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.

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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%.

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- 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%

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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.

Today's Headlines

Bloomberg:
- Norfolk Southern is buying new locomotives and Audi AG is investing in new models, part of a worldwide corporate spending spree that may take over the US consumer’s role in driving global growth next year.
- US health officials are preparing new hospital infection control guidelines to slow the growing spread of bacteria that has become resistant to antibiotics.
- FPL Group agreed to buy Constellation Energy Group for about $11 billion, doubling its number of nuclear power plants and expanding in deregulated electricity markets.
- DaimlerChrysler’s Chrysler will operate its North American factories at full capacity for the first time since 19999 as 10 new models help to increase US market share, the unit’s chief said.
- Shares of Pfizer rose as much as 12%, the most in more than 20 years, after a US court ruling blocked generic competition until 2011 for Lipitor, the world’s best-selling prescription drug.

Wall Street Journal:
- PepsiCo has started growing potatoes in China as part of a risky gambit to dominate the global market for snacks and other packaged foods.
- THQ Inc., the publisher of video games such as “SpongeBob SquarePants,” plans to announce today an agreement with Massive Inc. to deliver advertisements over the Internet to its games.
- The US is boosting training of dogs that can sniff explosives as part of a broader program to boost security on the nation’s transportation systems.
- AG Edwards has started a subsidiary that will sell investment services for third parties, such as mutual funds and insurance companies.
- SEC Chairman Cox has left intact new mutual fund governance rules, hedge fund registration requirements and other changes introduced by his predecessor.
- Southwest Air CEO Kelly said the carrier has six US cities, including Charlotte, North Carolina, that are “high on the list” for possible expansions to its route network.

Barron’s:
- Microsoft may be developing a digital media player to challenge Apple’s iPod.

NY Times:
- Some US minors create pornographic Web sites, displaying themselves through Web cameras, as they seek to earn money.
- US companies are helping filmmakers distribute movies to consumers through Internet downloads or direct DVD sales.

Lloyd’s List:
- A 12% overcapacity of liquefied natural gas tankers during the next two years may spur freight rates to fall and shop operators to cut costs by trimming crews and maintenance.

AFP:
- The Shiite Muslim-led United Iraqi Alliance won 58% of the vote in the province of Baghdad in the Dec. 15 parliamentary elections.