Thursday Watch

Late-Night Headlines
Bloomberg:
- Australia’s retail sales gained less than expected in September and the trade deficit widened, signaling growth is slowing in the Asia-Pacific region’s fifth largest economy.
- China’s central bank may wait until next year to raise interest rates after lending curbs slowed investment in the country.
- Copper fell in Shanghai as a slowdown in US manufacturing and rising global inventories increased speculation of declining demand for the metal.
- World crude steelmaking overcapacity could reach 300 million tones within 3 years, with much of this in China, Sigurd Mareels, director of McKinsey & Co., told delegates at the Latin American Iron and Steel Institute conference on Tuesday.
- Chalco, China’s dominant producer of alumina, is rumored to be planning another 15% cut to its domestic alumina list price, a move that will undercut current prices and put even more pressure on an already weak market.
- Iran will maintain crude oil shipments to Asia, its biggest export market, after cutting supplies to northwest Europe and Mediterranean markets.
- Toyota Motor(TM) led Japanese and South Korean carmakers to higher US sales again last month, while a surge for General Motors(GM) and Ford Motor(F) cut Asian brands’ share of the world’s largest auto market.

Financial Times:
- Smith & Nephew Plc, Europe’s largest maker of orthopedic products, is in merger talks with its US rival Biomet Inc.(BMET).
- Microsoft(MSFT) may reconsider its business in China because of the Chinese government’s persecution of people who operate blog sites, citing a Microsoft lawyer.

London-based Times:
- Google’s(GOOG) UK advertising revenue will overtake that of Channel Four Television, Britain’s second largest commercial television company.

Late Buy/Sell Recommendations
Morgan Stanley:
- September’s total television $ growth was the strongest we’ve seen since December 2001. September year-over-year percent flat panel US retail sales growth was 74%, up from 70% in August. Our 3Q forecasts for (BBY) and (CC) assume flat panel market growth of 50%. A widening of the gap between wholesale and retail TV ASPs suggest healthy margins.

Night Trading
Asian Indices are -.50% to +.50% on average.
S&P 500 indicated -.01%.
NASDAQ 100 indicated -.04%.

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Earnings of Note
Company/EPS Estimate
- (AAP)/.53
- (ATK)/1.17
- (APCC)/.15
- (ABC)/.56
- (AQNT)/.16
- (BDX)/.84
- (CA)/.20
- (CBS/A)/.40
- (CEPH)/1.16
- (CTSH)/.38
- (CSC)/.71
- (ERTS)/.02
- (ENR)/.76
- (FAF)/1.14
- (HTCH)/-.06
- (ICE)/.72
- (IP)/.43
- (IRF)/.49
- (JDSUD)/.00
- (MDR)/.59
- (MGM)/.41
- (NBIX)/-.91
- (OSG)/2.65
- (QCOM)/.41
- (QSII)/.27
- (PWR)/.17
- (RGLD)/.22
- (SINA)/.18
- (RIG)/.71
- (UVN)/.28
- (WDC)/.41
- (WFMI)/.29
- (WMB)/.25

Upcoming Splits
- (CACB) 5-for-4

Economic Releases
8:30 am EST
- Preliminary 3Q Non-farm Productivity is estimated to rise 1.0% versus a 1.6% increase in 2Q.
- Preliminary 3Q Unit Labor Costs are estimated to rise 3.4% versus a 4.9% increase in 2Q.
- Initial Jobless Claims for last week are estimated to rise to 310K versus 308K the prior week.
- Continuing Claims are estimated to fall to 2441K versus 2449K prior.

10:00 am EST
- Factory Orders for September are estimated to rise 4.0% versus unch. in August.

BOTTOM LINE: Asian indices are mixed as gains in technology shares are offsetting losses in automaker shares in the region. I expect US equities to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.

