Wednesday Watch

Late-Night Headlines
Bloomberg:
- Steel companies may lose their luster amid increasing production from China.
- Australian Prime Minister John Howard said the government has received information on a credible terrorism threat and will recall legislators to give police extra powers to deal with the threat.
- Toyota Motor and Honda Motor helped Asian auto brands win a record share of the US market in October as sales plunged for GM and Ford.

Financial Times:
- Delphi Corp. may ask GM to finance a one-off payment to workers facing wage and benefit cuts in return for lower parts prices.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on NFP and MSFT.
- Reiterated Underperform on SMP, SGP, SIRI and HCC.

Night Trading
Asian Indices are -.25% to +1.0% on average.
S&P 500 indicated -.05%.
NASDAQ 100 indicated -.13%.

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Earnings of Note
Company/EPS Estimate
ATVI/-.06
ATK/1.01
BZH/3.11
BMC/.23
CECO/.51
DF/.50
DVN/1.80
DUK/.48
PCLN/.37
QCOM/.33
SPW/.68
TK/.40
TWX/.17
UVN/.22

Upcoming Splits
- None of note

Economic Releases
10:30 am EST
- Platt's estimates that weekly crude inventories rose 2.75 million barrels, gasoline inventories rose 1.4 million barrels and distillate supplies fell 1 million barrels. Refinery utilization is expected to rise 2.5%.

BOTTOM LINE: Asian indices are mostly higher on earnings optimism in the region. I expect US equities to open modestly lower and to rise later in the day. The Portfolio is 100% net long heading into the day.

Stocks Finish Modestly Lower after Fed Rate Hike

Indices
S&P 500 1,202.76 -.35%
DJIA 10,406.77 -.32%
NASDAQ 2,114.05 -.29%
Russell 2000 643.02 -.56%
DJ Wilshire 5000 12,007.42 -.30%
S&P Barra Growth 574.29 -.54%
S&P Barra Value 624.34 -.17%
Morgan Stanley Consumer 583.70 -.59%
Morgan Stanley Cyclical 719.01 +.15%
Morgan Stanley Technology 498.92 -.09%
Transports 3,840.04 +.64%
Utilities 390.54 -2.64%
Put/Call .96 +9.09%
NYSE Arms 1.23 +33.05%
Volatility(VIX) 14.85 -3.07%
ISE Sentiment 165.00 -14.95%
US Dollar 90.08 +.01%
CRB 315.83 -.15%

Futures Spot Prices
Crude Oil 59.84 unch.
Unleaded Gasoline 160.36 unch.
Natural Gas 11.94 +.99%
Heating Oil 180.52 +.01%
Gold 460.80 +.04%
Base Metals 133.78 -.93%
Copper 181.50 -.06%
10-year US Treasury Yield 4.56% +.40%

Leading Sectors
Steel +1.73%
Oil Service +1.56%
Computer Services +1.31%

Lagging Sectors
REITs -2.14%
Computer Hardware -2.18%
Utilities -2.64%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on SYMC, MSFT, CL, TXU and TAP.
- Reiterated Underperform on SGP, CSE and MMC.

Afternoon/Evening Headlines
Bloomberg:
- Codelco, the world’s largest copper producer, said prices for the metal will drop by about a third in the next three years as mining companies expand output to meet growing demand from China.
- Microsoft plans to develop “live” programs that create real-time links to data over the Internet.
- Federal Reserve policy makers raised the benchmark US interest rate a 12th straight time to head off faster inflation and signaled they aren’t finished yet.
- Former US House Majority Leader DeLay won his bid to remove from his campaign-finance trial a Texas judge who has contributed money to Democratic candidates.
- Moderate US Senate Democrats said they want to know more about Supreme Court nominee Samuel Alito’s judicial philosophy and signaled reluctance to support a filibuster to block his confirmation.

Financial Times:
- Anheuser-Busch Cos. and Heineken NV are in talks to buy a controlling stake in Fujian Sedrin Brewery in a deal that may value the Chinese brewer at $800 million.

BOTTOM LINE: The Portfolio finished higher today on gains in my Semi longs, Internet longs, Medical Information System longs and Airline longs. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was slightly negative today as the advance/decline line finished lower, sector performance was mixed and volume was above average. Measures of investor anxiety were mostly higher into the close. Overall, today’s market action was neutral and likely frustrating for the bulls and bears. The major averages finished modestly lower; however, a number of sectors gained. It is a big positive that the MS Tech Index fell only 0.09% lower on the day of a Dell (DELL) earnings warning. I still expect stocks to build on recent gains over the next few days.

