Stocks Finish at Session Lows on Worries Over Fed Rate Hikes

Indices
S&P 500 1,297.23 -.60%
DJIA 11,235.47 -.35%
NASDAQ 2,294.23 -.86%
Russell 2000 736.10 -1.28%
Wilshire 5000 13,048.14 -.68%
S&P Barra Growth 612.68 -.53%
S&P Barra Value 681.12 -.68%
Morgan Stanley Consumer 613.36 -.44%
Morgan Stanley Cyclical 803.26 -.91%
Morgan Stanley Technology 536.83 -.24%
Transports 4,561.21 -.57%
Utilities 399.08 -1.08%
Put/Call .95 +9.20%
NYSE Arms .97 -15.05%
Volatility(VIX) 11.62 -1.44%
ISE Sentiment 169.00 +11.92%
US Dollar 89.62 unch.
CRB 322.77 +.66%

Futures Spot Prices
Crude Oil 62.15 -.30%
Unleaded Gasoline 180.00 -2.15%
Natural Gas 6.89 +.39%
Heating Oil 176.67 -.31%
Gold 553.10 -.02%
Base Metals 172.74 +.13%
Copper 232.15 -.11%
10-year US Treasury Yield 4.71% -.08%

Leading Sectors
Oil Tankers +.29%
Gaming +.23%
Oil Service +.05%

Lagging Sectors
Biotech -1.79%
Gold & Silver -1.92%
Tobacco -1.99%

Evening Review
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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- The UN Security Council postponed a second round of talks on how to increase pressure on Iran to stop uranium enrichment to give British and French diplomats time to win the support of China and Russia.
- Cowen Group, the investment banking unit of France’s Societe Generale, plans to raise $100 million in an IPO, the company said today in a filing with the SEC.
- DE Shaw raised its stake in Lexar Media(LEXR) to 7.9%, becoming the third-largest shareholder and signaling it may enter the fight over Micron’s(MU) $680 million bid for the company.
- Microsoft said the next version of its Windows program won’t be generally available until next January.

AP:
- Iran’s supreme leader, Ayatollah Ali Khamenei, said he supports talks with the US about Iraq.

BOTTOM LINE: The Portfolio finished lower today on losses in my Internet longs, Computer longs and Retail longs. I exited added to my (IWM)/(QQQQ) shorts in the final hour, thus leaving the Portfolio 50% net long. The tone of the market was very negative today as the advance/decline line finished substantially lower, sector performance was mostly negative and volume was heavy. Measures of investor anxiety were mostly lower into the close. Overall, today's market performance was bearish. The reversal higher in oil and 6-basis-point rise in the 10-year yield were the main culprits. As I have said before, there are a record number of market participants that benefit from a bearish or trading range environment. When we have rallies of the magnitude we have recently seen, they are sold vigorously for a short period of time. Today's action appears no different. I expect housing data on Thursday and Friday to calm interest rate jitters.

Stocks Lower into Final Hour on Interest Rate Jitters

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Semi longs and Networking longs. I added (IWM) and (QQQQ) shorts today, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is heavy. The Johnson Redbook same-store sales index rose 2.5% year over year last week vs. a 2.5% rise the prior week. This week's gain is up from a 1.5% increase in late April 2005. The long-term average is a gain of around 2.5%. The Morgan Stanley Retail Index is 22.3% higher since late October, almost double the 12.0% gain for the S&P 500 (SPX) over the same time period. I continue to believe a healthy labor market, low long-term interest rates, falling energy prices, improving sentiment and rising stock prices will cushion any consumer weakness this year related to a slowing housing market. Retail sales will likely remain around average levels for most of the year. I expect US stocks to trade mixed-to-higher into the close from current levels on bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- Google(GOOG) is adding a finance site to its stable of offerings, a move that sparks fresh competition for Microsoft(MSFT) and Yahoo!(YHOO).
- Newspaper publishers, including USA Today parent Gannett(GCI) and the LA Times’ Tribune(TRB), are taking a beating in the bond market as newsprint costs rise and advertisers increasingly turn to the Internet.
- Microsoft(MSFT) ramped up shipments of its Xbox 360 video-game console, seizing on a delay in Sony’s(SNE) PlayStation 3 to bolster sales.
- The number of US businesses owned by Hispanics rose by almost a third between 1997 and 2002, three times the average growth rate for all businesses.
- President Bush said Iraq is making progress toward democracy even as terrorist attacks persist.
- Jones Apparel(JNY), maker of Anne Klein clothes and Nine West shoes, said it’s exploring a sale of the company.
- The US Treasury yield curve inverted for the first time in nine days after Fed Chairman Bernanke’s comments led traders to speculate interest rate hikes would continue.
- General Motors(GM) and Delphi, closing in on an agreement with unions to cut costs, may offer as many as 70,000 workers incentives to retire, according to a labor analyst monitoring the talks.

