The government reported this morning that the unemployment rate rose to 5% from 4.9% last month. Payrolls dropped by 17,000 which was below the consensus of an addition of 70,000 jobs.

This is more evidence that the economy is sputtering and is no longer creating new jobs. The falling unemployment rate from 5% to 4.9% is just statistical noise. The big deal in the report is that there were just 52,000 new private services jobs last month. The average for the past three months was 118,000.

This indicates that the business sector is very cautious. Now the question is, "can the Fed's cuts pull us out in time to avoid a recession of two down quarters?"

Today we got news that the ISM Services Index plunged in January for the first time in almost five years.

The Institute for Supply Management reported that its index of service sector business activity declined to 44.6 in January from a revised reading of 54.4 in December. Economists surveyed by Thomson Financial/IFR had expected a slight slowdown but had still had expected growth, with a median estimate for the index of 53.

It was the first time the service sector reading has contracted since March 2003. A reading above 50 indicates expansion, while below 50 indicates contraction.

The ISM's manufacturing index helped intensify fears of a recession last month when it fell below 50 for December, to 48.4, before rebounding on Friday to 50.7 for January.

This is more evidence that the economy is in rough shape. That's why stock-picking remains crucial. This is not one of those markets where a rising tide lifts all boats.

China must be thankful that it is not hosting a Winter Olympics, since its worst winter storm in decades has blocked the country's main north-south railway route, the Beijing-Guangzhou line. On Friday, according to China's Railways Ministry, 1.4 million people were still waiting to leave Guangzhou by train. By Saturday, 168 trains arrived (and 185 left) stations adjacent to Guangzhou (formerly Canton), the capital of the southern Guangdong Province. According to the Ministry of Public Security, 141 trains were delayed, and 212,000 passengers were still stranded.

The heavy snowfall also hindered truck traffic. The Beijing-Zhuhai expressway, China's main north-south truck road, was re-opened on Friday but froze again on Saturday according to the Ministry of Public Security. Over 600 people were working on de-icing the Beijing-Zhuhai expressway Saturday, but in the interim, truck traffic was at a standstill. In Shanghai, the city shut some operations of its port and stranded over 1,000 ships. Overall, between the train, road and port problems, approximately 1.76 million people were stranded and forced to relocate. So far, 60 people were reported killed by the storms, but that number is expected to rise this week.

Since so many people were stranded by the emergency, the Chinese government has released emergency food supplies to aid stranded passengers. The People's Liberation Army sent 306,000 soldiers and over one million paramilitary personnel to help. Additionally, due to the storms and snowfall, 15.8 million livestock have died and caused economic losses of at least $7.5 billion. This is raising fears of more food price inflation, so the Chinese government decided to sell 18,000 tons of pork from its reserves to help stem the price increase of the country's staple meat.

Chen Xiwen, the deputy director of the Communist Party's top financial team, said that while the magnitude of losses was unclear, the regions hit by the worst winter storms in 50 years produce the bulk of the country's seasonal fruits and vegetables. On Thursday, Chen said, "The impact of the snow disaster in southern China on winter crop production is extremely serious." He added, "The impact on fresh vegetables and fruit in some places has been catastrophic." In Beijing, for example, only about 20% of the usual supplies of fresh vegetables and fruit were available.

China's President Hu Jintao has said in a State Council statement that the country's "top priority is to unclog transportation and restore power." There have been blackouts in at least 19 provinces and regions, the State Council added. So far, China's power production has fallen by 40 million kilowatts, since heavy snows hamper rail shipments of coal. The State Council said that producers should boost output "by all means, while ensuring worker safety." The council also stressed that ports in northern China should also send more coal to power plants in the east and south.

As a result of this crisis situation, I think it is safe to say that China will not cooperate with Western nations regarding global warming measures. In fact, some experts believe that China's growing reliance on coal for power generation is putting more particulates in the atmosphere, which is helping to cool the planet and resulting in these severe winter storms. This is a very complicated subject, I know, but after major volcanic eruptions, particulate matter in the atmosphere typically results in colder winters. So if you are getting sick of shoveling snow, like I am in Reno, we may find comfort in blaming the Chinese. In the interim, the U.S. and the rest of the world should sell China more "scrubbers" for their coal plants, as well as food shipments.

