Stocks Slightly Higher into Final Hour on Short-Covering in Beaten Up Sectors

BOTTOM LINE: The Portfolio is slightly lower into the final hour as gains in my Commodity shorts, Biotech longs and Retail longs are more than offset by losses in my Internet longs, Computer longs and Semi longs. I added (IWM)/(QQQQ) hedges this morning, thus leaving the Portfolio 75% net long. The overall tone of the market is slightly positive today as the advance/decline line is mildly higher, sector performance is mostly positive and volume is above average. Investor anxiety is above average. Today’s overall market action is slightly bullish. Yesterday, I cautioned recent short interest data indicated that the many bears had recently increased their short positions in the most beaten up and most heavily shorted stocks right near their lows and that recent action in the market should make them very nervous. Today, many of those stocks are soaring. Homebuilders, financials and retailers are all posting meaningful gains. While these sectors have likely bottomed for the intermediate-term, they will not remain market leaders for long, in my opinion. I continue to favor true growth stocks for the longer-term as growth, interest rates and inflation remain below long-term average levels. Fed fund futures now imply a 40% chance for a 50 basis point rate cut and a 60% chance of a 25 basis point rate cut at the upcoming meeting. The average 30-year mortgage rate fell again this week to 6.1%, down from 6.74% in June, which is a big positive. The 10-year swap spread and G-7 currency volatility index are falling meaningfully again today, which are also positives. The US dollar continues to trade as if at the very least an intermediate-term bottom is in place. This, combined will decelerating global demand, should also continue to pressure most commodities over the intermediate-term. I expect US stocks to trade mixed-to-lower into the close from current levels on profit-taking.

Today's Headlines

Bloomberg:
- China Mobile Ltd., the world’s largest wireless-phone operator by subscribers, said it is still in discussions to offer Apple’s(AAPL) iPhone handset, denying a newspaper report that talks between the two have ended.
- Countrywide Financial(CFC), the biggest US mortgage company, rose as much as 29% on optimism among investors that the US Treasury’s plan to freeze subprime mortgage rates will stem losses from record foreclosures.
- ABX Indexes tied to subprime-mortgage bonds rose on speculation that a plan to stem foreclosures among subprime borrowers may curb losses on the securities.
- Crude oil is falling $2/bbl. to below $90/bbl. for the first time in a month on concern over falling global demand growth and as Saudi Oil Minister Ali al-Naimi said supplies in the market are “absolutely ample.”
- Lincoln Anderson, who helps manage about $165 billion as chief investment officer at LPL Financial Services, says the subprime issue has been “overblown” and that the “top is in” for crude oil prices.
- Walt Disney(DIS) and retailer Nordstrom(JWN) led companies selling at least $35 billion in the busiest week in more than two months as Treasury yields fell to the lowest since April 2004.

USAToday.com:
- The number of US combat deaths in Iraq this month is headed toward the lowest monthly level since March 2006, reflecting a turnaround in US efforts to establish security and defeat insurgents.

NY Post:
- A pair of hedge funds that are getting battered by the choppy markets of the past few months are serving as a stark reminder that the pain inflicted on the once white-hot hedge-fund sector isn’t only confined to those with subprime-bond exposure.

Cash Daily:
- Swisscom AG has been selected by Apple Computer(AAPL) to sell the iPhone in Switzerland.

Personal Incomes/Spending Rise Less Than Estimates, Inflation Contained, Chicago PMI Surges, Construction Spending Falls

- Personal Income for October rose .2% versus estimates of a .4% gain and a .4% increase in September.

- Personal Spending for October rose .2% versus estimates of a .3% gain and a .3% increase in September.

- The PCE Core for October rose .2% versus estimates of a .2% gain and a .2% increase in September.

- The Chicago Purchasing Manager November rose to 52.9 versus estimates of 50.5 and a reading of 49.7 in October.

- Construction Spending for October fell .8% versus estimates of a .3% decline and a .2% increase in September.

BOTTOM LINE: Consumer spending and incomes in the US rose less than forecast in October, Bloomberg reported. The Fed’s favorite inflation gauge, the Core PCE rose .2% for a second straight month and is up 1.9% year-over-year, which is within the Fed’s comfort zone. Consumer spending should accelerate next month on more seasonal weather and incomes will remain relatively healthy over the intermediate-term as unemployment stays low by historic standards. I continue to believe inflation concerns have peaked for this cycle.

A measure of US business activity expanded more than expected in November, as employment and production rebounded, Bloomberg reported. The Production Component surged to 57.4 from 46.9 the prior month. The New Orders component continued to show expansion, remaining at 53.9. The Order Backlogs component rose to 45.9 versus 39.9 the prior month. The Employment component of the index jumped to 54.4 from 49.5 the prior month. The Inventories component fell to 47.1 from 49.6 the prior month. The Prices Paid component rose to 76.2 from 74.7 the prior month. The gain in this index is a big positive. I continue to believe manufacturing will help boost overall economic growth to around 2-2.5% over the intermediate-term as companies gain confidence in the sustainability of the current expansion and rebuild depleted inventories as exports boom.

Spending on US construction projects fell in October, Bloomberg reported. Private residential construction spending fell 2%, the 20^th consecutive decline. Non-residential construction rose .1%. I continue to believe overall construction spending will remain muted over the intermediate-term as homebuilders pare down inventories.

