Core Producer Prices Fall, Retail Sales Strong, Manufacturing Healthy

- The Producer Price Index for October rose .7% versus estimates of unchanged and a 1.9% increase in September.
- The PPI Ex Food & Energy for October fell .3% versus estimates of a .2% increase and a .3% gain in September.
- Advance Retail Sales for October fell .1% versus estimates of a .7% fall and a .3% rise in September.
- Retail Sales Less Autos for October rose .9% versus estimates of a .3% gain and an upwardly revised 1.4% increase in September.
- Empire Manufacturing for November rose to 22.8 versus estimates of 15.5 and a reading of 12.1 in October.

BOTTOM LINE: Core producer prices declined by the most in more than two years in October, reflecting cheaper cars, computers, food and clothes, Bloomberg reported. Core prices are now rising at a 1.8% annual pace versus a 2.1% rate at this time last year. Companies have had little success passing higher raw materials costs on to consumers. Car prices fell 3% in October, the largest fall in 4 years. As well, clothing prices declined .4%, the greatest drop in almost 4 years. I continue to believe inflation fears for this cycle peaked in September during the hurricanes.

Sales at US retailers fell less than expected last month as pre-holiday shopping at chain stores helped blunt a drop-off at auto dealerships, suggesting that consumers are largely unfazed by higher energy prices, Bloomberg reported. Sales at clothing and accessory stores rose 3.1%, the largest increase in 3 years, even with unseasonably warm weather. Last month was the 17th warmest October in US history. Moreover, sales at gas stations dropped .8% versus a 5.1% gain the prior month as the average price of gasoline fell to $2.77 from $2.95. This holiday shopping season is shaping up to be much better-than-expected.

Manufacturing in NY state expanded more than economists expected and executives were more optimistic about the future, Bloomberg reported. The prices paid component of the index rose to 60.6 from 57.3 in October. The employment component of the index rose to 16.9, the best level this year, from 9.3 the prior month. Optimism for the next six months soared to 46.9 from 32.6 in October. I continue to believe manufacturing will boost US growth over the next few months as inventory rebuilding continues.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Amazon.com will replace AT&T in the S&P 500 index on Nov. 18.
- Richard Fisher, president of the Federal Reserve Bank of Dallas, said the US economy is growing “very nicely” and he sees no signs that inflation is “running rampant.” “Globalization and competition from abroad is acting as a disinflationary force,” he said.
- GM has begun another round of incentives to lure US buyers after a sharp drop in October sales. Ford Motor said it will announce its own promotion tomorrow.
- Billionaire George Soros’s hedge fund bought stakes in the third quarter in technology companies including Intel, IBM, Amazon and Apple Computer.

Korea Economic Daily:
- Samsung Electronics will make mobile phone chips for Qualcomm of the US as part of a strategic alliance.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on EBAY, AIG and DIS.

Night Trading
Asian Indices are -.75% to unch. on average.
S&P 500 indicated -.19%.
NASDAQ 100 indicated -.15%.

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Earnings of Note
Company/EPS Estimate
ANF/.80
AEOS/.46
ADI/.34
BJ/.36
DKS/.07
GME/.14
HD/.68
JCP/.92
SPLS/.32
TJX/.34

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Producer Price Index for October is estimated to rise 0.0% versus a 1.9% increase in September.
- The PPI Ex Food & Energy for October is estimated to rise .2% versus a .3% increase in September.
- Advance Retail Sales for October are estimated to fall .7% versus a .2% increase in September.
- Retail Sales Less Autos for October are estimated to rise .3% versus a 1.1% gain in September.
- Empire Manufacturing for November is estimated to rise to 15.5 versus a reading of 12.1 in October.

BOTTOM LINE: Asian indices are mostly lowed, weighed down by financial shares in the region. I expect US equities to open mixed and rally modestly later in the afternoon. The Portfolio is 100% net long heading into the day.

Stocks Finish Mixed on Light Volume Ahead of Inflation Data

Indices
S&P 500 1,233.76 -.08%
DJIA 10,697.17 +.10%
NASDAQ 2,200.95 -.07%
Russell 2000 663.93 -.41%
DJ Wilshire 5000 12,323.20 -.09%
S&P Barra Growth 590.03 -.12%
S&P Barra Value 639.47 -.03%
Morgan Stanley Consumer 591.86 -.50%
Morgan Stanley Cyclical 751.127 +.93%
Morgan Stanley Technology 515.66 unch.
Transports 4,059.21 -.34%
Utilities 386.48 -.40%
Put/Call .91 +35.82%
NYSE Arms .78 +20.54%
Volatility(VIX) 12.18 +4.73%
ISE Sentiment 184.00 +9.52%
US Dollar 92.11 +.14%
CRB 315.08 -.16%

Futures Spot Prices
Crude Oil 57.85 +.28%
Unleaded Gasoline 150.00 +.26%
Natural Gas 11.61 +.07%
Heating Oil 173.25 +.12%
Gold 468.60 -.11%
Base Metals 140.02 +.16%
Copper 191.00 -.18%
10-year US Treasury Yield 4.60% +.91%

Leading Sectors
Papers +6.18%
Oil Service +1.26%
Semis +.56%

Lagging Sectors
Broadcasting -1.70%
Steel -1.83%
Coal -1.86%

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Afternoon Recommendations
Goldman Sachs:
- None of note

Afternoon/Evening Headlines
Bloomberg:
- US airlines must modify fuel tanks on jet aircraft to reduce the risk of explosions like the one that downed TWA Flight 800 in 1996, the FAA said.
- Martha Stewart’s “Apprentice” reality show, in last place in its timeslot, will end after its first season.
- Ben Bernanke’s nomination to succeed Alan Greenspan as Federal Reserve chairman is likely to proceed “quickly” after a confirmation hearing before the Senate Banking Committee tomorrow.
- Berkshire Hathaway doubled its stake in Tyco International and sold shares of Pier 1 imports.
- Target said November comparable store sales may fall below its forecast of 4% to 6%.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs, Medical longs, Semi longs and Medical Information Systems 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 light. Measures of investor anxiety were mostly higher into the close. Overall, today's market action appeared to be a healthy low volume consolidation of recent gains. The negativity bubble continues to inflate. These graphs of public short sales illustrate how much negativity has permeated the psyche of the general public with respect to U.S. stocks.