Stocks Lower Mid-day on Dell Warning and Fed Jitters

Indices
S&P 500 1,202.77 -.35%
DJIA 10,416.86 -.21%
NASDAQ 2,112.53 -.37%
Russell 2000 643.39 -.50%
DJ Wilshire 5000 12,010.05 -.28%
S&P Barra Growth 574.51 -.50%
S&P Barra Value 624.45 -.16%
Morgan Stanley Consumer 584.76 -.41%
Morgan Stanley Cyclical 716.82 -.15%
Morgan Stanley Technology 498.89 -.10%
Transports 3,836.76 +.56%
Utilities 393.83 -1.81%
Put/Call .92 +4.55%
NYSE Arms 1.22 +32.49%
Volatility(VIX) 14.90 -2.74%
ISE Sentiment 179.00 -7.73%
US Dollar 90.07 unch.
CRB 315.79 -.16%

Futures Spot Prices
Crude Oil 59.45 -.52%
Unleaded Gasoline 160.00 +.62%
Natural Gas 11.93 -2.25%
Heating Oil 180.50 -1.09%
Gold 460.90 -1.29%
Base Metals 133.78 -.93%
Copper 181.60 +.28%
10-year US Treasury Yield 4.56% +.22%

Leading Sectors %
Steel +1.51%
Computer Services +1.48%
Broadcasting +.71%

Lagging Sectors
REITs -1.55%
Computer Hardware -1.86%
Utilities -1.99%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Internet longs, Medical Information System longs, Semi longs and Airline longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, sector performance is mixed and volume is slightly above average. Measures of investor anxiety are mostly higher. Today’s overall market action is neutral considering the better economic data and Dell earnings’ warning. The Johnson Redbook same-store sales index rose 3.8% year-over-year last week vs. a 3.5% rise the prior week. This week's gain is up from a 1.5% increase in late April and the 26th week in a row the index has risen 3% or more. While consumer sentiment remains depressed, spending remains healthy. There is very little evidence of any widespread consumer slowdown. I expect US stocks to trade modestly higher from current levels into the close on short covering and bargain hunting after the Fed hike.

Today's Headlines

Bloomberg:
- China has seen no signs of deflation and consumer prices are falling because of decreasing production costs and rising output, Zheng Jingping, a spokesman for the National Bureau of Statistics wrote.
- Democrats’ only hope of blocking the US Supreme Court nomination of Samuel Alito Jr. may be a filibuster, and key Republican senators say it would probably have little change of success.
- Crude oil is falling to a three-month low in NY as warm weather in the US further reduced fuel consumption that was cut after hurricanes pushed prices to records.
- President Bush announced a $7.1 billion plan to prepare the US for a possible avian influenza pandemic, including at least $2.2 billion for research.


Wall Street Journal:
- A private-equity company led by Jerry Kent will buy a group of cable systems from Cox Communications for as much as $3 billion.
- Google will resume scanning copyrighted library books into its search engine after a self-imposed interval, even as some publishers and authors try to block it from doing so without their approval.
- Visa International, American Express and other credit-card companies are trying to come up with ways to make it easier for people to charge small payments on their cards.
- An administration tax panel will present proposals today to change how US households and businesses are taxed.
- Lockheed Martin and three private-equity companies are discussing a purchase price for Computer Sciences of as much as $65 a share.
- Fabric7 Systems, a Silicon Valley start-up company, plans to use microprocessor chips from Advanced Micro Devices to build server computers to compete with IBM, Hewlett-Packard and Sun Microsystems.

NY Times:
- Johnson & Johnson’s proposed acquisition of Guidant will probably be approved by the FTC as early as today, citing executives.
- Sprint Nextel is expected to announce an agreement to offer wireless telephone service to customers of Comcast, Time Warner Cable and Cox Communications.

Financial Times:
- The US Treasury is expected to outline its thinking on the creation of a lending facility to alleviate shortages of Treasury notes in the repurchase market.

Interfax:
- Azerbaijan plans to raise oil production 42% to 572,000/day next year, compared with expected output this year.

Construction and Manufacturing Still Strong, Prices Paid Elevated

- Construction Spending for September rose .5% versus estimates of a .5% increase and an upwardly revised .6% gain in August.
- ISM Manufacturing for October rose to 59.1 versus estimates of 57.2 and a reading of 59.4 in September.
- ISM Prices Paid for October rose to 84.0 versus estimates of 75.0 and a reading of 78.0 in September.

BOTTOM LINE: US construction spending rose for a third straight month in September, led by the biggest rise in homebuilding since February, Bloomberg reported. Construction will remain strong over the intermediate-term as hurricane rebuilding begins in earnest.

US manufacturing expanded in October at the second-fastest pace this year and an index of factory costs unexpectedly rose, Bloomberg reported. Corporate equipment upgrades, as well as declining inventories and hurricane rebuilding should continue to boost manufacturing. This reading was significantly higher than the 10-year average of 52.4. The order backlogs component of the index rose to 55.5 from 55.0 in September. The recent strength in manufacturing is amazing considering the hurricane-related disruptions along the Gulf coast. I expect manufacturing to remain strong through year-end. I also believe we are seeing a cyclical peak in inflation readings and the prices paid indices will decelerate over the intermediate-term.

Links of Interest

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