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Friday Watch

Late-Night Headlines
Bloomberg:
- Federal Reserve Chairman Ben S. Bernanke said volatility in credit markets has “affected” the economy’s prospects and policy makers must decide whether the risks between growth and inflation have now shifted.
- UMC Japan rose 22%, the most in almost nine years, after the Japanese unit of Taiwan’s United Microelectronics Corp. said it expected to post a narrower full-year loss on increased output of higher-value memory chips and lower production costs.
- India’s gold production in the seven months to October rose 16.8% to 8 metric tons from 6.85 tons a year earlier.
- Crude oil was little changed near $91 a barrel in New York as Enbridge Inc. re-opened three out of four pipelines closed after an explosion cut shipments of Canadian oil to US refiners.
- The yen fell against the dollar after a rally in Asian stocks prompted investors to buy higher-yielding assets with funds borrowed in Japan.
- The US dollar is headed for its biggest weekly gain in two months against the euro.

Wall Street Journal:
- Sprint Nextel(S) rejected a $5 billion investment offer from a group led by South Korea’s SK Telecom that would have made former Chairman Tim Donahue the company’s CEO.
- The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled subprime loans, according to people familiar with the matter.
- Bernanke Hints Rate Cut Possible.
- Why Citadel Pounced On Wounded E*Trade.

MarketWatch.com:
- China aims to play a stabilization rose in global markets through its $200-billion sovereign wealth fund, the China Investment Corp., Lou Jiwei, the fund’s chairman, said Thursday.

BusinessWeek:
- Move Over, ‘Cyber Monday’ Online retailers, bracing for a record holiday season, say their business day will come in December’s second week; eBay calls it “Green Monday”
- Honda’s Home Hydrogen Fueling Station. Honda has come up with a way to get around the problem of fueling its hydrogen cars – do it at home.

CNBC.com:
- Which Home Renovations Really Pay Off?

Morningstar.com:
- The credit crisis: Chicken Little or a game of chicken? Investors are running for the hills – or at least for safer havens including cash and gold. Yet at Morningstar, our analysts are recommending an unprecedented number of financial-services stocks, even names that have been badly beaten up such as Countrywide Financial(CFC), PMI Group(PMI) and Citigroup(C).
- US revised oil demand in September was .8% below year-ago levels, at 20.385 million barrels a day and the lowest for any month since April 2006, federal data released Thursday show. Demand was revised down from an earlier estimate, which would have shown a .3% decline from a year ago.

USA Today.com:
- Rates on 30-year mortgages fall to lowest point in 2 years.
- China dropping subsidies that aided exporters.

Economic Times:
- Temasek Holdings Pte, Singapore’s state-owned investment company, may be selling shares in Chinese companies to buy stakes in US and European financial institutions. Temasek has recently held discussions with US and European financial institutions and “the pricing is reasonable,” citing people familiar with the situation. The talks prompted it to pare its holdings to raise capital for potential acquisitions, it added. Temasek manages more than $100 billion in assets.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (INTC), target $33. Dell(DELL) reported their October quarter results Thursday after the close. While much of the conference call’s focus was on Dell’s strategic initiatives, their commentary reinforces our positive view of Intel. We continue to see upside margin surprise and market share momentum.
- Reiterated Buy on (BRCD), target $10.

Morgan Stanley:
- Reiterated Overweight on (OVTI), target $28.

Night Trading
Asian Indices are +.25% to +1.75% on average.
S&P 500 futures -%.
NASDAQ 100 futures -%.

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Earnings of Note
Company/EPS Estimate
- (BIG)/.12
- (TIF)/.25
- (BE)/.02
- (LDK)/.37

Upcoming Splits
- (DE) 2-for-1

Economic Releases
8:30 am EST
- Personal Income for October is estimated to rise .4% versus a .4% gain in September.
- Personal Spending for October is estimated to rise .3% versus a .3% gain in September.
- The PCE Deflator for October is estimated to rise .2% versus a .2% gain in September.

9:45 am EST
- The Chicago Purchasing Manager report for November is estimated to rise to 50.5 from 49.7 in October.

10:00 am EST
- Construction Spending for October is estimated to fall .3% versus a .3% gain in September.

Other Potential Market Movers
- The Fed’s Poole speaking, Fed’s Kroszner speaking, Fed’s Plosser speaking, NAPM-Milwaukee, (NVO) analyst meeting and UBS Global Real Estate Conference could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by gains in financial and mining stocks in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Slightly Higher on Healthy Consolidation of Recent Sharp Gains

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Stocks Mixed into Final Hour on Healthy Consolidation of Recent Gains

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Medical longs and Software longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is mixed today as the advance/decline line is mildly lower, sector performance is mixed and volume is above average. Investor anxiety is above average. Today’s overall market action is very healthy given the recent two-day advance that was the largest since near the major bear market low in 2002. The latest NYSE short interest data figures show a meaningful increase in short interest in the already heavily-shorted and beaten up financials and retailers. If I were one of the many bears that increased short positions meaningfully right near the lows, I would be very concerned by recent market action. The fact that the dollar is rallying nicely on today’s economic data and increased expectations for Fed rate cuts bodes well for my belief that the despised currency has at the very least put in place an intermediate-term bottom. This is one of the main reasons that oil is trading so poorly and failed to maintain this morning’s large gains related to the pipeline explosion. I continue to believe any meaningful decline in the price of oil would be a much larger positive for the broad US stock market than most investors perceive. The 10-year swap spread is falling again today and has declined 16% over five days, which is a large positive. As well, the investment grade credit default swap index has declined 9% over the last week and the Goldman Sachs(GS) credit default swap has plunged 31% over the last five days, which are big positives. I expect US stocks to trade mixed-to-higher into the close from current levels on bargain hunting and short-covering ahead of Fed chief Bernanke’s speech and Dell’s(DELL) earnings report tonight.

