Stocks Higher Mid-day on Fed "Pause" Hopes

Indices
S&P 500 1,271.67 +.92%
DJIA 10,871.43 +.95%
NASDAQ 2,271.69 +.48%
Russell 2000 692.25 +.39%
DJ Wilshire 5000 12,723.49 +.75%
S&P Barra Growth 607.62 +.74%
S&P Barra Value 659.26 +.97%
Morgan Stanley Consumer 597.22 +.96%
Morgan Stanley Cyclical 787.65 +.92%
Morgan Stanley Technology 537.72 +.38%
Transports 4,095.84 +.12%
Utilities 412.73 +1.22%
Put/Call .59 -14.49%
NYSE Arms .59 -27.06%
Volatility(VIX) 10.92 -4.80%
ISE Sentiment 181.00 -12.56%
US Dollar 90.27 -.06%
CRB 335.58 +.56%

Futures Spot Prices
Crude Oil 61.50 +.33%
Unleaded Gasoline 164.90 +.13%
Natural Gas 15.36 +3.63%
Heating Oil 183.25 +3.39%
Gold 524.80 -1.26%
Base Metals 153.38 +1.06%
Copper 202.00 +1.71%
10-year US Treasury Yield 4.52% -.39%

Leading Sectors
Restaurants +1.88%
Drugs +1.59%
Homebuilders +1.31%

Lagging Sectors
Airlines -1.09%
Oil Tankers -1.16%
Gaming -1.20%

BOTTOM LINE: The Portfolio is lower mid-day on losses in my Medical longs, Retail longs and Medical Information System longs. I added to my ELOS long this morning and added to an existing short, thus leaving the Portfolio 100% net long. The tone of the market is slightly positive as the advance/decline line is about even, most sectors are higher and volume is above average. Measures of investor anxiety are mostly lower. Overall, today’s market action is slightly negative considering the Fed removed the word “accommodative” from their description of the current level of rates. The Johnson Redbook same-store sales index rose 3.3% year-over-year last week vs. a 3.3% rise the prior week. This week's gain is up from a 1.5% increase in late April, and it's the 32nd week in a row that the index has risen 3% or more. I continue to believe retail will outperform through year-end. The Morgan Stanley Retail Index (MVRX) has returned 13% since late October versus a 7% gain for the S&P 500. I expect US stocks to trade mixed into the close as higher energy prices offsets optimism the Fed is closer to a “pause.”

Today's Headlines

Bloomberg:
- US Senate Majority Leader Bill Frist said Congress will likely extend tax cuts for dividends and capital gains before adjourning for the year.
- US Treasuries rose after the Fed raised its interest-rate target for the 13th straight time and indicated that it may be about done raising borrowing costs.

Wall Street Journal:
- US companies’ plans to hire workers look relatively robust, continuing a two-year trend, citing a quarterly survey that Manpower Inc. may release today.
- Mark Cuban, the owner of the Dallas Mavericks basketball team, is investing in Brondell, a San Francisco start-up company that wants to make heated toilet seats that use warm water to clean their users, citing Cuban.

NY Times:
- Nelson Peltz, who owns a 5.5% stake in Wendy’s International, plans to propose an overhaul of the third-largest fast-food company and may start a proxy fight.

Star-Ledger of Newark:
- A New Jersey state Senate committee yesterday passed stem-cell research legislation that would seek voter approval for $350 million in state funding.

Financial News:
- Blackstone Group LP has collected $12 billion for its latest buyout fund and plans to raise a further $1 billion before closing it next year.

Chronicle of Higher Education:
- Spending for online education at universities in the US may rise to as much as $10.4 billion in 2007 from an estimated $6.8 billion this year.

Retail Sales Remain Healthy, Inventories Low

- Advance Retail Sales for November rose .3% versus estimates of a .4% gain and an upwardly revised .3% increase in October.
- Retail Sales Less Autos for November fell .3% versus estimates of a .1% decline and a .8% increase in October.
- Business Inventories for October rose .3% versus estimates of a .5% increase and a .5% gain in September.

BOTTOM LINE: US retail sales rose less than forecast last month as consumers pocketed some of their savings from lower gasoline prices instead of spending the cash, Bloomberg reported. Gas station receipts fell 5.9% in November, the biggest drop since 2003 after average gas prices fell to $2.30/gallon from $2.77/gallon in October. Moreover, last month was the ninth warmest November in US history, depressing sales of winter clothing. The Morgan Stanley Retail Index has risen 13% since late October versus a 7% gain for the S&P 500. I continue to believe retail will outperform through year-end.

