Today's Headlines

Bloomberg:
- The SEC plans to have a database in place by next year that will help it crack down on hedge fund insider trading, a senior official said.
- Toll Brothers(TOL), the largest US builder of luxury homes, said the housing market may have reached bottom.
- New York City’s Board of Healthy today approved the first US ban by a major city on trans fat in cooking oils, requiring the city’s 24,000 food establishments to eliminate the substance.
- MySpace.com is creating technology to help block convicted sex offenders from using the site.
- Sales at US retailers rose 3.1% this past week, the largest increase since October, as consumer shopped for holiday gifts, a weekly survey by the ICSC said.
- A new weekly report by the CFTC will show aggregate futures and options positions in 12 agricultural commodities beginning in January.
- Microsoft(MSFT) may exceed its forecast to sell 10 million Xbox video-game consoles by the end of the year.
- Natural gas fell to a three-week low in NY as forecasters predicted mild weather and speculators pared their bets amid record inventories.

Wall Street Journal:
- Walt Disney(DIS) agreed yesterday to buy NASN Ltd., a London-based cable company that broadcasts sports including NFL, MLB and NHL games in Europe.
- Royal Philips Electronics NV, the world’s biggest maker of lighting, is trying to convince people to buy its energy-efficient bulbs, with television ads in Europe and China and pitches aimed at building designers.
- People in the US are buying more advanced digital cameras, creating a bonanza for Nikon Corp., Eastman Kodak(EK), Sony Corp.(SNE), Olympus Corp. and other manufacturers.
- APL Ltd. has started using cleaner-burning, low-sulfur diesel fuel for its ships in California ports and plans to test engine technologies to cut pollution further.
- Amway Corp. and Mary Kay Inc. have been licensed to sell their products directly to Chinese customers.
- The US government is providing older Americans with a new tool to help them figure out when they will reach a gap in their federally subsidized prescription-drug coverage.

NY Times:
- The Israeli Army, accused of war crimes in Lebanon, has declassified photographs and videos to support its assertion that Hezbollah fired from, and took cover in, civilian neighborhoods.
- Democrats including Senator Edward Kennedy and groups such as the National Partnership for Women and Families are pushing a bill that would give American workers paid sick days. Republicans worry the bill would increase business costs, thus increasing unemployment.
- The economic benefits of the US auto industry are shifting from north to south as Ford Motor(F) and General Motors(GM) close factories near Detroit and Toyota Motor(TM) invests in Kentucky. The number of automotive-related manufacturing jobs in Kentucky have soared 152% over the last 20 years.

Washington Post:
- A “virtual” fence along the US-Mexico border will be completed by 2011 at a cost of $7.6 billion, citing a report by the Dept. of Homeland Security.

Angola Press Agency:
- Angola will increase oil production to 2.6 million barrels a day by 2011, 62% higher than current levels, following discoveries of new fields in deep and ultra-deep waters, citing a World Bank report.

Unit Labor Costs Decelerate, Factory Orders Fall, ISM Non-Manufacturing Very Healthy

- Final 3Q Non-farm Productivity rose .2% versus estimates of a .5% gain and prior estimates of unch.
- Final 3Q Unit Labor Costs rose 2.3% versus estimates of a 3.2% gain and prior estimates of a 3.8% increase.
- Factory Orders for October fell 4.7% versus estimates of a 4.2% decline and a downwardly revised 1.7% increase in September.
- ISM Non-Manufacturing for November rose to 58.9 versus estimates of 55.5 and a reading of 57.1 in October.

BOTTOM LINE: Worker productivity grew at the slowest pace of the year last quarter while labor costs were revised down more than expected, easing concern that surging incomes will stoke inflation, Bloomberg said. The smaller increases in unit labor costs are a result of recent income revisions. Wages and salaries rose 4.5% for the third quarter versus prior estimates of a 4.8% gain. Wages and salaries are still rising more than three times the Consumer Price Index’s recent rise of 1.3%(yoy). Challenger, Gray & Christmas announced this morning that job cuts by US employers plunged 23% in November from the same time last year. I continue to believe the labor market will remain healthy without generating substantial unit labor cost increases over the intermediate-term.