Today's Headlines

Bloomberg:
- Bank of England policy maker David Blanchflower said the UK’s benchmark interest rates should “come down now” as growth is poised to slow.
- The subprime crisis that’s caused so much trauma for hedge funds and investment banks has brought only good news for John Paulson. He’s the manager of more than $7 billion in hedge fund money keyed to mortgage credit.
- Treasury Secretary Henry Paulson met with mortgage companies including Wells Fargo(WFC) as regulators press the biggest lenders to change terms of existing subprime home loans before they default.
- The LCDX index, a benchmark of investor confidence in the US leveraged loan market, reached a three-week high on speculation that a Federal Reserve rate cut next month will buoy the market for the rest of the year.
- Goldman Sachs(GS) advised investors to sell gold on expectations turmoil in financial markets will ease and a slump in the dollar will slow. Gold may decline 15-20% next year, Goldman Chief Economist Jim O’Neill said.
- Oil rose $4/bbl. this morning after an explosion cut Canadian oil shipments through Enbridge Inc. pipelines that supply US refiners. However, the commodity plunged into the afternoon on US dollar strength and is $.41/bbl. higher on the day.
- Trex Co.(TWP), the maker of composite decking and fencing materials, posted its biggest gain in NY trading after the company raised forecasts for year-end sales.
- Holiday spending at US retailers climbed 6.5% to $20 billion over the Thanksgiving, according to ShopperTrak RCT Corp.

Wall Street Journal:
- E*Trade Financial(ETFC) said it is getting a $2.55 billion cash infusion from Citadel Investment Group, in a bid to restore confidence and liquidity in the discount brokerage sector.

CNNMoney.com:
- Credit Crunch Doesn’t Slow Small Business Growth.
- Venture investments in American clean technology firms reach a new high.

BusinessWeek.com:
- Skeptic abound, but Hank Paulson says a breakthrough is near that could rescue troubled homeowners.

Washington Post:
- Bill Clinton’s Claim of Opposing Iraq War From Outset Disputed.

Agencia Estado:
- The US may eliminate trade restrictions on Brazilian ethanol by 2009, citing US Representative Gregory Meeks.

3Q GDP Growth Surges 4.9%, Price Index Rises at Slowest Pace Since 1998, Jobless Claims Rise, New Home Sales Bounce as Inventories Fall

- Preliminary 3Q GDP rose 4.9% versus estimates of a 4.9% gain and prior estimates of a 3.9% increase.

- Preliminary 3Q Personal Consumption rose 2.7% versus estimates of a 2.9% gain and prior estimates of a 3.0% increase.

- Preliminary 3Q GDP Price Index rose .9% versus estimates of a .8% gain and prior estimates of a .8% increase.

- Preliminary 3Q Core PCE rose 1.8% versus estimates of a 1.8% gain and prior estimates of a 1.8% increase.

- Initial Jobless Claims for this week rose to 352K versus estimates of 330K and 329K the prior week.

- Continuing Claims rose to 2665K versus estimates of 2575K and 2553K prior.

- New Home Sales for October rose to 728K versus estimates of 750K and a downwardly revised 716K the prior month.

BOTTOM LINE: Economic growth in the US surged in the third quarter to the most in 4 years, Bloomberg reported. A shrinking trade deficit, inventory rebuilding and more business investment than previously forecast were the primary contributors to the upward revision to third quarter growth. US I continue to believe inventory rebuilding, booming exports and decelerating inflation will more than offset the drag from housing over the intermediate-term, which will produce US economic growth has averaged a healthy 3.1% so far this year, despite the substantial drag from housing that began over 2 years ago. growth on average of around 2-2.5%.

The number of Americans filing first-time claims for unemployment benefits rose more than expected, Bloomberg reported. The four-week moving average of claims rose to 335,250 from 329,500 the prior week. The unemployment rate among those eligible to collect benefits, which tracks the US unemployment rate, rose to 2% from 1.9% the prior week, but remains historically low. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

New Home Sales rebounded in October after September sales fell more than previously thought, Bloomberg reported. The median price of a new home was $217,800. The number of new homes for sale at the current sales pace fell to 8.8 months’ worth from 9 months in September. New Home Sale rose 14% in the Midwest, 6.8% in the South and 1.8% in the Northeast. Sales fell 16% in the West. I expect New Home Sales to move higher next month as a result of the recent drop in mortgage rates and pent-up demand.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- China Investment Corp., the nation’s $200 billion sovereign wealth fund, wants to stabilize financial markets, which have been rocked by subprime mortgage defaults. “CIC wants to be a stabilizing force in the international capital markets,” Chairman Lou Jiwei told a conference in Beijing today. He cited a “recent example” in which a sovereign wealth fund invested in a financial institution with subprime losses. China Investment plans to set up overseas branches in major financial centers and will mainly invest in publicly traded securities.
- National Australia Bank, the nation’s largest, agreed to buy US-based Great Western Bancorporation for $798 million, its biggest acquisition since the 1998 purchase of HomeSide Lending.
- Radiation from CT scans may be responsible for up to 2% of cancers in the US, a report in the New England Journal of Medicine found. “If a physician chooses not to order a CT scan on you today to save you the radiation exposure, the physician takes on the risk of missing something, and if something is missed, there is a good chance you’ll sue the physician for not finding it,” said Elaine Rabin, an emergency room physician at Mount Sinai Hospital in NYC. GE(GE) plans to begin selling a high-definition CT scanner next year that provides clearer images than conventional CT machines using half the radiation.
- EBay Inc.(EBAY) and Amazon.com(AMZN) may “exceed” Sanford C. Bernstein’s earnings estimates, the brokerage wrote.
- Zinc, the worst-performer on the London Metal Exchange this year, will drop another 11% in 2008 as the market returns to surplus, National Australia Bank Ltd. said.
- Crude oil prices aren’t fundamentally sustainable at $90 per barrel, said Thomas Petrie, vice chairman of Merrill Lynch(MER). Petrie, in an interview today, responded to comments made earlier by Saudi Arabian Oil Minister Ali al-Naimi, who said there is “no relationship” between today’s price and fundamental supply and demand.
- Kellogg(K) and chemical maker DuPont(DD) led 13 borrowers into the US bond market today.

