Stocks Finish Near Session Lows, Led by Energy Shares

Indices
S&P 500 1,256.54 -.96%
DJIA 10,777.77 -.97%
NASDAQ 2,226.89 -1.0%
Russell 2000 676.58 -1.44%
DJ Wilshire 5000 12,566.31 -1.0%
S&P Barra Growth 600.91 -1.03%
S&P Barra Value 651.33 -.88%
Morgan Stanley Consumer 595.44 -.60%
Morgan Stanley Cyclical 786.89 -.75%
Morgan Stanley Technology 528.46 -.84%
Transports 4,216.26 -1.18%
Utilities 409.02 -.64%
Put/Call .88 +27.54%
NYSE Arms 1.66 +27.86%
Volatility(VIX) 11.57 +12.66%
ISE Sentiment 197.00 +23.13%
US Dollar 91.17 +.43%
CRB 324.59 -.53%

Futures Spot Prices
Crude Oil 57.80 -.62%
Unleaded Gasoline 151.30 -.03%
Natural Gas 10.97 -.43%
Heating Oil 163.65 -.03%
Gold 510.10 unch.
Base Metals 153.51 +.63%
Copper 206.95 +.10%
10-year US Treasury Yield 4.33% -.98%

Leading Sectors
Airlines +1.55%
Homebuilders -.05%
Telecom -.15%

Lagging Sectors
Coal -1.98%
Energy -2.82%
Oil Service -3.13%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on BSX.

Afternoon/Evening Headlines
Bloomberg:
- First Data Corp. shares rose as much as 1.6% after a report today that the company is in discussions with unidentified private equity firms about a sale of its Western Union subsidiary.
- Poland’s two-month-old government plans to keep soldiers in Iraq next year, countering the previous cabinet’s pledge to pull out of the US-led operation by this week.
- Fidelity National Financial, the biggest US title insurer, agreed to buy Sedgwick CMS Holdings for $635 million to offer third-party claims management services to Fortune 500 companies.
- Natural gas futures plunged 10%, the largest one-day drop in almost 3 years, as warmer-than-normal weather slashed demand for the furnace fuel.
- US Treasury notes rose on speculation a decline in 10-year yields to below two-year yields may foreshadow an economic slowdown.
- Hurricanes Katrina, Rita and Wilma may cost insurers $57.6 billion, more than double the annual record for US natural disasters, a consulting firm said.

Reuters:
- Iraq’s political leaders plan to meet their country’s interim president in his Kurdish homeland in the next few days to lay the groundwork for a new government, citing a senior government official.

CNBC:
- Mortgage-backed securities are attractive because of their high yields relative to government and corporate debt and their credit quality, Paul McCulley, a managing director at PIMCO said.

BOTTOM LINE: The Portfolio finished lower today on losses in my Medical longs, Internet longs and Semi longs. I covered some of my IWM and QQQQ shorts, thus leaving the Portfolio 75% 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 very light. Measures of investor anxiety were mostly higher into the close. The 4-basis-point decline in the 10-year Treasury note yield, besides energy declines, worried traders today. I continue to believe U.S. growth is slowing to average rates from vigorous levels before the hurricanes. This, combined with decelerating inflation readings and rising demand for U.S. assets, helped boost bonds. I do not believe bond gains are foreshadowing a meaningful slowdown in U.S. economic activity.

Stocks Sharply Lower Mid-day, Pressured by Energy Shares

Indices
S&P 500 1,258.83 -.77%
DJIA 10,800.19 -.76%
NASDAQ 2,229.91 -.87%
Russell 2000 677.68 -1.28%
DJ Wilshire 5000 12,587.37 -.83%
S&P Barra Growth 602.02 -.85%
S&P Barra Value 652.50 -.70%
Morgan Stanley Consumer 596.00 -.51%
Morgan Stanley Cyclical 788.37 -.56%
Morgan Stanley Technology 528.62 -.81%
Transports 4,219.88 -1.10%
Utilities 409.26 -.59%
Put/Call .93 +34.78%
NYSE Arms 1.55 +19.44%
Volatility(VIX) 11.50 +11.98%
ISE Sentiment 202.00 +26.25%
US Dollar 91.04 +.29%
CRB 323.87 -.75%

