Housing Starts Slow, Labor Market Remains Healthy

- Housing Starts for December fell to 1933K versus estimates of 2035K and 2121K in November.
- Building Permits for December fell to 2068K versus estimates of 2100K and 2163K in November.
- Initial Jobless Claims for last week fell to 271K versus estimates of 315K and 307K the prior week.
- Continuing Claims are estimated to fall to 2534K versus estimates of 2686K and 2692K prior.

BOTTOM LINE: US housing starts fell to a nine-month low in December as rising interest rates and prices make buying less affordable and builders pull back after the second-best year in history, Bloomberg reported. Starts declined 24% in the Midwest, 22% in the West and 14% in the Northeast. Starts rose 5.2% in the South. It is a positive that housing starts are slowing as sales slow. This should help ensure the market slows to a healthy sustainable level.

The number of Americans filing first-time claims for unemployment benefits unexpectedly fell last week to the lowest since April 2000, evidence that companies are holding on to workers to meet demand, Bloomberg reported. The four-week moving average of initial claims fell to 299,000, the lowest since October 2000. The unemployment rate among people eligible for benefits, which tracks the US unemployment rate, fell to 2% versus 2.1% the prior week. I continue to believe the labor market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- Brazil’s central bank stepped up the pace of interest rate reductions today in a bid to shore up growth in Latin America’s biggest economy.
- Asian stocks rebounded from their biggest declines in nine months, led by Samsung Electronics and BHP Billiton.
- The Tokyo Stock Exchange may be forced to close early for a second day as transactions reached 2.2 million at the 11 am midday break, or more than half the limit the bourse has set to avoid overloading its computers.

Xinhua News Agency:
- China investigated 32,162 government officials for corruption during the first 11 months of last year and 18,755 of them were sentenced by courts, citing figures from the Supreme People’s Procuratorate.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on (MYL), (SEPR), (JNC), (BBG) and (CAH).
- Reiterated Underperform on (UNH), (ABC), (HBAN) and (MRK).

Night Trading
Asian Indices are +.50% to +1.50% on average.
S&P 500 indicated +.20%.
NASDAQ 100 indicated +.32%.

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Earnings of Note
Company/EPS Estimate
(BZH)1.96
(COF).94
(CMA)1.18
(DHI).94
(FFIV).45
(FCS).07
(FSL).38
(GNSS).24
(HDI).81
(HYSL).36
(IGT).27
(MER)1.29
(MCHP).32
(MOT).34
(PFE).42
(RMBS).08
(SFA).43
(UNH).66
(WB)1.11
(XLNX).26

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Housing Starts for December are estimated to fall to 2035K versus 2132K in November.
- Building Permits for December are estimated to fall to 2100K versus 2163K in November.
- Initial Jobless Claims for last week are estimated to rise to 315K versus 309K the prior week.
- Continuing Claims are estimated to fall to 2682K versus 2702K prior.

12:00 pm EST
- Philly Fed. for January is estimated to rise to 13.0 versus 10.9 in December.

BOTTOM LINE: Asian indices are higher, boosted by tech companies and exporters in the region. I expect US equities to open mixed and to rally later in the day, finishing modestly higher. The Portfolio is 75% net long heading into the day.

Stocks Finish Mostly Lower, Pressured by Large-cap Commodity and Tech Shares

Indices
S&P 500 1,277.93 -.39%
DJIA 10,854.86 -.38%
NASDAQ 2,279.64 -1.0%
Russell 2000 703.78 +.02%
S&P Barra Growth 611.41 -.46%
S&P Barra Value 662.11 -.32%
Morgan Stanley Consumer 599.77 +.25%
Morgan Stanley Cyclical 779.53 -.64%
Morgan Stanley Technology 543.62 -.83%
Transports 4,129.69 +.95%
Utilities 420.83 -.11%
Put/Call 1.0 +29.87%
NYSE Arms 1.23 +12.22%
Volatility(VIX) 12.25 +2.85%
ISE Sentiment 172.00 -8.51%
US Dollar 89.25 -.06%
CRB 338.80 -1.07%

Futures Spot Prices
Crude Oil 65.85 +.18%
Unleaded Gasoline 177.34 +.01%
Natural Gas 8.70 +.07%
Heating Oil 175.34 -.12%
Gold 543.60 -.17%
Base Metals 162.64 +1.09%
Copper 211.80 -.09%
10-year US Treasury Yield 4.33% +.18%

Leading Sectors
Airlines +4.46%
HMOs +1.85%
Networking +1.04%

Lagging Sectors
Internet -2.14%
Oil Tankers -2.64%
Gold & Silver -3.05%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on (EBAY).
- Reiterated Underperform on (TER).

