Good Monday Morning

Monday Morning Links:

Dr. Brett on the bearish equity-put call ratio. (Our analysis has that ratio pegged as bullish, which illustrates the conundrum many technical investors are facing at the moment)

Abnormal Returns with links on the Blackstone IPO.

Alpha Male reports on hedge fund of funds.

Daily Options Report on March Expiration Madness.

The Curse of the Fat-Fingered Trader from FT Alphaville via Barry Ritholtz.

Great post from Hedge Fund blog on the 2 and 20 fee structure.

Millionaire Now! on the lag in mining stocks.

The U.S. markets slid last week on concerns of broad-market contagion linked to an increased level of mortgage defaults. Also, several economic reports illustrated that inflation remains a concern, which further reduces the likelihood of a Fed interest-rate cut in the near future.

Both the Financial and Retail sectors were down on speculation that rising foreclosures will slow home sales and restrain retail spending. Prices increased more than economists expected last month, as seen in the PPI and CPI repots.

The S&P 500 fell 15.90, or 1.1 percent, to 1386.95, wiping out the prior week's recovery and slipping to its level from the week ended March 2, when it dropped 4.4 percent. The Dow Jones Industrial Average sank 165.91, or 1.4 percent, to 12,110.41 while the NASDAQ Composite Index declined 14.89, or 0.6 percent, to 2372.66. Decliners outnumbered gainers on the NYSE by about five to three.

Our long-term market model remains bearish as of December 8^th. The total universe of stocks, ETF’s and mutual funds which we review on a daily basis is 1859. Of those reviewed, 276 are rated "Buy," 743 are rated "Sell" and 840 "Neutral.” We reduced our model portfolio allocations this past week and are currently recommending an allocation of 75% in cash or money market investments and 25% mixed between long and inverse funds. The model stock portfolio remains roughly 27% long with 73% cash.

The traditional technical measurements of market health match up closely to those in place last year between mid-May and late-July. The only bullish technical indicators we observe are the Bullish % Indexes for the S&P 500, NASDAQ and NYSE. All the other technical indicators, with the exception of the NYSE TRIN, are Bearish as of Friday’s close.

However, we’re seeing mixed readings with regard to the sentiment indicators we employ in our analysis. The volatility experienced over the last two weeks has brought VIX up to levels that we define as Bullish. Overall, on a technical basis the market appears to be in line with what can be expected following a modest correction.

As in the prior two or three weeks, we continue to see opportunities for alpha within the Utilities (IDU), Telecom (IXP and IYZ), Broadband (BDH) and Basic Materials (IYM).

The Utility sector is our top rated, currently holding a “Buy” recommendation with an AAS Rating Score of 26.93. Those interested in Utilities for alpha might look at the following ETF and mutual funds: Utilities HOLDRS (UTH), iShares DJ US Utilities (IDU), Vanguard Utilities (VPU), Fidelity Select Utilities Growth (FSUTX), Utilities Spider (XLU), ProFund Ultra Sector Utilities (UTPIX), Rydex Utilities (RYUIX). On an equity basis, Entergy Corp (ETR), Questar Corp (STR), Constellation Energy Group (CEG) or Public Service Enterprise Group (PEG) are generating alpha.

Basic Materials alternatives include: Profund Ultra Sector Basic Materials (BMPIX), Rydex Basic Materials (RYBIX), iShares DJ US Basic Materials (IYM), Vanguard Materials (VAW) and Materials SPDR (XLB). Allegheny Technologies (ATI), Ryerson Inc. (RYI), Rock-Tenn Co. (RKT), Chaporral Steel (CHAP), Cleveland Cliffs Inc. (CLF), Temple Inland, Inc. (TIN) and Steel Dynamics Inc. (STLD) are also solid.

Within the Telecomm / Broadband grouping look at Fidelity Select Comm. Eqp. (FSDCX), ProFund Ultra Sector Telecom (TCPIX), Rydex Telecommunications (RYMIX), Belden CDT Inc. (BDC), MEMC Electrical Material (WFR), Avnet Inc. (AVT), Fei Co. (FEIC), Commscope Inc. (CTV), Qualcomm Inc. (QCOM), Anixter International Inc. (AXE), Harmonic Lightwaves, (HLIT) and Quanta SVCS, Inc. (PWR).

Short-Term Technical Indicators

Investor Sentiment

Long-Term Market Model – Bearish since December 8^th.

Asset Allocation – AAS Model Portfolios have 75% cash allocations and mixed long – short allocations.

