Friday Watch

Late-Night Headlines
Bloomberg:
- Merck moved closer to winning the world’s first approval of a vaccine for the painful shingles infection by gaining the backing of US government advisers.
- Japan’s central bank held interest rates near zero and maintained the pace at which it floods the banking system with cash as it struggles to squeeze the last vestiges of deflation from the world’s second-biggest economy.

NY Times:
- As many as 11 million voters may have taken part in Iraq’s election for a National Assembly, boosted by the participation of the Sunni community. Initial indications are that overall turnout may reach 70%.

China Daily:
- China’s most expensive property market has been deflating since June, when new taxes aimed at speculators halted a six-year boom during which prices almost tripled. The amount of new apartment space on sale in Shanghai jumped to 9.66 million square meters as of Tuesday, almost three times the 3.59 million square meters on the market at the end of 2004.

Hankook Ilbo:
- South Korean steelmakers may have their most difficult year in 2006 because of an oversupply by their Chinese rivals, citing Lee Ku Taek, CEO of Posco.

Economic Daily News:
- Dell Inc. plans to raise the number of monitors it buys from Taiwan by 15% in 2006 from this year, citing the company’s global monitor purchasing chief. The computer maker plans to increase orders from the island because of the improved outlook for sales of PCs, laptops and liquid-crystal display televisions.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on CAH, MAR and ALK.
- Reiterated Underperform on PBG, MAXY and DRI.

Business Week:
- DR Horton(DHI) shares may reach $45 in a year, citing Peter Zuleba, portfolio manager at Glenmede Trust Co. which owns the stock.
- Montpelier Re Holdings Ltd.(MRH), a Bermuda-based re-insurer, may benefit as the annual frequency of hurricanes reverts back to two to three a year, citing John Maloney of M&R Capital Management.
- Western Digital(WDC) may benefit as its products are used in consumer electronics, citing Bernie Schaeffer of Schaeffer’s Investment Research.

Night Trading
Asian Indices are -.50% to +.50% on average.
S&P 500 indicated +.10%.
NASDAQ 100 indicated +.12%.

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Earnings of Note
Company/EPS Estimate
CCL/.41
GTK/.38
ZQK/.27
SCHL/1.80
SCS/.14

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Economic Releases
8:30 am EST
- The 3Q Current Account Deficit is estimated to widen to -$205.0 billion versus -$195.7 billion in 2Q.

BOTTOM LINE: Asian indices are mixed as gains in financial shares are offsetting losses in commodity stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon. The Portfolio is 50% net long heading into the day.

Stocks Finish Slightly Lower, Pressured by Commodity Shares

Indices
S&P 500 1,270.94 -.14%
DJIA 10,881.67 -.02%
NASDAQ 2,260.63 -.09%
Russell 2000 684.74 -.83%
DJ Wilshire 5000 12,704.21 -.23%
S&P Barra Growth 608.42 +.07%
S&P Barra Value 658.11 -.34%
Morgan Stanley Consumer 597.18 -.20%
Morgan Stanley Cyclical 787.26 -.04%
Morgan Stanley Technology 535.64 -.10%
Transports 4,145.77 +.71%
Utilities 417.89 +.29%
Put/Call .60 -10.45%
NYSE Arms .83 +6.41%
Volatility(VIX) 10.73 +2.39%
ISE Sentiment 218.00 -3.96%
US Dollar 90.01 +.20%
CRB 328.61 -.84%

Futures Spot Prices
Crude Oil 59.96 -.05%
Unleaded Gasoline 161.69 +.01%
Natural Gas 13.66 -.81%
Heating Oil 178.50 -.13%
Gold 503.90 unch.
Base Metals 150.33 -.15%
Copper 214.15 +.73%
10-year US Treasury Yield 4.46% +.13%

Leading Sectors
Airlines +3.04%
Biotech +1.12%
Disk Drives +.95%

Lagging Sectors
Oil Service -.93%
Hospitals -.97%
Steel -1.37%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on SYMC and CRL.

Afternoon/Evening Headlines
Bloomberg:
- Bonds of Calpine, last year’s largest issuer of junk-rated debt, dropped to an all-time low on speculation the company may be unable to make $146 million in interest payments due in the next month.
- Adobe Systems said fourth-quarter profit increased 38% on continued demand for new versions of its Photoshop and Illustrator programs.
- The US dollar rose the most in more than a week against the euro after a Treasury Department report showed foreigners increased purchases of US securities in October at a historic pace.
- Gold in NY fell, capping the largest three-day plunge in 20 months, after the Tokyo Commodities Exchange raised trading costs and measures of inflation declined.
- Crude oil, heating oil and natural gas all fell on speculation that milder weather in the Great Plains will move east by the end of the month, cutting heating-fuel consumption.

BOTTOM LINE: The Portfolio finished higher today on gains in my Technology longs and Commodity shorts. I added to my IWM and QQQQ shorts in the afternoon, thus leaving the Portfolio 50% net long. The tone of the market was negative today as the advance/decline line finished lower, sector performance was mostly negative and volume was about average. Measures of investor anxiety were mostly lower into the close. The AAII percentage bulls fell to 46.15% this week from 49.47% the prior week; this reading is back to around average levels. The percentage bears rose to 22.12% from 18.95% the prior week; this is still at below-average levels. I expect bullish sentiment to fall modestly again next week. It is a big positive to see sentiment ebb while the S&P 500 hits a four-year high.

***Alert***

I am unable to post the Mid-day Scoreboard due to a scheduling conflict. I will post the Thursday Close later this afternoon.

