Stocks Rising Again into Final Hour on Gains in Technology, Airline, REIT and Construction Shares

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Software longs, Semi longs and Biotech longs. I added a bit to my (GOOG) long and took some profits in another long today, thus leaving the Portfolio 100% net long. The overall tone of the market is very positive as the advance/decline line is higher, almost every sector is rising and volume is heavy. Investor anxiety is slightly above average, despite today’s gains. Today’s overall market action is very bullish given the jobs report, more news of impending subprime-related downgrades and recent sharp gains. Small and mid-caps are really flying today. The S&P 500 is now just 4.9% lower for the year and is massively outperforming almost every other global market. I suspect investment manager performance anxiety is coming into play again with so many proclaiming a new bear market had begun and short interest making new record highs right at the lows. The big story today is the monster gain in the semis. The (SMH) is 7% higher on the day, which is a significant new positive. The VIX is falling 7.0% today, but remains fairly high at 24.0. The ISE Sentiment Index is still below average at 124.0. Despite today’s jobs report the 10-year yield is rising slightly, the US dollar is surging and the odds for a recession this year are falling. Fed fund futures now imply a 70% chance for another 50 basis point rate at the March 18 meeting. I still believe the Fed is now “ahead of the curve” and it appears the market seems to agree. While the (MSFT)/(YHOO) deal is a short-term psychological negative for (GOOG), I suspect it will be viewed as a large positive over the intermediate-term. I also think the main causes for Google’s slight miss are temporary in nature and the company continues to build the foundation for stellar growth for much longer than most investors perceive. I view the stock as extremely attractive at current valuation levels given its prospects. Nikkei futures indicate an +253 open in Japan and DAX futures indicate an +58 open in Germany on Monday. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, less economic pessimism, lower energy prices and bargain-hunting.

Today's Headlines

Bloomberg:
- OPEC decided to keep oil production targets unchanged at its meeting in Vienna today.
- Crude oil is falling $2.50/bbl., despite OPEC saying it will not increase output, on a rise in the US dollar, less speculation by investment funds, decelerating global demand and record global production.
- Microsoft’s(MSFT) $44.6 billion unsolicited bid to buy Yahoo!(YHOO) signals a revival of mergers and acquisitions as corporate buyers exploit falling stock prices and fill a void left by private-equity firms.
- NY Insurance Superintendent Eric Dinallo is trying to organize a bank-led rescue of Ambac Financial(ABK) to prevent downgrades of the bond insurer that may roil credit markets. Ambac is soaring 16% on the news.
- Deutsche Bank AG, Germany’s largest bank, said it purchased US hedge fund administrator HedgeWorks, LLC.
- Republic of Iraq 1/15/2028 government bonds have risen from a low of 56.18 in August of last year to 69.75 today.
- Exxon Mobil(XOM), the world’s largest oil company, said fourth-quarter profit rose 14% amid the biggest increase in crude prices in the 148-year history of the petroleum industry.

Wall Street Journal:
- Societe Generale SA has stopped paying Jerome Kerviel, the trader whose unauthorized bets led to the biggest trading loss in history, yet it hasn’t been able to fire him.
- A Chicago-based hedge fund plans to launch a proxy fight Friday designed to force apartment real-estate investment trust Post Properties(PPS) to consider offers to sell itself.
- Anheuser-Busch(BUD) and InBev NV, the world’s largest brewer by volume, have talked about merging and may do so this year.
- Billionaire investor Carl Icahn has amassed “a big stake” in JC Penney(JCP), the third-largest US dept.-store chain. Icahn’s stake may be among his top five holdings and be worth hundreds of millions of dollars.

NY Times:
- Law Firm Helped Bundle Home Loans Into Securities.
- Having failed in recent year to impeach President Bush and stop the war in Afghanistan, members of the Berkeley, California City Council approved a resolution that encourages people to nonviolently “impede, passively or actively,” the work of military recruiters.

USA Today:
- State and local government workers are enjoying major gains in compensation, pushing the value of their average wages and benefits far ahead of private workers, a survey shows.

NY Daily News:
- The laptop Apple’s(AAPL) billion as the “world’s thinnest” could be in stores as early as today.

