Friday Watch

Late-Night Headlines
Bloomberg:
- Amazon.com plans to sell online access to any page or section of a book, as well as its entirety. Random House said it’s developing a similar service and may participate in Amazon’s program.
- Shares of BlueScope Steel Ltd. had their biggest-ever slump after Australia’s biggest steelmaker said profit may fall as much as 38% as rising inventories curb prices. Steel prices may fall as much as 27% next year as rising Chinese output causes a glut, ABN Amro analyst Michael Sones said.

Financial Times:
- Microsoft has agreed to a deal with the British Library to make digital copies of 25 million pages of material, including books, journals, maps and manuscripts, available on the Internet.

AFP:
- Riots broke out for the eighth consecutive night in the suburbs of Paris. The violence was most severe in the north-eastern Seine-Saint-Denis area, where 1,300 police officers were deployed. Over 40 vehicles were set alight and shots were fired at police.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on LVS, WON and SBUX.
- Reiterated Underperform on ABC, FTO and CSC.

Business Week:
- Drugmaker Wyeth(WYE) is an attractive takeover target because it would help a larger rival expand its biological drug business.
- Shares of Ethan Allen Interiors(ETH) may decline as the furniture designer and marker’s growth is threatened by low-cost, high-quality imports.

Night Trading
Asian Indices are unch. to +.75% on average.
S&P 500 indicated -.10%.
NASDAQ 100 indicated -.12%.

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Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Change in Non-farm Payrolls for October is estimated at 120K versus -27K in September.
- The Change in Manufacturing Payrolls for October is estimated at -9K versus -27K in September.
- The Unemployment Rate for October is estimated at 5.1% versus 5.1% in September.
- Average Hourly Earnings for October is estimated to rise .2% versus a .2% gain in September.

BOTTOM LINE: Asian indices are mostly higher, led by Japan as the Nikkei 225 broke 14,000 for the first time in more than four years. I expect US equities to open modestly higher on a better-than-expected employment report. The Portfolio is 100% net long heading into the day.

Stocks Finish Higher on Heavy Volume Even as Oil and Rates Rise

Indices
S&P 500 1,219.94 +.43%
DJIA 10,522.59 +.48%
NASDAQ 2,160.22 +.74%
Russell 2000 658.77 +.26%
DJ Wilshire 5000 12,195.25 +.42%
S&P Barra Growth 583.81 +.74%
S&P Barra Value 631.90 +.13%
Morgan Stanley Consumer 586.42 +.26%
Morgan Stanley Cyclical 732.98 +.39%
Morgan Stanley Technology 509.01 +.80%
Transports 3,973.44 +1.16%
Utilities 394.22 +.31%
Put/Call .91 +33.82%
NYSE Arms .80 +16.44%
Volatility(VIX) 13.00 -3.56%
ISE Sentiment 159.00 -10.17%
US Dollar 90.42 +.78%
CRB 321.29 1.53%

Futures Spot Prices
Crude Oil 61.75 -.05%
Unleaded Gasoline 162.47 -.13%
Natural Gas 11.66 -.25%
Heating Oil 183.25 -.06%
Gold 462.30 +.09%
Base Metals 135.50 +.58%
Copper 182.20 -.27%
10-year US Treasury Yield 4.64% +.98%

Leading Sectors
Computer Hardware +2.14%
Biotech +2.04%
Energy +1.93%

Lagging Sectors
Homebuilders -.95%
Telecom -1.36%
Gold & Silver -1.57%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on DIS and GE.
- Reiterated Underperform on MKL and CSC.

Afternoon/Evening Headlines
Bloomberg:
- The US military may have to cut at least $32 billion from its planned spending through 2011, the Pentagon’s No.2 civilian warned military service chiefs.
- The US government in June will begin letting air travelers move more quickly through airport security checkpoints if they successfully complete a background check beforehand.
- The US Senate is nearing approval of a package of about $36 billion in spending cuts as part of a Republican-led effort to reduce the budget deficit.
- US Treasuries fell, pushing the 10-year note yields to the highest since June of last year, after a report showed the biggest part of the economy in October was stronger than forecast.
- Crude oil and heating oil surged on light volume from three-month lows as traders covered short positions in the commodities.

Financial Times:
- The European Union’s “faltering” economic reforms are raising concern among European CEOs, citing Conference Board Chief Economist Fosler.
- Fujitsu Ltd. said it plans to sell high-performance computer servers with EDS Corp. in the US.

