Stocks Finish Sharply Higher as Energy Prices Continue to Plunge and Retail Sales Rise More than Estimates

Indices
S&P 500 1,275.53 +1.0%
DJIA 11,028.39 +1.25%
NASDAQ 2,262.17 +1.0%
Russell 2000 719.70 +1.29%
S&P Barra Growth 604.49 +.81%
S&P Barra Value 667.39 +1.21%
Morgan Stanley Consumer 597.95 +.92%
Morgan Stanley Cyclical 796.19 +2.23%
Morgan Stanley Technology 532.37 +.80%
Transports 4,407.78 +2.55%
Utilities 403.19 -.19%
Put/Call .85 -15.84%
NYSE Arms .78 -22.38%
Volatility(VIX) 12.25 -8.24%
ISE Sentiment 117.00 -30.36%
US Dollar 90.51 -.03%
CRB 325.05 -.77%

Futures Spot Prices
Crude Oil 59.42 -.25%
Unleaded Gasoline 138.20 -.21%
Natural Gas 7.09 -.30%
Heating Oil 160.71 -.18%
Gold 550.30 +.26%
Base Metals 168.37 +1.57%
Copper 226.65 unch.
10-year US Treasury Yield 4.60% +.69%

Leading Sectors
Airlines +3.78%
Steel +3.47%
Wireless +2.63%

Lagging Sectors
Alternative Energy -.68%
Energy +1.23%
Oil Service -2.76%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on (SSP).
- Reiterated Underperform on (MMC).

Afternoon/Evening Headlines
Bloomberg:
- Microsoft(MSFT) is aiming to get the next version of its Windows program in stores in time for the holiday shopping season.
- Alcoa(AA), Alcan(AL) and the rest of the aluminum industry will see their already weak credit quality worsen as they boost spending to build new smelters in areas with lower energy costs.
- Legg Mason(LM), Eastman Kodak’s(EK) biggest shareholder, increased its bet on the world’s largest photography company in the fourth quarter as Kodak’s shares approached 25-year lows.
- Bill Ackman, the activist investor who lobbied for spinoffs at two of the nation’s largest fast-food chains, said that his hedge funds have acquired stakes in Hilton Hotels(HLT) and Office Depot(ODP).
- Abercrombie & Fitch(ANF) said fourth-quarter profit jumped 58%, helped by sales of jeans, fleece tops and polo shirts.
- Crude oil fell below $60 a barrel for the first time in 2006 and gasoline futures dropped to the lowest in almost a year as speculation increased that inventories would rise further this week.

AP:
- Afghanistan’s President Hamid Karzai, who visits Pakistan today, will call on Pakistani leaders to find and close bases used by Taliban fighters on Pakistani territory.

BOTTOM LINE: The Portfolio finished higher today on gains in my Semi longs, Retail longs, Computer longs, Biotech longs and Energy-related shorts. I added back (IWM) and (QQQQ) shorts in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was positive today as the advance/decline line finished higher, almost every sector gained and volume was average. Measures of investor anxiety were mostly lower into the close. Overall, today's market action was positive as investors finally acknowledged the very positive implications of the decline in energy prices. As I predicted a couple of weeks ago, it looks like the oil speculators did in fact run out of firepower on Feb.1 when oil was trading near $70/bbl. Oil closed floor trading at session lows today and is now down $1.72 to $59.52 on the day. Around $56/bbl. is a key technical level for the long-term oil bulls. I expect this level to give way convincingly over the coming weeks, which should signal an end to the energy mania.

Stocks Sharply Higher into Final Hour as Energy Prices Plunge and Economic Data Exceeds Estimates

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Computer longs, Networking longs and Energy-related shorts. I exited the remainder of my (IWM) and (QQQQ) shorts this morning, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, almost every sector is gaining and volume is average. The Dow Jones Transportation Average is making another all-time high today. It has risen 120% since 2003 lows. It is also 15% above highs set during the bubble. This has to be a bit disconcerting to the U.S. secular bear crowd. The ISE Sentiment gauge is dropping 29% today down to the lowest level since last October. Considering today's gains and tomorrow's Bernanke speech, this is a positive. I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower commodity prices and bargain hunting.

Today's Headlines

- MovieBeam Inc., backed by Walt Disney(DIS), is taking on video-rental stores with a system that transmits the latest movies to homes for as little as $1.99 each.
- General Motors(GM) will announce today that it’s investing $500 million in five Michigan factories.
- Research In Motion(RIMM)’s Blackberry services will stay up and running “no matter what happens,” Co-Chief Executive Officer James Balsillie said in an interview.
- Coca-Cola(KO) said billionaire investor Warren Buffett won’t stand for re-election to the company’s board.
- US Treasury notes are dropping after a government report showed retail sales last month grew at the fastest pace since May 2004.
- Crude oil is falling below $60 a barrel and gasoline futures dropped to the lowest level in almost a year as traders ignored colder weather and worries over Iran and focused on deteriorating fundamentals for the commodities.

Wall Street Journal:
- Sun Microsystems(SUNW) will announce today technical information to help programmers to adapt Linux or other operating systems to a new range of servers that use the company’s Sparc chips.
- The US will step up its enforcement of existing trade rules with China rather than create new policy.
- US utility companies such as PG&E Corp.(PCG) are offering rewards to customers who use less energy.
- US money manager BlackRock(BLK) aims to branch out from big investors and the bond market to individuals and stock investing with its proposed $8.4 billion transaction with Merrill Lynch(MER).
- KB Home(KBH) said it its annual report that cancellations of home orders have risen and the number of orders has dropped in the past two months, as US housing starts have fallen.

