Stocks Finish Near Session Lows on Rate Worries and Profit Taking

Indices
S&P 500 1,249.48 -.64%
DJIA 10,805.87 -.76%
NASDAQ 2,232.82 unch.
Russell 2000 677.29 +.53%
DJ Wilshire 5000 12,496.61 -.45%
S&P Barra Growth 598.34 -.42%
S&P Barra Value 646.80 -.84%
Morgan Stanley Consumer 588.09 -.75%
Morgan Stanley Cyclical 774.21 -.36%
Morgan Stanley Technology 528.95 +.07%
Transports 4,113.80 -.39%
Utilities 400.15 -.85%
Put/Call .84 -22.22%
NYSE Arms 1.64 +26.04%
Volatility(VIX) 12.06 +1.43%
ISE Sentiment 165.00 +29.92%
US Dollar 91.57 -.05%
CRB 314.27 +.98%

Futures Spot Prices
Crude Oil 57.51 +.33%
Unleaded Gasoline 150.00 +.19%
Natural Gas 12.67 +.66%
Heating Oil 170.10 +.67%
Gold 496.90 -.36%
Base Metals 145.42 +.48%
Copper 192.10 -.26%
10-year US Treasury Yield 4.48% +.22%

Leading Sectors
Oil Service +1.89%
Oil Tankers +1.64%
Semis +1.23%

Lagging Sectors
Foods -1.10%
Banks -1.61%
Gold & Silver -2.43%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on RDEN.
- Reiterated Underperform on RAI.

Afternoon/Evening Headlines
Bloomberg:
- US short-term Treasury yields may plunge next year as the economy slows and central bank including the Federal Reserve lower interest rates, said Bill Gross, manager of the world’s largest bond fund.
- Atlantic Ocean current changes may reduce temperatures in Europe within a few decades, the BBC said on its Web site, citing research by the UK’s National Oceanography Centre.
- Ford Motor, whose Explorer has outsold all other sport-utility vehicles in the US for 15 years, is falling short of sales targets with its latest redesigned version.
- The US economy bounced back in October and November from the hurricanes as more workers found jobs and retailers took an “optimistic” view of the holiday shopping season, the Federal Reserve said.
- South Korea’s consumer prices posted the biggest decline in 19 years in November as food costs and oil prices fell, giving the central bank more room to keep interest rates near a record low.
- The deaths of four US women who used Danco’s RU-486 abortion pill were caused by toxic shock from severe bacterial infections, the Centers for Disease Control and Prevention found in a study.
- Research In Motion’s BlackBerry e-mail pager service came closer to being blocked in the US after a federal judge ruled that a $450 million patent settlement isn’t enforceable and rejected a request for a delay in the case.
- Crude oil and gas rose today on speculation that US economic growth will spur fuel consumption.

Financial Times:
- Fidelity Investments will expand into institutional business to increase its funds by up to fourfold under new management.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Internet longs, Semi longs and Medical longs. I did not trade in the afternoon, thus leaving the Portfolio 50% net long. The tone of the market was neutral today as the advance/decline line finished higher, sector performance was mixed and volume was above average. Measures of investor anxiety were mixed into the close. Overall, today's market action was slightly negative given the decline in the DJIA and Bank stocks. I am still of the opinion that the action over the past few days is just a healthy consolidation after a strong run higher.

Stocks Mixed Mid-day as Positive Economic Data Offsets Higher Rates and Energy Prices

Indices
S&P 500 1,253.38 -.32%
DJIA 10,851.34 -.33%
NASDAQ 2,234.33 +.08%
Russell 2000 677.45 +.58%
DJ Wilshire 5000 12,536.44 -.13%
S&P Barra Growth 600.72 -.02%
S&P Barra Value 649.31 -.46%
Morgan Stanley Consumer 591.44 -.18%
Morgan Stanley Cyclical 777.75 +.10%
Morgan Stanley Technology 530.12 +.29%
Transports 4,120.31 -.25%
Utilities 401.12 -.61%
Put/Call .82 -24.07%
NYSE Arms 1.19 -8.68%
Volatility(VIX) 11.93 +.34%
ISE Sentiment 160.00 +25.98%
US Dollar 91.58 -.04%
CRB 313.22 +.64%

