Friday Watch

Late-Night Headlines
Bloomberg:
- Asian stocks rose to the highest in more than five years, after US reports bolstered confidence the world’s largest economy is growing enough to sustain demand without generating inflation.
- Matsushita Electric Industrial will increase plasma panel production capacity 44% by July 2006 to meet demand for its Panasonic brand televisions.
- The yen traded near a record low against the euro and a 31-month low against the dollar in Asia as the Bank of Japan holds borrowing costs close to zero percent while central banks in the US and Europe raise them.
- Adobe Systems said its has been notified it will receive approval from international regulators for its proposed $3.4 billion acquisition of Macromedia.

Business Week:
- Liberty Media, the cable-television broadcaster controlled by billionaire John Malone, may be worth $14 a share if it strikes a deal with Rupert Murdoch, who controls News Corp., Steve Roge of Roge Partners Fund told Business Week.

AP:
- US Representative John Murtha, Democrat from Pennsylvania, who two weeks ago called for the immediate withdrawal of US troops from Iraq, predicted most soldiers will return within a year because they are “broken, worn out.”

Financial Times:
- Blackstone Group LOP plans to build a “flagship fund” as part of a move into hedge funds which may lead to $10 billion under management, citing company President Tony James.

Shanghai Daily:
- China’s 200 million cell-phone owners who use prepaid cards will have to register with telecom providers by mid-2006 or face a cutoff in service. China is trying to verify every telephone subscriber in the country as the government attempts to stem telephonic fraud and unauthorized transmissions, including pornographic or politically charged content.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on SYMC, SBUX, AMGN and FORM.
- Reiterated Underperform on ABC.

Business Week:
- Sohu.com Inc. will benefit from growth in China’s online advertising market, citing CE Unterberg Towbin analyst Tian Hou.

Night Trading
Asian Indices are +.50% to +1.0% on average.
S&P 500 indicated +.02%.
NASDAQ 100 indicated unch.

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Earnings of Note
Company/EPS Estimate
ATW/.25
CPRT/.27
DDS/-.20
NX/1.48

Upcoming Splits
RRC 3-for-2

Economic Releases
8:30 am EST
- The Change in Non-farm Payrolls for November is estimated to rise to 210K versus 56K in October.
- The Change in Manufacturing Payrolls for November is estimated to fall to 5K versus 12K in October.
- The Unemployment Rate for November is estimated to remain at 5.0% versus 5.0% in October.
- Average Hourly Earnings for November are estimated to rise .2% versus a .5% gain in October.

BOTTOM LINE: Asian indices are higher on strength in tech stocks in the region after more positive US economic reports. I expect US equities open modestly higher and to build on gains later in the afternoon. The Portfolio is 100% net long heading into the day.

Stocks Finish Sharply Higher on Increasing Optimism, Strong Economic Growth, Decelerating Inflation

Indices
S&P 500 1,264.67 +1.22%
DJIA 10,912.57 +.99%
NASDAQ 2,267.17 +1.54%
Russell 2000 690.21 +1.91%
DJ Wilshire 5000 12,659.74 +1.31%
S&P Barra Growth 605.16 +1.14%
S&P Barra Value 655.12 +1.29%
Morgan Stanley Consumer 593.37 +.90%
Morgan Stanley Cyclical 784.87 +1.38%
Morgan Stanley Technology 538.00 +1.71%
Transports 4,157.93 +1.07%
Utilities 403.27 +.78%
Put/Call .82 -2.38%
NYSE Arms .81 -50.99%
Volatility(VIX) 11.24 -6.80%
ISE Sentiment 155.00 -6.06%
US Dollar 91.82 +.27%
CRB 320.71 +2.05%

Futures Spot Prices
Crude Oil 58.56 +.15%
Unleaded Gasoline 156.91 +.42%
Natural Gas 13.04 +.11%
Heating Oil 173.85 -.01%
Gold 507.70 +.28%
Base Metals 148.99 +2.45%
Copper 199.80 -.08%
10-year US Treasury Yield 4.51% +.70%

Leading Sectors
Steel +4.23%
Semis +4.21%
Oil Service +3.36%

Lagging Sectors
Banks +.70%
Biotech +.70%
Defense +.62%

Evening Review
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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on PFGC and UTX.

Afternoon/Evening Headlines
Bloomberg:
- The US economy will grow an above-average 3.5% this year and 3.4% next year, according to estimates by the Bush administration’s top economists.
- Goldman Sachs Group, the Carlyle Group and Riverstone Holdings are putting up $500 million to back a new oil and natural-gas explorer led by the former president of Unocal Corp.
- Former President Clinton said the US should restructure how its troops are deployed in Iraq without setting a firm timetable for a withdrawal.
- Shares of US Steel and AK Steel rose on speculation they may be targets for takeover by the loser in the bidding for Canadian steelmaker Dofasco.
- Crude oil, heating oil and gas rose for a second day on speculation that colder weather would boost demand.

Globe and Mail:
- The elderly of New Orleans and its suburbs were at greatest risk after Hurricane Katrina; about 60% of the 623 victims identified so far were older than 60, citing census and state data.