Wall Street Journal:
- In a sign of continuing woes for hedge funds that use computer models to trade, GMN Capital closed shop, CEO and Managing Partner James Claus confirmed.

NY Times:
- For Toddlers, Toy of Choice Is Tech Device.
- Qualcomm Chief Welcomes iPhone’s Spread.

MarketWatch.com:
- Nine-to-one. Up volume swamped down volume in Wednesday’s trading.
- Trash Talk. Not convinced we are succumbing to fear-mongering? US consumers have taken $3-a-gallon gas and a drop in our home equity in stride. Yet the media seems hell-bent on convincing us multinational banks’ subprime mortgage losses and a weak dollar will torpedo the economy in a way the stock market’s collapse, mass layoffs and 9/11 scarcely did in 2001. Five signs we’re jawboning ourselves into a recession.

BusinessWeek:
- Clear Skies for Airline Stocks.

USA Today.com:
- Tech Holiday Gift Guide. Tips help navigate the tech-buying maze.
- Resale values for Detroit makers’ vehicles go up.
- Robots dazzle at Japanese exhibit.

Reuters:
- Freddie Mac(FRE) shares post biggest gain in 19 years.
- Hedge fund firm Pequot Capital Management, whose flagship fund gained 37% this year, will soon shut down three smaller portfolios due to “poor” performance and meager assets.

Financial Times:
- The four US television networks in a pay dispute with Hollywood television writers over online video advertising are in line to generate $120 million of revenues in 2007 from free web streaming of their content, according to a leading media buyer.

China Daily:
- A Hong Kong-based maker of bead toys that caused recalls in the US and Australia apologized for using a toxic chemical and for damaging the reputation of the made-in-China label, citing the company.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (NRGY), target $39.
- Reiterated Buy on (VMW), target $134. VMW’s recently introduced ESX Server 3i, is a thin hypervisor, that six of the leading OEMs(Dell, Fujitsu, Fujitsu Siemens Computers, HP, IBM and NEC) will pre-install on servers. We believe this is a significant step towards enhancing VMW’s already dominant position in the virtualization industry and is a pre-emptive strike against future Microsoft and Citrix/Xen releases in the battle for control of the x86 server virtualization market.

Night Trading
Asian Indices are +1.5% to +3.0% on average.
S&P 500 futures -.03%.
NASDAQ 100 futures -.18%.

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Earnings of Note
Company/EPS Estimate
- (SFD)/.23
- (GRB)/.13
- (DLM)/.17
- (WMG)/.04
- (SHLD)/.53
- (AMWD)/.37
- (LULU)/.08
- (BF/B)/1.00
- (JCG)/.36
- (OVTI)/.32
- (BRCD)/.13
- (MENT)/-.02
- (HNZ)/.67
- (VIP)/.42
- (GCO)/.57
- (ZOLT)/.23
- (DELL)/.35
- (FRED)/.14
- (MIK)/.30
- (ZUMZ)/.28

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Preliminary 3Q GDP is estimated to rise 4.9% versus prior estimates of a 3.9% increase.
- Preliminary 3Q Personal Consumption is estimated to rise 2.9% versus a prior estimate of a 3.0% gain.
- Preliminary 3Q GDP Price Index is estimated to rise .8% versus prior estimates of a .8% gain.
- Preliminary 3Q Core PCE is estimated to rise 1.8% versus prior estimates of a 1.8% gain.
- Initial Jobless Claims for this week are estimated at 330K versus 330K the prior week.
- Continuing Claims are estimated to rise to 2575K versus 2566K prior.

10:00 am EST
- New Home Sales for October are estimated to fall to 750K versus 770K in September.

Other Potential Market Movers
- The Fed’s Bernanke speaking, 3Q House Price Index, weekly EIA natural gas inventories report, (SAF) analyst day, (GPRO) analyst day, (STEC) analyst day, Bear Stearns Commodities & Capital Goods Conference, UBS Global Real Estate Conference, CSFB Tech Conference and the CSFB Aviation Conference could also impact trading today.

BOTTOM LINE: Asian indices are sharply higher, boosted by gains in automaker and technology stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.

Stocks Post Largest 2-day Gain Since Near Major Bear Market Low in 2002

Indices
S&P 500 1,469.02 +2.86%
DJIA 13,289.45 +2.55%
NASDAQ 2,662.91 +3.18%
Russell 2000 770.04 +3.60%
Wilshire 5000 14,753.22 +2.86%
Russell 1000 Growth 612.01 +2.80%
Russell 1000 Value 795.60 +2.91%
Morgan Stanley Consumer 751.65 +1.80%
Morgan Stanley Cyclical 983.23 +3.76%
Morgan Stanley Technology 622.85 +3.45%
Transports 4,625.43 +3.55%
Utilities 529.67 +1.21%
MSCI Emerging Markets 150.87 +2.98%

Sentiment/Internals
Total Put/Call .89 +9.88%
NYSE Arms .29 -56.7%
Volatility(VIX) 24.11 -8.26%
ISE Sentiment 96.0 -27.27%

Futures Spot Prices
Crude Oil $91.47 -3.13%
Reformulated Gasoline 229.33 -3.36%
Natural Gas 7.20 -4.68%
Heating Oil 260.0 -2.01%
Gold 812.0 -1.12%
Base Metals 218.24 -1.0%
Copper 303.70 +1.49%

Economy
10-year US Treasury Yield 4.02% +8 basis points
US Dollar 75.18 +.12%
CRB Index 343.78 -1.15%

Leading Sectors
I-Banks +5.95%
Homebuilders +5.78%
Computer Hardware +4.57%

Lagging Sectors
Energy +1.66%
Utilities +1.21%
HMOs +.74%

Evening Review
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Afternoon Recommendations
Oppenheimer:
- Rated (ARG) Sector Outperformer.

