Wednesday Watch

Late-Night Headlines
Bloomberg:
- Iraqi’s first election of a permanent government since the ousting of dictator Saddam Hussein may reduce the power of the governing Shiite Muslim coalition.
- Boeing beat larger rival Airbus SAS to win an order worth as much as $15.5 billion for 115 airplanes from Qantas Airways Ltd., Australia’s largest carrier.

Financial Times:
- US airlines may recruit 2,500 new pilots next year after an increase in the number of low-cost carriers, regional airlines and business planes, citing Kit Darby, a pilot consultant at Atlanta-based Air Inc.

CNBC:
- Morgan Stanley will pay “huge” bonuses even amid earnings that have fallen 25% this year, Crain’s NY Business reporter Aaron Elstein said.

Business Week:
- Legal music downloads are slowing down this quarter in spite of brisk sales of Apple Computer’s iPod portable music player, citing data from Nielsen SoundScan. Music downloads may pick up after Christmas because sales of iTunes gift cards are “off the charts,” the magazine said.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on GE.
- Reiterated Underperform on GXP, SIE and ELNK.

Night Trading
Asian Indices are -.50% to +.25% on average.
S&P 500 indicated -.07%.
NASDAQ 100 indicated -.15%.

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Earnings of Note
Company/EPS Estimate
NDN/.06
FRE/1.02
MERQE/.32
NAV/3.06
WGO/.42

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Trade Deficit for October is estimated to shrink to -$62.8 billion from -$66.1 billion in September.
- The Import Price Index for November is estimated to fall .5% versus a .3% decline in October.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude drawdown of 1.5 million barrels. Gasoline inventories are estimated to rise 1.0 million barrels and distillate supplies are expected to rise 800,000 barrels. Finally, refinery utilization is expected to rise 0.45%.

BOTTOM LINE: Asian indices are mostly lower after a Japanese manufacturing survey failed to meet expectations. I expect US equities to open lower and to rally modestly into the afternoon, finishing mixed-to-lower. The Portfolio is 75% net long heading into the day.

Stocks Finish Higher on Weak Breadth

Indices
S&P 500 1,267.43 +.56%
DJIA 10,823.72 +.52%
NASDAQ 2,265.00 +.18%
Russell 2000 689.03 -.07%
DJ Wilshire 5000 12,684.52 +.44%
S&P Barra Growth 605.72 +.43%
S&P Barra Value 657.33 +.68%
Morgan Stanley Consumer 596.23 +.80%
Morgan Stanley Cyclical 785.52 +.65%
Morgan Stanley Technology 536.34 +.12%
Transports 4,088.03 -.07%
Utilities 412.84 +1.24%
Put/Call .63 -8.70%
NYSE Arms .72 -11.56%
Volatility(VIX) 11.11 -3.14%
ISE Sentiment 174.00 -15.94%
US Dollar 90.53 +.23%
CRB 335.62 +.58%

Futures Spot Prices
Crude Oil 61.23 -.24%
Unleaded Gasoline 164.00 -.36%
Natural Gas 15.25 -.80%
Heating Oil 183.16 -.27%
Gold 521.70 -.44%
Base Metals 153.38 +1.06%
Copper 202.20 -.22%
10-year US Treasury Yield 4.51% -.61%

Leading Sectors
Restaurants +1.74%
Drugs +1.68%
Homebuilders +1.38%

Lagging Sectors
Oil Tankers -1.41%
Gaming -1.51%
Oil Service -1.54%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on PFE.

Afternoon/Evening Headlines
Bloomberg:
- Futures traders pared bets the Federal Reserve will boost its benchmark interest rate to 4.75% by April after the central bank raised rates a 13th straight time and signaled it’s moving closer to the end of the increases.
- Iraqis residing in the US began casting absentee ballots today at eight polling places across the country for Iraq’s parliamentary elections.

CNBC:
- Delphi Corp. CEO Steve Miller said the bankrupt auto-parts maker will likely come to a labor agreement with the UAW in the first quarter of next year.
- A judge granted a preliminary injunction today against a potential strike by NYC transit workers.

BOTTOM LINE: The Portfolio finished lower today on losses in my Medical longs and Retail longs. I added to my VLO short and added IWM and QQQQ shorts in the afternoon, thus leaving the Portfolio 75% net long. The tone of the market was mixed today as the advance/decline line finished slightly lower, sector performance was mostly positive and volume was above average. Measures of investor anxiety were mostly lower into the close. I still expect stocks to finish the year strongly with the S&P 500 returning around 10%. However, in the near term, it appears more consolidation is necessary.

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.

Links of Interest

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