Futures Spot Prices
Crude Oil 57.65 -1.33%
Unleaded Gasoline 152.25 -1.81%
Natural Gas 11.01 -10.12%
Heating Oil 165.00 -3.24%
Gold 510.10 +.83%
Base Metals 153.51 +.63%
Copper 206.75 +1.60%
10-year US Treasury Yield 4.34% -.71%

Leading Sectors
Airlines +1.89%
Gold & Silver +.07%
Homebuilders +.05%

Lagging Sectors
Coal -2.16%
Energy -2.83%
Oil Service -3.20%

BOTTOM LINE: The Portfolio is lower mid-day on losses in my Internet longs, Medical longs and Semi longs. I added IWM and QQQQ shorts this morning, thus leaving the Portfolio 50% net long. The tone of the market is negative as the advance/decline line is substantially lower, most sectors are lower and volume is light. Measures of investor anxiety are mostly higher. Overall, today’s market action is negative considering the decline in energy prices, falling long-term rates and lack of normal seasonal strength. It appears to me the losses in the energy sector, which had been one of the best performing in 2005, are prompting hedge funds to take profits in most other winners. Gains by most funds are mediocre for the year and they do not want to slip into the red. I expect US stocks to trade mixed-to-higher from current levels into the close on short-covering.

Today's Headlines

Bloomberg:
- Boston Scientific plans to proceed with its $25 billion offer to buy Guidant Corp. even after the cardiac device maker said profits will sink because of product recalls.
- Hedge fund investors, frustrated by the lowest returns in three years, say they are giving more money to managers who bet on stocks and macroeconomic trends because they expect them to post the biggest gains in 2006.
- Guidant was barred by US regulators from exporting heart-rhythm devices from its principal plant in St. Paul, Minnesota, because of quality-system failures.
- Natural gas is plunging for a third day in NY, dropping almost 30% in 10 days, as warmer-than-normal weather slashed demand for the furnace fuel.

Wall Street Journal:
- Beijing’s Communist Party leadership has announced a campaign against bad manners as the city prepares to host an international throng of Olympic spectators in 2008.
- NY State AG Eliot Spitzer served subpoenas on Sony BMG Music Entertainment and Vivendi Universal’s Universal Music Group as part of an industry-wide investigation into pricing of digitally downloaded music.
- US Retail spending over the holiday shopping period rose a strong 8.7%, with the biggest increase in sales of home furnishings and consumer electronics.
- A lawsuit by as many as 1,000 employees of Cintas Corp. against unions trying to organize at the company’s plants may deter workers from supporting further organizing drive.
- GM will introduce sport-utility vehicles that consume less fuel next year, including a new version of the Chevy Tahoe, to help it reverse a decline in sales.
- Sanofi-Aventis SA investors hoping the company’s obesity drug Accomplia will become a miracle cure risk being disappointed.
- Gamco Investors’ Mario Gabelli’s involvement in more than a dozen bids for airwave licenses from the FCC have become the focus of a federal lawsuit.
- North Korea wants to end food aid from the UN and private charities to limit the international presence in the country, citing Richard Ragan, head of North Korean operations for the UN’s World Food Program.

NY Times:
- Michigan Governor Jennifer Granholm is courting Toyota Motor, which has said it may build an engine plant in the Midwest.
- Louisiana planners are seeking to move an entire string of seaside Cajun towns and villages and their 4,000 residents in Cameron Parish as much as 20 miles inland.
- Sears Holdings, Target and other US retailers are tightening store policies to discourage returns because of the extra labor they involve.

NY Post:
- NYC’s Department of Health is buying radiation-detection equipment for 33 private city hospitals to prepare for the possibility of a “dirty bomb” attack.