Citigroup:
- Rated (CBEY) Buy, target $33.
- Rated (GLBC) Buy, target $25.
- Rated (TWTC) Buy.

Afternoon/Evening Headlines
Bloomberg:
- US stocks staged the biggest two-day rally in five years, led by financial shares, after Federal Reserve Vice Chairman Donald Kohn buttressed expectations for another interest rate cut.
- Natural gas in NY plunged 4.2% today on an outlook that above-average supplies are ample for winter.
- Crude oil fell another $3.03/bbl, reaching its largest 2-day drop since January, as a US government report showed that supplies declined less than expected and the US dollar rose further.
- SunPower Corp.(SPWR), the largest US supplier of solar panels, surged after it said Morgan Stanley(MS) will provide up to $190 million in financing for future projects.
- Treasury two-year notes had their biggest two-day decline since 2004 as a stock rally pared demand for the relative safety of government debt.
- Sigma Designs said net revenues for the third quarter rose 56% from the prior quarter and 164% from the same quarter last year. The stock is jumping 12% in after-hours trading.

CNNMoney.com:
- This bonus season, investment banks are doling out golden handcuffs.

BOTTOM LINE: The Portfolio finished higher today on gains in my Medical longs, Biotech longs, Semi longs, Computer longs, Internet longs, Software longs and Retail longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was exceptionally positive today as the advance/decline line finished substantially higher, every sector rose and volume was heavy. Measures of investor anxiety were above average into the close, despite today’s sharp gains. Today's overall market action was very bullish. As is usually the case in the current “US negativity bubble”, pundits spent most of their time today trying to scare investors and consumers with much talk of recession and bear markets, while stocks were in the midst of their best 2-day advance since near the major bear market bottom in 2002. Market leading growth stocks gained significant traction into the afternoon with many rising 6-9% on the day. Despite the recent pullback, the Nasdaq is still 11% higher year-to-date and large-cap growth stocks are 12% higher so far this year. The 10-year swap spread fell another 1.7 basis points today to 67.0 basis points over Treasuries. This is down from 87.5 basis points over Treasuries just six days ago, which is a big positive. The yen remained weak throughout the day again, which is also a positive. As well, the G-7 currency volatility index fell another 2% today. Nikkei futures are indicating a +400 open in Japan. Today's rally was of much higher quality than other recent advances that have failed. While some healthy consolidation days are likely in the near-term, I suspect a significant year-end rally is now underway.

Stocks Soaring into Final Hour on Another Plunge in Oil, Financial Sector Strength, Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Medical longs, Biotech longs, Retail longs, Computer longs, Internet longs and Software longs. I took profits in some of my (TLT) long and added to my (ILMN) long this morning, thus leaving the Portfolio 100% net long. The overall tone of the market is exceptionally positive today as the advance/decline line is substantially higher, every sector is rising and volume is heavy. Investor anxiety is above average despite today’s sharp gains. The 10-year TIPS spread, one of the best indicators of inflation expectations, is falling another 4 basis points today and is down 14 basis points in two days. This is mainly the result of the breakdown in energy prices. Pundits are saying that today’s rally is mainly the result of fed rate cut expectations. However, fed fund futures have implied a near 100% chance for another cut at the upcoming meeting for several weeks. In my opinion, the huge move in the broad market the last couple of days is directly related to the sharp decline in oil and firming of the US dollar. As I have said many times, record oil prices have had a much greater negative impact on the broad market than is commonly perceived. Moreover, despite the spin from the media, retail sales over the weekend, both online and offline, were much better than expected. There remains little evidence of the imminent recession that has been predicted for several years. There is much evidence that the US housing slowdown, combined with booming exports, is leading to modestly below average growth over the intermediate-term. The current macro backdrop remains exceptional for true “growth” stocks. Growth stock leaders are significantly outperforming the broad market during both weak markets and strong ones like today. For the most part, the stocks that I have disclosed that I am long are performing spectacularly year-to-date. These include GOOG +50%, AAPL +113%, ISRG +238%, ILMN +42%, GILD +41%, AMSC +138%, NUAN +80%, BRCM -12%, UA -4%, PWR +39% and TLT +11%. I now believe the broad market and US dollar have bottomed for the intermediate-term and that oil has put in at the very least an intermediate-term top. I expect US stocks to trade mixed-to-higher into the close from current levels on financial sector strength, a firmer US dollar, short-covering, bargain-hunting and lower energy prices.

