Stocks Higher Mid-day on Falling Energy Prices and Lower Long-term Rates

Indices
S&P 500 1,273.64 +.49%
DJIA 10,888.56 +.60%
NASDAQ 2,265.03 unch.
Russell 2000 690.85 +.26%
DJ Wilshire 5000 12,741.43 +.45%
S&P Barra Growth 643.87 N/A
S&P Barra Value 660.59 +.50%
Morgan Stanley Consumer 599.46 +.54%
Morgan Stanley Cyclical 788.13 +.33%
Morgan Stanley Technology 536.97 +.11%
Transports 4,114.89 +.66%
Utilities 416.16 +.81%
Put/Call .67 +6.35%
NYSE Arms .74 +3.36%
Volatility(VIX) 10.43 -6.12%
ISE Sentiment 231.00 +36.69%
US Dollar 89.81%
CRB 331.44 -1.25%

Futures Spot Prices
Crude Oil 60.85 -.85%
Unleaded Gasoline 164.30 -.18%
Natural Gas 14.69 -4.47%
Heating Oil 184.50 +.46%
Gold 509.60 -2.77%
Base Metals 150.55 -1.85%
Copper 196.60 -2.99%
10-year US Treasury Yield 4.44% -1.70%

Leading Sectors
Homebuilders +2.05%
Airlines +1.64%
Retail +1.25%

Lagging Sectors
Hospitals -.78%
Oil Tankers -.87%
Gold & Silver -2.32%

BOTTOM LINE: The Portfolio is slightly lower mid-day on losses in my Medical longs and Computer longs. I added to my IWM and QQQQ shorts and then covered some, thus leaving the Portfolio 75% 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 about average. Measures of investor anxiety are mixed. Overall, today’s market action is slightly negative considering the decline in long-term rates and energy prices. The S&P Supercomposite Restaurants Index is 2% higher over the last two days. It is at 316.09, very close to its all-time high of 317.34. This is more evidence that the consumer isn't weakening to any significant extent. I expect US stocks to trade mixed-to-higher into the close on short-covering.

Today's Headlines

Bloomberg:
- ConocoPhillips Chairman Jim Mulva, who said a month ago that acquisitions are “not that attractive,” is paying twice as much for Burlington Resources’ reserves as his peers did in two of the year’s biggest takeovers.
- Kohlberg Kravis Roberts will begin raising a global investment fund next month that may reach $10 billion.
- European donations of food to famine-struck countries dropped by more than 50% over the past decade, the top US aid official said.
- General Dynamics agreed to buy Anteon International for about $2 billion to increase sales of system integration services to defense and intelligence agencies.
- US Treasuries are rising, pushing the 10-year note yield to the lowest this month, on speculation that tame inflation will cause the Fed to pause or stop raising interest rates.
- The US dollar is falling by the most since March 2000 against the yen after Japanese business confidence rose to the highest in a year.

Wall Street Journal:
- Walt Disney will make its first film production in China, a Chinese-language joint-venture project called “The Secret of the Magic Gourd.”
- More than 850 US mutual funds cut the management fees they charge investors last year, up from 239 in 2003, and this year the number will be about 700.
- The Chicago Merc plans to match or top General Atlantic’s $135 million offer for a 10% stake in the NYMEX as early as this week.

NY Times:
- FPL Group is in advanced discussions to buy Constellation Energy Group for more than $11 billion.
- Voter turnout in Tikrit for Iraq’s parliamentary election tomorrow is expected to be high and reflects the change in Sunni attitude toward the political process.
- Three casinos are set to reopen by New Year’s Eve in Biloxi, Mississippi, where nine of 10 floating casinos were destroyed by Hurricane Katrina.
- Tribune’s LA Times will stop publishing its national edition next week as the company cuts jobs.
- JPMorgan, Citigroup and Consolidated Edison are among companies in NY preparing for a possible transit strike.
- Most of the Chinese public remains unaware that police in their country killed as many as 20 people last week while suppressing a demonstration.

USA Today:
- More Americans feel it was not a mistake to liberate Iraq by a 50%-48% margin.

Finanz und Wirtschaft:
- Starbucks expects to operate at least 30,000 stores in the coming years as it expands in China and studies new markets like India, Brazil and Russia, its CEO said.

AFP:
- Iranian President Mahmoud Ahmadinejad said the Holocaust is a myth and Israel should move as far away as Alaska.

Trade Deficit Widens, Import Prices Fall, Oil Supplies Rise

- The Trade Deficit for October widened to -$68.9 billion versus -$66.0 billion in September.
- The Import Price Index for November fell 1.7% versus estimates of a .5% decline and a .3% rise in October.
- The EIA reported crude inventories rose 892,000 barrels vs. estimates of a 1.5 million barrel drawdown. Gasoline inventories rose 1.76 million barrels vs. estimates of a 1.0 million barrel increase. Distillate supplies fell 88,000 barrels vs. estimates of a 600,000 barrel build. Refinery utilization fell 1.0% vs. estimates of a 0.5% increase.

BOTTOM LINE: The US trade deficit unexpectedly widened in October, as imports of crude oil, automobiles and televisions increased, Bloomberg reported. Imports rose 2.7% and exports rose 1.7% during the month. I continue to believe the trade deficit will only improve marginally over the intermediate-term as US economic growth continues to exceed that of most other major global economies, offsetting other factors.

Prices of goods imported into the US fell more than expected in November, reflecting cheaper oil, natural gas and building materials. I expect import prices to rise in the near-term before anther push lower next quarter.

Oil is slightly lower on the EIA report. Crude supplies are still well above-average levels for this time of the year. The drawdown in distillate supplies is likely the result of switching from natural gas.

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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.