AP:
- US companies, which contributed millions of dollars in relief following tsunamis, hurricanes and earthquakes in 2005, found their philanthropic works gave them a competitive advantage in the marketplace.
- More than 10,000 Iraqi demonstrators backing Sunni Arab and secular Shiite politicians marched through the streets of Baghdad today to push for unity throughout the country.

AFP:
- Britain and Sweden are the only European countries that are likely to meet their Kyoto Protocol commitments on greenhouse gas emissions, citing a UK study.

BBC:
- Numerous mass graves with thousands of bodies have been discovered in Iraq since the ousting of dictator Saddam Hussein in 2003.

Manufacturing Slows in Mid-Atlantic, Outlook Improves

- The Richmond Fed Index for December fell to -2 versus estimates of 10 and a reading of 9 in November.

BOTTOM LINE: Manufacturing activity in the Central Atlantic region edged lower in December, Bloomberg reported. The shipments component of the index fell to 1 from 14. The new orders component fell to -2 from 10 and a gauge of manufacturing employment in the region fell to -6 from 0. However, measures of confidence improved as the expected shipments component rose 21 points to 50. The expected new orders component of the index rose 20 to 43. The index for expected manufacturing employment rose 11 points to 10. Finally, the planned capital expenditures component rose 6 points to 18. I continue to believe manufacturing will add to US economic growth over the intermediate-term as businesses increase spending, inventories are rebuilt and hurricane rebuilding accelerates.

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Tuesday Watch

Weekend Headlines
Bloomberg:
- US toy sales are headed for their third straight annual decline because children like 6-year-old Dawson Painter prefer electronic games.
- President Bush asked Americans to keep the families of US military men and women in mind during the Christmas holiday, saying their wartime sacrifices are protecting the country’s freedoms.
- Eastman Kodak probably generated increased holiday sales of digital cameras and printers, boosting efforts by the world’s largest photography company to shift from its traditional film business.
- Amazon.com said holiday sale worldwide set a record this year on demand for Apple’s iPod music players, video games and jewelry.
- Royal Dutch Shell Plc said it discovered oil off Brazil’s southeastern coast and wants to start producing by the end of the decade.
- The yen is falling by the most against the euro in more than two months and had the biggest loss versus the dollar in a week after reports showed Japanese household spending unexpectedly slid and unemployment increased.
- Crude oil is falling as much as 1.4% in NY on forecasts for milder weather in the US and on expectations heating fuel stockpiles, including natural gas, are adequate to meet winter demand.

NY Times:
- Goldman Sachs and Merrill Lynch are among Wall Street firms investing in online casinos and betting parlors and ignoring the government’s edict that those organizations are illegal.
- Pennsylvania lawmakers are investigating whether the political atmosphere of 18 state-run universities and colleges requires legislation to ban political bias in the classroom.
- The Israeli economy is likely to grow 5% this year, up from 4% in 2004, as its technology industries approach the peak they reached in 2000.

Washington Post:
- Immigrant entrepreneurs in the US are using small vending carts or kiosks in malls as a springboard into retailing.

Economic Daily News:
- Global shipments for flat-panel displays used in computers will see a modest slide in the first quarter of 2006, falling by a single digit from the fourth quarter, citing AU Optronics Executive VP Hui.

Kommersant:
- OPEC President Sheikh al-Sabah is visiting Moscow to ask Russia to cooperate on a planned cut in oil production and to learn more about Russia’s plans to supply China.

Weekend Recommendations
Barron's:
- Had positive comments on OSK, COP, APC and FDX.
- Had negative comments on GE and NTRI.

Goldman Sachs:
- Reiterated Outperform on EBAY.

Night Trading
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NASDAQ 100 indicated +.24%.

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- Richmond Fed Index for December is estimated to rise to 10 versus a reading of 9 in November.

BOTTOM LINE: Asian Indices are mixed, as declining energy prices are offsetting disappointing economic data from Japan. I expect US stocks to open modestly higher and build on gains later in the day. The Portfolio is 100% net long heading into the week.