Today's Headlines

Bloomberg:
- The yen had the steepest two-day decline in three years versus the dollar as rallying global stocks persuaded investors to buy high-yielding assets funded by loans in Japan’s currency.
- William Ackman, whose hedge fund has short positions on bond insurers, said he will make “hundreds of millions of dollars” on his bets and plans to donate the proceeds to charity.
- Analog Devices(ADI) rose the most in nine months after analysts said the company will become more profitable.
- Freddie Mac(FRE) and Fannie Mae(FNM) rose the most in about two decades on optimism the mortgage-finance companies will raise enough capital to weather the housing slump.
- Chinese stocks are poised for their steepest monthly decline since at least 1995 as the government deflates a bubble that caused prices to quadruple in a year. The Shanghai Composite fell 19% so far in November.
- After 25 years of increases, US obesity rates were unchanged at about 34% in 2005-2006 compared with the previous two years, according to a survey by US health officials.
- Comcast, Time Warner and Charter Communications advanced after US regulators dropped for now a push to expand their oversight of the cable-tv industry.
- The US dollar gained the most in two weeks against the euro on speculation traders were scaling back bets on further declines in the US currency as stocks rallied.
- The Iraqi government has approved a plan to build an oil refinery with a capacity of 300,000 barrels a day in the southern city of Nasiriyah, Iraq’s oil minister said.
- Venezuela’s President Hugo Chavez alleged Time Warner’s(TWX) CNN is seeking to incite his assassination and called for an investigation of the cable-television news channel.
- The perceived risk of companies defaulting on their debt fell for a second day on optimism that financial companies will be able to shore up capital that was eroded by losses tied to subprime mortgages, according to credit default swap traders. Credit-default swaps tied to Citigroup(C) fell 8 basis points to 75 basis points. The contracts, used to speculate on a company’s ability to repay its debt or hedge against the risk it won’t, have dropped 17 basis points the past two days after reaching the highest in a least five years recently.
- Gold and silver fell for the second straight day after the dollar rebounded against the euro, reducing the appeal of the precious metals as alternative investments.
- US emissions of greenhouse gases fell 1.5% in 2006, the first annual reduction since 2001.
- Crude oil is falling another $3.30/bbl. in NY after a government report showed that US supplies declined less than expected and refineries increased fuel output.
- Nickel fell to its lowest in more than 2 months as stockpiles advanced for a 16^th straight day.

Wall Street Journal:
- ‘Value’ Stock Funds Take a Beating in Subprime Crisis. Name a big-company stock you didn’t want to own this year, and there’s a good chance it’s in the portfolio of your large-cap value fund.

CNNMoney.com:
- LinkedIn Sale Would Cost More Than $1 Billion.

Nikkei English News:
- Apple’s(AAPL) Japanese unit and Nippon Telegraph and Telephone Corp. will offer free wireless Internet access to users of Apple’s iPod Touch media player.

Durable Goods Orders Decline, Existing Home Sales Fall Slightly

- Durable Goods for October fell .4% versus estimates of a .1% decline and a 1.4% fall in September.

- Durables Ex Transports for October fell .7% versus estimates of a .3% gain and an upwardly revised 1.1% gain in September.

- Existing Home Sales for October fell to 4.97M versus estimates of 5.0M and 5.03M in September.

BOTTOM LINE: Orders for US durable goods fell more than forecast in October, Bloomberg reported. Bookings for non-defense capital goods excluding aircraft, a gauge of future business investment, fell 2.3%, the most since February, after a 1.2% increase in September that was larger than previously thought. Boeing(BA) had orders for 56 aircraft in October versus 132 the prior month. However, demand this year so far for their planes reached a record 1,047. I expect durable goods order to bounce back next month on inventory rebuilding and better-than-expected demand.

Sales for previously owned homes fell slightly more than forecast last month, Bloomberg reported. The median home price is now $207,800. The number of homes for sale at the current sales pace is 10.8 months’ worth. Existing home sales fell 1.7% in the Midwest and 4.4% in the West. Sales were unchanged in the Northeast and the South. I expect sales to bounce higher next month as the average 30-year mortgage rate has declined 54 basis points since June and there is likely some pent-up demand at this point. Fed fund futures now imply a 94% chance for a 25 basis point rate cut at the upcoming December 11^th meeting and a 6% chance of a 50 basis point cut.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Mohamed Al-Hamli, president of OPEC, said producers are pumping enough oil to meet global demand. Al-Hamli said world economic data is “most important” to OPEC and that OPEC’s spare capacity is 3 million bbls./day. He also said OPEC is spending $50 billion on refining projects and $150 billion on capacity expansion by 2012. OPEC sees a “real risk” of “wasting” resources on expansion as spare capacity may not be needed.
- Samsung Electronics, the world’s second-largest mobile-phone maker, forecast shipments will rise by more than 25% next year, outpacing industry growth, on demand for handsets with faster download speeds.
- Online sales rose to a record $733 million yesterday as US consumer returned to work after Thanksgiving and continued holiday shopping online. Internet retail purchases increased 21%, with shoppers favoring Amazon.com(AMZN), Wal-Mart(WMT) and Target(TGT), ComScore said today.
- Florida and Chicago borrowed a total of almost $500 million for schools in today’s largest single sales of US municipal bonds, tapping the market as benchmark tax-exempt yields rose from an eight-month low.
- Japan’s retail sales rose at the fastest pace in more than a year as consumer bought new-model cars.
- BHP Billiton(BHP) got financing for its $120 billion proposal to buy rival Rio Tinto Group(RTP) from seven banks with a loan of as much as $70 billion.
- Crude oil fell for a third day in NY on speculation that OPEC will next month agree to raise output.

Wall Street Journal:
- Hedge funds came through the first three months of the credit crunch in reasonable shape. But November is turning out to be a different proposition. Average returns look likely to be back in negative territory for the first time since August.
- Verizon(VZ) to Open Cell Network to Others’ Phones.