Orders placed with US factories fell in October, Bloomberg reported. Construction machinery bookings slumped 12% for the month. Orders for electrical equipment and appliances rose 4.7%. Orders for capital goods excluding aircraft and military equipment, a gauge of future business investment, fell 4.9% versus a 3.1% gain in September. The inventory-to-shipments ratio held steady at 1.23 months. I still expect manufacturing to begin heading back to around average levels as auto production cutbacks subside, consumer spending remains healthy and housing stabilizes at relatively high levels.

Growth at US service industries unexpectedly accelerated for a second month in November as lower energy prices and a strong job market spurred consumer spending, Bloomberg said. Consumers, buoyed by the decline in gas prices and the lowest unemployment rate in five years, are boosting the US economy even as housing and auto production slow. The new orders component of the index rose to 57.1 from 56.5 the prior month. The prices paid component increased to 55.6 from 51.9 prior. The employment component of the index rose to 51.6 from 51 in October. The inventories component of the index fell to 51.5 from 53. Finally, the backlogs component rose to 54.5 from 51.5. Retail sales are vigorous so far this holiday shopping season, according to the Intl. Council of Shopping Centers, which said today that sales at stores open at least a year rose 3.1% during the week ended Dec. 2. The service sector accounts for the vast majority of growth in the US economy, while manufacturing accounts for only 12%. This report should quell any talk of an imminent recession. I continue to expect holiday retail sales to exceed estimates and the service sector to remain very healthy over the intermediate-term.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Hewlett-Packard(HPQ) said sales of its notebooks during the holiday season are “very strong.”
- NASA plans to build a solar-powered base on the moon beginning in 2020 and use it as a launch point for missions to Mars.
- South Korea’s central bank forecasts economic growth will slow to 4.4% in 2007 from 5% this year.
- Copper futures in Shanghai fell for a second day after another gain in global inventories of the metal, sparking renewed concern that supply growth may outpace demand.

iSuppli Corp.:
- Advanced Micro Devices(AMD) and Hynix Semiconductor will probably enter the top 10 chipmakers in 2006 as their sales outpace rivals’.

AP:
- China consumers six percent of the crude oil traded globally and has been diversifying it sources of oil by looking for new suppliers in Africa and South America, citing China’s Assistant Minister of Foreign Affairs Zhai Jun.

Beijing Antaike Information Development Co.:
- China will overtake Australia to become the top maker of alumina next year, prompting prices of the commodity to slump further. Production in China of the semi-finished material that is used to make aluminum will jump by 45% to 20 million tons in 2007. Prices may average 2,000 yuan a metric ton in 2007 compared with 4,000 yuan this year.

Bangkok Post:
- Japan’s Mitsubishi Oil, a unit of Nippon Oil, found oil and gas reserves in Thailand’s Sukhothai province, citing Energy Minister Piyasvasti Amranand.

Xinhua News:
- Avon Products(AVP) has recruited almost 300,000 door-to-door sales people in China this year, citing Avon China’s president.

Late Buy/Sell Recommendations
Morgan Stanley:
- Reiterated Overweight on (BKC), raised target to $23.

Night Trading
Asian Indices are +.25% to +1.0% on average.
S&P 500 indicated -.03%.
NASDAQ 100 indicated +.01%.

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Earnings of Note
Company/EPS Estimate
- (ATVI)/-.10
- (ACS)/.81
- (AZO)/1.68
- (CPRT)/.30
- (KR)/.28
- (NOVL)/.04
- (PLAB)/.16
- (SAFM)/.26
- (TOL)/1.06
- (WITS)/.18
- (WWE)/.12

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Final 3Q Non-farm Productivity is estimated to rise .5% versus prior estimates of unch.
- Final 3Q Unit Labor Costs are estimated to rise 3.2% versus prior estimates of a 3.8% gain.

10:00 am EST:
- Factory Orders for October are estimated to fall 4.2% versus a 2.1% increase in September.
- ISM Non-Manufacturing for November is estimated to fall to 55.5 versus a reading of 57.1 in October.

BOTTOM LINE: Asian indices are 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.

