Today's Headlines

Bloomberg:
- UK Prime Minister Tony Blair arrived in Iraq on an unannounced trip to visit British troops and US officials.
- Japan’s population will decline this year for the first time since 1899, a trend that is expected to continue, reducing the government’s ability to raise tax revenue and repay debt.
- GE will buy Arden Realty for $45.25/share, adding the biggest publicly traded landlord in southern California as US real estate acquisitions accelerate.
- Placer Dome agreed to an increased takeover offer from Barrick Gold valued at $10.4 billion, uniting the two Canadian companies to create the world’s largest gold producer.
- Natural Gas prices are having their biggest drop in more than a year because of mild weather forecasts and a smaller-than-expected decline in stored supplies.
- Striking subway and bus workers in NYC agreed to end a three-day walkout today.

Wall Street Journal:
- Albertson’s may not accept a takeover offer from investors including Cerberus Capital Management, valuing the company at $9.6 billion.
- EntreMed’s cancer drug has shown promising results in human tests in China after failing to meet test objectives in the US.
- John Whitehead, former chairman of Goldman Sachs, said New York Democratic Attorney General Eliot Spitzer phoned him and said there was a “war” between them after Whitehead criticized Spitzer in an April commentary.

NY Times:
- President Bush has met with new NAACP President Gordon three times since September as he seeks to reach out to critics.

USA Today:
- NY’s population fell and more Californians left than moved in, citing Census figures.
- Volunteers and non-governmental organizations are helping rebuild areas affected by Hurricane Katrina as relief work moves forward.

Daily Telegraph:
- Harley-Davidson now has a larger market value than GM.

Interfax:
- Russian President Putin called on the government to boost the attractiveness of the nation’s energy industry for foreign investors.

CNBC:
- Ford Motor union workers at three plants rejected a health-care plan that would save the automaker $850 million annually.

Incomes and Spending Healthy, Another Measure of Inflation Decelerates, Leading Indicators Point to Further Strength

- Personal Income for November rose .3% versus estimates of a .3% increase and a .5% gain in October.
- Personal Spending for November rose .3% versus estimates of a .4% increase and a .2% gain in October.
- The PCE Core for November rose .1% versus estimates of a .2% increase and a .1% gain in October.
- Leading Indicators for November rose .5% versus estimates of a .5% increase and an upwardly revised 1.0% gain in October.

BOTTOM LINE: US consumer spending rose in November as auto sales recovered from a 7-year low and prices increased less than expected, Bloomberg reported. Rising incomes, increasing home values, rising stocks prices and falling gas prices are helping to boost consumer spending. The year-over-year gain in the PCE Core, the Fed’s favorite inflation gauge, of 1.8% is the smallest since March 2004. Income and spending growth should decelerate modestly in 2006, along with the PCE Core. This should help keep long-term interest rates near historically low levels.

The number of Americans filing first-time claims for unemployment benefits fell 13,000 last week, suggesting companies are keeping workers and hiring new ones to meet demand, Bloomberg said. The four-week moving average decreased to 324,500 from 329,250 the prior week. The unemployment rate for those eligible for claims, which follow the US unemployment rate, rose to 2.1% from 2.0% the prior week. I continue to believe the labor market will remain healthy over the intermediate-term without generating substantial inflation pressures.

The US index of leading economic indicators rose in November for a second month as the labor market improved and consumers became more optimistic, Bloomberg said. Leading Indicators are still pointing to healthy economic growth.

Links of Interest

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Thursday Watch

Late-Night Headlines
Bloomberg:
- US foodmakers are betting on a rebound of sales of sweets and baked goods and are introducing new items, including breakfast cookies and dessert pizzas.
- World oil markets are “well supplied,” OPEC President Sheikh Amad Fahd al-Sabah said today in Beijing.
- The US Senate passed a six-month extension of the USA Patriot Act after talks failed to produce a new version of the anti-terrorism law, part of which will expire at the end of the year.

Financial Times:
- Procter & Gamble will adopt the distribution systems and business practices of Gillette Co., which the biggest US household-goods maker bought for $57 billion, citing an interview with CEO Lafley.

Nihon Keizai:
- Sony Corp. is among companies that Saudi Prince Alwaleed bin Talal is considering for investment.

NHK Television:
- KDDI Corp. plans to tie up with Qualcomm Inc. to start distributing television programs for mobile phones in Japan.

Hindu Business Line:
- Coal India Ltd. may cut output of the fuel as inventories pile up at thermal power plants and mines in the country.

Kyodo News:
- Japan’s Foreign Minister Taro Aso said China’s increasing military presence is “beginning to be a considerable threat” to Japan.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on ALK, CAKE, SBUX.
- Reiterated Underperform on DRI, MU and HRB.

Night Trading
Asian Indices are -.75% to -.25% on average.
S&P 500 indicated -.02%.
NASDAQ 100 indicated -.03%.