Top Alpha Generating Securities
Date = Date of AAS “Buy” or “Short/Sell” Recommendation

Top Major Market ETF – No buy recommended major market investments

Top Style-Box ETF for Alpha – No buy recommended style-box investments

Top Sector ETF for Alpha – iShares Dow Jones U.S. Utilities (IDU 3/12/07)

Top Long Stocks for Alpha

Precision Castparts Corp. (PCP 9/20/06)

Allegheny Technology Inc. (ATI 10/5/06)

Deckers Outdoor Corp. (DECK 9/7/06)

Blue Coat Systems Inc. (BCSI 3/1/07)

WebEx Communications Inc. (WEBX 2/13/07)

Belden CDT Inc. (BDC 1/19/07)

Chemed Corp. (CHE 3/8/07)

Constellation Energy Group Inc. (CEG 11/24/06)

Ryerson Inc. (RYI 12/7/06)

Rock-Tenn Co. (RKT 4/27/06)

Top Short Stocks for Alpha

Beazer Homes USA Inc. (BZH 1/25/07)

Meritage Homes Corp. (MTH 12/18/06)

Spectrum Brands Inc. (SPC 2/8/07)

Shuffle Master Inc. (SHFL 12/11/06)

The Ryland Group Inc. (RYL 2/20/07)

Good Morning

High volatility continues to define the trading environment, with the Dow dropping below 12,000 intraday only to end the session well above that psychologically significant level. Wednesday’s market volatility was driven by somewhat positive news on the U.S Current Account deficit, which reportedly narrowed for the last quarter. The improvement came in part due to lower costs for imported oil and the slowing of price increases associated with other imported goods. Reports released by both the Department of Labor and the Department of Commerce reflected the improvement in the Current Account Deficit.

The Dow Jones Industrial Average was up 57.44 points, or 0.48 percent, to end at 12,133.40. The S&P 500 Index finished up 9.22 points, or 0.67 percent, at 1,387.17 and the NASDAQ Composite Index ended up 21.17 points, or 0.90 percent, at 2,371.74. All three indices erased significant mid-session tumbles as investor’s regained confidence believing that mortgage delinquencies pose less of a risk to the financial system than previously thought. Elsewhere it was reported that all sixteen homebuilders in the S&P 500 advanced.

Trading was moderate to heavy, with about 2.08 billion shares changing hands on the NYSE with advancing stocks outnumbering declining ones by a ratio of about 20 to 13. On the tech-heavy NASDAQ, about 2.29 billion shares were traded with about sixteen advancers for every 13 decliners.

The Bearish posture of our Major Market Model has deepened as the result of this weeks weak market performance and we maintain our Bearish advisory which as been in place since December 8^th, 2006. We’ve made the decision to reduce both our long and short exposure further from 50% to 25%, thus increasing our cash levels to 75% in all five model portfolios. We feel that maintaining a significant allocation in money market investment is the best strategy over the short-term.

You will note that we have removed New Century Financial Corp. (NEW) from Today’s Top “Sell” Recommended Stocks list after a long run. The removal came after the NYSE suspended trading in the shares of NEW on Tuesday due to the worsening financial condition of the company along with a pull back by lenders and rumors of defaulted debt obligations.

Short-Term Technical Indicators

Investor Sentiment

Long-Term Market Model – Bearish since December 8^th.

Asset Allocation – AAS Model Portfolios have 75% cash allocations and mixed long – short allocations.

Beta Exposure and Portable Alpha Generation
Date = Date of AAS “Buy” or “Short/Sell” Recommendation

Top Rated Major Market Derivative – No buy recommended major market investments

Top Rated Style-Box Derivative – No buy recommended style-box investments

Top Rated Sector Derivative – Broadband HOLDRs (BDH 3/14/07)

Today’s Top “Buy” Recommended Stocks

Chicago Mercantile Exchange (CME 3/6/07)

RTI International Metals (RTI 10/11/06)

Precision Castparts Corp. (PCP 9/20/06)

Blue Coat Systems Inc. (BCSI 3/1/07)

Deckers Outdoor Corp. (DECK 9/7/06)

Belden CDT, Inc. (BDC 1/19/07)

Ryerson Inc. (RYI 12/7/06)

Chemed Corp. (CHE 3/8/07)

Deere & Co. (DE 1/11/07)

Big Lots Inc. (BIG 5/25/06)

Today’s Top “Sell” Recommended Stocks

Meritage Homes Corp. (MTH 12/18/06)

Beazer Homes USA Inc. (BZH 1/25/07)

Fremont General Corp. (FMT 12/29/06)

Daktronics Inc. (DAKT 2/14/07)

Shuffle Master Inc. (SHFL 12/11/06)

Good Morning

Our long-term market model remains bearish as of December 8^th. The total universe of stocks, ETF’s and mutual funds which we review on a daily basis is 1862. Of those reviewed, 258 are rated "Buy," 767 are rated "Sell" and 837 "Neutral." Our model portfolios are currently allocated with 50% in cash or money market investments and the other 50% mixed between long and inverse funds. The model stock portfolio remains roughly 50% long with 50% cash.