Wall Street Journal:
- The European Union has agreed to offer protection for regional foods names to non-EU exporters of foods such as Idaho potatoes.
- High US fuel inventories and subdued household demand have pushed down prices of gasoline, heating oil and other refined products, resulting in narrower margins and lower share prices for refiners.
- US investment banks are looking at acquisitions of home-loan providers, eager for more assets to underpin their mortgage securities businesses.
- President Bush’s administration will ask the US Congress to force the chemical industry to improve security at plants and in transportation.
- Credit Suisse Group, Lehman Brothers Holdings(LEH) and hedge funds have gotten into energy trading in search of profit, yet the markets remain highly volatile.

NY Post:
- Nike Inc.(NKE) has joined with Google(GOOG) to develop a soccer Web site called Joga.com, which is Portuguese for “joy,” as the athletic-shoe maker seeks to increase brand loyalty.

NY Times:
- Some US banks, credit card issuers and wireless providers are developing payment systems that use mobile phones.
- US high school students are applying to as many as 12 colleges, up from three or four a generation ago.

Focus-Money:
- Adidas-Salomon AG regained market share of soccer-related equipment from rival Nike(NKE), recovering the leading position in Europe.
- Intel(INTC) is still suffering from supply problems.

Vedomosti:
- ConocoPhillips(COP) plans to spend $2.5-$3 billion raising its stake in OAO Lukoil to 20% by the end of this year.

Independent Online:
- South Africa will apply to the UN to boost its sea territory by as much as 65% to increase the area for oil exploration.

Shanghai Securities News:
- China’s central bank may tighten monetary policy by raising the percentage of deposits domestic banks must set aside as reserves.

Independent:
- Japanese and other nationals are increasingly buying kidneys and other organs that come from executed prisoners in China, citing recipients and doctors.

El Watan:
- Algerian Energy Minister Khelil said global oil production will rise this summer.

Producer Prices Fall More Than Expected

- The Producer Price Index for February fell 1.4% versus estimates of a .2% decline and a .3% increase in January.
- The PPI Ex Food & Energy for February rose .3% versus estimates of a .1% increase and a .4% rise in January.

BOTTOM LINE: Producer prices fell in February by the most in almost three years, Bloomberg reported. Prices of raw materials dropped 9.2%. Foods prices fell 2.7%, the largest decline since April 2002. Producer Prices have now risen 3.7% over the last 12 months, down from a 5.7% y-o-y gain last month. I continue to believe inflation readings will decelerate throughout most of the year as commodity prices fall further, US growth slows to average rates and unit labor costs remain subdued.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Pakistan and the US will boost their cooperation in fighting Taliban and al-Qaeda terrorists on the border between Pakistan and Afghanistan, said Marine General Peter Pace.
- Verizon Communications(VZ) won a bid for more control over its high-speed networks after its US regulator freed it from rules on data services it sells to large businesses.
- The US dollar rose for a second day against the euro after Fed Chairman Bernanke said “the implications for future economic activity are positive rather than negative.”
- Crude oil traded near $60/bbl. amid speculation a report tomorrow will show US supplies last week rose to their highest in seven years.

Guardian:
- Expenditure on Internet advertising in the UK advanced about 73% in 2005 with revenue rising to over $1.93 billion, citing Advertising Association figures.
- BAE Systems Plc, Europe’s biggest weapons maker, may make a $10 billion offer for US defense electronics company L-3 Communications(LLL).

DigiTimes:
- Dell Inc.(DELL) cut orders for flat panel displays used for computer monitors in March by between 15% and 20%, reducing profits for manufacturers in South Korea and China.

Nihon Keizai:
- Toshiba Corp. will start selling the world’s first next-generation DVD player in Japan later this month.

Late Buy/Sell Recommendations
Wachovia:
- Rated (IRF), (CRUS), (SJI) and (ATG) Outperform.

Night Trading
Asian Indices are -.25% to +.25% on average.
S&P 500 indicated -.03%.
NASDAQ 100 indicated -.03%.

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Earnings of Note
Company/EPS Estimate
- (BMET)/.43
- (CMC)/1.00
- (DRI)/.65
- (DG)/.49
- (FDS)/.37
- (GME)/1.07
- (MKC)/.24
- (NKE)/1.10
- (PAYX)/.31
- (PVH)/.37
- (TDS)/.31

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Economic Releases
8:30 am EST
- The Producer Price Index for February is estimated to fall .2% versus a .3% gain in January.
- The PPI Ex Food & Energy for February is estimated to rise .1% versus a .4% gain in January.

BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity shares 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.