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Earnings of Note
Company/EPS Estimate
AGE/.71
AM/.58
CTAS/.48
CAG/.38
DCN/-.02
GIS/.96
GPN/.35
OLG/.66
SLR/.03

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Personal Income for November is estimated to rise .3% versus a .4% increase in October.
- Personal Spending for November is estimated to rise .4% versus a .2% gain in October.
- The PCE Core for November is estimated to rise .2% versus a .1% gain in October.
- Initial Jobless Claims for last week are estimated to fall to 325K versus 329K the prior week.
- Continuing Claims are estimated to fall to 2580K versus 2606K prior.

10:00 am EST
- Leading Indicators for November are estimated to rise .4% versus a .9% increase in October.

BOTTOM LINE: Asian indices are lower on profit-taking in the region after recent strong gains. I expect US equities to open mixed and to trade modestly higher into the afternoon. The Portfolio is 100% net long heading into the day.

Stocks Finish Modestly Higher on Merger Activity and Strong US Economic Growth

Indices
S&P 500 1,262.79 +.25%
DJIA 10,833.73 +.26%
NASDAQ 2,231.66 +.42%
Russell 2000 679.74 +1.03%
DJ Wilshire 5000 12,623.75 +.35%
S&P Barra Growth 604.78 +.24%
S&P Barra Value 653.59 +.27%
Morgan Stanley Consumer 600.89 +.27%
Morgan Stanley Cyclical 787.43 +1.16%
Morgan Stanley Technology 527.70 +.55%
Transports 4,198.69 +2.33%
Utilities 408.24 -1.21%
Put/Call .71 -37.72%
NYSE Arms .89 -21.66%
Volatility(VIX) 10.81 -3.40%
ISE Sentiment 204.00 -17.41%
US Dollar 91.00 +.24%
CRB 326.53 +.22%

Futures Spot Prices
Crude Oil 58.65 +.17%
Unleaded Gasoline 154.20 +.36%
Natural Gas 14.31 +.28%
Heating Oil 176.05 +.23%
Gold 497.70 +.48%
Base Metals 151.67 +.39%
Copper 201.50 -.12%
10-year US Treasury Yield 4.49% +.66%

Leading Sectors
Disk Drives +7.55%
Gold & Silver +2.48%
Gaming +1.90%

Lagging Sectors
Semis -.33%
Telecom -.52%
Utilities -1.21%

Evening Review
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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on WCC, IBM, PFE, CEM, FD, CCU and GNW.

Afternoon/Evening Headlines
Bloomberg:
- French Connection Group Plc, the owner of fashion stores in Europe, the US and Asia, has won a fight to continue using its FCUK logo on watches and jewelry, the BBC said on its Web site.
- Research In Motion said third-quarter profit rose 33%, beating analysts’ estimates and soothing concerns about customer defections.

BOTTOM LINE: The Portfolio finished higher today on gains in my Medical longs, Medical Information System longs and Computer longs. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, most sector rose and volume was slightly below average. Measures of investor anxiety were mostly lower into the close. Overall, I would classify today's action as neutral. The major averages and breadth are finishing modestly higher, however the afternoon weakness was disappointing for the bulls. My sense is that hedge funds, which now dominate trading, are very worried about a January swoon in stocks and have been positioning accordingly, which should benefit stocks in January. I expect stocks to put in a better showing to end the week.

Stocks Higher Mid-day on Merger Activity

Indices
S&P 500 1,264.47 +.38%
DJIA 10,855.42 +.47%
NASDAQ 2,232.42 +.45%
Russell 2000 678.50 +.85%
DJ Wilshire 5000 12,632.89 +.42%
S&P Barra Growth 605.62 +.38%
S&P Barra Value 654.38 +.39%
Morgan Stanley Consumer 601.07 +.31%
Morgan Stanley Cyclical 786.94 +1.09%
Morgan Stanley Technology 527.29 +.47%
Transports 4,197.43 +2.30%
Utilities 410.71 -.61%
Put/Call .58 -49.12%
NYSE Arms .79 -30.04%
Volatility(VIX) 11.67 -4.83%
ISE Sentiment 226.00 -8.50%
US Dollar 91.03 +.28%
CRB 325.69 -.04%

Futures Spot Prices
Crude Oil 58.35 +.45%
Unleaded Gasoline 151.70 +.54%
Natural Gas 14.11 +.21%
Heating Oil 175.20 +1.84%
Gold 495.30 -.34%
Base Metals 151.67 +.39%
Copper 201.75 -.12%
10-year US Treasury Yield 4.48% +.57%

Leading Sectors
Disk Drives +6.78%
Steel +1.75%
Gaming +1.62%

Lagging Sectors
Semis -.09%
Telecom -.37%
Utilities -.70%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Semi longs, Medical longs and Medical Information System longs. I covered the rest of my IWM and QQQQ shorts this morning and was stopped-out of a short, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are higher and volume is about average. Measures of investor anxiety are mostly lower. Overall, today’s market action is mildly positive considering recent trading. The Fed's Lacker is saying that he sees 3.5% real GDP growth next year, with household spending rising 3.5% as well. However, he said he sees "substantially faster" business investment. He said core inflation has been low and steady, but the Fed must respond vigorously to inflation signs. Finally, he says housing activity will cool next year. It is a positive that the Fed is acknowledging the slowing housing market. I expect US stocks to trade mixed-to-higher into the close on short-covering.