Although our analytic has yet to upgrade any Major Market, Style-Box or Sector investments, we continue to see alpha generation in the following sectors: Transport, Utilities, Basic Materials, Telecom, and Natural Resource. In terms of style-box categories, the Mid Cap groups are showing the most strength.

Some Exchange Traded funds worth further examination include PowerShares Dynamic Semiconductors (PIS) and Semiconductor HOLDRs (SMH) along with iShares Dow Jones Basic Materials (IYM), Vanguard Materials (VAW)and Materials SPIDR (XLB). Attractive plays in the Utilities sector would include Utilities HOLDRs (UTH), iShares Dow Jones U.S. Utilities (IDU) and Vanguard Utilities (VPU).

In line with the above mentioned sectors, funds generating alpha from Fidelity include Fidelity Select Utilities Growth (FSUTX), Fidelity Select Telecommunications (FSTCX), Fidelity Select Natural Resources (FNARX) and Fidelity Select Electronics (FSELX).

Sector plays from ProFunds would include both the Ultra Sector Wireless (WCPIX) and the Rising U.S. Dollar fund (RDPIX). Those seeking to work into the bearishness of the market would find the Ultra Short OTC (USPIX), Ultra Short Dow (UWPIX) and Ultra Bear (URPIX) funds to their likening. Similar selections from within the Rydex family include Inverse Dynamic OTC (RYVNX), Inverse Dynamic Dow (RYCWX), Inverse S&P 500 (RYTPX)and Inverse OTC (RYAIX).

What started as a promising early morning rally fizzled out after lunch on Friday, as investors and traders alike closed their positions over the weekend. Moving the market was data indicating the continuation of moderate economic growth. Among the data points released was a decrease in the U.S. trade deficit in January to $59.1 billion, the addition of 97,000 jobs to non-farm payrolls in February and the easing in the unemployment rate from 4.6 to 4.5 percent. But concerns over the sub-prime mortgage market curbed the optimism from the healthy economic reports.

The Dow Jones Industrial Average rose 15.62 points, or 0.13 percent, to 12,276.32. The S&P 500 index edged up 0.96 point, or 0.07 percent, to 1,402.85 and the NASDAQ Composite index slipped 0.18 point, or 0.01 percent, to 2,387.55. All three U.S. stock indexes rose over the past week.

U.S. Treasury bond and gold prices fell after the jobs data while the dollar rallied. Benchmark 10-year notes traded down 18/32 in price for a yield of 4.60 percent. Spot gold rose as high as $658.00 an ounce before falling to $649.90/650.65 and gold for April delivery on the COMEX settled down $3.50 at $652.00 an ounce. The Dollar erased more than half of the losses incurred from the carry trade sell-off, with the greenback up 1.3% this week to 118.37 Yen. The Euro traded lower by 0.1% to $1.3111. Finally, April crude settled $1.59 lower, or 2.6 percent, at $60.05 a barrel.

The FTSE 100 ended up 17.5 points, or 0.28 percent, at 6,245.2 while the FTSEurofirst 300 Index closed up 0.2 percent at 1,489.5 points. The CAC 40 gained 0.3 percent while the DAX ended up 0.1 percent. In Tokyo, the Nikkei 225 Index gained 0.43 percent to close at 17,164.04.

The week ahead is chock full of economic data that will give investors further insight into the health of the economy and direction of interest rates. Tuesday will see the release of February retail sales and Thursday will see the Producer Price Index. But most of the data comes at the end of the week including the Consumer Price Index, March Consumer Sentiment, and the Federal Reserve’s February report on industrial production and capacity utilization. Finally, Friday marks the quarterly expiration and settlement of four different types of March futures and options contracts -- a convergence known as quadruple witching.

Short-Term Technical Indicators

Investor Sentiment

Long-Term Market Model – Bearish since December 8^th.