BOTTOM LINE: The Portfolio finished substantially higher today on gains in my Semi longs, Internet longs, Medical longs, Retail longs and Computer longs. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, most sectors rose and volume was heavy. Measures of investor anxiety were mostly higher into the close. Overall, today’s market action was positive. The bears' main arguments have revolved around a collapsing housing market, a "spent-up" consumer and runaway inflation. Over the last couple of days these arguments appear hugely flawed. Beazer Homes (BZH), the major homebuilder most exposed to ARMs and the most heavily shorted, beat quarterly estimates by 16% and raised 2006 guidance. As I predicted in September, the preliminary reading on 3Q unit labor costs showed a 0.5% decline. Two-thirds of inflation comprises unit labor costs. Inflation will not become a problem with muted unit labor cost increases. This number should make the Fed very happy. Finally, the International Council of Shopping Centers said today that October same-store sales rose 4.4%, the most since June. This confirms what I have been saying for some time. With gas futures down almost 50% from September highs and a warmer-than-expected winter so far bringing down natural gas and heating oil prices, consumer spending should remain strong through the holiday season. These three developments are very bullish for stocks and bode well for my prediction of a strong finish to the year.

Stocks High Mid-day on Positive Economic Data and More Optimism

Indices
S&P 500 1,217.37 +.22%
DJIA 10,500.58 +.27%
NASDAQ 2,156.08 +.55%
Russell 2000 658.39 +.20%
DJ Wilshire 5000 12,172.64 +.24%
S&P Barra Growth 582.81 +.57%
S&P Barra Value 630.57 -.07%
Morgan Stanley Consumer 585.15 +.06%
Morgan Stanley Cyclical 732.63 +.34%
Morgan Stanley Technology 508.26 +.65%
Transports 3,973.77 +1.17%
Utilities 395.59 +.65%
Put/Call .85 +25.0%
NYSE Arms .81 +20.04%
Volatility(VIX) 13.10 -2.82%
ISE Sentiment 166.00 -6.21%
US Dollar 90.42 +.79%
CRB 321.25 +1.52%

Futures Spot Prices
Crude Oil 61.75 +3.35%
Unleaded Gasoline 162.75 +3.72%
Natural Gas 11.67 +.57%
Heating Oil 183.25 +2.78%
Gold 462.00 +.02
Base Metals 135.50 +.58%
Copper 182.65 -.03%
10-year US Treasury Yield 4.64% +.89%

Leading Sectors %
Gaming +2.13%
Biotech +1.81%
Energy +1.80%

Lagging Sectors
Homebuilders -.89%
Gold & Silver -1.62%
Telecom -1.73%

BOTTOM LINE: The Portfolio is substantially higher mid-day on gains in my Internet longs, Software longs, Semi longs, Computer longs, Medical longs and Retail longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are higher and volume is heavy. Measures of investor anxiety are mostly higher. Today’s overall market action is positive considering the rise in long-term rates/oil and recent gains. The U.S. economy is in the middle of the longest string of 3%+ GDP growth quarters since 1986. That's right, better than the growth streak during the bubbling 1990s. This has occurred during a time of terrorism fears, war, multiple natural disasters, soaring commodity prices, pandemic worries, many Fed rate hikes, corporate scandals, historically bitter politics and the hangover effects from the overcapacity generated during the bubble years. The bears' worst nightmare is P/E multiple expansion. I contend that the S&P 500's current forward multiple of 15.8 is too low given the U.S. economy's bulletproof disposition. I expect US stocks to trade modestly higher from current levels into the close on more optimism and short-covering.

Today's Headlines

Bloomberg:
- Adidas-Salomon AG raised its annual earnings and sales forecasts as demand in the US increased and the company won orders tied to the 2006 World Cup soccer tournament.
- Wal-Mart said October sales rose 4.3% as gas prices fell and cooler weather spurred purchases.
- Exxon Mobil, Microsoft and Qualcomm led US companies to an average 15% gain in third-quarter profits as corporations weathered record oil prices and rising interest rates.
- Microsoft’s Xbox 360 video-game machine is already sold out on some Web sites including Wal-Mart Stores, a sign the company may have shortages when the console goes on sale this month.
- US retailers reported the strongest sales gain in four months, rising 4.4%, bolstering expectations for the holiday shopping season.
- Playboy Enterprises and Penthouse Media Group may make adult movies for portable video players such as Apple’s new iPod to capitalize on soaring demand for the devices.
- Federal Reserve Chairman Greenspan said the US economy is poised for continued growth even after the shock of two hurricanes raised energy prices and increased the risk of broader inflation.
- Merck won the second lawsuit to come to trail over its painkiller Vioxx, easing concerns that the company would have to settle thousands of cases after it pulled the drug from the market.
- The US economy hasn’t growth so fast for so long in almost 20 years, unemployment is near a four-year low and home ownership is at a record high, yet most Americans say President Bush is doing a bad job handling the economy.
- The US dollar is rising against the euro and climbed to a two-year high versus the yen after Greenspan said US growth remains “firm.”