From Bloomberg:

Yahoo! Inc., the world's second most popular Internet search engine, plans to reject Microsoft Corp.'s $44.6 billion unsolicited takeover offer, the Wall Street Journal reported, citing a person familiar with the situation.

The board decided the price "massively undervalues" the Sunnyvale, California-based company, and Yahoo may face risks because regulators could oppose the combination, the newspaper said today. On Feb. 1, Microsoft offered $31 a share in cash and stock for Yahoo, 62 percent more than the price before the bid.

Chief Executive Officer Jerry Yang, who said this week that Yahoo is examining its options, may consider a partnership with bigger rival Google Inc. or ways to wrest a higher offer from Microsoft. Yahoo's failure to crack Google's dominance in search led to eight straight profit declines and cut the stock's value in half in the two years before the offer.

I guess Yahoo wants more money. For the record, I have it rated as a "C - Hold" in PortfolioGrader Pro.

Based on the full parking lot at the Gaylord Palms Hotel in Orlando, there was no doubt that the "World Money Show" enjoyed record attendance last week. I had to valet my car, since finding a parking place was eventually futile. I enjoyed seeing many of my subscribers there. I must say you are among the most sophisticated investors I meet. I can see that my PortfolioGrader Pro, and my weekly letters and hotlines help educate and empower investors more than ever.

Although I'm still a bull on global markets, I strongly object to the bulk of advisors in Orlando, who told folks that it was time to go "bargain-hutting" in financial stocks, especially major banks. Profits have essentially been wiped out in the financial sector and are now back to where they were 20 years ago. I see continued write-downs, mostly due to escalating mortgage woes, over the next five to six quarters. In fact, the housing market may not improve until late 2009, due to excess inventories.

At the Money Show, I also commented that much of the freefall in the operating profits of the financial sector is attributable to the collapse in derivative securities, especially Collateralized Debt Obligations (CDOs) and Structured Investment Vehicles (SIVs). The only bright spot that I could see is that maybe the massive multi-billion write-downs from major banks and financial institutions might get a bit smaller in the upcoming quarters. In Florida, I also argued that the "seismic shift" out of value and into growth would continue to persist, due to the fact that the Russell value indices are dominated (30% to 38%) by financial stocks, predominately banks.

Due to the "anchor" that financial stocks will likely continue to have on the U.S. economy and the overall stock market, I stressed at last week's Money Show that selected Blue Chip Growth, Emerging Growth and other "A"-rated stocks would continue to represent the "silver lining" in the stock market chaos. I stressed that there are now obvious problems with some emerging markets, like India, but that our quality would likely continue to fare well. I also told investors that I jumped into the stock market recently with my own money, in mutual funds that I manage, but of course I am an aggressive investor. I stressed that the overall stock market will likely have to "retest" its recent lows and then trade within a wide range. Only then, after the volatility dies down, will there be a good buying opportunity for more conservative investors. I expect that to fall some time between mid-March and early May, after the Fed makes more rate cuts, on March 18 and perhaps April 30.

I've been dreading the retail sales report that was due today, but the good news is that it wasn't nearly as bad as I was expecting.

Retailers posted a 0.3% increase in sales last month. After retail sales plunged 0.4% in December, Wall Street was expecting a 0.3% decline for January. This is very important because half of all consumer spending is retail sales, and consumer spending makes up two-thirds of the total economy.

What this means is that a market retest is now less likely. The risk of a retest is still there, but it's diminishing. Today's report should help calm recession fears and give a much-needed boost to stock prices.

Conservative investors can now start bargain-hunting. If you're a conservative investor, I recommend that you "dollar cost average" over the next one to two-and-half months to get fully invested. Your objective should be to get fully-invested by mid-March to early May.

I have to warn you--business spending is still a problem, but it should firm up now that inventories are low. We can now see the light at the end of the tunnel.

The future of solar energy is certainly looking bright, and solar stocks have tremendous potential right now. These stocks can be quite volatile, which is why I've placed them in the Aggressive category of my Blue Chip Growth Letter.

For instance, First Solar (FSLR) posted fourth-quarter earnings yesterday of $0.77 per share--consider that in the year-ago period, it earned just $0.11 a share! You can see how much this company has taken off. First Solar also reported $201 million in revenue. The company was able to reduce its costs while increasing its sales. That's what I like to see!

Analysts had forecast earnings of $0.53 cents per share, which means the company posted an outstanding 45% earnings surprise. In fact, FSLR ended the day a whopping 30% higher! That's the power of superior fundamentals.