Asset Allocation – AAS Model Portfolios have 50% cash allocations and mixed long – short allocations.

Beta Exposure and Portable Alpha Generation
Date = Date of AAS “Buy” or “Short/Sell” Recommendation

Top Rated Major Market Derivative – No buy recommended major market investments

Top Rated Style-Box Derivative – No buy recommended style-box investments

Top Rated Sector Derivative – No buy recommended sector investments.

Today’s Top “Buy” Recommended Stocks

Chicago Mercantile Exchange (CME 3/6/07)

Martin Marietta Materials, Inc (MLM 11/6/06)

Vulcan Materials Co. (VMC 10/31/06)

Brush Engineered Material (BW 3/6/07)

Precision Castparts Corp. (PCP 9/20/06)

Allegheny Technologies Inc. (ATI 10/5/06)

Chemed Corp. (CHE 3/8/07)

Blue Coat Systems Inc. (BCSI 3/1/07)

Deckers Outdoor Corp. (DECK 9/7/06)

Belden CDT Inc. (BDC 1/19/07)

Today’s Top “Sell” Recommended Stocks

New Century Financial Corp. (NEW 6/13/06)

Meritage Homes Corp. (MTH 12/18/06)

Fremont General Corp. (FMT 12/29/06)

Plexus Corp. (PLXS 1/5/07)

Beazer Homes USA Inc. (BZH 1/25/07)

Good Morning

I’ve updated the PDF files for the five AAS Model Portfolios through the end of January 2007. Those files, which include performance analysis, holdings and allocations, can be seen by clicking on the portfolio link in the performance chart to the right.

Our long-term market model remains bearish as of December 8^th. The total universe of stocks, ETF’s and mutual funds which we review on a daily basis for alpha is 1866. Of those reviewed, 97 are rated "Buy," 768 are rated "Sell" and 1001 "Neutral." Our model portfolios are currently allocated with 50% in cash or money market investments and the other 50% mixed between long and inverse funds. The model stock portfolio remains roughly 50% long with 50% cash.

Tuesday’s momentum and impressive rebound was unsustainable yesterday as stocks lost ground in late trading. The majority of the session was spent in a narrow trading range, with traders and investors seeming shrugging off inflationary concerns and weak economic data. A much welcomed return to normalcy fell upon the global markets, evident in the pre-market futures, which translated to average volume on Wall Street.

Perhaps indicative of the conundrum facing investors, the question after Wednesday is whether the resilience of the broad-indexes in the face of “stubborn inflation” and weak economic data is a sign of stability or evidence that complacency is still rampant.

The Dow Jones industrial average fell 15.14, or 0.12 percent, to 12,192.45. The S&P 500 index fell 3.44, or 0.25 percent, to 1,391.97, the NASDAQ composite index declined 10.50, or 0.44 percent, to 2,374.64 and the Russell 2000 index fell 2.98, or 0.38 percent, to 775.90.

With much of the day spent range-bound, advancing issues ended roughly equal to declining issues on the NYSE, with volume around 1.72 billion shares. On the NASDAQ, about 2.07 billion shares were traded, above last year's daily average of 2.02 billion, with three stocks down for every two that were up.

The Federal Reserve Beige Book, released on Wednesday, indicated modest economic growth in February for most of the country, although four of the twelve districts reported slowing activity. This of course perpetuated the flight to quality that began last week as investors grow increasingly wary of a weakening economy. The benchmark 10-year Treasury note rose 10/32 in price for a yield of 4.495 percent, compared with 4.52 percent before the report and 4.54 percent late on Tuesday. Two-year notes, which are closely correlated to interest-rate expectations, rose 2/32 in price for a yield of 4.54 percent versus 4.58 percent late on Tuesday.

The Beige Book pushed the dollar lower on the belief that the Fed might have to cut interest rates more than once this year. The dollar fell to 115.84 yen while the euro closed at $1.32. A surprise drop in U.S. supplies pushed crude oil for April delivery higher by $1.13 to settle at $61.82 a barrel on the NYMEX. Precious metals ended lower with gold falling to $648.50 an ounce and silver down at $12.93 an ounce.

Uncertainty defined the global markets as well on Wednesday with most major indexes ending on a mixed note. Japan's Nikkei stock average closed down 0.47 percent and Hong Kong's Hang Seng Index fell 0.73 percent, but the Shanghai Composite Index rose 1.99 percent. In Europe, Britain's FTSE 100 closed up 0.29 percent, Germany's DAX index added 0.34 percent, and France's CAC-40 advanced 0.33 percent.