Afternoon/Evening Headlines
Bloomberg:
- Increased manufacturing and employment helped the US economy expand in the final weeks of last year, with competition and lower energy costs holding down prices increases in some areas, the Federal Reserve said.
- Kohlberg Kravis Roberts, seeking to raise more than $10 billion for its biggest buyout fund ever, won a $1.5 billion commitment from the Oregon Investment Council.
- EBay(EBAY) said fourth-quarter profit jumped 36% after US sales outpaced growth in Europe.
- Apple Computer(AAPL) said first-quarter profit almost doubled and sales reached a record, buoyed by surging holiday sales of iPod digital music players.
- Advanced Micro Devices(AMD) posted its highest quarterly profit in more than four years after the company took sales from Intel Corp.(INTC).
- Exxon Mobil(XOM) expects global gasoline and diesel production to expand faster than demand over the next five years, squeezing refining profits that set records last year.
- Natural gas fell for the sixth time in seven sessions on more predictions of mild winter weather.

Wall Street Journal:
- US billionaire investor Carl Icahn, who is urging Time Warner(TWX) be split up, would merge the company’s America Online and entertainment businesses with a smaller Internet portal.

Financial Times:
- Google(GOOG) and Yahoo!(YHOO) are extending their rivalry to local and image searches, citing Keynote Systems.

BOTTOM LINE: The Portfolio finished lower today on losses in my Semi longs, Medical longs and Internet longs. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was modestly negative today as the advance/decline line finished slightly lower, sector performance was mixed and volume was heavy. Measures of investor anxiety were higher into the close. Overall, today's action was mildly bearish considering the declines in Asian markets, commodity stocks and several tech leaders. Apple Computer(AAPL), one of my longs, is down 3 points after-hours. This appears to be an overreaction to me. I may buy more tomorrow if losses worsen.

Major Averages Lower into Final Hour, Pressured by Energy and Technology Shares

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet longs, Semi longs and Medical longs. I added to my GOOG long and to my IWM and QQQQ shorts, thus leaving the Portfolio 75% net long. The tone of the market is modestly negative as the advance/decline line is lower, most sectors are falling and volume is heavy. Measures of investor anxiety are higher. Today's "global selloff" is only resulting in a 0.6% decline in the S&P 500 (SPX). The SPX is still 2.2% higher for the year, while the Nasdaq is 3.2% higher. This is better than most other major global indices. One of last year's best performers, the Nikkei, is now down 4.8% for the year. It is too early to tell, but it appears to me that a global rotation back into U.S. stocks is in its early stages. I expect US stocks to trade modestly higher from current levels into the close on short-covering, positive economic data and lower energy prices.

Today's Headlines

Bloomberg:
- Ford Motor(F) last week started offering an all-expenses-paid college education to laid-off workers at one truck plant, a plan it will soon extend to at least one other factory.
- ASML Holding NV(ASML), Europe’s largest maker of semiconductor equipment and a bellwether for the chip industry, said orders in the fourth quarter were are the highest in five quarters, indication a market rebound.
- Gold in NY fell 1.5%, the most in almost two weeks, as US consumer prices unexpectedly fell in December, eroding the precious metal’s appeal as a hedge against inflation.
- Burlington Coat Factory Warehouse, a discount retailer with three US chains, agreed to be purchased by Bain Capital Partners LLC for $2.06 billion after struggling to compete against rivals such as Syms Corp.
- The US and the EU rebuffed Iran’s proposal to resume talks on the Islamic republic’s nuclear program until it ceases the recent resumption of research.
- Energy prices reversed morning gains even as supply worries persist.

Wall Street Journal:
- Citigroup Inc.(C) plans to start its own electronic stock-trading network, in a move that may steal some market share from the NYSE and Nasdaq.
- Apple Computer’s(AAPL) newly revised iMac G5 has been converted to Intel Corp.(INTC) processors at no discernible loss in speed or function, even though Apple had to add a translator to allow most existing third-party software to function, Walter Mossberg wrote.

NY Times:
- Two subway trains on NYC Transit’s L line between Rockaway Parkway and Broadway Junction are now operating under computer control during early morning hours as part of a $228 million project.

USA Today:
- Methamphetamine use triggers the most US emergency room visits of any drug, citing a National Assoc. of Counties survey of 200 hospitals.

Reuters:
- US first lady Laura Bush pledged $163 million this year to help combat AIDS in Nigeria.