Wednesday Watch

Late-Night Headlines
Bloomberg:
- Democrats are on the verge of taking control of the US House of Representatives for the first time in 12 years, while the US Senate is still too close to call with a recount likely in Virginia.
- Microsoft Corp.(MSFT) will pay $442 million to Novell(NOVL) in a technology accord signed last week to make their rival server software work together.
- The prices of London’s most-expensive homes are rising at the fastest pace in 18 years as bankers, traders and hedge fund managers anticipate record bonuses this year, real estate adviser Knight Frank LLC said.
- China will complete a highway across the world’s biggest sandy desert, near the ancient Silk Road, six months before schedule to tap oil fields in the west of the country and reduce reliance on imports.
- The US and its European allies differ so greatly from China and Russia over how to prevent Iran from developing nuclear weapons that a compromise on UN action may be impossible, China’s ambassador said.

Financial Times:
- Microsoft Corp.(MSFT) may offer some of its Office desktop software tools over the Internet, citing Bill Gates.

London-based Times:
- Ousted Iraqi dictator Saddam Hussein, convicted of crimes against humanity, could be executed by the end of this year, citing Iraqi Prime Minister Nuri al-Maliki.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (MGA), target $84.
- Downgraded (OSIP) to Sell, target $28.

Night Trading
Asian Indices are -.75% to unch. on average.
S&P 500 indicated -.22%.
NASDAQ 100 indicated -.17%.

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Earnings of Note
Company/EPS Estimate
- (UHAL)/2.95
- (BRL)/.74
- (BMC)/.32
- (CELL)/.18
- (CVC)/-.15
- (CSCO)/.29
- (CTRP)/.24
- (DYN)/.09
- (FD)/.25
- (FWLT)/.49
- (IPG)/-.14
- (LAMR)/.17
- (NWS/A)/.20
- (PCG)/.67
- (RL)/1.06
- (PCLN)/.67
- (SIRI)/-.14
- (BID)/-.33

Upcoming Splits
- None of note

Economic Releases
10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil build of 750,000 barrels versus a 1,910,000 barrel increase the prior week. Gasoline inventories are expected to remain unchanged versus a 2,799,000 barrel decline the prior week. Distillate supplies are estimated to fall 800,000 barrels versus a 2,723,000 barrel decline the prior week. Finally, refinery utilization is expected to increase .5% versus a 2.72% rise the prior week.

BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.

Dow Jones Industrial Average Makes Another All-Time High on Falling Energy Prices and Lower Long-term Interest Rates

Indices
S&P 500 1,382.84 +.22%
DJIA 12,156.77 +.42%
NASDAQ 2,375.88 +.42%
Russell 2000 764.39 +.17%
Wilshire 5000 13,835.35 +.20%
S&P Barra Growth 642.48 +.23%
S&P Barra Value 738.13 +.21%
Morgan Stanley Consumer 674.86 +.47%
Morgan Stanley Cyclical 854.68 -.05%
Morgan Stanley Technology 556.69 +.32%
Transports 4,718.71 +.51%
Utilities 442.61 -.17%
Put/Call .76 +1.33%
NYSE Arms 1.11 +77.16%
Volatility(VIX) 11.09 -.63%
ISE Sentiment 172.0 +6.17%
US Dollar 85.41 -.40%
CRB 311.25 -.15%

Futures Spot Prices
Crude Oil 59.07 -1.58%
Unleaded Gasoline 152.45 -.29%
Natural Gas 7.75 +3.52%
Heating Oil 168.30 -2.06%
Gold 626.50 -.19%
Base Metals 248.82 +1.67%
Copper 335.0 -.46%
10-year US Treasury Yield 4.66% -.76%

Leading Sectors
Semis +1.91%
Airlines +1.57%
Networking +1.17%

Lagging Sectors
Energy -.92%
REITs -1.02%
Coal -2.05%

Evening Review
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Afternoon Recommendations
Bank of America:
- Rated (RCL) Buy, target $49.
- Rated (CCL) Buy, target $54.
- Rated (ATVI) Buy, target $19.
- Rated (THQI) Buy, target $36.

Afternoon/Evening Headlines
Bloomberg:
- The DJIA made another all-time high today and is 13% higher for the year.
- Crude oil fell more than $1/bbl. to $58.93/bbl. on speculation that US inventories rose and doubts that OPEC will make promised output cuts.
- Hedge funds globally returned an average of 1.98% in October as manager failed to keep pace with gains by the S&P 500 and other market benchmarks, according to data compiled by Hedge Fund Research.
- National Semi(NSM) said second-quarter revenue will decline more than previously thought. The stock fell .25 cents in after-hours trading.
- Consumer borrowing in the US unexpectedly declined for the first time in six months in September as Americans took out fewer car loans and spent less at the gasoline pump.
- Saudi Aramco, the world’s largest state-owned oil company, expects in coming months to finish hiring all the rigs it needs to explore for oil and natural gas for years.

Wall Street Journal:
- Dean Baquet, editor of the LA Times, will leave under pressure from newspaper owner Tribune(TRB).

Die Welt:
- German Chancellor Angela Merkel’s panel of economic advisers, known as the Five Wise Men, expect the economy to grow 1.8% next year after expanding 2.4% in 2006.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Retail longs, Semi longs and Telecom longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was modestly positive today as the advance/decline line finished slightly higher, most sectors gained and volume was above average. Measures of investor anxiety were mostly higher into the close. Today's overall market action was bullish. The DJIA made another all-time high. The market's ability to build on yesterday's sharp gains into still significant election uncertainty was a positive. The 10-year treasury finished off session highs, but the yield was still 3 basis points lower on the day. Technology and Consumer stocks outperformed throughout the day. I expect stocks to build on this week's gains towards week's end after a brief pause.