Short-Term Technical Indicators

Investor Sentiment

Long-Term Market Model – Bearish since December 8^th.

Asset Allocation – AAS Model Portfolios have 50% cash allocations and mixed long – short allocations.

Beta Exposure and Portable Alpha Generation
Date = Date of AAS “Buy” or “Short/Sell” Recommendation

Top Rated Major Market Derivative – No buy recommended major market investments

Top Rated Style-Box Derivative – No buy recommended style-box investments

Top Rated Sector Derivative – No buy recommended sector investments.

Today’s Top “Buy” Recommended Stocks

Chicago Mercantile Exchange (CME 3/6/07)

Vulcan Materials Co. (VMC 10/31/06)

Precision Castparts Corp. (PCP 9/20/06)

Brush Engineered Material (BW 3/6/07)

The Goodyear Tire & Rubber Co. (GT 8/24/06)

Deere & Co. (DE 1/11/07)

Ryerson Inc. (RYI 12/7/06)

Avnet Inc. (AVT 10/5/06)

Blue Coat Systems Inc. (BCSI 3/1/07)

MEMC Electronic Materials (WFR 1/8/07)

Today’s Top “Sell” Recommended Stocks

New Century Financial Corp. (NEW 6/13/06)

Meritage Homes Corp. (MTH 12/18/06)

Beazer Homes USA Inc. (BZH 1/25/07)

OM Group Inc. (OMG 3/5/07)

Fremont General Corp. (FMT 12/29/06)

Dead Cat Bounce?

Our long-term market model remains bearish as of December 8^th. The total universe of stocks, ETF’s and mutual funds which we review on a daily basis is 1876. Of those reviewed,188 are rated "Buy," 653 are rated "Sell" and 1035 "Neutral." Our model fund portfolios are currently allocated with 50% in cash or money market investments and the other 50% mixed between long and inverse funds. The model stock portfolio remains roughly 75% long with 25% cash.

There are currently no “buy” recommended major market, style box or sector investments being generated by our models. This is to be expected after such a large sell-off since momentum and relative strength are critical components. In terms of AAS Rating Score analysis, Mid and Small cap investments continue to out-rank their Large cap counterparts. Performance comparisons over various time frames validate the ranking. However, investors concerned about a more substantial correction or even potential recession will shift their allocation focus to large cap equities, which often produce dividends and defensive earnings growth. If this broad-based shift takes place, large cap investments will begin to generate alpha based primarily on the influx of capital.

With regards to our sector analysis, those sectors previously listed as “buy” recommended over the last several weeks have maintained their position at the top of our list. These sectors include Utilities (IDU), Telecom (IXP and IYZ), Basic Materials (IYM) and Real Estate (IYR). Weakness in the Financial (IYF and IYG) sectors can be partially attributed to the sub-prime mortgage market as well as uncertainty surrounding the interest rate environment.

Short-Term Technical Indicators

Investor Sentiment

Long-Term Market Model – Bearish since December 8^th.

Asset Allocation – AAS Model Portfolios have 50% cash allocations and mixed long – short allocations.

Beta Exposure and Portable Alpha Generation
Date = Date of AAS “Buy” or “Short/Sell” Recommendation

Top Rated Major Market Derivative – No buy recommended major market investments

Top Rated Style-Box Derivative – No buy recommended style-box investments

Top Rated Sector Derivative – No buy recommended sector investments.

Today’s Top “Buy” Recommended Stocks

Vulcan Materials Co. (VMC 10/31/06)

Martin Marietta Materials, Inc. (MLM 11/6/06)

Texas Industries Inc. (TXI 10/11/06)

U.S. Steel Corp. (X 2/28/07)

Avnet Inc. (AVT 10/5/06)

Weyerhaeuser Co. (WY 1/3/07)

TXU Corp. (TXU 2/23/07)

Temple-Inland, Inc. (TIN 12/5/06)

Itron Inc. (ITRI 1/19/07)

Ryerson Inc. (RYI 12/7/06)

Today’s Top “Sell” Recommended Stocks

New Century Financial Corp. (NEW 6/13/06)

Google Inc. (GOOG 12/18/06)

Fremont General Corp. (FMT 12/29/06)

Plexus Corp. (PLXS 12/29/06)

SanDisk Corp. (SNDK 10/20/06)

Correction...Not Quite

What a ride! The long awaited correction FINALLY happened…except that yesterday’s sell-off can hardly be classified as a “correction,” at least in accordance with my definition of the word. A 3.29% single-day decline in the Dow is gut wrenching to be sure, but since when is that defined as a correction? Most published definitions quote a decline of 10% or more. I’m willing to define an 8% decline as a correction, but that still leaves us with 4.7% left to go. Furthermore, seldom (read: never) does a “correction” take place in the span of one trading day.