Futures Spot Prices
Crude Oil 57.05 +.97%
Unleaded Gasoline 141.50 +1.43%
Natural Gas 12.43 +5.91%
Heating Oil 161.40 +.33%
Gold 498.40 -1.01%
Base Metals 145.42 +.48%
Copper 192.50 +.71%
10-year US Treasury Yield 4.49% +.48%

Leading Sectors
Oil Service +2.10%
Semis +1.46%
Steel +1.28%

Lagging Sectors
Utilities -.73%
Banks -1.30%
Gold -1.68%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Internet longs, Semi longs and Medical longs. I covered some of my IWM and QQQQ shorts this morning, thus leaving the Portfolio 50% net long. The tone of the market is slightly positive as the advance/decline line is higher, sector performance is mixed and volume is about average. Measures of investor anxiety are mostly lower. Overall, today’s market action is positive considering the bounce in oil and long-term rates. I am seeing an abnormal amount of crosscurrents today. However, the action overall looks slightly positive given recent gains. Small caps and tech are outperforming, leading to modestly positive breadth. The positive action in Yahoo! (YHOO) is telling given its recent downgrade. Stocks seem to be tracking bond yields very closely today. I expect US stocks to trade mixed from current levels into the close as strong economic data offsets the bounce in rates and oil.

Today's Headlines

Bloomberg:
- The US dollar is headed for its first three-month gain against the euro and yen in almost four years on signs the US economy will expand faster than Europe and Japan and the Fed will keep raising interest rates.
- Wal-Mart may report higher sales growth than Target for the first time in 18 months, a sign efforts to revamp merchandise may be paying off.
- GE, which is exiting the insurance business, will sell 38 million shares of life- and mortgage-insurer Genworth Financial.
- President Bush said Iraqi security forces were achieving growing success in taking over the fight against violent insurgents.
- A judge refused to enforce a settlement that would have ended a lawsuit over patents for Research In Motion’s Blackberry e-mail pager, instead ordering a hearing on whether he should block US service of the device.
- Google has built up cash reserves and plans to hire more workers to fend off competition from companies such as Microsoft, a top executive said.

Wall Street Journal:
- Intel Corp. said more than 40 companies plan entertainment products for its “Viiv” technology, which is designed for home media computers.
- US retailers may get a final boost in sales from this year’s late Hanukkah shopping season.
- ASML US Inc. and other insurers are showing gory surgical operations on their Web sites, in an attempt to educate patients about medical procedures and persuade people to adopt healthier habits.
- Microsoft will begin offering a free trial of its Windows OneCare Live computer-security service today.
- Anheuser-Busch said yesterday that it plans to boost advertising spending for cable television and the Internet and cut back on network television ads to reflect consumer viewing patterns.
- Tiffany, Kay Jewelers and other jewelry sellers are cautiously expanding their collections to cater to a trend among men under 40 for titanium pendants, three-diamond rings, bracelets and other accoutrements.
- DR Horton, Pulte Homes and other US builders say they can boost sales, get better pricing from suppliers, and grab market share by consolidating even if the housing market weakens.
- The average vacancy rate of commercial-office real estate in the US fell to 15% in the third quarter, the sixth-consecutive drop.

FT.com:
- Walt Disney has narrowed the filed of candidates to buy its ABC radio stations to three, which should mean the unit can be sold by the end of the year.

Globes:
- Amdocs Ltd., a maker of telephone-billing software, is in talks with Sprint Nextel for a contract that may be worth tens of millions of dollars.

NY Times:
- Senator Hillary Clinton is now calling for the withdrawal of troops from Iraq next year.