BOTTOM LINE: The Portfolio finished substantially higher today on gains in my Internet longs, Semi longs, Retail longs, Computer longs and Medical longs. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was very positive today as the advance/decline line finished substantially higher, every sector rose and volume was heavy. Measures of investor anxiety were mostly lower into the close. Overall, today's market performance was very positive as the major averages finished sharply higher with strong breadth and volume. Every sector I follow was positive. Moreover, the 10-year Treasury note yield finished only slightly higher, notwithstanding good economic data, stock gains and the rise in energy prices. Today’s action looked very much like a function of p/e multiple expansion as the irrational pessimism that has enveloped the US stock market since the bursting of the bubble in 2000 continues to lift. I expect DJIA 11,000 to give way within the next 10 days.

Stocks Sharply Higher Mid-day on Strong Economic Growth, Short-covering and More Optimism

Indices
S&P 500 1,264.32 +1.19%
DJIA 10,919.93 +1.05%
NASDAQ 2,265.27 +1.45%
Russell 2000 689.39 +1.79%
DJ Wilshire 5000 12,653.27 +1.25%
S&P Barra Growth 605.05 +1.12%
S&P Barra Value 654.95 +1.26%
Morgan Stanley Consumer 593.50 +.93%
Morgan Stanley Cyclical 784.03 +1.27%
Morgan Stanley Technology 537.76 +1.67%
Transports 4,157.71 +1.07%
Utilities 403.33 +.80%
Put/Call .86 +2.38%
NYSE Arms .68 -58.60%
Volatility(VIX) 11.19 -7.21%
ISE Sentiment 139.00 -15.76%
US Dollar 91.89 +.35%
CRB 318.59 +1.37%

Futures Spot Prices
Crude Oil 57.75 +.75%
Unleaded Gasoline 153.80 +2.73%
Natural Gas 12.70 +.90%
Heating Oil 171.25 +1.50%
Gold 506.80 +1.62%
Base Metals 148.99 +2.45%
Copper 199.95 +3.82%
10-year US Treasury Yield 4.52% +.83%

Leading Sectors
Semis +3.86%
Steel +3.81%
Gold & Silver +3.15%

Lagging Sectors
Utilities +.66%
Defense +.57%
Broadcasting +.29%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Internet longs, Semi longs, Airlines and Medical longs. I covered my IWM and QQQQ shorts this morning and added ANF long into weakness, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, every sector is higher and volume is heavy. Measures of investor anxiety are mixed. Overall, today’s market action is very positive considering the bounce in oil and long-term rates. SanDisk (SNDK), a recent short addition, is down 88 cents to around session lows. This decline is occurring even with an almost 4% rise in the SOX and rumors of its addition to the S&P 500. I expect US stocks to trade mixed-to-higher from current levels into the close as strong economic data, short-covering and more optimism once again offsets the bounce in rates and oil.

Today's Headlines

Bloomberg:
- Intel said it will build a $3.5 billion plant in Israel to extend its lead in the production of microprocessors after receiving assurances of a $525 million government grant.
- Wal-Mart Stores said US November sales rose 4.3% as shoppers bought Metro 7 apparel and $997 plasma televisions for the holidays.
- The euro is falling against the dollar as European Central Bank President Jean-Claude Trichet said today’s interest rate increase isn’t the start of a series.
- President Bush said he is tapping US religious groups to help people in the developing world who are infected with HIV/AIDS get treatment.
- Ford Motor said its November US sales of cars and trucks fell 15%, led by sport-utility vehicles. DaimlerChrysler’s sales dropped 2.7% and Toyota Motor’s increased 10%.
- US Ambassador John Bolton said the United Nations demonstrated its irrelevance today by adopting six resolutions on the Israeli-Palestinian conflict, including non-binding calls for Israel to withdraw from the West Bank and Golan Heights.

Wall Street Journal:
- Schering-Plough and other drugmakers are donating to charities set up to help insured patients who can’t afford the higher premiums and co-payments insurance companies require.
- General Electric’s consumer-finance group is installing self-service kiosks at Ikea, a Swedish-owned home-furnishing retailer, to enable people to apply for credit right away.
- US home prices will probably rise at a slower pace but won’t experience a nationwide decline, Michael T. Darda, chief economist and director of research at MKM Partners, wrote.
- American Express aims to attract engaged couples and newlyweds with credit cards that offer discounts on services such as wedding-planning.
- Bank of America may say today that it will cut its online stock-trading fees to as little as $7 per trade for checking-account customers and to $5 for some rich investors.
- Television talk show host Oprah Winfrey has become so popular on the pan-Arab satellite station MBC that the broadcaster has made her the centerpiece for programs of its own.
- Skype Technologies SA will soon release a software update and compatible telephone handsets that may turn the Internet phone network into a mainstream service.

NY Times:
- The number of NYC residents under the age of five grew more than 26% between 2000 and 2004.

USA Today:
- The US will propose next year a new form of identification in a bid to make border crossing easier for Americans and Canadians.

Financial Times:
- Junk bonds and debt from emerging market borrowers, which for years traded in parallel, have drifted apart.

El Moudjahid:
- BP Plc plans to spend $300 million on oil and gas exploration in Algeria over the next three years, citing Akli Brihi, the director of the company’s branch in the North African state.

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

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