Today's Headlines

Bloomberg:
- The trial of ousted dictator Saddam Hussein resumed today as a second witness testified that she was stripped naked, beaten and electrocuted by Iraqi officers repeatedly.
- Kirk Kerkorian may seek more influence at GM after losing $400 million on his recent investment.
- US Democrat John Murtha said on NBC’s “Today” show that the US should leave Iraq immediately.
- US Treasuries are rising substantially today, pushing the 10-year T-note up by the most in almost three weeks, after a government report showing labor costs fell last quarter more than initially estimated eased concern inflation will accelerate.

Wall Street Journal:
- Hyundai Motor, Toyota Motor, Nissan Motor and other Asian automakers are competing to hire automotive engineers and engineering students in the Detroit area as they try to develop more products for the US market.
- Sun Microsystems, Cisco Systems and other software and parts makers are using startup companies as laboratories to come up with new ideas for products that they hope will generate sales growth.
- Johnson & Johnson ranked first and Coca-Cola second in Reputation Quotient’s annual ranking of companies with the best reputation.
- The US Dept. of Energy and a group of companies including American Electric Power and Consol Energy have signed an agreement to build a coal-fired plant that removes carbon dioxide and other pollutants.
- E*Trade Financial plans to introduce a credit card today that allows customers to transfer balances from air-mile credit cards at low interest rates while keeping the reward points that go with those accounts.
- Time Warner and Microsoft are likely to conclude by the end of the month an agreement to set up an online advertising service that will compete with Google.
- Verizon Communications, AT&T, Sprint Nextel and other US phone companies are developing and offering consumers new gadgets and services that combine landline, wireless and Internet access.

NY Daily News:
- New York is the source of about half of all pirated DVDs sold in the US, citing the Motion Picture Association of America.

NY Times:
- Time Warner’s talks with Microsoft and Google involving its AOL unit may not lead to the sale of an AOL stake.
- Pay by Touch, a closely held maker of fingerprint-based payment technology, said it expects to announce the acquisition of rival BioPay LLC today for $82 million in cash and stock.

Interfax:
- Russian Foreign Minister Sergei Lavrov rejected US criticism of the country’s plans to sell anti-aircraft missile systems to Iran.

Reuters:
- Representatives from broadcast and cable-tv networks including CBS and NBC met privately this week to consider regulators’ concerns about indecent programming.

Kyodo News:
- Japan plans to extend the current mission of its Self-Defense Forces in Iraq for another year, citing the government’s new mission plan.

Largest Component of Inflation Declines Again, Factory Orders Rebound, Pending Home Sales Decline

- Final 3Q Non-farm Productivity rose 4.7% versus estimates of a 4.5% increase and a prior estimate of a 4.1% gain.
- Final 3Q Unit Labor Costs fell 1.0% versus estimates of a .9% decline and a prior estimate of a .5% decrease.
- Factory Orders for October rose 2.2% versus estimates of a 2.3% increase and an upwardly revised 1.4% decline in September.
- Pending Home Sales for October fell 3.2% versus estimates of a 1.2% decline and a downwardly revised 1.0% fall in September.

BOTTOM LINE: The productivity of US workers rose from July through September at the fastest pace in two years and labor costs dropped for a second quarter, easing concern that rising wages will fuel inflation, Bloomberg said. Moreover, 2Q unit labor costs were revised from a 1.8% increase to a 1.2% decline. Contained labor costs, the largest component of inflation, and the jump in productivity should all the Fed to make increasingly dovish comments going forward.

US factory orders increased for the second time in three months during October as the Gulf Coast recovered from hurricanes, suggesting production gains will fuel the economy in coming months, Bloomberg said. Unfilled business equipment orders rose 1.6% to the highest on record, implying demand was larger than manufacturers’ ability to produce. Commercial aircraft orders surged 51.0%. Orders for capital goods excluding aircraft, an indicator of future activity, gained 1.4%. The inventory-to-shipments ratio dropped to 1.17 months from 1.18 months in September.

Contracts to buy previously owned US homes fell more than expected in October as rising prices and borrowing costs pushed buyers out of the market, Bloomberg said. The Pending Home Sales Index has averaged 125.4 this year versus 120.03 last year. Moreover, sales of new and existing owned homes are still headed for another record year, the fifth in a row. I continue to believe the housing market is slowing to more healthy sustainable levels, not collapsing. This should also allow the Fed to become more dovish.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- The SEC said it will allow drug makers to record immediately sales of life-saving vaccines stockpiled by the federal government for future pandemics such as avian flu.
- Confidence among CEOs of small- and medium-sized US companies rebounded from a two-year low as energy prices ebbed, according to a private survey by TEC Intl.

