Today's Headlines

Bloomberg:
- Yahoo! dropped out of talks to purchase a stake in Time Warner’s AOL unit, leaving Microsoft and Google as potential bidders.
- al-Qaeda claimed responsibility for three hotel bombings yesterday that killed at least 56 people in Amman Jordan. Thousands of Jordanians marched against the bombings and expressed support for their monarch, King Abdullah. “The Radisson SAS hotel, the Grand Hyatt Amman and the Days Inn hotels had been turned by the dictator of Jordan into a garden for the enemies of our religion, the Jews and the Crusaders,” AFP quoted al-Qaeda’s al-Zarqawi as saying. Casualty figures show the dead included 15 Jordanians, five Iraqis, three Chinese, a Saudi, a Palestinian and an Indonesian, while the bodies of 30 people have yet to be identified.
- US Treasuries surged after demand from overseas investors rose to a record in an auction of 10-year notes.
- Man Group Plc won an auction for parts of bankrupt futures broker Refco.
- Intel Corp. plans to spend $25 billion buying back stock, the second-largest share repurchase in the US behind Microsoft’s record $30 billion buyback.
- Crude oil and heating oil are falling to the lowest in more than three months after the IEA reduced its forecast for world oil demand for a fourth straight month.

Wall Street Journal:
- About half of all US seniors say they are likely to sign up for the new Medicare drug benefit, citing a poll.
- Bridgestone’s US tire-making unit has recommended a maximum life span, of 10 years, for passenger and light-truck tires.
- US drug companies are more reluctant than other industries to invest in China and India, because of concern about security and intellectual property, citing a survey by E&Y.

NY Times:
- Some US home-based entrepreneurs are seeking commercial real estate because of lack of room.
- King Pharmaceuticals will pay $150 million initially and as much as $150 million more to Pain Therapeutics for the rights to an abuse-resistant version of the painkiller OxyContin.

AP:
- The Chicago Merc will offer investors the opportunity to trade housing-price futures contracts, beginning in April.

NY Post:
- Median apartment prices in Manhattan fell 4.2% in the month of October.
- The NY Police Department plans to give 200 officers hand-held digital devices with data on arrest warrants and photos of wanted suspects.

Trade Deficit Widens, Import Prices Fall, Jobless Claims Steady, Consumer Confidence on the Rebound

- The Trade Deficit for September widened to -$66.1B versus estimates of -$61.5B and -$59.3B in August.
- The Import Price Index for October fell .3% versus estimates of a .2% decline and a 2.3% increase in September.
- Initial Jobless Claims for last week rose to 324K versus estimates of 320K and 324K the prior week.
- Continuing Claims rose to 2818K versus estimates of 2792K and 2795K prior.
- Preliminary Univ. of Mich. Consumer Confidence for November rose to 79.9 versus estimates of 76.5 and a reading of 74.2 in October.

BOTTOM LINE: The US trade deficit widened more than expected to a record $66.1 billion in September as oil imports surged and exports dropped by the most in four years, Bloomberg reported. Disruptions from the hurricanes on the Gulf Coast likely contributed meaningfully to the decline in exports. I expect the Trade Deficit to shrink modestly over the intermediate-term as the decline in energy prices more than offsets slightly decreasing demand for our exports as global growth slows.

Prices of goods imported into the US fell last month for the first time since May, reflecting cheaper crude oil, business equipment and consumer goods, Bloomberg reported. Excluding energy prices, import prices rose at the same rate as the prior month which is likely the result of companies’ limited ability to pass on higher commodity prices. As I forecast a few weeks ago, I still believe import prices will fall over the intermediate-term as commodity prices continue to weaken.

The number of Americans filing first-time claims for unemployment insurance rose last week as more workers displaced by hurricanes sought benefits. The US economy has created jobs at the second best pace since the peak of the stock market bubble in 1999 notwithstanding losses related to the hurricanes. The four-week moving-average of jobless claims dropped to 334,250 from 350,500 the prior week. The insured employment rate, which tracks the US unemployment rate, remained at 2.2%. I continue to believe the job market will improve slowly from depressed levels seen after the hurricanes, but not reach the levels seen prior.

Consumer Confidence rose this month as gasoline prices plunged from the record levels seen after the hurricanes hit. Unleaded Gasoline futures have now collapsed almost 50% since post-hurricane highs. The current conditions component of the index rebounded sharply to 100.3 from 91.2 the prior month. The International Council of Shopping Centers recently predicted same-store sales to rise 3-3.5% this holiday season versus a 2.3% increase last year. I continue to believe Consumer Confidence will rebound sharply from post-hurricane lows.

Links of Interest

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Thursday Watch

Late-Night Headlines
Bloomberg:
- Mittal Steel, Arcelor SA and Nippon Steel may have lower profits next year as rising Chinese steel production increases the cost of iron ore.

Sydney Morning Herald:
- The Sydney members of a group of alleged terrorists arrested by police in Australia had stockpiled enough chemicals to make at least 15 large bombs.

Economic Daily News:
- Quanta Display plans to expand capacity at its so-called “sixth-generation” liquid-crystal display plant next year because of excess demand.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on DOX, FDC, USB, AIG, BAC and SBUX.
- Reiterated Underperform on UIS.

Banc of America:
- Upgraded ZGEN to Buy, target $25.