Non-Farm Payrolls Below Estimates, Unemployment Falls, Confidence Bounces, Manufacturing Expanding, Construction Declines

- The Change in Non-farm Payrolls for January was -17K versus estimates of 70K and an upwardly revised +82K in December.

- The Unemployment Rate for January fell to 4.9% versus estimates of 5.0% and 5.0% in December.

- Average Hourly Earnings for January rose .2% versus estimates of a .3% gain and a .4% rise in December.

- Final Univ. of Mich. Consumer Confidence for January fell to 78.4 versus estimates of 79.0 and a prior estimate of 80.5.

- ISM Manufacturing for January rose to 50.7 versus estimates of 47.3 and a reading of 48.4 in December.

- ISM Prices Paid for January rose to 76.0 versus estimates of 68.0 and a reading of 68.0 in December.

- Construction Spending for December fell 1.1% versus estimates of a .5% decline and a .4% decline in November.

BOTTOM LINE: Non-farm payrolls unexpectedly declined for the first time in more than four years, increasing the odds the Federal Reserve will cut rates another half point next month, Bloomberg reported. However, the unemployment rate unexpectedly fell back to 4.9% from 5.0% the prior month. Moreover, December’s job gains were revised higher from +18,000 to +82,000. Service industries, which include banks, insurance companies, restaurants and retailers, actually added 34,000 workers in January. Government payrolls shrank by 18,000, the first decrease in six months and builders trimmed payrolls by 27,000. Wages rose a healthy 3.7% from year ago levels. Today’s report runs counter to the ADP Employer Services report released Wednesday that showed a 130,000 gain in jobs during January. I expect January non-farm payrolls to be revised higher and a bounce-back in job creation in February.

Confidence among US consumers rose in January from a month earlier, the first increase in six months, as Americans’ sentiment about their economic prospects improved, Bloomberg reported. The Expectations component of the index rose to 68.1 from 65.5 in December. The Current Conditions component, which reflects Americans’ perceptions of their financial situation and whether it is a good time to buy big-ticket items such as cars, rose to 94.4 from 91.0 in December. I expect Consumer Confidence to rise again this month on less economic pessimism, lower interest rates, lower energy prices and a rising stock market.

Manufacturing in the US unexpectedly expanded in January, showing business investment is rising, Bloomberg reported. International sales and a backlog of orders may continue to help support manufacturing. The Employment component fell to 47.1 from 48.7 the prior month. The Prices Paid component rose to 76 from 68 in December. The New Orders component rose to 49.5 from 46.9 the prior month. The Production gauge jumped to 55.2 from 48.6 prior. The Inventory component rose to 49.1 from 45.4. The Export Orders component surged to 58.5 from 52.5 in January. I continue to expect manufacturing to help boost overall US growth over the intermediate-term as record low inventories are rebuilt and exports continue to boom.

Spending on US building projects fell more than forecasts in December, reflecting homebuilders’ attempts to pare down inventories, Bloomberg reported. Private residential construction fell 18% for all of 2007. Non-residential construction was unch. for the month and jumped 16% for the year. Private non-residential construction rose 1.3%, reflecting increases in factory and communications facilities. Overall construction activity will remain muted over the intermediate-term as homebuilders continue to bring down inventories.

Bear Radar

Style Underperformer:

Large-cap Value (-.14%)

Sector Underperformers:

Oil Tankers (-2.75%), Software (-2.7%) and Gold (-1.75%)

Stocks Falling on Unusual Volume:

MIL, SXE, ELY, OMCL, AVID, PFWD, CERN, DRIV, COLM, MSFT, BPHX, CAVM, GOOG, INSU, OMRI and GFI

Bull Radar

Style Outperformer:

Mid-cap Growth (+1.01%)

Sector Outperformers:

Steel (+3.2%), Semis (+3.0%) and Construction (+2.5%)

Stocks Rising on Unusual Volume:

CCO, DLB, ZZ, AGM, SWC, XSD, JCG, BBL, YHOO, SWIR, IWOV, TSRA, ONEX, SBNY, ISRG, STAR, AFFX, MCRS, LAVA, INFN, BLOG, MNST, AMAG, RADS, ALTR, INFY, ORLY, TWIN, IVN, DOV, PGI, SNP, PTR, AXA, CA, RNOW, NAK and TSCO

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