Today's Headlines

Bloomberg:
- UN Secretary General Kofi Annan said the voting in Iraq today has “gone very well so far” and that voter turnout will be “high.”
- Crude oil is falling for a second day after a government report showed that US stockpiles last week were 11% higher than the five-year average.
- Robert Hagstrom, manager of the Legg Mason Growth Trust, increased his investments in Amazon.com and EBay after the companies’ shares tumbled because he expects more shoppers to buy gifts online.
- The US dollar is rising the most in more than a week against the euro after a Treasury Department report showed foreigners increased purchases of US securities in October at a historic pace.
- The union representing 32,000 NY subway and bus workers hardened its public stance on contract negotiations ahead of a midnight deadline, saying the likelihood of a strike was increasing.

Wall Street Journal:
- US net purchases of foreign stocks in the first 10 months of this year are likely to have exceeded the 2003 record of $86.6 billion.
- Quizno’s Corp., which operates the Quizno’s Classic Subs restaurants chain, is to be sold at auction and may fetch as much as $2 billion.
- Walt Disney may buy partner Pixar, citing research reports by CSFB.
- Microsoft is reorganizing its consumer units, citing an internal memorandum that it’s reviewed.
- BMW is set to pass DaimlerChrysler’s Mercedes-Benz cars in worldwide sales for the first time since 1993.
- Ford Motor will run new ads in US gay and lesbian magazines such as the Advocate and Out, after the automaker appeared two weeks ago to have pulled some Jaguar and Land Rover ads from such magazines, citing a Ford letter to gay groups.
- Comcast, Time Warner and other companies with cable systems are experimenting with offering local-content, on-demand services such as video dating or high-school football games.
- Wal-Mart Stores has teamed up with Hewlett-Packard to boost holiday sales of technology products at its stores.
- Time Warner’s HBO unit may announce an agreement today to offer two channels of programming on Cingular Wireless’s phones.
- Google will provide links to musicians’ songs, lyrics and related material at the top of its results pages, starting today.

Washington Post:
- The US House of Representatives yesterday passed legislation that grants local law enforcement agencies funds to investigate and prosecute brothel owners, pimps, and customers of prostitutes.

Arab News:
- Saudi Arabia plans to increase by 61% the number of new oil wells its drills next year to boost production, citing a statement from state-owned Saudi Arabian Oil Co.

NY Times:
- Google, Microsoft and Sun Microsystems will underwrite a $7.5 million lab for computer research at the Univ. of Cal. in Berkeley.

Consumer Prices Fall Most in 50 Years, Manufacturing Remains Healthy, Labor Market Still Strong, Foreign Demand for US Assets Hits Another Record

- The Consumer Price Index for November fell .6% versus estimates of a .4% decline and a .2% increase in October.
- The CPI Ex Food & Energy for November rose .2% versus estimates of a .2% increase and a .2% gain in October.
- Empire Manufacturing for December rose to 28.7 versus estimates of 18.2 and a reading of 22.8 in November.
- Initial Jobless Claims for last week rose to 329K versus estimates of 320K and 328K the prior week.
- Continuing Claims fell to 2606K versus estimates of 2626K and 2585K prior.
- Net Foreign Security Purchases for October rose to $106.8 billion versus estimates of $75.0 billion and $101.7 billion in September.
- Industrial Production for November rose .7% versus estimates of a .5% gain and an upwardly revised 1.3% gain in October.
- Capacity Utilization for November rose to 80.2% versus estimates of 79.8% and a reading of 79.8% in October.
- The Philly Fed for December fell to 12.6 versus estimates of 15.0 and a reading of 11.5 in November.

BOTTOM LINE: A record decline in energy costs last month drove the US consumer price index down .6%, the biggest drop in more than 50 years, Bloomberg said. Gasoline prices declined 16% in November, the most in US history. The average price of gas has continued falling in December, dropping from $2.30/gallon to $2.21/gallon. The cost of all goods including cars, apparel and food fell 2.2% last month versus a .5% decline the prior month. I continue to believe measures of inflation will decelerate most of next year as commodity prices weaken and unit labor costs remain subdued.

Manufacturing in New York state expanded at the fastest pace in 17 months in December as costs declined and demand rose, Bloomberg reported. The new orders component of the index rose to 30.2 from 25.9 in November. I continue to believe manufacturing will add to US economic growth over the intermediate-term as companies rebuild inventories from depleted levels and confidence improves.

The number of Americans filing first-time unemployment benefit claims rose by 1,000 last week, remaining at a level that shows companies are holding on to workers to meet strong demand, Bloomberg reported. The four-week moving-average of claims increased to 328,750 from 322,750 the prior week. The unemployment rate among those able to receive benefits, which follows the US unemployment rate, held steady at 2.0%. I continue to expect the US labor market to remain healthy. However, it is unlikely that enough tightness will occur as to generate a substantial increase in unit labor costs, the largest component of inflation.

International investors increased their net holdings of US assets in October at a historic pace as strong growth lured funds to the world’s largest economy. The US economy grew at more than twice the pace of Europe last quarter. I continue to expect foreign demand for US assets to remain near record levels as US growth outpaces that of other developed nations, the dollar remains firm and commodity prices fall.

US industrial production rose in November for a second month, as companies increased inventories and manufacturing and energy production recovered from the Gulf Coast hurricanes. At 80.2, capacity utilization is well below average levels for this point in the economic cycle. This is a result of the massive overcapacity generated during the late 90s.

Manufacturing in the Philadelphia area expanded more quickly this month, adding to evidence of strength in US industry as companies rebuild inventories and invest in new equipment, Bloomberg reported. The prices paid component of the index fell to 49.0 from 56.8 in November. This large drop in the prices paid component is a big positive and should provide the Fed with another reason to “pause” over the coming months.

Links of Interest

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