Night Trading
Asian Indices are -.25% to +.25% on average.
S&P 500 indicated unch.
NASDAQ 100 indicated -.18%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
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Earnings of Note
Company/EPS Estimate
DWA/.00
DELL/.39
IGT/.30
KSS/.44
PSUN/.54
COL/.62
TGT/.45
URBN/.22

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Trade Deficit for September is estimated to widen to -$61.5B versus -$59.0B in August.
- The Import Price Index for October is estimated to fall .2% versus a 2.3% rise in September.
- Initial Jobless Claims for last week are estimated to fall to 320K versus 323K the prior week.
- Continuing Claims are estimated to fall to 2792K versus 2823K prior.

9:45 am EST
- Preliminary Univ. of Mich. Consumer Confidence for November is estimated to rise to 76.5 versus 74.2 in October.

2:00 pm EST
- The monthly budget deficit for October is estimated to shrink to -$50.0B versus -$57.3B in September.

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

Stocks Finish Slightly Higher Despite Headwinds

Indices
S&P 500 1,220.65 +.17%
DJIA 10,546.21 +.06%
NASDAQ 2,175.81 +.17%
Russell 2000 659.83 +.55%
DJ Wilshire 5000 12,200.43 +.19%
S&P Barra Growth 584.20 +.09%
S&P Barra Value 632.22 +.24%
Morgan Stanley Consumer 586.97 +.31%
Morgan Stanley Cyclical 732.74 -.01%
Morgan Stanley Technology 511.88 +.14%
Transports 4,004.37 +1.09%
Utilities 395.86 +.53%
Put/Call .82 -4.65%
NYSE Arms .76 -32.88%
Volatility(VIX) 12.80 -2.14%
ISE Sentiment 149.00 -14.86%
US Dollar 91.53 +.19%
CRB 316.54 -.53%

Futures Spot Prices
Crude Oil 58.79 -.14%
Unleaded Gasoline 154.70 -.43%
Natural Gas 11.60 -.06%
Heating Oil 178.30 -.66%
Gold 468.10 +.60%
Base Metals 136.62 +.38%
Copper 183.25 +.10%
10-year US Treasury Yield 4.64% +9.38%

Leading Sectors
Oil Tankers +3.26%
Gold & Silver +3.09%
Airlines +1.92%

Lagging Sectors
Energy -.86%
Restaurants -.88%
Coal -1.56%

Evening Review
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In Play

Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on FD.
- Reiterated Underperform on WGR.

Afternoon/Evening Headlines
Bloomberg:
- Citigroup Inc. Chairman Sanford Weill told CNBC the US economy is in “good shape,” even after multiple hurricanes in the Gulf of Mexico.
- Google Inc. sought to patent a system that helps individuals and small businesses sell items online by automatically creating ads that appear next to Web search results.
- T. Boone Pickens, the Dallas hedge fund manager who predicted oil would continue rising after the hurricanes sent it to $72/bbl. is now saying prices will drop toward $50/bbl. in coming months.
- The US dollar rose against the euro for a fifth straight day, its longest winning streak since August, on continuing speculation the riots in France will result is an increase in demand for US assets.
- The Jordanian government said blasts at three hotels in the capital Amman late today were coordinated “terror operations,” probably carried out by homicide bombers.

NY Times:
- Reported Judith Miller, a key figure in a federal investigation into who divulged the name of a CIA agent, is retiring immediately from the NY Times.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Internet longs, Retail longs and Oil Tanker shorts. I took profits in an Oil Tanker short and exited an Internet long 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 slightly below average. Measures of investor anxiety were mostly lower into the close. Overall, today’s market action was positive given recent gains, the terrorist bombings, a morning rally in oil and a 9 basis point surge in the 10-year T-note yield could not send stocks lower. I expect better-than-expected readings on inflation, consumer confidence and the deficit to propel stocks higher tomorrow.

Stocks Slightly Higher Mid-day Even as Long-term Rates Rise

Indices
S&P 500 1,223.26 +.38%
DJIA 10,569.10 +.28%
NASDAQ 2,177.93 +.26%
Russell 2000 661.53 +.81%
DJ Wilshire 5000 12,225.22 +.38%
S&P Barra Growth 585.26 +.28%
S&P Barra Value 633.38 +.42%
Morgan Stanley Consumer 587.19 +.34%
Morgan Stanley Cyclical 733.59 +.11%
Morgan Stanley Technology 511.22 +.01%
Transports 3,993.43 +.80%
Utilities 396.86 +.79%
Put/Call .88 +2.33%
NYSE Arms .72 -36.82%
Volatility(VIX) 12.81 -2.06%
ISE Sentiment 139.00 -20.57%
US Dollar 91.50 +.14%
CRB 316.74 -.47%

Futures Spot Prices
Crude Oil 59.05 -1.11%
Unleaded Gasoline 155.00 -.79%
Natural Gas 11.67 -1.04%
Heating Oil 178.75 +.42%
Gold 467.60 +1.15%
Base Metals 136.62 +.28%
Copper 183.15 -.35%
10-year US Treasury Yield 4.63% +1.63%

Leading Sectors %
Oil Tankers +3.57%
Gold & Silver +2.69%
Airlines +1.86%

Lagging Sectors
Hospitals -.50%
Coal -.57%
Restaurants -.57%

BOTTOM LINE: The Portfolio is slightly lower mid-day on losses in my Internet longs, Energy-related shorts 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 rising and volume is about average. Measures of investor anxiety are mixed. Overall, market action is positive given the rise in long-term rates and recent gains. I expect US stocks to trade modestly higher from current levels into the close on short-covering and lower energy prices.