Dow Finishes at 4-Year High after Another Decline in Commodity Prices and Positive Economic Data

Indices
S&P 500 1,280.00 +.35%
DJIA 11,058.97 +.28%
NASDAQ 2,276.43 +.63%
Russell 2000 725.10 +.75%
S&P Barra Growth 607.10 +.43%
S&P Barra Value 669.17 +.27%
Morgan Stanley Consumer 601.08 +.52%
Morgan Stanley Cyclical 797.09 +.11%
Morgan Stanley Technology 534.27 +.36%
Transports 4,442.29 +.78%
Utilities 403.42 +.06%
Put/Call .70 -17.65%
NYSE Arms 1.02 +30.76%
Volatility(VIX) 12.31 +.49%
ISE Sentiment 126.00 +7.69%
US Dollar 90.69 +.17%
CRB 320.75 -1.32%

Futures Spot Prices
Crude Oil 57.88 +.40%
Unleaded Gasoline 139.28 +.58%
Natural Gas 7.12 +.76%
Heating Oil 161.30 +.34%
Gold 542.80 +.02%
Base Metals 161.55 -4.05%
Copper 219.10 unch.
10-year US Treasury Yield 4.59% -.30%

Leading Sectors
Biotech +1.68%
Hospitals +1.66%
Airlines +1.65%

Lagging Sectors
Steel -1.82%
Oil Service -2.34%
Gold & Silver -2.42%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Underperform on (HC).

Afternoon/Evening Headlines
Bloomberg:
- Bill Gross, chief investment officer at PIMCO told CNBC that his firm is investing in shorter-maturity debt in anticipation of the economy slowing and the Federal Reserve cutting interest rates.
- AT&T(T) CEO Whitacre and Verizon Communications(VZ) CEO Seidenberg urged US lawmakers to adopt a national rule making it easier for phone companies to sell television service.
- Vice President Cheney, in an interview with Fox News, took the blame for a hunting accident that left a friend hospitalized.
- Applied Materials(AMAT) said first-quarter profit fell after costs to close facilities. Sales rose for the first time in a year.
- Morgan Stanley(MWD), the No. 3 US securities firm, increased its holdings in General Motors(GM) to 5.1%, joining billionaire investor Kirk Kerkorian and other shareholders in buying stock as the automaker tries to end losses.
- Hewlett-Packard(HPQ) said first-quarter profit rose 30% as holiday demand drove sales. The earnings forecast for this quarter exceeded analysts’ estimates.

AFP:
- Afghanistan and Pakistan agreed to increase cooperation in fighting terrorists operating on their border.

Australian:
- Mills Corp.(MLS) appointed JP Morgan Chase(JPM) and Goldman Sachs Group(GS) as advisers with a mandate including the possible sale of its shopping centers.

Australian Review:
- Commodity prices will fall this year as supplies increase, eroding export earnings for Australia, citing Steven Kennedy, general manager of the economy division of the Australian Treasury.

Bolivarian news agency:
- Iran and Venezuela, the second- and third-largest producers in OPEC, created a $200 million fund to spur investment in each other’s economies.

BOTTOM LINE: The Portfolio finished higher today on gains in my Biotech longs, Retail longs, Computer longs, Networking longs and Energy-related shorts. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, most sectors gained and volume was about average. Measures of investor anxiety were mixed into the close. Overall, today's market performance was bullish, given the declines in commodity stocks, Bernanke's mostly hawkish comments and the bears' inability to capitalize on morning weakness. Small caps were especially strong today and the Russell 2000 is up about 8% for the year.

Stocks Modestly Higher into Final Hour Despite Falling Commodity Stocks

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Computer longs, Retail longs, Networking longs and Energy-related shorts. I exited my (IWM)/(QQQQ)shorts, added a (VLO) short and exited an existing long today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are higher and volume is above average. Copper inventories at the London Metal Exchange (LME) are at the highest level since Sept. 2004 and have risen 313% since July. On an absolute basis, supplies are still historically low, but I expect this to change as the year progresses. I will look to short Phelps Dodge (PD) on any substantial bounce. I continue to believe that the declines in almost all commodities are not the result of any substantial U.S. economic slowdown. They are more a function of the end to the commodity mania. I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower long-term interest rates, lower commodity prices and bargain hunting.