Financial Times:
- Coca-Cola will start its $25 million bottling plan in Afghanistan this week after an absence of more than 15 years.

South China Morning Post:
- Chinese Premier Wen Jiabao said he’s “very concerned” about the political situation in Hong Kong after a pro-democracy march drew more than 80,000 people in the city.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on USB, WFC, KO, EBAY, BAC and AMP.

Night Trading
Asian Indices are -.25% to +.50% on average.
S&P 500 indicated +.07%.
NASDAQ 100 indicated +.03%.

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Earnings of Note
Company/EPS Estimate
AZO/1.54
BRCD/.05
CMTL/.42
CMVT/.15
FLS/.28
KEGS/.20
KR/.25
PLL.21
SAFM/.68
SHLD/.28

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Final 3Q Non-farm Productivity is estimated to rise 4.5% versus a prior estimate of a 4.1% increase.
- Final 3QUnit Labor Costs are estimated to fall .9% versus a prior estimate of a .5% decline.
- Factory Orders for October are estimated to rise 2.3% versus a 1.7% decline in September.
- Pending Home Sales for October are estimated to fall 1.2% versus a .3% decline in September.

BOTTOM LINE: Asian indices are mixed as strength in energy shares is offsetting weakness in exporting shares in the region. I expect US equities open mixed and to rally modestly into the afternoon. The Portfolio is 100% net long heading into the day.

Stocks Finish Lower on Rising Long-term Rates

Indices
S&P 500 1,262.09 -.24%
DJIA 10,835.01 -.39%
NASDAQ 2,257.64 -.69%
Russell 2000 686.57 -.58%
DJ Wilshire 5000 12,629.10 -.29%
S&P Barra Growth 604.09 -.31%
S&P Barra Value 653.62 -.16%
Morgan Stanley Consumer 592.64 -.37%
Morgan Stanley Cyclical 779.25 -.27%
Morgan Stanley Technology 531.30 -1.07%
Transports 4,086.81 -1.25%
Utilities 404.24 +.30%
Put/Call .85 unch.
NYSE Arms .93 -24.54%
Volatility(VIX) 11.60 +5.36%
ISE Sentiment 190.00 -18.10%
US Dollar 91.49 -.48%
CRB 325.59 +.68%

Futures Spot Prices
Crude Oil 59.93 +.03%
Unleaded Gasoline 159.25 +.17%
Natural Gas 13.54 -.87%
Heating Oil 179.20 +.13%
Gold 513.00 +.08%
Base Metals 151.59 +1.55%
Copper 200.45 -.15%
10-year US Treasury Yield 4.56% +1.18%

Leading Sectors
Steel +1.49%
Energy +.67%
I-Banks +.63%

Lagging Sectors
Oil Tankers -1.23%
Computer Services -1.50%
Semis -1.57%

Evening Review
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Afternoon Recommendations
Goldman Sachs:
- None of note

Afternoon/Evening Headlines
Bloomberg:
- KB Home, the fifth-largest US homebuilder by stock market value, formed a joint venture with a Louisiana contractor to build houses in areas damaged by Hurricane Katrina.
- ABC News named Elizabeth Vargas and Bob Woodruff to co-anchor “World News Tonight” and said the pair also will host an Internet show as the US television network seeks a formula to stem a decline in viewers.
- Defense Secretary Rumsfeld today said press coverage of Iraq focuses too much on sensationalism and misses “the full story.”
- Natural gas prices reversed 7% lower intra-day as traders “sold the news” of colder weather.

AP:
- The organization that overseas the Internet approved a “.asia” Internet domain for the Asia-Pacific region and put off a decision on “.xxx” designation for pornography.

BOTTOM LINE: The Portfolio finished lower today on losses in my Internet longs, Semi longs, Airline longs and Medical Information Systems longs. I took profits in my SNDK short in the afternoon and added to a few existing shorts, thus leaving the Portfolio 100% net long. The tone of the market was negative today as the advance/decline line finished lower, most sectors fell and volume was average. Measures of investor anxiety were mostly higher into the close. Overall, today was a pretty good day for the bears as the major averages failed to mount much of a rally even as energy prices reversed and long-term rates stabilized higher. However, I still believe stocks will mount another push higher this week. Given two-thirds of inflation is comprised from unit labor costs, tomorrow's report should be monitored closely.