Washington Post:
- US officials plan to stockpile as many as 8 million doses of an experimental vaccine by February to guard against a potential outbreak of avian influenza in humans.
- Mental health drugs are exempted from a US House proposal to push Medicaid recipients to seek cheaper treatments.

San Francisco Chronicle:
- A California judge threw out most legal arguments against the state’s stem cell program that have prevented research grants from being issued.

US Growth Streak Best Since 1986, Manufacturing Strong

- Preliminary 3Q GDP rose 4.3% versus estimates of a 4.0% gain and a prior estimate of a 3.8% increase.
- Preliminary 3Q GDP Price Index rose 3.0% versus estimates of a 3.1% increase and a prior estimate of a 3.1% gain.
- Preliminary 3Q Personal Consumption rose 4.2% versus estimates of a 3.9% gain and a prior estimate of a 3.9% increase.
- Chicago Purchasing Manager for November rose to 61.7 versus estimates of 60.0 and a reading of 62.9 in September.

BOTTOM LINE: The US economy grew at a 4.3% annual rate from July through September, the quickest since the first quarter of last year and evidence of resilience in the face of soaring energy costs related to the hurricanes, Bloomberg reported. As companies gain confidence, inventory rebuilding will continue to spur growth, providing stimulus for an economy that has growth in excess of 3% for 10 straight quarters, the best streak in almost 20 years. The core personal consumption expenditures index, the Fed’s favorite inflation gauge, rose just 1.2% after a 1.7% gain in the second quarter. The economy’s strong performance in spite of the hurricanes is stunning. There is still no evidence of any consumer weakness despite the attempts of many to suggest otherwise. This should help alleviate some of the irrational pessimism that has enveloped many circles.

Manufacturing in the Chicago area expanded more than expected in November, adding to evidence of strength in the economy, Bloomberg reported. The prices paid index jumped to 94.1 from 79.6 in October. The employment component of the index slipped to 50.3 from 51.3 in October. The order backlogs component rose to 62.0, the highest since July 1994. Manufacturing will continue to boost US growth over the intermediate-term as companies rebuild depleted inventories. The jump in the prices paid component is likely an end of hurricane aberration as the CRB Index recently fell through its 200-day moving-average for the first time in almost a year.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Japanese stocks are rising, lifting the Nikkei 225 Stock Average above 15,000 for the first time in five years.
- Rio Tinto Group, the world’s third largest mining company, agreed to sell its stake in Papua New Guinea’s Lihir Gold Ltd. for $294 million to tap bullion prices near their highest in 22 years.

Commercial Times:
- China Steel, Taiwan’s largest steelmaker, may struggle in 2006 to reach half of this year’s expected pretax profit of $1.94 billion, citing Chairman Yao-chung.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on LUV and GNW.

Night Trading
Asian Indices are unch. to +1.0% on average.
S&P 500 indicated +.11%.
NASDAQ 100 indicated +.09%.

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Earnings of Note
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JBX/.59
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MERQE/.32
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Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Preliminary 3Q GDP is estimated to rise 4.0% versus a prior estimate of a 3.8% increase.
- Preliminary 3Q GDP Price Index is estimated to rise 3.1% versus a prior estimate of a 3.1% increase.
- Preliminary 3Q Personal Consumption is estimated to rise 3.9% versus a prior estimate of a 3.9% rise.

10:00 am EST
- The Chicago Purchasing Manager for November is estimated to fall to 60.0 versus a reading of 62.9 in October.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude drawdown of 500,000 barrels. Gasoline inventories are estimated to rise 1.2 million barrels and distillate supplies are expected to rise 1.0 million barrels. Finally, refinery utilization is expected to rise 1.0%.

2:00 pm EST
- Fed’s Beige Book

BOTTOM LINE: Asian indices are mostly higher on strength in exporters in the region after strong US economic reports. I expect US equities to trade modestly higher on the open and to fall slightly later in the day, finishing mixed. The Portfolio is 25% net long heading into the day.