Today's Headlines

Bloomberg:
- US Treasury officials are sounding out investors about the potential impact of naming China as a currency manipulator.
- Merrill Lynch will give up its fund management unit for a 49.8% stake in BlackRock(BLK).
- UK Prime Minister Tony Blair won the first of a series of votes on his Terrorism Bill, making it a crime to glorify or incite terrorism.
- Google(GOOG) and Yahoo!(YHOO) were among technology companies criticized by US lawmakers for agreeing to help Chinese authorities by censoring Internet searches nd handing over private data.
- Crude oil is falling below $59/bbl. in NY for the first time this year after the EIA reported US inventories soared.
- Federal Reserve Chairman Bernanke, in his first report to Congress, said the US economy is in a sustained expansion that may require additional interest rate increases to restrain inflation.

Wall Street Journal:
- United Technologies’(UTX) Pratt & Whitney unit is likely to announce today that it will make spare parts for the top-selling CFM56 jet engine supplied by its rival, General Electric(GE).
- British and American women are drinking more than they did a few years ago, a trend that is worrying health-care officials even as it boosts sales for the alcoholic drinks industry.
- Johnson & Johnson(JNJ) will cut the size of its sales operations for the anemia drug, Procrit, because it has lost business to a competitor.
- Two US labor unions representing construction workers plan to quit the AFL-CIO to set up a separate association and boost membership, citing union officials.
- Nike Inc.(NKE) has created a new line of fitness dance apparel in an effort to boost the company’s brand appeal among women.
- Bristol-Myers Squibb(BMY) plans to license its Reyataz drug for AIDS without charge to generic drugmakers Aspen Pharmacare Holdings of South Africa and Emcure Pharmaceuticals of India.

NY Times:
- General Electric(GE) expects that over the next five years alternate energy products will more than triple to account for more than a quarter of the sales of energy equipment, its largest industrial business.
- Two car dealerships will open next month in Harlem, the first in the neighborhood in more than 40 years, continuing economic expansion in what has long been one of Manhattan’s poorest communities.

AFP:
- Iran is ready to use offensive action to counter any US aggression, citing the Islamic Republic’s Revolutionary Guards.

Daily Telegraph:
- Batman, the superhero who has previously fought the Joker and the Penguin, is to turn his attention to fighting Osama bin Laden in a new graphic novel, citing the writer Frank Miller.

Manufacturing Healthy, Foreign Demand for US Assets Slows from Record Levels, Capacity Utilization Back Near Average Levels, Oil Inventories Soar

- Empire Manufacturing for February rose to 20.3 versus estimates of 18.0 and a reading of 20.1 in January.
- Net Foreign Security Purchases for December fell to $56.6 billion versus estimates of $76.2 billion and $91.6 billion in November.
- Industrial Production for January fell .2% versus estimates of a .2% increase and an upwardly revised .9% gain in December.
- Capacity Utilization for January rose to 80.9% versus estimates of 80.8% and an upwardly revised 81.2% in December.
- The EIA reported crude inventories rose 4,853,000 barrels vs. estimates of a 1,000,000 barrel rise. Gasoline supplies rose 2,115,000 barrels vs. estimates of a 1,600,000 barrel build. Distillate supplies rose 907,000 barrels vs. estimates of a 1,000,000 barrel decline. Refinery utilization rose .28% vs. estimates of unchanged.

BOTTOM LINE: Manufacturing in NY state unexpectedly accelerated in February as sales and orders grew, Bloomberg said. Factories got a boost from a spike in consumer spending as retail sales gained 2.3% in January, the largest gain since May 2004. The prices paid component of the index rose to 52.8 versus 46.6 in December. Manufacturing should continue to add to US economic growth over the intermediate-term.

