Stocks Sharply Higher Mid-day on Fall in Oil and Long-term Rates

Indices
S&P 500 1,239.11 +.64%
DJIA 10,705.65 +.29%
NASDAQ 2,209.09 +.97%
Russell 2000 664.68 +1.54%
DJ Wilshire 5000 12,377.91 +.77%
S&P Barra Growth 593.60 +.40%
S&P Barra Value 641.11 +.85%
Morgan Stanley Consumer 592.26 +.45%
Morgan Stanley Cyclical 754.87 +1.05%
Morgan Stanley Technology 522.64 +1.52%
Transports 4,064.28 +1.57%
Utilities 396.49 +1.29%
Put/Call .78 +1.30%
NYSE Arms .79 -6.72%
Volatility(VIX) 11.75 -4.16%
ISE Sentiment 180.00 +20.0%
US Dollar 91.93 -.43%
CRB 313.28 -.64%

Futures Spot Prices
Crude Oil 56.20 -2.40%
Unleaded Gasoline 145.75 -1.72%
Natural Gas 11.94 -3.16%
Heating Oil 169.50 -1.98%
Gold 486.30 +1.50%
Base Metals 139.01 +.14%
Copper 194.50 +.52%
10-year US Treasury Yield 4.45% -.39%

Leading Sectors
Homebuilders +3.14%
Airlines +2.59%
Networking +2.31%

Lagging Sectors
Oil Service -.08%
Tobacco -.48%
Energy -.58%

BOTTOM LINE: The Portfolio is substantially higher mid-day on gains in my Medical longs, Retail longs, Medical Information System longs and Internet longs. I covered the rest of my IWM and QQQQ shorts this morning and added to my PWR, BBY and MDRX longs, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, almost every sector is rising and volume is slightly above average. Measures of investor anxiety are mostly lower. Overall, today’s market action is positive considering the strong breadth readings and mixed economic data. A stronger dollar, weakening commodity prices, healthy growth and lower long-term rates are boosting small-caps. The Russell 2000 has slightly underperformed over the last three months. However, the index is up 1.5% today vs. a .6% gain for the S&P 500. I expect small caps to regain their leadership role over the intermediate term on a continuation of recent trends. I expect US stocks to trade mixed-to-higher from current levels into the close as lower long-term rates and falling energy prices more than offset profit-taking.

Today's Headlines

Bloomberg:
- Don Voelte, chief executive of Australia’s Woodside Petroleum Ltd., said oil prices at $60 a barrel were unsustainable.
- GM may use up most of its $19.2 billion in cash reserves in the event of a strike at Delphi, its largest auto-parts supplier, analysts said.
- Google shares are rising above $400 for the first time, propelled by soaring growth in online advertising and investors’ expectations that the company will continue to diversify its products beyond Internet search.
- US House Republican leaders dropped some cuts to the Medicaid health program in a $50 billion plan to reduce spending.
- Hedge funds that chase macroeconomic trends by investing in the stock, bond, currency and commodity markets posted their worst returns of the year in October as managers bet wrongly that the US dollar would drop in value.
- Gold in NY is rising to a 17-year high on investor demand for alternatives to the European currency and oil.
- Pennsylvania Congressman John Murtha, the senior Democrat on the House Defense Appropriations Subcommittee, called for the immediate withdrawal of US troops from Iraq.
- Manufacturing in the Philadelphia area expanded in November as companies began rebuilding depleted inventories to meet rising consumer demand.

Wall Street Journal:
- Ranbaxy Laboratories Ltd., the Indian generic-drugmaker, is talking with Roche Holding AG about licensing the rights to make the antiviral drug, Tamiflu.
- Nestle SA is focusing on making containers easier to open in response to one of its biggest complaints from consumers.
- Stirling Energy Systems, a Phoenix-based energy company, plans to place 20,000 solar dishes over four square miles of the Mohave Desert in California to collect and ship energy 80 miles south to Los Angeles.
- Silicon Labs, Intel, Texas Instruments and other semiconductor makers are producing single chips that put the key parts of a mobile telephone into one place.
- Sprint Nextel’s music download service functions well and marks a new advance for the music industry.
- EBay aims to offer a link between people and local services of all kinds.