USA Today:
- The US military says 40% of Iraq’s combat battalions have taken the lead role in fighting insurgents, a sign of their greater effectiveness and a measure of when US troops can return home.

Washington Post:
- The Virginia Senate voted to ban smoking in state workplaces, restaurants and bars.

NY Times:
- More than a third of NY high school students failed to graduate on time in 2005, citing State Education Commissioner Richard P. Mills.
- NY is developing a city-branded condom that may help measure the effectiveness of its free condom distribution program, citing the Health and Mental Hygiene Dept.
- Paul Hackett, an Iraq war veteran and popular Democratic candidate in Ohio’s US Senate race said he is dropping out of the election and leaving politics because of pressure from Senators Harry Reid and Charles Schumer. Hackett said he learned that Democratic party leaders were calling his campaign contributors and asking them to stop donating money.
- The Center for Union Facts spent $240,000 to run full-page ads in three newspapers yesterday as part of its campaign to get the truth out about organized labor.

Chicago Tribune:
- Abbott Labs(ABT) has purchased 500 acres of land in Pleasant Prairie, Wisconsin, for about $30 million and may use it to expand.

Chronicle of Higher Education:
- S&P said the financial outlook for US public and private colleges and universities remains stable.

China Daily:
- China is drawing up an alternative-fuel strategy that will be part of the country’s new development plan for the five years through 2010.
- China will seek wider uses of agriculture biotechnology and increase investment in safety monitoring of gene-altered crops.

ThisDay:
- OPEC has told Nigeria and Saudi Arabia that they can boost oil production by a combined 2 million barrels a day, citing the head of Nigeria’s state oil company.

Ansa:
- Italian Reforms Minister Roberto Calderoli today began wearing a T-shirt sporting copies of the Danish cartoons of the prophet Muhammad that sparked international protests by Muslims.

Retail Sales Very Strong

- Advance Retail Sales for January rose 2.3% versus estimates of a .9% increase and a downwardly revised .4% increase in December.
- Retail Sales Less Autos for January rose 2.2% versus estimates of a .8% increase and a .2% rise in December.

BOTTOM LINE: Retailers rang up their biggest sales gains since May 2004 last month, more than doubling economists’ forecasts as energy prices fell and the labor market improved, Bloomberg reported. Unemployment is at a four-year low and recent wage gains have been healthy. Sales at restaurants and drinking establishments gained 3.2%, the best showing since January 2001. Moreover, same-store sales rose a brisk 5.1% in January, the largest year-over-year increase since June, according to the ICSC. The National Retail Federation estimates that $18.5 billion in gift cards were purchased last year, a 6.6% gain over 2004. Economists are now projecting strong US economic growth of 4% for the first quarter of this year. I continue to believe falling energy prices, a healthy job market, low long-term rates, rising stocks prices, improving sentiment and a stable housing market will boost consumer spending throughout most of the year.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Fidelity Investments is in talks to build a facility for as many as 5,000 workers in Research Triangle Park in North Carolina.
- Amgen(AMGN) plans to sell $4 billion of convertible notes to fund a $3 billion stock repurchase plan.
- Whirlpool(WHR) agreed to delay the completion of its acquisition of Maytag(MYG) so that the US Justice Dept. can have more time to review the transaction.

Wall Street Journal:
- Starbucks Corp.(SBUX) Chairman Howard Schultz said the coffee chain will continue its aggressive expansion in China.
- India may invest as much as $1 billion to develop oil-sands projects in Canada within the next 12 months, citing an Indian government official.
- Morgan Stanley(MWD) CEO John Mack, who last month ended talks to buy a majority stake of money-manager BlackRock(BLK), may try to buy as many as 12 smaller hedge funds.

DigiTimes:
- Intel Corp.(INTC) plans to reduce prices of some of its newest microprocessors by as much as 50% in April to spur demand.

London-based Time:
- Unilever NV will award an $871.3 million outsourcing contract to Accenture Ltd.(ACN).

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on (EBAY), (BSX), (UHCO), (MRVL) and (SYMC).

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S&P 500 indicated unch.
NASDAQ 100 indicated +.03%.

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Earnings of Note
Company/EPS Estimate
(ANF)/1.78
(CEPH)/.74
(DE)/.83
(EXBD)/.51
(FAF)/1.10
(ITRI)/.48
(JAH)/.52
(LVS)/.27
(MMC)/.31
(MAS)/.50
(STR)/1.11
(SIAL)/.93
(RIG)/.48
(WMI)/.40

Upcoming Splits
- (WGOV) 3-for-1

Economic Releases
8:30 am EST
- Advance Retail Sales for January are estimated to rise .9% versus a .7% increase in December.
- Retail Sales Less Autos for January are estimated to rise .8% versus a .2% gain in December.

10:00 pm EST
- Business Inventories for December are estimated to rise .5% versus a .5% gain in November.

BOTTOM LINE: Asian indices are mostly lower, pressured by exorters in the region. I expect US equities to open modestly lower and to trade higher into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.