Wall Street Journal:
- Southwest Airline will debut a airplane today with basketball motif as part of its sponsorship with the NBA.
- Vonage Holdings, which sells Internet-based telephone service, may put itself up for sale for more than $2 billion.
- Volkswagen AG, Europe’s largest carmaker, plans to develop products specifically for the US market and to improve its standing in quality surveys as it seeks to combat a sales decline in the world’s largest economy.
- The number of Americans with diabetes on dialysis machines doubled to almost 325,000 between 1988 and 2003.
- A sale of Knight Ridder could herald a raft of mergers and acquisitions in the newspaper industry.
- A Web-based technology that allows users of shared computers in Internet cafes, military installations and schools to send instant messages without jeopardizing their confidentiality, is attracting applications and investors.
- Google makes available thousands of public-domain books and documents through its search service starting today, the first program to scan works at several university and public libraries.
- Iridium Satellite LLC and other providers of satellite-telephone services have become the hottest companies in the telecommunications industry because of demand for dependable communications.
- Billionaire investor Wilbur Ross says he may spend more than $4.5 billion to assemble a group of auto-parts companies.

NY Times:
- Media companies such as Viacom are losing their allure with investors as their stocks languish amid concern about the effects of the Internet and advertising trends.

NY Post:
- Scientific-Atlanta may be exploring a possible sale of the company after hiring two investment banks earlier this year.

New Scientiest:
- Nestle SA has applied for a patent for a beer-like foaming coffee drink.

Productivity Soars, Unit Labor Costs Fall, Jobless Claims Fall, Factory Orders Decline, Service Sector Strong, Pending Home Sales Fall from Record

- Preliminary 3Q Non-farm Productivity rose 4.1% versus estimates of a 2.6% rise and an upwardly revised 2.1% gain in 2Q.
- Preliminary 3Q Unit Labor Costs fell .5% versus estimates of a 1.8% increase and a downwardly revised 1.8% gain in 2Q.
- Initial Jobless Claims for last week fell to 323K versus estimates of 330K and 331K the prior week.
- Continuing Claims fell to 2823K versus estimates of 2898K and 2867K prior.
- Factory Orders for September fell 1.7% versus estimates of a 1.0% decline and a 2.9% increase in August.
- ISM Non-Manufacturing for October rose to 60.0 versus estimates of 57.0 and a reading of 53.3.
- Pending Home Sales for September fell .3% versus estimates of a 1.8% decline and a

BOTTOM LINE: The productivity of US workers rose more than forecast last quarter and labor costs unexpectedly declined as business concentrated on improving efficiency to combat soaring fuel prices, Bloomberg said. The decline in labor costs, which comprise two-thirds of inflation, was the first decrease since the second quarter of 2004. The 6% decline in the CRB Index and decelerating unit labor cost increases bode very well for muted inflation readings going forward.

The number of first-time jobless claims unexpectedly declined last week to a two-month low because of fewer hurricane-related filings, Bloomberg reported. The four-week moving average of jobless claims decreased to 350,500 from 367,500 the prior week. The four-week moving average of continuing claims fell to 2.85M from 2.86M prior. The insured employment rate, which tracks the US unemployment rate, stayed at 2.2%. I expect tomorrow’s non-farm payroll report to exceed estimates of 110,000 new jobs created.

Orders placed with US factories fell 1.7% in September, as bookings for aircraft, computers and household appliances dropped after the hurricanes hit, Bloomberg reported. Considering August’s strong gains and the effects of the hurricanes this number is not surprising. I expect Factory Orders for October to bounce sharply.

US service companies expanded more than economists expected in October as some hurricane-stricken businesses along the Gulf Coast reopened and energy prices retreated from record levels, Bloomberg reported. The prices paid component of the index fell to 78 from 81.4 in October. As well, the new orders component of the index rose to 58.2 from 56.6 in September. I expect this gauge of the service sector to remain strong as consumer sentiment rises over the next few months.

Contracts to purchase previously owned US homes fell in September from an all-time record as rising borrowing costs and the effects of the hurricanes deterred some prospective buyers. I continue to believe the housing market is slowing to more healthy sustainable levels.

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