4Q GDP Rises Less-Than-Estimates, Mortgage Applications Surge Again, ADP Employment Above Estimates

- Advance 4Q GDP rose .6% versus estimates of a 1.2% gain and a 4.9% increase in 3Q.

- Advance 4Q Personal Consumption rose 2.6% versus estimates of a 2.0% gain and a 2.8% increase in 3Q.

- Advance 4Q GDP Price Index rose 2.6% versus estimates of a 2.6% increase and a 1.0% gain in 3Q.

- Advance 4Q Core PCE rose 2.7% versus estimates of a 2.5% increase and a 2.0% gain in 3Q.

BOTTOM LINE: The US economy grew less-than-expected in the fourth quarter, Bloomberg reported. Home construction fell 24% last quarter, the eighth consecutive drop, which subtracted 1.2 percentage points from growth. The GDP deflator rose 2.5% versus a 1.0% increase the prior quarter. Consumer spending contributed 1.4 percentage points to growth during the fourth quarter. Business spending rose at a 7.5% pace. An unexpected drop in inventories was one of the main reasons growth wasn’t stronger during the quarter. Inventories fell at a $3.4 billion annual rate, the largest drop in almost six years, which subtracted 1.3 percentage points from growth. For all of 2007, international trade contributed .55 percentage points to growth, the greatest since 1991. I expect GDP growth this quarter to accelerate modestly on inventory rebuilding and a smaller increase in the deflator.

MBA mortgage applications jumped another 7.5% this week, led by a 22.2% surge in re-financings. The four-week average of re-financings is at the highest level since April 2004 as mortgage rates continue to plunge. The ADP Employment change for January was +130,000 jobs versus estimates of +40,000 and +37,000 in December. I suspect this Friday’s January employment report will modestly exceed estimates of +65,000. According to Intrade.com, the odds the US enters recession this year have fallen from 77.5% to 59.9% over the last week. I continue to believe the overwhelming majority of investors have already priced a recession into most stocks, despite the fact that most datapoints indicate slow growth, not a recession. Fed fund futures now imply a 74.0% chance for a 50 basis point rate cut and 26.0% chance for a 25 basis point cut today.

Bull Radar

Style Outperformer:

Large-cap Growth (+.15%)

Sector Outperformers:

I-Banks (+1.36%), Airlines (+.77%) and Restaurants (+.43%)

Stocks Rising on Unusual Volume:

FPO, TUP, BCA, CGX, OPY, FTD, JLL, UDR, WBSN, EGLT, BBOX, NETL, KNSY, SLAB, ZINC, CYBS, INFA, FLEX, JBHT, HLIT, UTEK, QMAR, RMBS, JRJC, ERTS, CHRW, IBCP, GILD, DSPG, ACV, ESRX, MHS, BA, SU, CLWR, DCM and DLLR

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Andrew Liveris, CEO of Dow Chemical(DOW), Doesn’t See Recession for US in 2008. (video)
- Copper Jumps the Most in Three Weeks as US Growth Concerns Ease.
- Uranium fell to a three-month low after Australia and Kazakhstan, two of the world’s three-biggest producers, reported higher output.
- Lehman Brothers Holdings(LEH) boosted the dividend on its stock by 13%, extending a 12-year streak of increases after posting smaller mortgage losses than rivals.
- The FBI is investigating 14 corporations for possible accounting fraud and other crimes related to the subprime lending crisis, officials said.
- Yahoo! Inc.(YHOO) said fourth-quarter profit fell 23% and projected revenue that missed some estimates after some customers switched to Google Inc.(GOOG) for online searches. The shares fell 10% in extended trading.
- JB Hunt Transport Services(JBHT) reported fourth quarter revenue rose 11% from year ago levels. The stock jumped 6.1% in after-hours trading.
- China deployed half a million soldiers to help restore transport links, power supplies and clear debris as the nation’s worst snowstorms in 50 years stranded migrant workers before the Lunar New Year holidays.

Wall Street Journal:
- Ford Motor(F) plans to bring its European commercial van, known as Transit Connect, to the US.
- The SEC and the China Banking Regulatory Commission will sign an agreement to allow Chinese banks to develop US mutual funds. The agreement is expected to be signed in the next few days and will let Chinese citizens invest savings in US markets.
- Arizona Sen. John McCain won Florida’s presidential primary, according to media projections, thrusting him into the forefront of the Republican race.