US business sales rose .8% in October, more than double the increase in inventories and reinforcing forecasts that companies will increase production in coming months, Bloomberg said. I continue to believe inventory rebuilding will add to US economic growth over the intermediate-term as executive confidence rises further.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- ConocoPhillips(COP), agreed to buy Burlington Resources(BR) for $35.6 billion in cash and stock.
- California Governor Schwarzenegger refused to stop tomorrow’s execution of Stanley Williams, co-founder of the Crips gang in LA and convicted murderer who won the support of celebrities. Schwarzenegger said William’s refusal to apologize for the murders, his unwillingness to help police dissect the structures of street gangs, as well as a plan he had to blow up a jail transportation bus and escape during his trial, raised doubt about his redemption.
- Microsoft sod 39% of its new Xbox game console in the first two days its was available in Japan, according to market researcher Enterbrain Inc.

Financial Times:
- Kuwait may allow international oil companies access to its oilfields by the end of 2006 to meet its oil production targets.

AP:
- Osama bin Laden may no longer be directing operations of his al-Qaeda terrorist organization, citing remarks made by Ryan Crocker, the US ambassador to Pakistan.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on AMP, CRL, DNA and EBAY.

Night Trading
Asian Indices are -.50% to unch. on average.
S&P 500 indicated unch.
NASDAQ 100 indicated +.03%.

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Earnings of Note
Company/EPS Estimate
ADCT/.17
BBY/.30
EASI/.56
LEH/2.64

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Advance Retail Sales for November are estimated to rise .4% versus a .1% decline in October.
- Retail Sales Less Autos for November are estimated to fall .1% versus a .9% increase in October.

10:00 am EST
- Business Inventories for October are estimated to rise .5% versus a .5% increase in September.

2:15 pm EST
- The FOMC is expected to raise the benchmark interest rate 25 basis points to 4.25%.

BOTTOM LINE: Asian indices are mostly lower on rising apprehension ahead of the US Fed announcement. I expect US equities to open mixed and to rally modestly into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Mixed Ahead of Fed Announcement

Indices
S&P 500 1,260.43 +.08%
DJIA 10,767.77 -.10%
NASDAQ 2,260.95 +.19%
Russell 2000 689.54 +.11%
DJ Wilshire 5000 12,628.53 +.10%
S&P Barra Growth 603.15 +.17%
S&P Barra Value 652.92 unch.
Morgan Stanley Consumer 591.52 +.13%
Morgan Stanley Cyclical 780.46 -.03%
Morgan Stanley Technology 535.68 +.59%
Transports 4,090.70 -.28%
Utilities 407.78 -.50%
Put/Call .69 -13.75%
NYSE Arms .81 -20.38%
Volatility(VIX) 11.47 -1.88%
ISE Sentiment 207.00 +5.61%
US Dollar 90.31 -1.03%
CRB 333.70 +1.80%

Futures Spot Prices
Crude Oil 61.41 +.18%
Unleaded Gasoline 165.25 +.35%
Natural Gas 15.04 +1.37%
Heating Oil 177.65 +.23%
Gold 531.00 -.09%
Base Metals 151.76 -1.53%
Copper 199.00 +.20%
10-year US Treasury Yield 4.54% +.57%

Leading Sectors
Energy +1.22%
Oil Service +1.12%
Broadcasting +1.10%

Lagging Sectors
Utilities -.50%
Restaurants -.58%
Insurance -.64%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on CL and RDEN.
- Reiterated Underperform on MARSA.

Afternoon/Evening Headlines
Bloomberg:
- GM’s debt rating, already non-investment grade, was cut two levels by S&P because of concern that losses at the automaker’s North American operations will be difficult to end.
- Diebold said CEO Walden O’Dell resigned and will be replaced by President Thomas Swidarski.
- Crude oil rose to a five-week high as falling temperatures in the US spurred demand for heating oil.

CNBC:
- US Steel may sell its oil pipe business for $2.5 billion, Mergermarket consulting editor Josh Kosman said.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs, Medical longs and Semi longs. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was mixed today as the advance/decline line finished slightly lower, sector performance was mixed and volume was above average. Measures of investor anxiety were lower into the close. Intuitive Surgical (ISRG) broke out of a two-week trading range today, making another all-time high on above-average volume. This stock remains one of my largest long positions. I expect it to continue to outperform over the intermediate term.