Despite our market model being bearish, I feel allocating our portfolios in a 100% defensive posture is not prudent at the moment. I am recommending that the cash levels in the model fund portfolios be increased to 50%. I am also beginning to incorporate inverse funds in several portfolios, but only when those inverse funds carry "buy" recommendations.

With regard to the Model Stock Portfolio, we are not initiating any trades today and have decided to maintain our current allocation which is roughly 75% long and 25% cash. Our analytic is still rating those selected securities within the portfolio very high in terms of alpha generation and despite yesterday's losses, none of the issues triggered any "sell" recommendations. If the markets continue to weaken, we will recommend selling certain stocks and increasing the cash allocation.

Sell-offs and periods of correction are the most strident tests of investment discipline. Although our portfolios lost value yesterday, we maintain our confidence not only in the strategy employed but in our alpha analytic and market models. We will continue to select those funds that are generating the most alpha, we will not override our models on "speculation" or "theory" and we will not deviate from the strategy that has generated our historical out-performance.

With that being said, it’s interesting to see how yesterday’s sell-off impacted our alpha analytic. Believe it or not, we did see several securities upgraded to buy status. The top eight are listed below:

Conversely, many more were downgraded to “sell” status with the bottom eight as follows:

My gut tells me that several months from now we’ll look back on yesterday’s session as the beginning phase of a defined market correction. I would feel much more comfortable shifting to a bullish stature in late-spring or early-summer if the market looses a bit more ground and the foundation for a bullish recovery is a more established. Until then I plan on hedging our portfolios either through cash or inverse fund allocations.

Short-Term Technical Indicators

Investor Sentiment

Long-Term Market Model – Bearish since December 8^th.

Asset Allocation – AAS Model Portfolios have 50% cash allocations and mixed long – short allocations.

Beta Exposure and Portable Alpha Generation
Date = Date of AAS “Buy” or “Short/Sell” Recommendation

Top Rated Major Market Derivative – No buy recommended major market investments

Top Rated Style-Box Derivative – No buy recommended style-box investments

Top Rated Sector Derivative – No buy recommended sector investments.

Today’s Top “Buy” Recommended Stocks

Martin Marietta Materials, Inc. (MLM 11/6/06)

Vulcan Materials Co. (VMC 10/31/06)

Texas Industries Inc. (TXI 10/11/06)

Energizer Holdings Inc. (ENR 1/26/07)

TXU Corp. (TXU 2/23/07)

Weyerhaeuser Co. (WY 1/3/07)

Avnet Inc. (AVT 10/5/06)

Carbo Ceramics Inc. (CRR 2/27/07)

Temple-Inland, Inc. (TIN 12/5/06)

Itron Inc. (ITRI 1/19/07)

Today’s Top “Sell” Recommended Stocks

New Century Financial Corp. (NEW 6/13/06)

Chicago Mercantile Exchange (CME 2/22/07)

Google Inc. (GOOG 12/18/06)

Plexus Corp. (PLXS 12/29/06)

SanDisk Corp. (SNDK 10/20/06)

Weakness in Asian Markets

Bulls hoping to start the week off on a good foot were disappointed Monday as last week’s broad-market declines carried over into yesterday’s session. Concerns of a pending recession off-set significant M&A activity involving a private equity buyout of TXU Corp. (TXU) and potential buyout of Dow Chemical (DOW). With sour economic reports expected throughout the week, including a downward GDP revision, investors are beginning the feel the wheels coming off the rally that started back in July 2006. Recent spikes in the Put/Call ratios illustrate institutional investors’ concern that a market correction is fast approaching.

The Dow Jones industrial average fell 15.22, or 0.12 percent, to 12,632.26. The S&P 500 index was down 1.82, or 0.13 percent, at 1,449.37, the NASDAQ composite index fell 10.58, or 0.42 percent, to 2,504.52 and the Russell 2000 index of fell 2.95, or 0.36 percent, to 823.69.

Volume was moderate on the NYSE, where about 1.56 billion shares changed hands, below last year's estimated daily average of 1.84 billion shares. Decliners registered at 1,657 while advancers were slightly below at 1,650. On the NASDAQ, about 1.94 billion shares traded, below last year's daily average of 2.02 billion with an advance-decline ratio of three to two.