MarketWatch.com:
- The NY Insurance Department said on Tuesday that it hopes to have enough time to resolve bond insurer problems, ahead of possible decisions by rating agencies S&P and Moody’s Investors Service to downgrade leading companies in the $2.4 trillion industry.

CNBC:
- French Trader: Bosses Knew About Risky Trades.

Forbes.com:
- WaMu CEO Sees Boost From Fed Rate Cuts.

MSNBC.com:
- Former NYC mayor Rudy Giuliani will endorse Senator John McCain as the Republican nominee for president on Wednesday.

USA Today.com:
- Independent hotels cater to elite business travelers.
- Airlines blame fuel prices for losses but see solid demand.

Australian:
- Rio Tinto Group’s(RTP) advisers say BHP Billiton(BHP) can afford to increase its takeover offer to as much as five shares for one.

Business Times:
- Government of Singapore Investment Corp. could still invest in another distressed bank if the deal is worthwhile, citing Tony Tan, deputy chairman of the fund.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (LEA), target $42.
- Reiterated Buy on (GKSR), target $49.
- Reiterated Buy (STLD), target $66.

Night Trading
Asian Indices are -1.0% to unch. on average.
S&P 500 futures -.27%.
NASDAQ 100 futures -.30%.

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Earnings of Note
Company/EPS Estimate
- (D)/.55
- (AGN)/.58
- (BHI)/1.28
- (SEE)/.43
- (RCL)/.34
- (NCR)/.52
- (K)/.44
- (CEG)/1.42
- (WWW)/.44
- (MRK)/.73
- (KFT)/.44
- (EK)/.50
- (HES)/1.72
- (SO)/.24
- (BA)/1.33
- (UPS)/1.13
- (ITW)/.84
- (PHM)/-.76
- (SBUX)/ .27
- (AFL)/.80
- (NVLS)/.37
- (MUR)/1.24
- (ADS)/.68
- (AMZN)/.47
- (MBI)/-2.98
- (OI)/.42
- (MO)/.97

Upcoming Splits
- (KWK) 2-for-1

Economic Releases
8:30 am EST
- Advance 4Q GDP is estimated to rise 1.2% versus a 4.9% gain in 3Q.
- Advance 4Q Personal Consumption is estimated to rise 2.6% versus a 2.8% gain in 3Q.
- Advance 4Q GDP Price Index is estimated to rise 2.6% versus a 1.0% gain in 3Q.
- Advance 4Q Core PCE is estimated to rise 2.5% versus a 2.0% gain in 3Q.

2:15 pm EST
- The FOMC is expected to lower the benchmark fed funds rate to 3.0% from 3.5%.

Other Potential Market Movers
- The ADP Employment Change report, weekly EIA energy inventory report, weekly MBA mortgage applications report, (NNDS) Investor Day, (BLC) Analyst Meeting, (VDSI) Investor Conference and (CLWR) Investor Day could also impacting trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by shipbuilding and utility 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.

Stocks Finish Near Session Highs, Boosted Again by Financials, Homebuilders, Retailers

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In Play

Stocks Higher into Final Hour on Less Economic Pessimism

BOTTOM LINE: The Portfolio is mixed into the final hour as gains in my Computer longs, Retail longs and Commodity shorts offset losses in my Internet longs and Medical longs. I added (IWM)/(QQQQ) hedges, added (ISRG) puts and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The overall tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is about average. Investor anxiety is above average again. Today’s overall market action is bullish. Cyclicals, specifically transports, are especially strong. The heavily shorted and beaten-up financials, retailers and homebuilders are also strong again today. These groups have become very extended and short-term traders will likely take profits on tomorrow’s economic data and FOMC announcement. I wouldn't be surprised to see 4Q GDP and ADP Employment, which are released before the open tomorrow, surprise on the upside. This could also lead to weakness in the broad market, as traders cut expectations for a 50 basis point cut in the afternoon. I still sense there are a very large number of investors still on the sidelines who believe a complete retest or new lows are a certainty. This should keep pullbacks in the major averages relatively mild and short-term in nature. The VIX is falling 3.0% today, but remains high at 27.0. Weekly retail sales rose .7% this week, which is sluggish, but not recessionary. GM’s CFO said this afternoon that he does not see the US economy sliding into recession, as well. Fed fund futures now imply a 74% chance of a 50 basis point rate cut and a 26% chance for a 25 basis point cut tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering and bargain-hunting.