Wake Up Call - Mar 6

Good Morning. U.S. equities are indicating a sharply higher open. Even so, the market seemed to have a significant obstacle to overcome today in the unit labor cost report that could raise inflation concerns. After considering this, we believe the unit labor cost figure is benign, as it likely reflects decreased manufacturing activity, not increased hourly wages. Alan Greenspan dropped the "R" word again, but it was less powerful this time around. It looks like global markets are ready to consider looking for bargains, but every issue is now under the microscope, and a new one was just spawned by a verbal battle between Chinese and Taiwanese officials over the sovereignty of Taiwan.

Asia:

Hang Seng Index +2.11%; Shanghai/Shenzhen 300 +1.81%; NIKKEI 225 +1.22%; BSE SENSEX 30 +2.27%; KRX 100 +2.06%

U.K. & Europe:

DJ STOXX 50 Index +0.64%; FTSE 100 +0.71%; CAC 40 +0.84%; DAX +0.6%; Russian RTS Index +1.25%

KEY HEADLINE NEWS

• U.S. futures may be deriving some of their strength this morning from a return to overseas stability. Markets in Asia and Europe recovered ground today and the yen finally weakened a bit, potentially showing signs of tiring carry trade reversals.
• Still, the U.S. market has some obstacles to overcome, as Alan Greenspan once again dropped the "R" word. Either he's desperate to sell his book or really believes there is a one-third chance of recession this year. It's amazing that this legend who went out with such fanfare is now being ostracized by financial talking heads. I wonder if the Fed might excommunicate him as well.
• The Q4 productivity revision was in line with expectations, showing a rise of 1.6%, versus fluctuating expectations that settled at 1.6%. The revision, however, marked an adjustment lower from the 3.0% initially reported. Still, it accurately reflected the GDP revision of last week. The scary news of the day was a reported increase in unit labor costs of 6.6%, versus the consensus expectation for a 3.0% increase. The figure almost looks like a misprint, and we have initially heard reports that it could reflect accruals of bonus activity. However, if this is so, it should have been reflected in the consensus expectations of the experts. As we stated in our introduction, the figure likely reflects decreased manufacturing, not an increase in hourly wages. Thus, we view it as benign, and not as a signal of price inflation.
• Treasury Secretary Paulson tried to come to the market's rescue today, as he called the global market "sound" and said that sub-prime loan issues were "largely contained" and that the financial sector is "healthy."

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