DJIA Hits Another All-Time High on Plunging Energy Prices, Decelerating Inflation and More Homebuilder Optimism

Indices
S&P 500 1,399.76 +.23%
DJIA 12,305.82 +.44%
NASDAQ 2,449.06 +.26%
Russell 2000 790.75 -.15%
Wilshire 5000 14,041.90 +.16%
S&P Barra Growth 650.05 +.20%
S&P Barra Value 747.48 +.25%
Morgan Stanley Consumer 678.68 +.60%
Morgan Stanley Cyclical 875.23 +.07%
Morgan Stanley Technology 579.63 +.54%
Transports 4,881.57 +1.06%
Utilities 449.53 +.25%
Put/Call .77 -3.75%
NYSE Arms .77 -3.38%
Volatility(VIX) 10.16 -1.45%
ISE Sentiment 123.0 -15.17%
US Dollar 85.50 +.20%
CRB 304.85 -1.93%

Futures Spot Prices
Crude Oil 56.12 -4.49%
Unleaded Gasoline 152.50 -3.61%
Natural Gas 7.72 -4.89%
Heating Oil 165.76 -2.06%
Gold 618.80 -.47%
Base Metals 234.61 +2.24%
Copper 305.20 -.75%
10-year US Treasury Yield 4.65% +.77%

Leading Sectors
Gaming +1.51%
Restaurants +1.06%
Homebuilders +1.04%

Lagging Sectors
Steel -3.17%
Oil Service -3.71%
Gold & Silver -3.76%

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Afternoon Recommendations
Deutsche Bank:
- Rated (CNQR), target $19, (TLEO), target $16 Buys.

Afternoon/Evening Headlines
Bloomberg:
- The DJIA made another all-time high as energy prices plunged, inflation decelerated and a survey of homebuilder sentiment improved.
- Oil had its biggest one-day decline since August 2005 in NY, falling $2.71/bbl. to $56.05/bbl.
- Starbucks(SBUX) said fourth-quarter profit fell 5.2% on costs to open new stores and lower sales at existing stores. The shares declined 5% in after-hours trading.
- New York City’s unemployment rate fell to 4.1% in October, the lowest in US history, from 5.8% a year ago, the state’s chief economist said.
- Shifting ocean patterns may bring cooler air to the Arctic and help slow global warming, according to a report released today from the US National Oceanic & Atmospheric Administration.
- Copper fell in NY to its lowest price since June on signs that slowing US and Chinese industrial production and rising production from China’s mines may ease supply concerns.
- Hewlett-Packard(HPQ) said fourth-quarter profit jumped fourfold after it reclaimed the title of world’s largest personal-computer maker from rival Dell(DELL).

Nikkei English News:
- Sony Corp.(SNE) will ask new owners of its PlayStation 3 video-game consoles to aid Stanford University in researching drugs to treat cancer and other conditions through access to the new machine.

BOTTOM LINE: The Portfolio finished higher today on gains in my Retail longs, Semi longs, Computer longs and Commodity shorts. 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 about even, most sectors rose and volume was above average. Measures of investor anxiety were mostly lower into the close. Today's overall market action was mildly bullish. Bell Dell, a member of Sanford Bernstein's energy research team in London, wrote in a recent report that on a weighted average basis, commercial independent oil storage is now 97% full, up from 70% in 2003. Besides record speculation by investment funds, commercial hoarding has been responsible for the historic mania in energy. With storage near full, China's industrial production slowing and "peak oil" fears diminishing, recent hoarding should subside, thus alleviating the contango in the oil futures market. Dell's research note also said OPEC's spare production capacity will reach 4 million barrels per day next year and even higher in 2008. This should result in a significant decline in the "fear premium" that is still priced into oil. Despite historic capital inflows into commodities and numerous potential upside catalysts, oil has declined $20/bbl. from July highs. Energy bulls remain very complacent, in my opinion, as it is just assumed that oil can't fall meaningfully from current levels. Prices of oil or natural gas anywhere near current levels do not represent the underlying fundamentals, in my opinion. I continue to believe oil will weaken meaningfully over the intermediate-term and eventually decline to levels recently deemed unimaginable by most investors during the next significant global slowdown.

