Friday Watch

Late-Night Headlines
Bloomberg:
- Coking coal prices may slump 17% next year on expectations of increased output of the key steelmaking ingredient and little or no growth in steel demand, according to UBS AG.

Financial Times:
- VeraSun Energy(VSE), the US’s second-biggest producer of ethanol, will today disclose details of a new technology that enables the production of both ethanol and bio-diesel from corn.

Late Buy/Sell Recommendations
Business Week:
- Atheros Communications(ATHR) and Anheuser-Busch(BUD) are defensive stocks that protect investors from economic downturns, Dawn Bennett of Bennett Group Financial Services said.
- Carter’s(CRI), a children’s clothing manufacturer, could see its shares rise 90% by 2008, citing Robert Olstein, president of investment firm Olstein & Assoc.

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

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Earnings of Note
Company/EPS Estimate
- (DUK)/.56
- (MHS)/.69
- (OMG)/2.01
- (THQI)/.03

Upcoming Splits
- (CACB) 5-for-4

Economic Releases
8:30 am EST
- The Change in Non-farm Payrolls for October is estimated at 123K versus 51K in September.
- The Change in Manufacturing Payrolls for October is estimated at -5K versus -19K in September.
- The Unemployment Rate for October is estimated at 4.46% versus 4.6% in September.
- Average Hourly Earnings for October are estimated to rise .3% versus a .2% gain in September.

10:00 am EST
- The ISM Non-Manufacturing Index for October is estimated to rise to 54.5 versus a reading of 52.9 in September.

BOTTOM LINE: Asian indices are mostly higher, boosted by financial shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the day.

Stocks Finish Slightly Lower on Political Worries and Growth Concerns

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BOTTOM LINE: The Portfolio finished about even today as losses in my Retails longs offset gains in my Commodity shorts. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was modestly negative today as the advance/decline line finished lower, sector performance was mixed and volume was about average. Measures of investor anxiety were mostly lower into the close. Today's overall market action was neutral. For those interested, there will be a webcast tonight (8 p.m. EST) at the Shawnee Mission Medical Center, with urologist David Emmott, M.D., performing a robot-assisted radical prostatectomy using Intuitive Surgical's (ISRG) da Vinci Surgical System. Yesterday, Chindex International announced it had completed the first mainland China sale of a da Vinci Surgical System. The People's Liberation Army 301 General Hospital in Beijing made the purchase. I still believe ISRG is providing longer-term investors a very attractive entry point and remain long the stock.

Stocks Slightly Lower into Final Hour on Political Uncertainty and Growth Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Retail longs. I covered some of my (IWM) and (QQQQ) hedges today, thus leaving the Portfolio 75% net long. The tone of the market is slightly negative as the advance/decline line is lower, sector performance was mixed and volume is above average. I disagree with those who think a strong employment report tomorrow will hurt stocks. I think investors are now much more concerned with slowing growth, rather than rising inflation. I suspect the change in non-farm payrolls will come in around estimates of 123K. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering and falling energy prices.

Today's Headlines

Bloomberg:
- Federal Reserve Bank of Dallas President Fisher said inflation may have peaked and is now receding.
- Iran, after international pressure to scrap its nuclear program, announced the test-firing of a Shahab-3 ballistic missile capable of traveling 2,000 kilometers, a range that puts Israel’s major cities within reach.
- Crude oil is falling again amid forecasts for mild weather and calls by Kuwait for OPEC to pause before cutting production again.

Wall Street Journal:
- Microsoft’s(MSFT) delay in introducing its Windows Vista operating system will spur a Christmas-shopping price war in computers.
- Democrats still haven’t figured out how to get US troops out of Iraq without appearing to be soft on terrorism. Senator John Kerry’s facetious remark about young Americans winding up in Iraq if they can’t make the grade academically at home has added to unease among Democrats over a possible backlash.
- Dell Inc.(DELL) has started selling laptop computers using chips from Advanced Micro Devices(AMD).

NY Times:
- A cooperative of Missouri farmers that owns part of an ethanol plant is rejecting offers that would yield 10 times some members’ investment. Mid-Missouri Energy’s facility, which cost $60 million to build and opened in February 12005, has received bids for as much as $275 million. The plant, which converts corn into ethanol, has 729 farmer-owners.
- NYC will get $2.7 billion more in tax revenue this year than it expected, cutting next year’s budget deficit by 87%. The increased revenue is coming from commercial property sales and personal and business income.

Washington Post:
- The alleged terrorists arrested in London in August planned to blow up planes over US cities, not over the Atlantic Ocean as previously thought, citing the chief of the FBI’s New York office.

Financial Times:
- Morgan Stanley’s(MS) decision to buy a 19% stake in a London hedge fund, Lansdowne Partners LP, shows how investment banks are starting to view hedge-fund investments as a regular source of income.

Guardian:
- Brazil will build plants in Nigeria to produce ethanol form sugar cane and cassava.

Le Monde:
- France’s support for imposing sanctions on Iran may be softening because of concern that tough measures could endanger its troops in Lebanon.

Productivity Slows, Unit Labor Costs Decelerate, Jobless Claims Rise Slightly, Continuing Claims Fall, Factory Orders Rebound

- Preliminary 3Q Non-farm Productivity was unch. versus estimates of a 1.0% rise and a 1.2% gain in 2Q.
- Preliminary 3Q Unit Labor Costs rose 3.8% versus estimates of a 3.4% increase and a 5.4% gain in 2Q.
- Initial Jobless Claims for last week rose to 327K versus estimates of 310K and 309K the prior week.
- Continuing Claims fell to 2415K versus estimates of 2441K and 2442K prior.
- Factory Orders for September rose 2.1% versus estimates of a 4.0% increase and a .3% decline in August.

BOTTOM LINE: US labor costs rose less in the 3rd quarter and productivity slowed, Bloomberg reported. Among manufacturers, productivity rose at a 5.9% pace versus a 2.7% rise in 2Q. Tomorrow’s jobs report is expected to show that companies added 123,000 jobs last month and the unemployment rate stayed at a historically low 4.6%. I expect Unit Labor costs to continue to decelerate over the intermediate-term with productivity rebounding.

The number of Americans filing first-time claims for unemployment benefits rose slightly last week from low levels, Bloomberg reported. The four-week moving-average is still low at 311,250. A separate report from Challenger, Gray & Christmas today showed that companies plan to fire 15% less people this year compared with the same month last year. As well, continuing claims fell to the lowest level since June. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate fell to 1.8%, a new cycle low, from 1.9% the prior week. I expect the job market to remain healthy over the intermediate-term as inflation continues to decelerate, energy prices fall further, companies gain confidence in the sustainability of the current expansion, business spending accelerates, auto production cutbacks subside, housing stabilizes at relatively high levels and interest rates remain low.

Orders placed with US manufacturers rose less than forecast in September, held back by falling oil prices, Bloomberg said. Durable goods orders rose a brisk 8.3%, suggesting that companies are still investing in machinery to improve productivity. Auto bookings fell 6.3% versus a 3.7% rise in August. Non-durable orders, which include oil, fell 4.6%. Orders for capital goods excluding aircraft and defense, a gauge of future business investment, rose 2%, the biggest gain since March. The inventory-to-shipments ratio rose to 1.22 months versus 1.17 months the prior month. I expect factory orders to rebound over the coming months as auto production cutbacks subside and businesses continue spending.

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