International investors boosted their holdings of US assets by $56.6 billion in December, Bloomberg reported. Net holdings of Treasury notes, stocks and corporate bonds by international investors slowed from $91.6 billion in November and an all-time record of $105.6 billion in October. The UK, Japan and China all increased their holdings of US Treasuries. However, Caribbean banking centers, which are mainly hedge funds, decreased their Treasury holdings. Foreigners’ holdings of US stocks rose $8.7 billion. I expect international demand for US assets to increase further over the intermediate-term as energy prices fall, inflation measures decelerate, the dollar remains firm and US growth remains relatively healthy.

US Industrial Production unexpectedly fell in January after a record decline in utility output, while manufacturing strengthened for a fourth month, Bloomberg said. Business spending to upgrade equipment is helping to keep manufacturers’ order book full. Utility production plunged 10.1% in January, the largest decline in US history. Manufacturing, which comprises more than 80% of the index, rose .7% versus a .5% gain in December. Capacity utilization is only now back near average levels of 80.7%. I expect industrial production to remain healthy over the intermediate-term as companies continue to gain confidence in the sustainability of the current expansion and inventories are rebuilt.

The EIA energy inventory data was overall very bearish once again for the entire energy complex. Oil is getting oversold short-term, however I still expect long-term support at $56/bbl. to give way over the coming weeks.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- A proposed $140 billion fund for asbestos exposure victims was killed in the US Senate.
- The Fed’s benchmark interest rate “might have to increase some more,” said Jeffrey Lacker, president of the Fed Bank of Richmond.
- US Treasury Secretary John Snow said Congress shouldn’t raise the capital gains tax, which was lowered in May 2003, and should protect the middle class from the alternative minimum tax.
- Oil traded below $60 for a second day as rising US inventories eased concern about supplies before the peak summer motoring season.

Wall Street Journal:
- The IRS supports a method individuals use to avoid gift taxes by prepaying family members’ tuition bills.

Financial Times:
- Nasdaq Stock Market Inc.(NDAQ) is to introduce a new top tier for companies to list their shares to compete with other stock exchanges.

London-based Times:
- Saudi Arabia plans to double its oil refining capacity over the next five years by investing $20 billion in its facilities, citing Oil Minister Ali al-Naimi.

Independent:
- Online gambling companies’ shares have declined following a potential political move in the US to clampdown on the industry.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on (OXY), (NFP) and (GILD).
- Reiterated Underperform on (VICL) and (WPI).

Night Trading
Asian Indices are -.75% to +.50% on average.
S&P 500 indicated -.13%.
NASDAQ 100 indicated -.09%.

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Earnings of Note
Company/EPS Estimate
(AMAT)/.16
(AQNT)/.14
(BIIB)/.47
(CECO)/.67
(CMX)/.55
(CEN)/.25
(DTE)/2.00
(EXPE)/.25
(FST)/.56
(GENZ)/.60
(GTRC)/1.14
(HPQ)/.44
(JNY)/.45
(NTAP)/.21
(ODP)/.32
(OSI)/.55
(PFCB)/.33
(PENN)/.43
(PGN)/.52
(SNPS)/.14

Upcoming Splits
- (CLDN) 3-for-2
- (JOSB) 5-for-4

Economic Releases
8:30 am EST
- Empire Manufacturing for February is estimated to fall to 18.0 versus a reading of 20.1 in January.

9:00 am EST
- Net Foreign Security Purchases for December are estimated to fall to $76.2 billion versus $89.1 billion in November.

9:15 am EST
- Industrial Production for January is estimated to rise .2% versus a .6% rise in December.
- Capacity Utilization for January is estimated to rise to 80.8% versus 80.7% in December.

10:00 am EST
- Bernanke Report on Economy & Fed Policy

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude build of 1,000,000 barrels. Gasoline inventories are estimated to rise 1,600,000 barrels, and distillate supplies are expected to decrease by 1,000,000 barrels. Finally, refinery utilization is expected to remain unchanged.

1:00 pm EST
- NAHB Housing Market Index for February is estimated at 57 versus a reading of 57 in January.

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