Today's Headlines

Bloomberg:
- Japan’s stock market will be among the world’s “worst performers” in the next three months as a strengthening yen lowers the value of exporters’ overseas sales, according to Goldman Sachs’ Kenneth Courtis.
- New Yorkers woke up to a transit strike and set out to travel to work without public transportation for the first time in a quarter of a century.
- A Pennsylvania school district cannot require the teaching of intelligent design in high school biology classes, a federal judge ruled in a case that may influence other challenges to the theory of evolution.
- Chevron said it discovered oil in the deepest well ever drilled in the Gulf of Mexico in a joint effort with three other companies including Canada’s Nexen, the field operator.
- Shares of GM fell as much as 6.8% to a 23-year low.
- The US dollar climbed the most in six months against the euro and advanced versus the yen as a report showing gains in US housing spurred optimism for US assets.
- Exxon Mobil and BP Plc were sued by a local development agency in Alaska that alleged the companies withheld natural gas from US markets.
- Morgan Stanley increased bets in commodity markets by 53% in the fiscal fourth quarter, faster than in any other market.
- Gold is falling below $500/oz. for the first time since Nov. 30.

Wall Street Journal:
- Ford Motor plans to support efforts by environmental groups to stabilize global carbon dioxide emissions, becoming the first automaker to back such programs.
- Apollo Advisers, a private equity firm, is close to agreeing to buy the plastics and adhesives unit of Tyco International for about $1 billion.
- News Corp.’s Fox Film Entertainment said yesterday it will start a unit making films and other entertainment distributed via the Internet and cell phones for teenagers and young adults.

NY Times:
- Google will experiment with advertisements using logos and graphics on its Web site, a change of policy prompted by talks with Time Warner’s AOL unit.

Reuters:
- US Defense Secretary Donald Rumsfeld ordered a cut in the number of American troops in Afghanistan to about 16,000 from the current 19,000 by next spring.

CNBC:
- Steve Forbes, CEO of Forbes Inc., said the US economy will enter a recession by 2008 if Congress doesn’t extend tax cuts on dividends and capital gains.
- Sprint Nextel agreed to buy Nextel Partners for about $28.50 a share.

Producer Prices Fall the Most in Almost 3 Years, Housing Starts Exceed Estimates

- The Producer Price Index for November fell .7% versus estimates of a .5% decline and a .7% gain in October.
- The PPI Ex Food & Energy for November rose .1% versus estimates of a .2% increase and a .3% decline in October.
- Housing Starts for November rose to 2123K versus estimates of 2018K and 2017K in October.
- Building Permits for November rose to 2155K versus estimates of 2091K and 2103K in October.

BOTTOM LINE: US producer prices fell in November by the most since April 2003 as energy prices receded, a government report showed, Bloomberg reported. Core prices are rising at a 1.8% annual pace this year versus a 2.2% rate at the same time last year. The cost of energy fell 4.0% last month, the largest fall in 2 ½ years. As well, car prices fell .8%, computers fell 1.1% and capital equipment prices declined .1%. I continue to believe most measures of inflation will continue to decelerate through next year.

US housing starts in November rose by the most in seven months as a pickup in jobs and reconstruction after the hurricanes reignited the homebuilding market. Home sales have set four consecutive annual records. The National Assoc. of Realtors is forecasting a 4.8% decline in home starts next year. New housing starts increased 12.3% in the Midwest, 11.5% in the West and 11% in the Northeast. Starts declined 1.3% in the South. I continue to believe housing is slowing to more healthy sustainable levels.

Links of Interest

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- About 500 pounds of commercial explosives were stolen yesterday from an Albuquerque business licensed by the US government.
- President Bush’s job-approval rating rose 8 percentage points in one month to 47%, with the public viewing his handling of the war in Iraq more favorably, according to an ABC News/Washington Post poll.
- Honda Motor said its auto sales may rise 4% next year in the US, helped by demand for its redesigned Civic and other new vehicles.
- Japan’s government, the world’s biggest debtor, will reduce bond sales for the first time in nine years as it cuts spending and economic growth boosts tax receipts.

Financial Times:
- Average company dividend pay-out ratios are to rise by 60% over the next four years, citing a report by Eaton Vance, the largest US manager of funds designed to minimize taxes.
- US hotels may report record profits on higher room rates, tighter supply of accommodation and a recovery in business travel since September 2001, citing research by PricewaterhouseCoopers LLP.

Xinhua News:
- Wuhan Iron & Steel Group, China’s third-largest steelmaker, acquired Liiuzhou Iron & Steel Group as the industry consolidates amid an oversupply of steel.

Interfax:
- The al-Qaeda terrorist network has lost 70% of its highest-ranking members in the international war against terrorism, citing Sergei Lebedev, director of Russia’s Foreign Intelligence Service.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on CFC, UVN and EBAY.
- Reiterated Underperform on HRB, STXS and TCO.

Night Trading
Asian Indices are -.25% to +.50% on average.
S&P 500 indicated -.05%.
NASDAQ 100 indicated -.06%.

Morning Preview
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Earnings of Note
Company/EPS Estimate
PLB/.05
BSG/.17
FDS/.34
FLS/.28
JBL/.42
KEGS/.20
MWD/1.08
NKE/1.03
PALM/.43

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Producer Price Index for November is estimated to fall .5% versus a .7% rise in October.
- The PPI Ex Food & Energy for November is estimated to rise .2% versus a .3% fall in October.
- Housing Starts for November are estimated to rise to 2020K versus 2014K in October.
- Building Permits for November are estimated to fall to 2090K versus 2103K in October.

