Wednesday Watch

Late-Night Headlines
Bloomberg:
- After paying more than $12 billion in fines and settlements over four years, Wall Street firms including Goldman Sachs and Lehman Brothers are headed for their biggest profits since 2000.

Wall Street Journal:
- Microsoft is seeking to benefit from the Internet advertising and software boom as it introduces new Web-based services.
- A McDonald’s shareholder with a 4.9% stake has suggested the company sell a major portion of its company-owned restaurants in an IPO to provide holders more value.

London-based Times:
- GE, Mitsubishi Heavy Industries, Shaw Group and Toshiba are among the companies on the shortlist to buy British Nuclear Fuels Plc’s Westinghouse Electric, the world’s largest holder of nuclear technology.

South China Morning Post:
- The US and China will agree to resume military exchanges during President Bush’s meeting with President Jintao in Beijing next week.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on MDT, DISH, CBB, MSFT, FSH and KRG.
- Reiterated Underperform on AGI and PFG.

Night Trading
Asian Indices are -.25% to +1.25% on average.
S&P 500 indicated +.07%.
NASDAQ 100 indicated +.09%.

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Earnings of Note
Company/EPS Estimate
DOX/.38
CSCO/.24
FD/.23
FST/.94
HANS/.59
IPG/-.08
JDSU/.00
KG/.33
L/.00
MVL/.30
NVDA/.36
SNDA/.37
WFMI/.53

Upcoming Splits
SMG 2-for-1

Economic Releases
10:00 am EST
- Wholesale Inventories for September are estimated to rise .3% versus a .5% gain in August.

10:30 am EST
- Platt's estimates that weekly crude inventories rose 1.7 million barrels, gasoline inventories rose 1.1 million barrels and distillate supplies increased 600,000 barrels. Refinery utilization is expected to rise 2.3%.

BOTTOM LINE: Asian indices are mostly higher, spurred by gains in technology shares in the region. I expect US equities to open modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Modestly Lower as Long-term Rate Fall on Perceived Weakness in Housing

Indices
S&P 500 1,218.59 -.35%
DJIA 10,539.72 -.44%
NASDAQ 2,172.07 -.28%
Russell 2000 656.23 -.76%
DJ Wilshire 5000 12,177.21 -.38%
S&P Barra Growth 583.66 -.32%
S&P Barra Value 630.69 -.36%
Morgan Stanley Consumer 585.18 -.36%
Morgan Stanley Cyclical 732.80 -.76%
Morgan Stanley Technology 511.17 -.13%
Transports 3,961.24 -.46%
Utilities 393.77 -.21%
Put/Call .86 +2.38%
NYSE Arms 1.13 +19.49%
Volatility(VIX) 13.08 -.15%
ISE Sentiment 175.00 -7.41%
US Dollar 91.40 +.12%
CRB 318.24 +.25%

Futures Spot Prices
Crude Oil 59.59 -.20%
Unleaded Gasoline 156.10 -.08%
Natural Gas 11.87 +.65%
Heating Oil 177.30 -.31%
Gold 462.00 -.06%
Base Metals 136.24 -.01%
Copper 183.65 -.08%
10-year US Treasury Yield 4.55% -1.41%

Leading Sectors
Disk Drives +.80%
Oil Service +.77%
Energy +.75%

Lagging Sectors
Papers -1.66%
Gaming -2.51%
Homebuilders -5.38%

Evening Review
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In Play

Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on ADP and COF.
- Reiterated Underperform on INFA.

Afternoon/Evening Headlines
Bloomberg:
- Pixar, the computer-animation film studio run by Steven Jobs, posted a 22% rise in profit on surging home-video sales from movies such as “The Incredibles.”
- Bank of New York agreed to pay $38 million to settle two criminal investigations, after admitting it failed to report $7 billion in suspicious transactions from Russia that were linked to money laundering.

AP:
- American Airlines faces a possible fine after a man boarded a Miami-bound flight at Newark, New Jersey’s Liberty International Airport without a ticket or boarding pass.

BOTTOM LINE: The Portfolio finished lower today on losses in my Internet longs, Homebuilding longs and Retail longs. I exited a Homebuilding long in the afternoon and added to some existing longs, 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 about average. Measures of investor anxiety were mostly higher into the close. Overall, today’s market action was modestly negative given recent gains and the losses in the Homebuilding sector. Two of the main arguments for Fed rate hikes have been excessive speculation in housing and rising commodity prices. The speculative froth in many housing markets has been greatly curtailed over the last few months. As well, energy prices have dropped substantially from September highs. While these two trends may need to persist for a bit longer to get the Fed's attention, it is becoming much easier for them to justify a "pause" in the pace of rate hikes.