Bonds prices continued to improve after last week’s sell off, spurred by a warning from former Fed Chairman Greenspan about the possibility of a recession by year’s end. The yield on the benchmark 10-year Treasury note fell to 4.63 percent from 4.68 percent late Friday.

The dollar lost traction against the other major currencies. The Euro bought $1.3185, the Pound rose to $1.9644 from $1.9637 and the dollar bought 120.57 Yen.

A weakening dollar and geopolitical tensions led gold to its highest level in nine months on Monday. Other central banks expecting to diversify reserves out of the U.S dollar and into other currencies also fueled the rally. Gold for April delivery on the COMEX settled up $3.10 at $689.80 an ounce.

A strong winter storm traversing across the U.S led oil prices higher and spurred expectations of increased heating oil demand. Light sweet crude rose 25 cents to $61.39 on the NYMEX. April Brent crude added 45 cents to finish at $61.33 a barrel. Heating oil prices settled at $1.7562 a gallon while natural gas futures dropped 20.8 cents to $7.547 per 1,000 cubic feet.

Overseas, Japan's Nikkei stock average closed up 0.15 percent on Monday. However, Tuesday’s session saw the Shanghai Composite Index fall 8.8 percent to close at 2.771.79 after investors sold off stocks to lock in recent profits. The massive decline will likely carry over into European and U.S. markets today.

In Europe, the FTSEurofirst 300 index rose 0.4 percent to end at 1,550.4, its highest closing level since December 2000. London's FTSE 100 index added 0.5 percent, Paris's CAC 40 gained 0.8 percent, and Frankfurt's DAX was 0.5 percent higher.

Our long-term market model remains bearish as of December 8^th. The total universe of stocks, ETF’s and mutual funds which we review on a daily basis is 1877. Of those reviewed, 456 are rated "Buy," 429 are rated "Sell" and 992 "Neutral." Our model portfolios are currently allocated between 37.5% and 75% long currently.

To be sure, we see continued opportunities for adding alpha to existing portfolios in both the Mid Cap and Small Cap market segments. For those risk-averse investors, alpha can be found within the following sectors: Transports (IYT), Telecommunication (IYZ), Retail (RTH) and Consumer Services (IYC).

Short-Term Technical Indicators

Investor Sentiment

Long-Term Market Model – Bearish since December 8^th.

Asset Allocation – AAS Model Portfolios are between 37.50% and 75% long currently.

Beta Exposure and Portable Alpha Generation
Date = Date of AAS “Buy” or “Short/Sell” Recommendation

Top Rated Major Market Derivative – No buy recommended major market investments

Top Rated Style-Box Derivative – No buy recommended style-box investments

Top Rated Sector Derivative – iShares Dow Jones Transports (IYT 2/20/07)

Today’s Top “Buy” Recommended Stocks

Martin Marietta Materials, Inc. (MLM 11/6/06)

Vulcan Materials Co. (VMC 10/31/06)

NBTY, Inc. (NTY 12/5/06)

Precision Castparts Corp. (PCP 9/20/06)

Texas Industries Inc. (TXI 10/11/06)

Rock-Tenn Co. (RKT 4/27/06)

MEMC Electronic Materials Inc. (WFR 1/8/07)

OM Group Inc. (OMG 2/7/07)

Energizer Holdings Inc. (ENR 1/26/07)

Cleveland-Cliffs Inc. (CLF 11/17/06)

Today’s Top “Sell” Recommended Stocks

New Century Financial Corp. (NEW 6/13/06)

Chicago Mercantile Exchange (CME 2/22/07)

Google Inc. (GOOG 12/18/06)

SanDisk Corp. (SNDK 10/20/06)

Daktronics Inc. (DAKT 2/14/07)

Good Morning

Our long-term market model remains bearish as of December 8^th. We’ve seen steady improvement in the model over the last week, yet several critical components remain negative at this time. The interest rate environment is positive, but further improvement in the NASDAQ is critical before the model turns bullish. The total universe of stocks, ETF’s and mutual funds which we review on a daily basis is 1882. Of those reviewed, 444 are rated "Buy," 302 are rated "Sell" and 1136 "Neutral." Our model portfolios are currently allocated between 75% long and 25% cash.