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 mixed and to trade modestly lower into the afternoon. The Portfolio is 50% net long heading into the day.

Stocks Finish Lower After Housing Index Unexpectedly Declines

Indices
S&P 500 1,259.92 -.58%
DJIA 10,836.53 -.36%
NASDAQ 2,222.74 -1.32%
Russell 2000 672.25 -1.59%
DJ Wilshire 5000 12,577.35 -.71%
S&P Barra Growth 603.91 -.43%
S&P Barra Value 651.53 -.74%
Morgan Stanley Consumer 600.51 +.20%
Morgan Stanley Cyclical 780.26 -.83%
Morgan Stanley Technology 525.84 -1.64%
Transports 4,108.15 -.83%
Utilities 412.14 -1.36%
Put/Call .93 +16.25%
NYSE Arms .88 -7.90%
Volatility(VIX) 11.38 +6.55%
ISE Sentiment 230.00 +23.66%
US Dollar 89.88 +.21%
CRB 326.06 -.08%

Futures Spot Prices
Crude Oil 57.40 +.10%
Unleaded Gasoline 152.69 -2.68%
Natural Gas 14.18 +.98%
Heating Oil 170.75 +.25%
Gold 506.60 +.10%
Base Metals 152.12 -.76%
Copper 201.10 -.10%
10-year US Treasury Yield 4.43% +.09%

Leading Sectors
Drugs +2.56%
Disk Drives +.01%
Telecom -.07%

Lagging Sectors
Steel -1.65%
Biotech -1.84%
Semis -2.30%

Evening Review
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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on KR.

Afternoon/Evening Headlines
Bloomberg:
- El Paso said it agreed to sell the majority of its remaining wholesale power trading portfolio to Morgan Stanley Capital Group for $442 million.
- Ford Motor was cut to junk by Fitch Ratings amid falling sales, forcing the bonds of its finance unit out of Lehman Brothers Holdings’ investment-grade index.
- New York’s economy has been hurt by a threatened bus and subway strike as negotiations between transit workers and the state-run Metropolitan Transportation Authority approach a midnight deadline.
- Crude oil and heating oil fell to the lowest this month on forecasts that a warm weather system will move across the northern US.

Dow Jones Newswire:
- The NY Merc, the word’s largest energy market, received an expression of interest from the Chicago Merc for a possible investment stake.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Semi longs and Airline longs. I added to my IWM and QQQQ shorts in the afternoon and took profits in a few existing longs, thus leaving the Portfolio 50% net long. The tone of the market was negative today as the advance/decline line finished substantially lower, almost every sector fell and volume was average. Measures of investor anxiety were mixed into the close. Overall, today's action was bearish as the major indices and breadth finished near session lows. This is even more disappointing for the bulls, considering another drop in oil and stable long-term rates. It appears as though investors are factoring in a substantial slowdown in consumer spending on technology products. I believe this fear will prove unfounded. However, the technical action of late leads me to conclude more sideways action is in store.

Stocks Lower Mid-day on Weakness in Small-caps

Indices
S&P 500 1,262.57 -.37%
DJIA 10,849.91 -.23%
NASDAQ 2,234.73 -.79%
Russell 2000 674.14 -1.31%
DJ Wilshire 5000 12,607.76 -.47%
S&P Barra Growth 605.68%
S&P Barra Value 652.54 -.58%
Morgan Stanley Consumer 601.40 +.35%
Morgan Stanley Cyclical 781.18 -.71%
Morgan Stanley Technology 529.77 -.91%
Transports 4,116.76 -.62%
Utilities 412.55 -1.25%
Put/Call .99 +23.75%
NYSE Arms .79 -17.43%
Volatility(VIX) 11.12 +4.12%
ISE Sentiment 226.00 +21.51%
US Dollar 89.94 +.27%
CRB 326.23 -.04%

Futures Spot Prices
Crude Oil 57.40 -1.14%
Unleaded Gasoline 153.10 -2.42%
Natural Gas 13.98 +2.62%
Heating Oil 171.20 -1.15%
Gold 506.70 +.16%
Base Metals 152.12 -.76%
Copper 201.40 -.74%
10-year US Treasury Yield 4.43% unch.

Leading Sectors
Drugs +2.88%
Papers +.15%
Telecom -.11%

Lagging Sectors
Homebuilders -1.36%
Steel -1.53%
HMOs -1.56%

BOTTOM LINE: The Portfolio is slightly lower mid-day on losses in my Semi longs and Medical longs. I covered my IWM and QQQQ shorts this morning and added back to them, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is substantially lower, most sectors are lower and volume is slightly below average. Measures of investor anxiety are mixed. Overall, today’s market action is negative considering the decline in energy prices and recent positive economic reports. The fact that Yahoo! (YHOO) is approaching a 52-week high notwithstanding the Google (GOOG)/AOL news illustrates the magnitude of the opportunity for both parties in my opinion. Google is trading at another all-time high, up $4.50. I expect US stocks to trade mixed-to-lower into the close on fears that a slowing housing market will damage consumer spending.