NY Times:
- Oil Producers See the World and Buy It Up.
- Congressional negotiators are nearing agreement on a measure to set significantly higher fuel economy standards for cars and light trucks, according to aides and lobbyists following the talks.
- Google’s(GOOG) Next Frontier: Renewable Energy.

BusinessWeek:
- Abu Dhabi’s Citigroup(C) Bargain. The emirate’s investment arm grabs a chunk of the financial giant, as US woes offer tempting buys for cash-rich, Gulf state funds.

CNNMoney.com:
- $100 oil and the ‘S’ word. Is it growing demand and tight supply, or merely rampant speculation that has pushed crude to record highs?
- 25 most powerful business people.

CNBC.com:
- Dell(DELL) to Sell Google(GOOG) Business Search Devices.

ABCNews.com:
- California’s Gold Coast. No Sign of Real Estate Slump Among the Priciest Homes.

Reuters:
- GM(GM) to build hybrid cars in China from 2008: report.
- Insiders snapping up shares at Fannie Mae(FNM).
- Short interest on the NASDAQ rose 1.5% in mid-November, the exchange said on Tuesday, suggesting an increase in bearish sentiment in the stock market.

Financial Times:
- A derivatives index tracking subprime mortgage securities is up from record lows this week, after loan performance data showed the pace of deterioration in the mortgage market slowed slightly in October. An analysis of the ABX indices by Goldman Sachs last week showed the index was pricing in cumulative losses of $402 billion, or 29% of the subprime mortgage market, roughly double the $211 billion it has estimated. This figure assumes 32% of the losses priced into the ABX will come from loans issued in 2007, and 39% of losses will come from loans issued in 2006, with the balance relating to prior years. Goldman said the AAA-rated slice of the index had fallen too far, and should have no losses, regain their 22% losses and trade at par.
- Investment funds from the Middle East and Asia have invested an estimated $37 billion in shares of western financial companies this year in a sign the funds are taking a more optimistic view than other investors of the growth prospects for banks, exchanges and asset managers.
- Some 48% of Americans now believe the US military effort in Iraq is going well, compared with 30% in February, according to the latest poll by the Pew Research Center.

Economic Daily News:
- High Tech Computer, the world’s largest maker of mobile phones using Microsoft’s(MSFT) Windows operating system, may post record monthly sales of $433 million this month on demand for its handsets. High Tech said sales will rise at least 10% next year as the company releases models with more features. Handset shipments will increase about 20% in 2008 from the estimated 11 million phones to be sold this year.

China Daily:
- China’s ruling Communist Party will continue to guide the government to strengthen macroeconomic controls next year in order to promote “sound and rapid” economic growth, particularly by limiting fixed asset investments.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (SPW), target $115.
- Maintained Buy on (ADBE), target $56.
- Maintained Buy on (ATVI), target $29.
- Reiterated Buy on (DELL), target $35.
- Reiterated Buy on (TECD), target $56.
- Buy (SNPS) ahead of earnings report on 12/6, target $35.

Night Trading
Asian Indices are -.50% to +.50% on average.
S&P 500 futures -.13%.
NASDAQ 100 futures -.16%.

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Earnings of Note
Company/EPS Estimate
- (BWS)/.66
- (CBRL)/.66
- (DLTR)/.37
- (MW)/.69
- (ARO)/.47
- (SIGM)/.53
- (JAS)/.25
- (CWTR)/-.12

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Durable Goods Orders for October are estimated to fall .1% versus a 1.7% decline in September.
- Durables Ex Transports for October are estimated to rise .3% versus a .3% increase in September.

10:00 am EST
- Existing Home Sales for October are estimated to fall to 5.0M versus 5.04M in September.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -1,000,000 barrels versus a -1,071,000 barrel decline the prior week. Gasoline supplies are estimated to rise by 500,000 barrels versus a 163,000 barrel increase the prior week. Distillate Inventories are expected to fall by -1,200,000 barrels versus a -2,407,000 barrel decline the prior week. Finally, Refinery Utilization is expected to rise by .55% versus a .66% decline the prior week.

2:00 pm EST
- Fed’s Beige Book

Other Potential Market Movers
- The Fed’s Mishkin speaking, Fed’s Fisher speaking, Fed’s Kohn speaking, weekly MBA Mortgage Applications report, weekly EIA energy inventory report, (ROH) analyst day, (ERF) analyst meeting, Bear Stearns Commodities & Capital Goods Conference, CSFB Tech Conference, CSFB Aviation Conference, FBR Investor Conference, JPMorgan Homebuilding Conference, CIBC Mid & Small Cap “Best Ideas” Conference, Lazard Healthcare Conference, Piper Jaffray Healthcare Conference and Merrill Lynch Health Services Conference could also impact trading today.

BOTTOM LINE: Asian indices are mixed as gains in technology stocks are being offset by losses in commodity shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Sharply Higher on Strength in Financial Sector, Falling Energy Prices

Indices
S&P 500 1,428.23 +1.49%
DJIA 12,958.44 +1.69%
NASDAQ 2,580.80 +1.57%
Russell 2000 743.27 +1.12%
Wilshire 5000 14,343.23 +1.35%
Russell 1000 Growth 595.33 +1.4%
Russell 1000 Value 773.09 +1.43%
Morgan Stanley Consumer 738.35 +1.3%
Morgan Stanley Cyclical 947.63 +1.2%
Morgan Stanley Technology 602.08 +1.97%
Transports 4,466.78 +1.88%
Utilities 523.36 +.62%
MSCI Emerging Markets 146.54 +.15%

Sentiment/Internals
Total Put/Call .81 -16.49%
NYSE Arms .70 -64.47%
Volatility(VIX) 26.28 -9.1%
ISE Sentiment 132.0 +28.16%