Stocks Finish Lower on US Political Worries and Profit-taking

Indices
S&P 500 1,367.81 -.74%
DJIA 12,031.42 -.41%
NASDAQ 2,334.35 -1.37%
Russell 2000 752.15 -1.92%
Wilshire 5000 13,673.20 -.86%
S&P Barra Growth 634.64 -.73%
S&P Barra Value 731.06 -.74%
Morgan Stanley Consumer 666.96 -.57%
Morgan Stanley Cyclical 847.85 -.83%
Morgan Stanley Technology 546.02 -1.26%
Transports 4,674.75 -1.10%
Utilities 452.65 +.97%
Put/Call .90 -8.16%
NYSE Arms 1.70 +41.17%
Volatility(VIX) 11.51 +3.69%
ISE Sentiment 122.00 +6.09%
US Dollar 85.45 +.15%
CRB 306.35 +.16%

Futures Spot Prices
Crude Oil 58.55 -.31%
Unleaded Gasoline 146.15 +2.40%
Natural Gas 7.75 +2.87%
Heating Oil 164.75 -1.17%
Gold 620.60 +.21%
Base Metals 244.97 -1.09%
Copper 326.30 +.68%
10-year US Treasury Yield 4.56% -.86%

Leading Sectors
Utilities +.97%
Defense -.09%
Tobacco -.10%

Lagging Sectors
Coal -2.24%
I-Banks -2.34%
Alternative Energy -2.44%

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In Play

Afternoon Recommendations
Bank of America:
- Rated (MYGN) Buy, target $40.
- Rated (NUVO) Buy, target $26.
- Rated (ARRY) Buy, target $13.
- Rated (KERX) Buy, target $26.

Afternoon/Evening Headlines
Bloomberg:
- US Treasuries gained, driving 10-year notes to their longest rally since 2004, after the Prices Paid component of the ISM Manufacturing Index plunged.
- Morgan Stanley(MS) said it bought a 19% stake in London-based Lansdowne Partners LP, accelerating a push into hedge funds.
- Toyota Motor(TM), the world’s top seller of gasoline-electric autos, may turn its Prius car into a line of vehicles as the company tries to triple annual US sales of hybrids.
- Tyco Intl.(TYC) said its telecommunications unit won a contract to build an undersea fiber-optic system for BP America.
- The President of Newmont Mining(NEM) said US inflation has peaked and that the Fed will cut interest rates next year.

Wall Street Journal:
- Tribune(TRB) may sell off its parts after receiving low bids for the whole company.

Fortune:
- Yahoo!(YHOO) is considering buying Time Warner’s(TWX) AOL unit.

BOTTOM LINE: The Portfolio finished lower today on losses in my Semi longs, Biotech longs and Medical longs. I added to my (IWM) and (QQQQ) hedges and to my short (BHP) position in the final hour, 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 about average. Measures of investor anxiety were mostly higher into the close. Today's overall market action was bearish. I suspect today's weakness is mainly the result of significant political uncertainty and profit-taking after one of the best Aug/Sept/Oct market runs in U.S. history. On the positive side, today's volume was only around average levels and my intraday gauges of investor angst finished at elevated levels. The U.S. dollar finished slightly higher despite today's economic data. The 10-year yield finished near session lows, down another 4 basis points to 4.55%, as inflation concerns continue to subside rapidly. I expect stocks to trade mixed-to-lower through week's end. However, I expect another meaningful push higher in the major averages after the election through year-end.

Stocks Lower into Final Hour on Profit-taking and Political Uncertainty

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Semi longs, Retail longs and Internet longs. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is substantially lower, almost every sector is declining and volume is about average. I think most of today’s decline is related to the potential for significant political changes after the mid-term election next week and profit-taking after one of the best Aug/Sept/Oct market runs in US history. The Master Card data today and recent retail sales reports show consumer spending, which accounts for two-thirds of the growth in the US economy, remains strong. Yesterday's October consumer confidence number came in at 105.4, slightly below September's upwardly revised reading of 105.9. This gauge is still being skewed by depressed sentiment in the Northeastern part of the country. Here is a breakdown of consumer confidence by region:

• Northeast Central -- 78.10
• New England -- 86.60
• Mid-Atlantic -- 97.10
• Northwest Central -- 105.90
• Southeast Central -- 108.20
• South Atlantic -- 118.70
• Pacific -- 124.10
• Mountain -- 130.70
• Southwest Central -- 132.20

As I have said many times before, there are more market participants currently than at any other time in U.S. history that perceive they personally benefit both politically and financially from a declining or stagnant U.S. stock market. I still believe the fact that most financial media and investment funds are located in the Northeast is resulting in the overwhelmingly negative commentary that is so pervasive today despite DJIA record highs. I expect US stocks to trade mixed-to-lower into the close from current levels on political worries and profit-taking.

