from the Commodity Futures & Trading Commission, crude oil speculative open long positions totaled 257,989 contracts. These speculative long positions, which are a gauge of investment fund demand(which is paper demand, not real physical demand) for the commodity, have soared 28.6% in just the last six weeks and 112.9% from November 2005. On the other hand, crude oil speculative short positions totaled 166,364 open contracts in the latest report, which is just 2.6% higher from levels seen in November 2005. I continue to believe investment fund speculation is the driving force behind the current oil bubble. Moreover, the oil bubble is one of the main driving forces behind the current "US negativity bubble," in my opinion. It is also noteworthy that since November 2005, global oil demand is up a total of only 2.0% to 86.3 million barrels per day, while global production is up 2.6% to 87.0 million barrels per day, according to the Energy Intelligence Group. The graph above depicts the spread between the oil speculative longs(top) and speculative shorts(bottom) since November 2005.

Wednesday Watch

Late-Night Headlines
Bloomberg:
- Australia’s economy grew at the slowest pace in moiré than a year in the fourth quarter as construction decline and bottlenecks at ports cut exports.
- Japanese businesses cut investment last quarter at twice the pace economists predicted, suggesting the government will trim its economic growth estimate next week.
- China’s key economic tasks for this year are to curb accelerating inflation and prevent overheating, Premier Wen Jiabao said.
- US bank regulators assured Congress the banking industry, bolstered by a long period of strong economic growth and low credit losses, remains strong amid losses stemming from the subprime-mortgage crisis.
- More than 30,000 Californians could benefit from new Federal Housing Administration rules raising loan limits to almost $730,000, Housing Secretary Alphonso Jackson said.
- China, the world’s biggest grain producer, will use imports of essential commodities and the sales of reserve stockpiles to stabilize supplies and prices, the Minister of Finance said.
- Sugar fell the most in nine months as investors such as hedge funds sold commodities.
- Goldman Sachs(GS) investment management co-head Peter Kraus is leaving after his division’s Global Alpha hedge fund suffered a 40% drop last year.
- Three years after Theo van Gogh was murdered in Amsterdam for making a film critical of Islam, the Netherlands is embroiled in another row over religion.

Wall Street Journal:
- McCain Clinches GOP Nomination; Clinton Notches Win in Ohio.
- Citigroup Inc.(C) executives are confident with the company’s capital levels and aren’t looking to raise additional funds from outside investors.
- Top crude oil consumer the US said Tuesday it is “imperative” to expand the use of renewable energy such as wind power and biofuels to reduce its dependence on foreign oil.
- Iran vowed to push ahead with uranium enrichment Tuesday, a day after the UN Security Council passed a third round of sanctions that Tehran called “worthless” and politically biased.

CNBC.com:
- Banks Hope to Reach Deal Soon on Ambac(ABK) Rescue.
- Some Bank Stocks Worth Buying Despite Bad News.

NY Times:
- The Bush administration and the Fed are inching closer toward a government rescue of distressed homeowners and mortgage lenders.

IBD:
- Big Solar Deal Shows Applied(AMAT) Is Heating Up.
- Microsoft’s(MSFT) Gamble With Xbox Business Has Turned Corner.

CNNMoney.com:
- The man who must keep Goldman(GS) growing. Lloyd Blankfein has a lot on his mind. The chief of Wall Street’s most successful investment bank has to outsmart treacherous markets while balancing the firm’s interests with those of its clients.
- Housing: Best time to buy in four years.

Morningstar:
- JPMorgan Chase(JPM) remains the biggest US hedge-fund manager as total assets of the biggest hedge-fund firms topped $1.6 trillion as of Jan. 1.

USA Today.com:
- Nike(NKE), Apple(AAPL) plug iPods into gym equipment.
- Businesses give veterans a big lift in starting new franchises.

SEC:
- The SEC sued a Salt Lake City hedge-fund manager for allegedly misleading clients about risks it took while making wrong-way bets on New Century Financial.

Reuters:
- SEC proposes tougher “naked” short selling rules.
- US growth stocks outperformed value stocks last month in all size categories except microcaps.

Financial Times:
- Al-Qaeda is losing the war of minds. The US “surge” in Iraq has been so manifestly successful that no serious person can deny that gains have been made. In large measure because of what is going on in Iraq, the tide within the Islamic world is beginning to run strongly against al-Qaeda – and this may be the single most important ideological development in recent years.
- Amazon.com(AMZN) to enter US wine market.

AFP:
- China’s south to build nation’s largest offshore wind farm.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (PX), target $90.
- Maintained Buy on (HOLX), target $81.
- Reiterated Buy on (TECD), target $50.
- Reiterated Buy on (ADBE), target lowered to $46.

Night Trading
Asian Indices are -1.0% to unch. on average.
S&P 500 futures -.04%.
NASDAQ 100 futures +.14%.

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Earnings of Note
Company/EPS Estimate
- (BWS)/.42
- (BJ)/.74
- (SKS)/.19
- (ADCT)/.17
- (MATK)/.22
- (CMTL)/.79
- (MR)/.20
- (HRB)/.09
- (PETM)/.59
- (COST)/.74
- (CSK)/-.11
- (LDG)/.97
- (BIG)/.84

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Final 4Q Non-farm Productivity is estimated to rise 1.8% versus prior estimates of a 1.8% gain.
- Final 4Q Unit Labor Costs are estimated to rise 2.1% versus prior estimates of a 2.1% gain.

10:00 am EST
- Factory Orders for January are estimated to fall 2.5% versus a 2.3% gain in December.
- ISM Non-Manufacturing for February is estimated to rise to 47.3 versus 44.6 in January.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil build of 2,400,000 barrels versus a 3,231,000 barrel increase the prior week. Gasoline supplies are estimated to rise 125,000 barrels versus a 2,355,000 barrel build the prior week. Distillate Supplies are expected to fall by -1,825,000 barrels versus a -2,575,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to rise .23% versus a 1.16% increase the prior week.

2:00 pm EST
- Fed’s Beige Book

Other Potential Market Movers
- The Fed’s Pianalto speaking, ADP Employment report, Challenger Job Cuts report, weekly MBA Mortgage Applications report, weekly EIA energy inventory report, (PFE) analyst meeting, (XOM) analyst meeting, (KWK) analyst meeting, (ARRS) analyst meeting, (TAP) analyst meeting, (JNJ) analyst meeting, Susquehanna Healthcare Conference, CSFB Under Followed Opportunities Conference, Morgan Stanley Tech Conference, CSFB Global Biotech Conference, Citi Global Real Estate Conference, Bear Stearns Retail/Restaurants/Consumer Conference, Citi Industrial Manufacturing Conference, CIBC Retail Conference and Raymond James Institutional Investor Conference could also impact trading today.

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