Futures Spot Prices
Crude Oil $94.58 -3.19%
Reformulated Gasoline 237.10 -2.88%
Natural Gas 7.56 -2.10%
Heating Oil 265.95 -1.74%
Gold 810.50 -1.94%
Base Metals 220.43 -1.03%
Copper 297.85 -2.36%

Economy
10-year US Treasury Yield 3.95% +11 basis points
US Dollar 75.13 +.36%
CRB Index 347.77 -1.58%

Leading Sectors
I-Banks +3.31%
Banks +2.6%
REITs +2.21%

Lagging Sectors
Gold -.25%
Energy -.73%
Oil Service -1.4%

Evening Review
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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Wells Fargo(WFC) will take a $1.4 billion pretax charge in the fourth quarter because of increased losses on home equity loans.
- Freddie Mac(FRE) plans to sell $6 billion in preferred stock and cut its dividend in half to shore up capital.
- Youths fought police for a second night in suburbs north of Paris, injuring more than 60 officers, as unrest triggered by the death of two teenagers spread.
- Crude oil fell more than $3 a barrel in NY after Saudi Arabia’s oil minister, Ali al-Naimi, said the country increased production to the highest this year.

globeandmail.com:
- Movie rental chain Blockbuster Inc. is in talks with all the major mobile phone makers about partnerships aimed at making it easier for consumers to watch movies on the go, CEO Keyes said.

BOTTOM LINE: The Portfolio finished higher today on gains in my Medical longs, Biotech longs, Semi longs and Retail longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, almost every sector rose and volume was above average. Measures of investor anxiety were about average into the close. Today's overall market action was bullish. Market leading growth stocks gained meaningful traction on the close with many substantially outperforming the broad market once again. I continue to believe true “growth” stocks will outperform “value” stocks for the foreseeable future. The 10-year swap spread fell another 1.9 basis points today to 69.6 basis points over Treasuries. This is down from 87.5 basis points over Treasuries just five days ago, which is a big positive. It is also interesting to note that the yen remained weak throughout the day, notwithstanding the intraday pullback we experienced in the broad US stock market, which is a positive. As well, the G-7 Currency volatility index reversed lower today and is close to breaking down, which is also a positive. Nikkei futures are indicating a +50 open in Japan.

Stocks Higher into Final Hour on Falling Oil and Financial Sector Strength

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Medical longs, Biotech longs and commodity shorts. I covered some of my (EEM) short and my (IWM)/(QQQQ) hedges this morning, thus leaving the Portfolio 100% net long. The overall tone of the market is positive today as the advance/decline line is slightly higher, most sectors are rising and volume is above average. Investor anxiety is above average. The NYSE reported last Wednesday that total short interest on the exchange rose another 3.8% over the first two weeks of the month, to 12.38 billion shares. Moreover, short interest on the Amex, where many ETFs trade, jumped 11.9%. Short interest in the Financial Select Sector SPDR (XLF) rose by 18,739,906 shares, to 116,045,478 shares. It is still the second most heavily shorted security on the exchange and the most heavily shorted sector ETF. The (XLF) is rising 1.6% on today’s Citigroup news. Breadth is weaker than I would like to see and we have given back too much of today’s earlier gains. I expect US stocks to trade mixed into the close from current levels as financial sector strength and lower energy prices offset global economic concerns.

Today's Headlines

Bloomberg:
- Google Inc.(GOOG) created a research group aimed at developing cheaper renewable energy sources, focusing on solar, wind and other alternative forms of power.
- MBIA Inc.(MBI) and Ambac Financial(ABK), the two largest bond insurers, are considering raising capital through reinsurance or sales of debt or stock to maintain their AAA ratings, executives said.
- Cheng Jian Wei, on a 24-hour visit to NY from China, was willing to risk missing his bus to the airport for the chance to buy his son an iPod at Apple’s(AAPL) Fifth Avenue store.
- Treasury two-year notes fell the most in more than three years after Abu Dhabi agreed to invest $7.5 billion in Citigroup(C), boosting stocks and easing demand for the relative safety of government debt.
- Carlyle Group’s Blue Wave hedge fund has lost 9.3% since being started in March by the Washington-based firm to expand beyond buyouts. The fund, overseen by former Deutsche Bank AG executives Rick Goldsmith and Ralph Reynolds, fell 9.5% in October after beginning the month with $690 million in assets.
- Thornburg Mortgage(TMA) will reinstate its dividend, possibly as early as next month, said COO Larry goldstone.
- The Baltic Dry Index, a measure of the cost of hauling commodities, posted its longest losing streak since May amid a decline in Chinese iron-ore imports and expectations that global economic growth with slow.
- Crude oil is falling more than $3/bbl. in NY after Saudi Arabia’s oil minister said the country increased production to the highest this year.
- Gold is falling the most in a week after a decline in energy costs reduced demand for the precious metal as a hedge against inflation.

Wall Street Journal:
- NBC Universal agreed to become the first major television broadcaster to use TiVo’s viewership data and ad products.

NY Times:
- California’s Orange County Water District plans to start the world’s largest plant to purify sewer water enough for it to be drinkable.

Boston Herald:
- Massachusetts may become the first state in the nation to make it illegal for parents to slap or spank their children.

USA Today:
- The Department of Homeland Security is creating new technologies including camera systems and chemical sensors to detect improvised explosive devices.

Dow Jones:
- OPEC is discussing a 750,000-barrel-a-day increase in production because of concerns about the effect of oil prices on the US economy, citing an OPEC delegate.