Analysts are scrambling to raise their estimates on First Solar, and I continue to maintain high hopes for this company. If you haven't gotten in on it yet, I'll be calculating a new Buy Below price in my March Blue Chip Growth issue. Look for it online this Tuesday, February 19.

MarketWatch reports:

Federal Reserve Chairman Ben Bernanke said Thursday the central bank was ready to cut interest rates further if fresh signs of a weaker-than-expected U.S. economy emerge.

The Federal Open Market Committee, which sets Fed monetary policy, "will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks," Bernanke told the Senate Banking Committee in prepared testimony.

The Fed has done a lot to stave off a recession but stands ready to do more if the outlook darkens, he said.

This is very good news. I expect a 50-point cut on March 18.

The Labor Department reported this morning that consumer prices rose 0.4% last month. This was a bit of a surprise since Wall Street was only expecting a 0.3% increase.

As anyone who's been to a supermarket recently can tell you, one of the trouble spots has been food inflation which rose 0.7% in January. The "core rate" of inflation, which excludes food and energy, rose 0.3% which was also 0.1% above Wall Street's estimate.

MarketWatch reports:

On a year-over-year basis, the CPI is up 4.3% in January. Core inflation is up 2.5% over the same period, the fastest pace since February 2007.

Fed officials won't like the CPI report, but it probably won't be enough to slow down additional rate cuts in coming months. The Fed is worried that financial market turmoil will create a credit crunch that could push the economy into a prolonged downturn.

Economists expect the Fed to choose to cut interest rates by a half-a-percentage point at their next meeting on March 18.

Fed officials have recently begun to emphasize headline inflation after years of just focusing on core prices.

In a separate report Wednesday, the Commerce Department said housing starts rose 0.8% in January to a seasonally adjusted annual rate of 1.01 million units. Building permits fell 3.0%.

With the headline CPI rising 0.4%, inflation-adjusted, or real, average weekly earnings fell 0.5% in January.

Frankly, this was not the best CPI report. I think it will bring up a lot of "stagflation" talk. My view is that in the worst case scenario, the Fed only cuts by 25 basis points on March 18. It will all rest on the payroll report and the unemployment rate.

There's growing chaos in the "auction-rate" market. All the big securities firms borrow on municipal bonds to provide higher-than-normal returns than you can get on money market funds. Since many individuals were using this as a money market substitute (brokers typically get paid 25 basis points on these securities), their sudden illiquidity is a big problem.

The New York Times reports:

The failures also indicate that talk of rescuing municipal bond insurance companies, like Ambac and MBIA, has not reassured investors. Auctions continue to fail, even at absurdly high yields, if the principal guarantee of repayment is an insurance policy.

As evidence of the chaos in the market, among Tuesday's auctions were two virtually identical securities (differing only in the original underwriter) that produced wildly different rates: one 7.98 percent, the other 5 percent.

I'm confused as to why the firms will not buy these securities back. I can only assume that they're out of capital.

What does this mean for us? Due to continuing problems with these securities, the shift out of value and into growth should accelerate.

Three months ago, I mentioned a list of ten tech stocks to sell right now. Since then, they've had an average loss of over 12%.

Before you make any investment decision, I strongly encourage you to visit PortfolioGrader Pro. The tool is completely free. Just enter in each ticker symbol and it will give you my rating, ranging from "Strong Buy" to "Strong Sell." The database covers over 5,000 stocks and it's updated every week so you're never left in the dark.

Here's how the stocks to sell have done since November:

An explosion and fire at a Texas refinery was largely responsible for driving the futures price on light, sweet crude oil to over $100 per barrel two consecutive days last week. The Big Springs refinery, 290 miles west of Dallas, has the capacity to process 70,000 barrels of crude oil per day, but was completely shut down. It is expected to resume partial operations within two months, but frankly, this is a very small refinery. This panic shows that oil traders react first and think second.

On Thursday, the Energy Department reported that U.S. crude inventories rose 4.2 million barrels in the week ended February 15, which outstripped the increase of 3.2 million barrel that analysts had anticipated. Gasoline demand averaged nine million barrels a day, which is only 0.5% higher than a year ago. Demand for distillate fuels (diesel, jet fuel, heating oil, etc.) averaged 4.3 million barrels per day over the last four weeks, down 1.9% over the same period last year. There is no doubt that high gasoline and diesel prices are already curtailing consumption in the U.S.