Stocks Mixed Mid-day on Healthy Consolidation of Recent Gains

Indices
S&P 500 1,233.38 -.11%
DJIA 10,687.24 +.01%
NASDAQ 2,199.07 -.16%
Russell 2000 662.33 -.65%
DJ Wilshire 5000 12,314.11 -.16%
S&P Barra Growth 590.04 -.12%
S&P Barra Value 639.03 -.10%
Morgan Stanley Consumer 591.91 -.49%
Morgan Stanley Cyclical 750.52 +.83%
Morgan Stanley Technology 515.24 -.08%
Transports 4,047.33 -.64%
Utilities 386.82 -.31%
Put/Call .96 +43.28%
NYSE Arms .72 +11.57%
Volatility(VIX) 12.25 +5.33%
ISE Sentiment 183.00 +8.93%
US Dollar 92.09 +.12%
CRB 314.62 -.29%

Futures Spot Prices
Crude Oil 57.60 +.03%
Unleaded Gasoline 149.50 +.67%
Natural Gas 11.62 -.79%
Heating Oil 173.00 +.52%
Gold 469.10 -.06%
Base Metals 140.02 +.16%
Copper 191.35 +.42%
10-year US Treasury Yield 4.59% +.65%

Leading Sectors
Papers +6.16%
Oil Service +1.41%
Semis +.72%

Lagging Sectors
Coal -1.50%
Airlines -1.56%
Steel -1.89%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Internet longs, Semi longs, Medical longs and Medical Information System longs. I added ELOS long this morning and added to existing shorts, thus leaving the Portfolio 100% net long. The tone of the market is slightly negative as the advance/decline line is lower, sector performance is mixed and volume is light. Measures of investor anxiety are mostly higher. Overall, today’s market action is positive considering recent gains and the rise in rates. Sanford C. Bernstein is out with a report today saying that prime brokerage fees from hedge funds will top $7.5 billion this year, up 32% in two years. Bernstein estimates these fees will rise by another 33% by 2009. According to Hedge Fund Research Inc., hedge fund assets have risen 2,650% to $1.1 trillion since 1990. These facts underscore my point last week that there has been a massive shift of capital from institutional and high-net-worth investors since the bursting of the bubble in 2000. Assets have shifted from long-only strategies into strategies that are negatively correlated or have a low correlation with the U.S. equity market, which could in turn spur a substantial short-covering rally over the intermediate term.

Today's Headlines

Bloomberg:
- A NYSE membership, known as a seat, sold for a record $3.025 million today, bolstering the Big Board’s defense against critics of its plan to purchase electronic exchange Archipelago Holdings.
- Hedge funds will pay Wall Street record fees this year for brokerage services, a business dominated by Morgan Stanley, Bear Stearns and Goldman Sachs.
- The French government approved extending the nation’s sate of emergency as curfews and bans on public meetings in Paris and Lyon brought calm to areas hit more than two weeks of violence.

Wall Street Journal:
- Google has contacted at least one publisher to gauge interest in a possible service that allows consumers to “rent” books online.
- The computer industry’s unceasing drive to improve performance has encountered an obstacle, in that the latest hardware uses too much electricity and generates too much heat.
- A Chinese government copper trader is missing after he took a big short position on the London Metal Exchange.
- President Bush’s administration is looking to trade easier foreign investment in US airlines in exchange for improved entry rights for US carriers to London’s Heathrow Airport.
- Negotiations over a possible sale of Computer Sciences to Lockheed Martin and three private-equity firms have broken down over the structure of the transaction.
- Archipelago Holdings intends to start an exchange-traded fund focusing on technology, an area of the market in which there’s already plenty of competition.
- A plan to make a $100 laptop computer has attracted the interest of computer companies and governments.

NY Times:
- The US record industry says it loses most sales to so-called “casual piracy” or the copying and sharing of CD’s by friends.
- In some Arab countries, such as Jordan, secret police are a hindrance to democratic reform.
- A coalition of US liberal groups plans a television campaign against Judge Samuel Alito, the Supreme Court nominee, seeking to move attention from his record on abortion to other issues.
- EBay may announce today that it will stop charging fees to people who develop Internet and software programs that direct customers to its Web site.
- Members of the Writers Guild of America and the Screen Actors Guild want to create rules that restrict how commercial products can be incorporated into the story lines of television shows.

Crain’s New York Business:
- Many of New York’s wine and liquor wholesalers are eliminating discounts to stores and restaurants in response to an investigation by state Attorney General Eliot Spitzer.

AP:
- The number of US prisoners sentenced to death and those executed fell last year as the country’s death row population declined.

Profil:
- EBay’s $2.6 billion purchase of Skype Technologies will make it easier for the online auctioneer to sell more expensive products such as new cars and real estate, CEO Whitman said.