Cnet:
- Sony began offering a free video-phone service for Internet users yesterday.

BBC:
- Saddam Hussein, the deposed Iraqi dictator, was punched several times by two court clerks after he insulted two of Shia Islam’s saints, citing Iraqi television.

Chicago Tribune:
- Tribune’s Chicago Tribune will cut about 100 jobs and vacant positions won’t be filled to help cut costs and compensate for a decline in circulation.

NY Post:
- NY City’s Department of Transportation has installed parking meters that accept credit cards in midtown Manhattan.

Washington Post:
- A US commander in Iraq yesterday decried calls by Democratic US senators to set a deadline for troop withdrawal, saying “setting a date would mean that the 221 soldiers I’ve lost this year, that their lives will have been lost in vain.”

Housing Starts Fall, Jobless Claims Plunge, Industrial Production Rebounds

- Housing Starts for October fell to 2014K versus estimates of 2070K and an upwardly revised 2134K in September.
- Building Permits for October fell to 2071K versus estimates of 2160K and an upwardly revised 2219K in September.
- Initial Jobless Claims for last week will fall to 303K versus estimates of 324K and 328K the prior week.
- Continuing Claims rose to 2793K versus estimates of 2790K and 2790K prior.
- Industrial Production for October rose .9% versus estimates of a 1.0% increase and a 1.3% decline in September.
- Capacity Utilization for October rose to 79.5% versus estimates of 79.6% and 78.9% in September.

BOTTOM LINE: US housing starts fell in October and building permits dropped, suggesting higher mortgage rates are chipping away at home construction after four straight years of record sales, Bloomberg reported. Starts fell 10.8% in the West, 10.5% in the Mid-West, 7.5% in the Northeast and .5% in the South. Backlogs are 15% high than a year earlier, which suggests a substantial slowdown is unlikely.

The number of Americans filing first-time claims for state unemployment benefits fell to a seven-moth low of 303,000 last week, evidence of an improving labor market, Bloomberg reported. Consumer spending rose last month which suggests increased hiring is raising incomes. 333,500 people a week have filed claims so far this year versus 343,000 last year. The four-week moving average of claims fell to 321,500 from 335,000 the prior week. The unemployment rate of people eligible for benefits which tracks the US unemployment rate held steady at 2.2%. The upcoming jobs report should exceed expectations.

US industrial production rose .9% in October, the most since May 2004, as manufacturers recovered from the Gulf Coast hurricanes and a strike ended at Boeing, Bloomberg said. The mining component of industrial production, which includes oil and gas production, fell .5%. I expect production to remain strong over the coming months as more energy production, shut-in from the hurricanes, comes back on-line. Capacity Utilization is still below the long-term average of 81.0. Historically, inflationary pressures do not become worrisome until utilization approaches 85.0.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- China will sell $80 million of copper from inventories next week amid speculation the government is seeking to drive down prices and limit losses from an investment by one of its traders.
- US House leaders, seeking support for a budget-cutting plan, dropped from a transportation measure the designation of $442 million for Alaska projects, including one dubbed a “bridge to nowhere.”
- Taiwan is a “sovereign country” and is concerned China will use “military hegemony” to reunify the two, Taiwan’s representative said at a summit of Asia-Pacific leaders in South Korea.

Financial Times:
- China stopped plans to let foreign news publications print inn the mainland on concerns news about the “color revolutions” in the West may undermine political order.


AP:
- The LA Times plans to cut about 85 newsroom jobs, or 8% of its editorial staff, before the end of the year.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Underperform on AMAT, APU and HCCC.

Night Trading
Asian Indices are -.25% to +.75% on average.
S&P 500 indicated -.04%.
NASDAQ 100 indicated -.09%.