Dow Jones Industrial Average Makes Another All-Time High as Energy Prices Fall, Election Uncertainty Winds Down and Long-term Rates Decline

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Telecom longs and Retail longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is heavy. The Johnson Redbook same-store sales index rose 3.4% year-over-year this week vs. a 3.4% rise the prior week. The long-term average is a gain of about 2.9%. There is still no evidence, in my opinion, that a meaningful slowdown in consumer spending is underway, even as this remains a focal point for the many bears. Housing sales and net home equity extractions have been falling substantially for over a year. The Case-Shiller housing futures are still projecting about a 5% decline in the average home price over the next seven months. Considering that the median house has appreciated over 50% during the last few years, with record high U.S. home ownership, this would be considered a "soft landing." Home values are more important than stock prices to the average American. However, the median home has barely declined in value after a record run-up, as the S&P 500 has risen 15.4% over the last year. Americans' median net worth is still at or near all-time high levels. I continue to believe the overall negative effects of housing on the U.S. economy are currently being exaggerated by the bears. Recently, Alan Greenspan and several Fed members have made similar statements. I still expect holiday shopping sales to exceed estimates. I continue to believe a healthy labor market, falling energy prices, relatively low long-term interest rates, decelerating inflation, a rising stock market and less irrational pessimism will keep boosting consumer spending over the intermediate term as housing stabilizes at relatively high levels. The Morgan Stanley Retail Index (MVRX) has soared 20.2% in about 15 weeks vs. a 12.2% gain in the S&P 500 over the same timeframe. I still expect continued out-performance and another surge by retail stocks into year-end. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, performance anxiety, declining interest rates and lower energy prices.

Today's Headlines

Bloomberg:
- The Dow Jones Industrial Average is making another all-time high today as interest rates fall and election uncertainty winds down.
- YouTube Inc., the popular online video Web site that is being bought by Google(GOOG), was named best invention of the year by Time magazine.
- FedEx(FDX) scrapped its order for the troubled Airbus A380 jumbo jet and said it would purchase 15 Boeing(BA) 777 jets instead.
- US Treasuries are rising the most in a week on expectations international investors will add to their holdings at auctions this week.
- One of Britain’s top al-Qaeda terrorists will serve at least 40 years in prison for plotting to kill thousands of people through a series of attacks in the US and the UK.
- Baldor Electric, a maker of electric motors and drives, agreed to buy Rockwell Automation’s power systems business for $1.8 billion to expand into transmission products and larger motors.
- Energy consumers, including the US, European nations and China, must encourage alternative energy to avoid excessive costs, environmental damage and supply disruptions in coming decades, the International Energy Agency said.
- Oil prices at current levels are damaging world economic growth and a moderate price would be one that is “significantly” lower than $60 a barrel, the head of the IEA said.
- Crude oil is falling slightly on speculation that US inventories rose last week and doubts that OPEC will make promised output cuts.
- Saudi Aramco, the world’s largest state-owned oil company, plans to spend $80 billion over 5 years to increase crude production, company VP Al-Falih said.
- Corn and soybean prices in Chicago may fall on speculation farmers will increase sales as the US harvest nears completion and supplies in storage climb.
- Marathon Oil(MRO), the fourth largest US energy company, said it will go through with a $3.2 billion project that will expand its Garyville, Louisiana, refinery’s processing capacity by 73%.

Wall Street Journal:
- ABC, CBS, NBC, CNN, Fox News and the AP will tighten control over exit poll findings to prevent confusion that caused complaints about accuracy after the 2004 elections. Results were leaked two years ago from early polls that were posted by bloggers inaccurately called some states for Senator John Kerry, inaccurately suggesting that he would defeat President Bush.
- Verizon Communications(VZ) is negotiating with YouTube about bringing the Internet site’s videos to mobile phones and televisions.
- Expedia(EXPE) is offering customers loyalty points collected by Citigroup(C) credit-card holders to encourage people to make more bookings.
- The Humane Society, a group 10 million-strong in the US, is working to ensure candidates who support its animal-welfare agenda are elected to Congress this year. The group has spent $3.4 million on congressional elections and promoting initiatives that ban dove hunting in Michigan and determine the size of pigpens in Arizona.

NY Times:
- New York City is considering a plan that would allow people to change their genders on birth certificates even if they hadn’t had sex-change operations. Under the plan, which is likely to be passed by the city’s Board of Health, people born in New York will be able to make the change if they have affidavits from doctors and mental-health professionals that explain whey they should be considered members of the other sex.
- Comcast(CMCSA) has agreed to carry News Corp.’s(NWS) planned business channel, which would be spun off from the Fox News Channel. News Corp. Chairman Rupert Murdoch indicated the channel would “definitely” begin in 2007.

NY Post:
- Federated Department Stores(FD) plans to give division presidents more freedom over holiday promotions to help increase sales.

NY Daily News:
- Clorox’s(CL) Glad product line will post ads on 2,200 sanitation trucks to promote cleanliness in NYC and discourage littering.

AP:
- Syria is ready to resume peace talks with Israel, citing remarks by Syrian Foreign Minister Walid al-Moallem.
- Southeast Asian nations have reached a preliminary agreement to strengthen the fight against terrorism, citing diplomats.

Washington Post:
- Gannett Co.(GCI), the largest US newspaper chain, is increasingly trying to involve readers in news-gathering.

Xinhua News:
- China discovered a coal mine with estimated reserves of 6.4 billion tons in the northern Inner Mongolia Autonomous Region.

Economic Releases

- None of note

Links of Interest

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