DJIA Hits Another All-Time High on Rising Homebuilder Optimism and Plunging Energy Prices

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Retail longs and Computer longs. I took more profits in my (TLT) long and added to an existing long, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is mixed, most sectors are rising and volume is above average.
The prices paid component of the Philly Fed fell again in November to 26.7.
It has plunged 60% from October 2005 highs. This gauge of inflation is just another in the slew of very benign readings of late. Today's modest rise in the 10-year yield is a result of "selling the news" and a reflection of the likelihood that economic data will show economic growth is accelerating modestly into year-end, in my opinion. This is a positive for equity investors as most are more worried about growth slowing too much rather than inflation. My TLT long is now an underweight position. I expect US stocks to trade modestly higher into the close from current levels on short-covering, performance anxiety, more economic optimism and falling energy prices.

Today's Headlines

Bloomberg:
- Crude oil is falling $2.50/bbl. to $56.26, the largest decline since August 2005, after an EIA report showed that US inventories of natural gas climbed and reports surfaced of Nigeria and Venezuela cheating on their pledged production cuts.
- House Democrats elected Steny Hoyer to the No.2 post in their caucus for the next session of Congress, handing a defeat to their own leader, Nancy Pelosi, who campaigned against him.
- Confidence among US homebuilders unexpectedly rose in November for a second month, in another sign that the slump in housing may be moderating, according to a private survey released today.

Wall Street Journal:
- Delta Air Lines plans to install air bags on its newest Boeing 777s to improve onboard safety.
- Economist Milton Friedman died today at the age of 94, citing his daughter.

CNBC:
- Clear Channel Communications(CCU) agreed to be acquired by Thomas H. Lee Partners and Bain Capital LLC for about $19 billion, or $37.60/share.

NY Times:
- Toyota Motor(TM) plans to open a $1.2 billion plant in Texas tomorrow to assemble the biggest version of its Tundra pickup.

AP:
- Target Corp.(TGT) is donating $1 million to the Salvation Army for a third year.

Financial Times:
- News Corp.’s(NWS) 20th Century Fox film unit may announce this week that it has set up a financial deal worth more than $520 million backed by Dune Capital Management, a hedge fund formerly controlled by billionaire George Soros.

Telegraaf:
- European Central Bank Governing Council member Nout Wellink said Democrats winning a majority in both houses of the US Congress for the first time since 1994 benefits Europe.

El Universal:
- Venezuela failed to meet a pledge to cut its output by 50,000 barrels a day as of Oct. 1, citing figures from OPEC. Nigeria also failed to meet its pledged cut of 120,000 bpd.

Jana:
- Libya, Africa’s second-largest oil producer, calculated its 2007 public budget on the assumption that the average price of its crude oil will be $35 a barrel, citing Prime Minister Baghdadi Mahmudi.

CPI Rises Least Since 2002, Job Market Still Healthy, Industrial Production Rebounds, Philly Fed Bounces, Prcies Paid Falls Again

- Consumer Price Index for October fell -.5% versus estimates of a -.3% decline and a -.5% fall in September.
- CPI Ex Food & Energy for October rose .1% versus estimates of a .2% increase and a .2% rise in September.
- Initial Jobless Claims for last week fell to 308K versus estimates of 311K and 310K the prior week.
- Continuing Claims remained at 2443K versus estimates of 2430K and 2443K prior
- Industrial Production for October rose .2% versus estimates of a .3% increase versus a -.6% decline in September.
- Capacity Utilization for October rose to 82.2% versus estimates of 82.0% and a reading of 82.1% in September.
- Philly Fed for November rose to 5.1 versus estimates of 5.0 and a reading of -.7 in October.

BOTTOM LINE: Consumer prices in the US fell in October for the second consecutive month, reflecting cheaper energy costs and adding to evidence that inflation pressures are easing, Bloomberg said. Drops in airline fares and the biggest fall in natural gas prices on record helped. Consumer Prices rose 1.3% year-over-year, the smallest increase since June 2002. Gasoline prices plunged 11.1% on top of a 13.5% decline the prior month. The CPI is the government’s broadest measure of the costs of goods and services. So far this year, the CPI is increasing at a 2.4% rate, well below the long-term average of 3%, versus a 5.0% gain during the first 10 months of 2005. This very good inflation reading joins the PPI, which recently matched the largest monthly decline in US history. As I said several months ago, I continue to believe inflation has peaked for this cycle and it is not a problem. Modest inflation and moderate growth provide a very good backdrop for stocks as p/e multiples expand.

The number of Americans filing first-time claims for jobless benefits fell last week, indicating the labor market is still healthy, Bloomberg said. The four-week moving-average of jobless claims rose to 313,750 from 311,750 the prior week. Average monthly payroll increases are running ahead of last year’s pace so far this year and the unemployment rate is at historically low levels. The unemployment rate for those eligible to collect benefits, which tracks the US unemployment rate, remained at 1.9% last week. I continue to believe the labor market will remain healthy over the intermediate-term without generating sustained substantial unit labor cost increases.