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Company/EPS Estimate
ARO/.46
ADSK/.30
BKS/-.02
BEAS/.10
PLCE/.91
CLE/.35
FL/.42
GPS/.24
HRB/-.16
HPQ/.46
HUG/.67
LTD/-.03
MRVL/.33
JWN/.35
TSA/.09
SBUX/.15
DIS/.18
WSM/.30

Upcoming Splits
SWN 2-for-1

Economic Releases
8:30 am EST
- Housing Starts for October are estimated to fall to 2070K versus 2108K in September.
- Building Permits for October are estimated to fall to 2160K versus 2219K in September.
- Initial Jobless Claims for last week are estimated to fall to 324K versus 326K the prior week.
- Continuing Claims are estimated to fall to 2790K versus 2818K prior.

9:15 am EST
- Industrial Production for October is estimated to rise 1.0% versus a 1.5% decline in September.
- Capacity Utilization for October is estimated to rise to 79.6% versus 79.0% in September.

12:00 pm EST
- Philly Fed for November is estimated to fall to 15.3 versus a reading of 17.3 in October.

BOTTOM LINE: Asian indices are mostly higher, boosted by exporters in the region. I expect US equities to open mixed and to trade modestly higher later in the day. The Portfolio is 75% net long heading into the day.

Stocks Finish Slightly Lower Even as Long-term Rates Fall

Indices
S&P 500 1,231.21 +.18%
DJIA 10,674.76 -.11%
NASDAQ 2,187.93 +.05%
Russell 2000 654.64 -.24%
DJ Wilshire 5000 12,283.90 +.14%
S&P Barra Growth 591.20 +.33%
S&P Barra Value 635.69 +.04%
Morgan Stanley Consumer 589.64 -.22%
Morgan Stanley Cyclical 747.02 -.08%
Morgan Stanley Technology 514.76 +.30%
Transports 4,001.65 -.11%
Utilities 391.45 +.84%
Put/Call .77 -6.10%
NYSE Arms .85 -1.37%
Volatility(VIX) 12.26 +.25%
ISE Sentiment 150.00 -8.54%
US Dollar 92.33 +.26%
CRB 315.31 +.82%

Futures Spot Prices
Crude Oil 57.82 -.10%
Unleaded Gasoline 148.80 +.34%
Natural Gas 12.36 +.25%
Heating Oil 173.08 +.09%
Gold 479.90 +.17%
Base Metals 138.82 -.20%
Copper 193.30 -.10%
10-year US Treasury Yield 4.47% -1.76%

Leading Sectors
Gold & Silver +5.96%
Oil Service +2.92%
Energy +2.39%

Lagging Sectors
Alternative Energy -.94%
I-Banking -.97%
Broadcasting -1.45%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on IMCL, GILD, WEC and ACN.
- Reiterated Underperform on SGP.

Afternoon/Evening Headlines
Bloomberg:
- US Treasuries rose, led by the biggest gain in 10-year notes since June, after government reports showed consumer prices increased in October at the slowest pace in four months and foreign demand for US assets soared.
- Ford Motor introduced discounts combining reduced prices and rebates two days after competitor GM rolled out new sales incentives.

Financial Times:
- VNU NV, the owner of market researcher ACNielsen, may say tomorrow it will abandon its plan to buy IMS Health for $7 billion.

NY Times:
- The SEC is investigating whether a Wachovia Corp. analyst was fired for refusing to alter securities recommendations to win i-banking business.

AP:
- Irving “Irv Gotti” Lorenzo, founder of the hip-hop recording label Murder Inc., and his brother Christopher went on trial in NY yesterday on racketeering charges, including allegedly laundering money for a drug dealer.

BOTTOM LINE: The Portfolio finished unchanged today as gains in my Internet longs, Retail longs and Computer longs offset losses in my Energy-related shorts. I did not trade in the afternoon, thus leaving the Portfolio 75% net long. The tone of the market was negative today as the advance/decline line finished lower, sector performance was mixed and volume was average. Measures of investor anxiety were mixed into the close. Overall, today's market action was slightly negative. I expect the Fed to make increasingly more dovish comments by early next year as housing continues to slow to more healthy levels and energy prices remain far weaker than most expect. Investors should begin anticipating this soon. I continue to believe U.S. economic growth is slowing to average levels from vigorous rates before the hurricanes and that inflation has peaked for this cycle. This "Goldilocks" economic environment will boost U.S. stock prices.