Today's Headlines

Bloomberg:
- The world’s biggest automakers posted US sales gains in October. General Motors(GM) recorded a 17% increase for its second monthly gain this year. US rival Ford’s(F) 8.1% advance was its second straight advance.
- Democratic Senator John Kerry of Massachusetts canceled campaign appearances with Democratic congressional candidates after making remarks about the intellect of the troops in Iraq spurred outrage among Republicans.
- Shares of Canadian income trusts plunged after the government said it plans to close a loophole that allows the securities to avoid taxes, threatening to shut down the fastest-growing segment on the Toronto Stock Exchange.
- Brazil, the world’s biggest ethanol exporter, boosted shipments of the alternative fuel 91% last month on surging demand form the US.
- Copper prices on the London Metal Exchange showed for the first time in three years that supply has caught up with demand after stockpiles surged to the highest level in more than two years.

Wall Street Journal:
- RiskMetrics Group is buying Institutional Shareholder Services for about $553 million in cash and stock.
- CBS Corp.(CBS), NBC Universal Television Group and ABC television are all using rookie news anchors to present results of US mid-term elections Tuesday, adding to pressure on how their organizations match up against rivals.

NY Times:
- CVS Corp.(CVS) is in advanced talks to buy drug benefits manger Caremark Rx(CMX) for more than $21 billion.
- Citgo Petroleum Corp., the US refining unit of Venezuela’s state oil company, is trying to bolster its image after Venezuelan President Hugo Chavez compared President Bush to the devil during a speech at the UN.

Financial Times:
- Fortress Investment Group LLC, a NY-based hedge fund, plans to file for an IPO next week that would make it the first publicly traded US hedge fund.

Moscow Times:
- Russia and the US may agree on Russia’s accession to the World Trade Organization within days, citing Economy Minister German Gref.

AP:
- Lego A/S said staff cuts have left it unable to keep up with demand during the Christmas season and its most popular products have already sold out.

China Gold Assoc.:
- China produced 150.1 metric tons of gold in the first eight months of this year, up 11% from a year ago.

Construction Spending Continues to Slow, ISM Manufacturing Decelerates, Inflation Gauge Plunges, Pending Home Sales Fall Slightly

- Construction Spending for September fell .3% versus estimates of unch. and a downwardly revised unch. in August.
- ISM Manufacturing for October fell to 51.2 versus estimates of 53.0 and a reading of 52.9 in September.
- ISM Prices Paid for October fell to 47.0 versus estimates of 58.0 and a reading of 61.0 in September.
- Pending Home Sales for September fell 1.1% versus estimates of a .9% fall and an upwardly revised 4.5% rise in August.

BOTTOM LINE: Construction spending in the US fell unexpectedly in September as home building slowed further, Bloomberg reported. Private non-residential construction rose .1% and is up 19.2% form year ago levels. I expect construction to continue to moderate over the intermediate-term as the housing market works off inventories and commercial building slows to more average rates.

Manufacturing in the US slowed last month on decelerating auto production, Bloomberg reported. The Prices Paid Component dropped to the lowest level in four years. The Prices Paid Index, an indication of inflation in the manufacturing sector, has plunged 46.6% since April 2004. The price of a barrel of crude oil has dropped almost $22 since July as the mania for the commodity continues to unwind. A report from ADP Employer Services showed today that US companies added 128,000 jobs in October, enough to keep the unemployment rate at a historically low 4.6%. The new orders component of the index fell to 52.1 from 54.2 in September. The employment component of the index rose to 50.8 in October versus 49.4 in September. I expect manufacturing to rebound next quarter as auto production cutbacks subside.

Contracts to buy previously owned homes in the US declined in September, Bloomberg reported. Pending re-sales fell 5.9% in the Northeast, 1.3% in the South and .4% in the West. They rose 2.1% in the Midwest. The median home price is still over 50% higher over the last several years. I still believe housing is in the process of stabilizing at relatively high levels.

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