Consumer Prices Decelerate, International Demand for US Assets Stronger Than Expected, Industrial Production Higher Than Expected

- The CPI for December rose .3% versus estimates of a .2% gain and a .8% rise in November.

- The CPI Ex Food & Energy for December rose .2% versus estimates of a .2% gain and a .3% rise in November.

- Net Long-term TIC Flows for November fell to $90.9 billion versus estimates of $50.0 billion and $114.0 billion in October.

- Industrial Production for December was unch. versus estimates of a .2% decline and a .3% increase in November.

- Capacity Utilization for December fell to 81.4% versus estimates of 81.2% and 81.6% in November.

BOTTOM LINE: Consumer prices in the US rose at a slower pace in December, signaling that inflation may decelerate, Bloomberg said. Slower economic growth will make it harder for companies to pass on higher costs to consumers, economists said. Core consumer prices rose 2.4% for all of last year versus a 2.6% gain in 2006. Energy prices rose .9% in December versus a 5.7% gain the prior month. Fuel costs were up 18% in 2007, the most in 17 years. The 10-year TIPS spread, a good gauge of inflation expectations, fell to 2.18% this morning, which is the lowest level it has been since August 2003. If the commodity mania is finally ending, as I suspect, inflation expectations are about to drop dramatically. I continue to believe inflation fears have peaked for this cycle and the secular trend of disinflation remains firmly in tact.

International buying of US financial assets rose more than forecasts in November, Bloomberg reported. International holdings of US stocks rose a net $4.6 billion in November. I continue to believe international demand for US assets will remain healthy and may even strengthen over the intermediate-term as the US dollar firms.

Industrial Production in the US was greater than forecast in December as exports surged, Bloomberg reported. Record US exports and a consumer that slows, but doesn’t collapse, will help the US economy to avoid recession, economists said. Utility production fell .2% after 2 months of no change. Output of computers and peripherals rose 1.1% versus a 1.7% gain the prior month. I expect industrial production to increase slightly this month on more seasonal weather and inventory rebuilding.

Bull Radar

Style Outperformer:

Small-cap Value (+.46%)

Sector Outperformers:

Hospitals (+1.22%), HMOs (+1.15%) and Telecom (+1.14%)

Stocks Rising on Unusual Volume:

APU, CH, BEAS, NWPX, NITE, VRUS, QDEL, WOOF, RRGB, LLTC, PPDI, PENN, JAVA, FORM, IPCC, TXCO, LBTYA, LPHI, WYNN, SYMC, SCHL, CFFN, AMRI, LTC, SKS, GGP, AET and GLBC

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- House Financial Services Committee Chairman Barney Frank said Democrats are likely to reach an agreement with President Bush on an economic stimulus plan that may be passed early this year.
- The risk of Citigroup Inc.(C) defaulting fell after the biggest US bank wrote down the value of subprime mortgage investments by $18 billion, less than some analysts had anticipated. Credit-default swaps on NY-based Citigroup fell 2 basis points to 83 basis points.
- Stacy Smith, chief financial officer of Intel Corp.(INTC) sees no slowdown in computer business. (video)

Wall Street Journal:
- Toxic Factories Take Toll On China’s Labor Force.
- Romney Wins Michigan Primary After Tight Contest With McCain.
- John Paulson Bet Big on Drop in Housing Values; Greenspan Gets a New Gig, Soros Does Lunch.

MarketWatch.com:
- Rising oil prices meet silence on the campaign trail.
- Three Wall Street firms cut ratings across energy sector.

CNBC:
- Bank of America(BAC) said on Tuesday it would eliminate 650 corporate and investment banking jobs and sell its equity prime brokerage business.

NY Times:
- Bloomberg Hires Quadrangle to Manage His Wealth.

SmartMoney.com:
- Luxury Stocks at a Discount.
- Apple’s(AAPL) slim new laptop promises to pump up Mac sales.

Late Buy/Sell Recommendations
Citigroup:
- Upgraded (TIN) to Buy, target $26.
- Reiterated Buy on (MER), target $75.

Night Trading
Asian Indices are -3.0% to -2.0% on average.
S&P 500 futures -.65%.
NASDAQ 100 futures -1.56%.

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Earnings of Note
Company/EPS Estimate
- (AMR)/-.76
- (PGR)/.33
- (JPM)/.92
- (WFC)/.40
- (KMP)/.45
- (CLC)/.51
- (FIG)/.20

Upcoming Splits
- (STAN) 2-for-1

Economic Releases
8:30 am EST
- The Consumer Price Index for December is estimated to rise .2% versus a .8% gain in November.
- The CPI Ex Food & Energy for December is estimated to rise .2% versus a .3% gain in November.

9:00 am EST
- Net Long-term TIC Flows for November are estimated to fall to $50.0B versus $114.0B in October.

9:15 am EST
- Industrial Production for December is estimated to fall .2% versus a .3% gain in November.
- Capacity Utilization for December is estimated to fall to 81.2% versus 81.5% in November.

1:00 pm EST
- The NAHB Housing Market Index for January is estimated at 19.0 versus 19.0 in December.

2:00 pm EST
- Fed’s Beige Book

Other Potential Market Movers
- The weekly MBA Mortgage Applications report, weekly EIA energy inventory report, Cowen Consumer Conference and Goldman Sachs Energy Conference could also impact trading today.

BOTTOM LINE: Asian indices are sharply lower, weighed down by technology and financial 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 Lows on Rising Economic Worries

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In Play

Stocks Sharply Lower into Final Hour on Weakness in Homebuilders, Financials, Energy

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet longs, Computer longs, Semi longs, Retail longs and Medical longs. I added IWM/QQQQ hedges, was stopped out of my (UA) long and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The overall tone of the market is very negative today as the advance/decline line is substantially lower, almost every sector is declining and volume is above average. Investor anxiety is high. Today’s overall market action is very bearish. It is a big negative that the most beaten up and heavily shorted sectors with the most bad news already priced in are today’s worst performers. The fact that Alan Greenspan is going to work with the hedge fund that has arguably benefited more than any other from the destruction in housing likely means even more vocal and negative commentary from the former Fed chairman. The market’s biggest problem, in my opinion, is a lack of confidence in the future. Unfortunately, due to the explosion in popularity of low correlation/negative correlation investment funds and all the businesses that cater to them, there has never been a time in US history when this many market participants actually want to see a recession and bear market. This is the main reason for the deafeningly pessimistic rhetoric, in my opinion. The TED spread, a meaningful gauge of credit market angst, is dropping another 5 basis points today to 85 basis points. The TED spread is down 139 basis points in just over one month and is at its lowest level since August of last year. It appears as though a much larger positive catalyst than IBM’s report is needed to shake investors free the current malaise. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, bargain hunting, diminishing credit angst and lower energy prices.