Personal Incomes/Spending Healthy, Inflation Decelerating, Construction Strong, Manufacturing Still Elevated

- Personal Income for October rose .4% versus estimates of a .5% rise and a 1.7% gain in September.
- Personal Spending for October rose .2% versus estimates of a .2% increase and a .5% gain in September.
- PCE Deflator for October rose 3.3% versus estimates of a 3.3% increase and a 3.7% gain in September.
- PCE Core for October rose 1.8% versus estimates of a 1.9% gain and a 2.0% increase in September.
- Initial Jobless Claims for last week fell to 320K versus estimates of 325K and 337K the prior week.
- Continuing Claims fell to 2767K versus estimates of 2788K and 2791K prior.
- Construction Spending for October rose .7% versus estimates of a .5% increase and a .2% gain in September.
- ISM Manufacturing for November fell to 58.1 versus estimates of 58.0 and a reading of 59.1 in October.
- ISM Prices Paid for November fell to 74.0 versus estimates of 78.0 and a reading of 84.0 in October.

BOTTOM LINE: US consumer spending rose in October even as auto sales slumped, Bloomberg reported. The 1.8% gain in the Core PCE, the Fed’s favorite inflation gauge, was the smallest increase since March 2004. This reading is now back to the lower end of the Fed’s 1.75%-2.0% annual projection at the beginning of the year. Plunging gas prices and rising incomes are boosting sentiment and providing the stimulus for a strong holiday shopping season. Incomes rose 5.3% year-over-year, which is almost twice the current rate of most inflation measures. I expect consumer incomes and spending to remain strong as falling energy prices, a healthy employment market, rising stock prices, increasing optimism and lower inflation readings more than offset a slowing housing market.

The number of Americans filing first-time claims for unemployment benefits declined last week, reflecting distortions from the Thanksgiving holiday weekend and fewer hurricane-related claims, Bloomberg said. The four-week moving-average of claims fell to 322,500 from 323,750. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, remained at 2.2%. The labor market is improving from artificially depressed levels related to the hurricanes and should continue to improve slightly over the intermediate-term.

US construction spending rose for a fourth straight month in October, led by homebuilding and commercial projects. I expect construction to continue adding to US growth as federal spending and hurricane rebuilding more than offsets a slowing housing market.

US manufacturing slowed in November after the two fastest-growing months of the year and an index of factory costs fell, Bloomberg reported. The 55.7 January through November average is equivalent to a strong 4.7% increase in GDP, according to the ISM. The new export orders component of the index rose to 59.2, the best since May 2004. This is just another indication of the health of the manufacturing sector. Manufacturing will continue to add to US growth over the intermediate-term. The decline in the Prices Paid component of the index if a big positive and another indication that inflation fears have peaked.

Links of Interest

Market Snapshot
Detailed Market Summary
Market Internals
Economic Commentary
Movers & Shakers
IBD New America
NYSE OrderTrac
I-Watch Sector Overview
NYSE Unusual Volume
NASDAQ Unusual Volume
Hot Spots
NASDAQ 100 Heatmap
DJIA Quick Charts
Chart Toppers
Option Dragon
Real-time Intraday Chart/Quote

Thursday Watch

Late-Night Headlines
Bloomberg:
- Apple Computer’s iPod portable music player topped the list of the most sought after digital consumer electronic items that Japanese want to buy with their year-end bonuses, according to a survey by the Nikkei Business Daily.
- China’s economic growth is likely to slow to 6.7% in 2006, the official Xinhua News Agency reported, citing a Morgan Stanley report.
- Japan’s proportion of total funding for the UN is too large and should be more balanced, said Shinzo Abe, chief Cabinet secretary.
- Saudi Aramco, the world’s biggest oil company by output, plans to expand its refineries in the US, South Korea and the Philippines to alleviate a shortage of processing capacity and meet rising demand for fuels, a company official said today.

AP:
- The Justice Department’s lead lawyer in its racketeering trial against cigarette makers will no longer serve in the case.

Reuters:
- Clear Channel Communications may sign distribution agreements next year with Yahoo! or Apple Computer for its programs.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on T and MAR.

Night Trading
Asian Indices are -.50% to +.50% on average.
S&P 500 indicated +.23%.
NASDAQ 100 indicated +.24%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Before the Bell CNBC Video(bottom right)
Global Commentary
Asian Indices
European Indices
Top 20 Business Stories
In Play
Bond Ticker
Daily Stock Events
Macro Calls
Rasmussen Consumer/Investor Daily Indices
CNBC Guest Schedule

Earnings of Note
Company/EPS Estimate
CENT/.30
DLM/.19
FRE/1.05
GHCI/.63
JTX/-.33
NOVL/.03
OVTI/.31
WWE/.07

Upcoming Splits
WTR 4-for-3
BBD 2-for-1

Economic Releases
8:30 am EST
- Personal Income for October is estimated to rise .5% versus a 1.7% gain in September.
- Personal Spending for October is estimated to rise .2% versus a .5% increase in September.
- PCE Deflator for October is estimated to rise 3.3% versus a 3.8% gain in September.
- PCE Core for October is estimated to rise 1.9% versus a 2.0% gain in September.
- Initial Jobless Claims for last week are estimated to fall to 325K versus 335K the prior week.
- Continuing Claims are estimated to fall to 2780K versus 2824K prior.

10:00 am EST
- Construction spending for October is estimated to rise .5% versus a .5% increase in September.
- ISM Manufacturing for November is estimated to fall to 58.0 versus a reading of 59.1 in October.
- ISM Prices Paid for November is estimated to fall to 77.5 versus a reading of 84.0 in October.

Afternoon
- Total Vehicle Sales for November are estimated to rise to 15.8 million versus 14.7 million in October.
- Domestic Vehicle Sales for November are estimated to rise to 12.4 million versus 11.4 million in October.

BOTTOM LINE: Asian indices are mostly higher on strength in exporters in the region after more strong US economic reports. I expect US equities to trade mixed-to-higher ahead of Friday’s employment report. The Portfolio is 50% net long heading into the day.

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%

Evening Review
Detailed Market Summary
Market Gauges
Daily ETF Performance
Style Performance
Market Wrap CNBC Video(bottom right)
S&P 500 Gallery View
Economic Calendar
Timely Economic Charts
GuruFocus.com
PM Market Call
After-hours Movers
Real-time/After-hours Stock Quote
In Play

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.