The next big test will be whether or not consumption will rise as the summer driving season approaches. In late March to early April, many refineries in the U.S. switch from oxygenated winter fuels to summer fuels, so the inventories of gasoline often tighten then. However, if the inventory of gasoline remains higher than normal due to moderating consumer demand, then the price of crude oil may decline. This is why many economists expect an oil price decline soon.

On Thursday, famous oil man T. Boone Pickens announced that he is short crude oil and natural gas and expects that prices will fall near-term. Speaking on CNBC, Pickens stated that he expects the price of oil to fall $10 to $15 a barrel in the second quarter. However, Pickens also said that he expects the price of oil to be back above $100 a barrel in the second half of the year. Pickens also mentioned that natural gas prices are unusually high and said he expects them to moderate.

In the interim, crude oil traders are obviously on pins and needles, poised to react to any bad news around the globe. Since the U.S. still consumes about 25% of crude oil worldwide, any slowdown in demand can reduce prices. However, since no one really seems to have a handle on what consumer demand will be like this summer, crude oil prices still remain stubbornly high.

Follow this link to hear a podcast I did with David LaPlante of Twelve Horses. Bonus feature: You can hear the background of my name!

Right up the street from me is the 52-room Hearst mansion which was just sold for $22 million at a foreclosure auction. You know it's bad out there when one of the priciest homes in the country went into foreclosure. The house was once owned by the late Randolph Hearst (if you're scoring at home, that's Patty's dad and William Randolph's son).

Hearst bought the mansion for $30 million just before he died in 2000. After his death, his wife started borrowing on the home to fuel her NYC lifestyle.

This is a classic example of how property values are being killed by property taxes. Florida cut property taxes a few percentage points, but now many towns are fighting for revenue so they do not have to layoff folks.

There are a few homes near me that aren't being kept up because the absentee owners have to pay $100,000 a year in property taxes. I think fire-sales on the ocean will continue for sometime.

It will take probably a year or more for the housing market to stabilize due to excess inventories. Even better-managed banks, like Wells Fargo, that have no significant exposure to CDOs or SIVs, will still post extraordinary write-downs for the next several quarters due to rising delinquencies. This means that the exodus out of interest-rate-sensitive financial stocks will persist for at least the next year.

Fed Chairman, Ben Bernanke, is speaking today on Capitol Hill. This is from his prepared remarks:

Many of the challenges now facing our economy stem from the continuing contraction of the U.S. housing market. In 2006, after a multiyear boom in residential construction and house prices, the housing market reversed course. Housing starts and sales of new homes are now less than half of their respective peaks, and house prices have flattened or declined in most areas. Changes in the availability of mortgage credit amplified the swings in the housing market. During the housing sector's expansion phase, increasingly lax lending standards, particularly in the subprime market, raised the effective demand for housing, pushing up prices and stimulating construction activity. As the housing market began to turn down, however, the slump in subprime mortgage originations, together with a more general tightening of credit conditions, has served to increase the severity of the downturn. Weaker house prices in turn have contributed to the deterioration in the performance of mortgage-related securities and reduced the availability of mortgage credit.

The housing market is expected to continue to weigh on economic activity in coming quarters. Homebuilders, still faced with abnormally high inventories of unsold homes, are likely to cut the pace of their building activity further, which will subtract from overall growth and reduce employment in residential construction and closely related industries.

I think he's clearly worried. A 50-basis-point cut appears to be a lock on March 18.

This was a big disappointment. The main strength is still exports.

For all of 2007, the economy grew at the weakest pace in five years, rising at an inflation-adjusted 2.2% after a 2.9% gain in 2006. The economy grew 4.9% in the third quarter.

Many -- but not all -- economists believe a recession has now begun, based on data showing declining employment, incomes and industrial production. For the current quarter, economists are predicting no growth.

Gross domestic purchases -- the total value of goods and services bought by U.S. residents -- fell 0.3% in the fourth quarter, the first decline since the last recession quarter in 2001. Final sales of domestic product, including exports, rose 2.1%.

The futures market now thinks there's a 62% chance that the Fed will cut rates by 0.75% on March 18. Yesterday, that same percentage stood at 30%.

Personally, I only expect 50 points on March 18, since 75 points would send the U.S. dollar into a tailspin.