Stocks Modestly Lower Mid-day on Weakness in Homebuilders

Indices
S&P 500 1,219.34 -.28%
DJIA 10,550.29 -.34%
NASDAQ 2,173.78 -.21%
Russell 2000 656.35 -.74%
DJ Wilshire 5000 12,180.61 -.36%
S&P Barra Growth 584.16 -.24%
S&P Barra Value 630.52 -.39%
Morgan Stanley Consumer 585.76 -.26%
Morgan Stanley Cyclical 733.26 -.70%
Morgan Stanley Technology 510.86 -.19%
Transports 3,960.28 -.48%
Utilities 393.65 -.24%
Put/Call .84 unch.
NYSE Arms 1.11 +17.48%
Volatility(VIX) 13.18 +.61%
ISE Sentiment 176.00 -6.88%
US Dollar 91.38 +.10%
CRB 317.61 +.05%

Futures Spot Prices
Crude Oil 59.40 -.12%
Unleaded Gasoline 154.75 -.55%
Natural Gas 11.73 -1.20%
Heating Oil 176.30 -1.29%
Gold 462.30 +.41%
Base Metals 136.24 -.01%
Copper 183.80 -.51%
10-year US Treasury Yield 4.57% -1.06%

Leading Sectors %
Oil Service +.79%
Energy +.74%
Disk Drives +.73%

Lagging Sectors
Papers -1.46%
Gaming -2.30%
Homebuilders -4.72%

BOTTOM LINE: The Portfolio is lower mid-day on losses in my Internet longs, Homebuilding longs and Retail longs. I added to my NTES long this morning and to existing shorts, thus leaving the Portfolio 100% net long. I am using a close below $60 as a stop on this position. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is about average. Measures of investor anxiety are mostly higher. The Johnson Redbook same-store sales index rose 4.2% year-over-year last week even with unseasonably warm weather vs. a 3.8% rise the prior week. This week's gain is up from a 1.5% increase in late April and the 27th week in a row the index has risen 3% or more. I continue to believe while consumer sentiment remains depressed, spending remains healthy. There remains little evidence of any widespread consumer slowdown. I expect US stocks to trade modestly higher from current levels into the close on short-covering.

Today's Headlines

Bloomberg:
- The euro dropped to a two-year low against the dollar after a 12th night of rioting in France. Concern that the social disorder will damp growth and deter investment in euro-denominated assets pushed the currency lower.
- President Chiraq declared a state of emergency to quell spiraling urban violence, applying for the first time in France a 50-year law that authorizes curfews and warrant-less searches.
- The UN Security Council voted 15 to 0 to authorize US-led forces to remain in Iraq until Dec. 31, 2006, to give Iraqi troops time to prepare for assuming responsibility for the nation’s security.
- US Treasuries are rising for a second day, the first back-to-back gain in more than two weeks, as yield near the highest since March attracted investors.
- Linens ‘n Things agreed to a $1.3 billion buyout by a group led by Apollo Management LP after struggling to compete with Bed Bath & Beyond.
- Comcast plans to sell $2 billion of five-, 10-, and 30-year bonds today, according to Market News.
- Yum! Brands is developing contingency plans to educate consumers that it’s safe to eat at its Kentucky Fried Chicken restaurants amid rising concerns about a possible avian flu outbreak.
- Guidant said the SEC started a formal investigation into the company’s disclosures about unspecified products and trading in Guidant stock.

Wall Street Journal:
- Worldwide demand for business jets is expected to reach a record of about 850 aircraft deliveries in 2006, citing estimates by Honeywell.
- Advanced Micro Devices in October beat Intel in supplying chips for personal computers to US retail stores.
- US House of Representatives and Senate negotiators reached agreement on a $30.5 billion water and energy bill.
- Genetically modified plants are increasingly distorting the makeup of traditional crops as they account for a growing share of the world’s farmland.
- GM’s Chevrolet brand may pass Ford’s Ford nameplate as the No. 1 vehicle marque this year in the US for the first time in 18 years.

NY Times:
- Some US retailers such as Gap Inc., Walgreen Co. and Wal-Mart Stores are developing national crime databases to combat shoplifting gangs.
- The FASB will decide this week whether to alter its 20-year-old rule on how US companies account for pensions.

DigiTimes:
- Global demand for indium-tin oxide, which is used to make liquid-crystal displays, may rise as much as 40% net year because of increasing demand from panel makers.

NY Post:
- Sales of Apple Computer’s Macintosh personal computers have benefited from the success of the iPod personal music player.

Le Parisien:
- French courts are imposing increasingly heavy punishment on youths involved in riots which have rocked the country in the past 12 days.

Ath-Thawra:
- Syria wants foreign companies to carry out more seismic surveys in its waters to search for oil and gas fields.

Economic Releases

- None of note

Links of Interest

Market Snapshot
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