Industrial Production in the US rose last month, boosted by a rebound in utilities and gains at computer and electronics manufacturers, Bloomberg said. Unseasonably cool temperatures raised demand for heating and computer manufacturers gained from increasing orders as businesses update equipment. Manufacturing production, which accounts for four-fifths of output, declined .2% for the second month in a row due to a 3.9% slump in auto production. Utility production jumped 4.1% as US temperatures in October were .9 degrees cooler than normal during October. Production of business equipment rose .7% versus a .2% fall in Sept, spurred by a 1.2% gain in computer production and a 2.5% increase in semiconductors. I expect industrial production to begin improving next year as auto production cutbacks subside.

Manufacturing in the Philadelphia region expanded for the first time in three months as costs eased and shipments rose, Bloomberg said. The report shows manufacturing, which accounts for about 12% of the US economy, is holding up despite the housing slowdown and auto production cutbacks. The price paid component of the index fell to 26.7 versus 32 the prior month. The prices paid component has plunged 60.0% from October 2005 highs. The unfilled orders component of the index rose to -3.9 from -11.1 the prior month. The new orders component fell to -3.7 from 13.4 the prior month. The expectations component declined to 12.4 from 16.7 prior. I expect manufacturing to strengthen next year as auto production cutbacks subside and companies restock inventories as confidence improves with respect to the sustainability of the current expansion.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- KBR Inc., the largest US military contractor in Iraq, raised $473.3 million in an IPO that began the process of extricating the firm from its parent.
- Dell Inc.(DELL) will delay reporting of its fiscal third-quarter results, originally scheduled for tomorrow, until the end of the month. The change reflects the “complexity” of probes, both internally and by the SEC into possible accounting errors.
- An index of UK house prices rose to the highest level in four years in October, evidence that higher interest rates have yet to cool Britain’s $6.8 trillion property market, the Royal Institute of Chartered Surveys reported.
- The Bank of Japan kept the lowest interest rates among major economies on hold as it waits for more evidence that consumer spending will recover.
- China’s spending on factories, real estate and other fixed assets grew at a slower pace in October after the government curbed lending and project approvals.
- Copper in Shanghai fell for the fourth straight day amid speculation that demand from China and the US is waning.

Financial Times:
- Cibus Genetics, a San Diego-based agriculture and chemicals company, will say it has developed technology that may deliver the benefits of genetic modification without inserting foreign genes into a crop.
- Goldcorp Inc., Canada’s second-largest gold producer, may hedge more of its copper production to protect the company against a price decline.

Shanghai Securities News:
- Royal Dutch Shell Plc will hasten oil shale development in northeastern China’s Jilin province. Shell plans to drill 40 to 70 wells in the next two years and may invest further on as many as three refining facilities that can produce 5 to 15 million metric tons of oil products a year each.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (LIZ), target $55.
- Reiterated Buy on (DELL), target $27.

Night Trading
Asian Indices are -.25% to +.50% on average.
S&P 500 indicated -.14%.
NASDAQ 100 indicated -.08%.

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Earnings of Note
Company/EPS Estimate
- (BKS)/-.04
- (BIG)/-.03
- (PLCE)/1.20
- (CLE)/.38
- (FL)/.41
- (GPS)/.22
- (HP)/.74
- (HPQ)/.64
- (HIBB)/.28
- (INTU)/-.12
- (JLG)/.33
- (KLIC)/.09
- (MRVL)/.15
- (SHLD)/.98
- (SSI)/.01
- (SBUX)/.17
- (WSM)/.24
- (ZLC)/-.46
- (ZOLL)/.37

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Consumer Price Index for October is estimated to fall -.3% versus a -.5% decline in September.
- The CPI Ex Food & Energy for October is estimated to rise .2% versus a .2% gain in September.
- Initial Jobless Claims for last week are estimated to rise to 311,000 versus 308,000 the prior week.
- Continuing Claims are estimated to fall to 2430K versus 2448K prior.

9:15 am EST
- Industrial Production for October is estimated to rise .3% versus a .6% decline in September.
- Capacity Utilization for October is estimated to rise to 82.0% versus 81.9% in September.

12:00 pm EST
- The Philly Fed for November is estimated to rise to 5.0 versus a reading of -.7 in October.

1:00 pm EST
- The NAHB Housing Market Index for November is estimated to fall to 30 versus a reading of 31 in October.

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