With over 60% of the securities we analyze carrying “neutral” recommendations, we’re still not seeing a preponderance of buying opportunities for alpha. That being said, we are seeing improvement in our sector analysis. Real Estate (IYR) has vaulted to the top of our rankings based on the AAS Rating Score, although Transports (IYT), Retail (RTH), Consumer Services (IYC) and Telecom (IYZ) are out-performing. Conversely, Energy (IYE) and Natural Resources (IGE) continue to under-perform.

Inflation was again the catalyst on Wall Street yesterday as the release of FOMC minutes coupled with a larger-than-expected CPI reading led the Dow lower. A 0.2 percent rise in the CPI surprised economists and analyst’s alike, many of whom expected a 0.1 percent increase. The core figure, which excludes food and energy prices, rose 0.3 percent. An unseasonably warm January, which resulted in a drop in energy prices, failed to offset a rise in medical, food and airline costs. Furthermore, the Fed minutes illustrated inflationary pressures, although easing despite a weak housing and sub-prime mortgage market, remain paramount.

The Dow Jones industrial average declined by 0.38 percent to close at 12,738.41; the S&P 500 index retreated 0.14 percent to close at 1,457.63; the Russell 2000 improved by 0.15 percent to end at 827.33 and the NASDAQ Composite added 0.21 percent to finish the session at 2,518.42, its highest level in six years.

Bonds prices ended the day lower despite a modest recovery following the release of the FOMC January 30-31 policy meeting minutes. Although the minutes indicated a positive perspective on core inflation from the central banker’s point of view, inflationary pressures remain and a downward trend has yet to be established. The benchmark 10-year U.S. Treasury note fell 4/32 in price with the yield at 4.70 percent; the 2-year U.S. Treasury note was down 1/32 with the yield at 4.84 percent while the 30-year U.S. Treasury bond lost 6/32 with the yield at 4.79 percent.

Currency traders acted on news that the Bank of Japan raised interest rates to 0.5 percent. The dollar traded up 0.76 percent at 120.86 yen while the euro remained relatively unchanged at $1.3138. The U.S. Dollar Index improved by 0.04 percent to close the session at 84.20.

Gold prices, a traditional hedge against a weakening market, rose sharply to $682.10 an ounce. COMEX gold for April delivery settled at $684.00 an ounce, pushed higher on geopolitical concerns, oil prices and mutual fun inflows.

News of a pipeline and oil field shut down, in conjunction with tensions between Iran and the west over uranium enrichment, led oil prices above $60 for the first time this year. Light, sweet crude for April delivery settled at $60.07 a barrel while Brent crude for April delivery rose $1.37 to $59.35 a barrel on the ICE Futures Exchange in London. Heating oil settled at $1.6816 a gallon, while natural gas futures rose 6 cents to $7.646 per 1,000 cubic feet.

The international markets lost ground throughout the day, with Japan's Nikkei stock average down 0.14 percent ahead of the U.S. open. Britain's FTSE 100 closed down 0.86 percent, Germany's DAX index fell 0.59 percent, France's CAC-40 declined by 0.33 percent and the FTSEurofirst 300 index retreated 0.6 percent to 1,535.51.

Short-Term Technical Indicators

Investor Sentiment

Long-Term Market Model – Bearish since December 8^th.

Asset Allocation – AAS Model Portfolios are between 75% long and 25% cash currently.

Beta Exposure and Portable Alpha Generation
Date = Date of AAS “Buy” or “Short/Sell” Recommendation

Top Rated Major Market Derivative – No buy recommended major market investments

Top Rated Style-Box Derivative – No buy recommended style-box investments

Top Rated Sector Derivative – iShares Dow Jones Real Estate (IYR 1/10/07)

Today’s Top “Buy” Recommended Stocks

Martin Marietta Materials, Inc. (MLM 11/6/06)

Vulcan Materials Co. (VMC 10/31/06)

NBTY, Inc. (NTY 12/5/06)

CPI Corp. (CPY 1/23/07)

OM Group Inc. (OMG 2/7/07)

Carpenter Technology Corp. (CRS 1/31/07)

Crocs, Inc. (CROX 9/6/06)

MEMC Electronic Materials Inc. (WFR 1/8/07)

Energizer Holdings Inc. (ENR 1/26/07)

Sears Holding Corp. (SHLD 2/15/07)

Today’s Top “Sell” Recommended Stocks

New Century Financial Corp. (NEW 6/13/06)

Plexus Corp. (PLXS 12/29/06)

Advanced Micro Devices Inc. (AMD 9/27/06)

The Corporate Executive Board Co. (EXBD 12/1/06)

SanDisk Corp. (SNDK 10/20/06)