Stocks Finish Sharply Higher on Lower Energy Prices, M&A Activity and Investor Performance Anxiety

Indices
S&P 500 1,409.12 +.89%
DJIA 12,283.85 +.74%
NASDAQ 2,448.39 +1.46%
Russell 2000 795.85 +1.88%
Wilshire 5000 14,170.92 +.97%
S&P Barra Growth 653.64 +.69%
S&P Barra Value 753.35 +1.08%
Morgan Stanley Consumer 681.40 +1.41%
Morgan Stanley Cyclical 887.89 +1.19%
Morgan Stanley Technology 576.03 +1.51%
Transports 4,745.77 +.82%
Utilities 460.77 +.68%
Put/Call .86 -3.37%
NYSE Arms 1.07 -18.44%
Volatility(VIX) 11.23 -3.69%
ISE Sentiment 137.0 +13.22%
US Dollar 82.49 +.01%
CRB 315.38 -1.82%

Futures Spot Prices
Crude Oil 62.43 -1.58%
Reformulated Gasoline 166.45 -2.21%
Natural Gas 7.75 -7.87%
Heating Oil 180.89 -2.1%
Gold 651.0 +.02%
Base Metals 245.89 +.73%
Copper 318.0 +.13%
10-year US Treasury Yield 4.42% -.18%

Leading Sectors
Gaming +5.45%
Steel +4.11%
I-Banks +2.59%

Lagging Sectors
Oil Service -.60%
Oil Tankers -.65%
Drugs -1.19%

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Afternoon Recommendations
Deutsche Bank:
- Rated (EGLT) Buy, target $20.

Afternoon/Evening Headlines
Bloomberg:
- International Speedway Corp.(ISCA), the largest US automobile racetrack operator, said it had ended plans to build a Nascar track on NYC’s Staten Island because of a lack of political support and unacceptable approval requirements.
- Delta Air Lines reached an agreement with the Pension Benefit Guaranty Corp.
- Puget Energy’s(PSD) Washington utility, the state’s biggest, is seeking proposals for construction of a 500-kilowatt solar-powered generating facility.
- Ecopetrol, Colombia’s state oil company, said it plans to increase production from its Tibu oil field by more than 800% with help from partner Petroleo Brasileiro SA.
- Natural gas plunged almost 8%, the most in more than two months, as forecasters predicted above-average temperatures across most of the US starting this weekend and speculation by investment funds subsided.
- US Democratic Representative Barney Frank, expected to lead the House panel that overseas Wall Street, said he may hold hearings on hedge funds.
- The SEC is unified in wanted to limit the pool of individuals that can invest in hedge funds and proposing new rules aimed at curtailing hedge-fund fraud, SEC Chairman Cox said.

BOTTOM LINE: The Portfolio finished higher today on gains in my Biotech longs, Semi longs, Medical 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 very positive today as the advance/decline line finished substantially higher, almost every sector rose and volume was above average. Measures of investor anxiety were lower into the close. Today's overall market action was very bullish as the major averages and breadth finished near session highs. As well, many market-leading stocks traded substantially higher throughout the day. Natural gas plunged almost 8% today as record speculation by investment funds subsides. I sense many US equity shorts and underexposed longs are entering "hope and pray" mode again with respect to their expectations of a significant market pullback before year-end. Bloomberg reported Microsoft's (MSFT) Zune dropped to fifth place in its second week on the market as it lost share. It now has 2.1% of the U.S. digital media player market. Apple (AAPL) and Sandisk (SNDK) led sales in the week ended Nov. 25. I believe investors are still focusing too much on the iPod market and not enough on the PC market, but this is still good news for Apple and it remains my second largest long position, behind Google (GOOG). Apple should break above $100 over the coming weeks.

Stocks Sharply Higher into Final Hour on M&A Activity, Falling Energy Prices and a Firming US Dollar

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Telecom longs, Medical longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, almost every sector is rising and volume is above average. Last week, Banc of America put out a report, which stated that U.S. investors have poured $106.1 billion this year into mutual funds that invest in international equities. This is 40% more than last year at this time. On the other hand, investors have pulled $1.4 billion from U.S. mutual funds so far this year vs. inflows of $18.7 billion this time last year. I have heard many pundits and analysts say recently that U.S. stocks are still expensive relative to international equities. I couldn't disagree more. Many international markets, especially emerging markets, are heavily weighted toward very cyclical or commodity companies. These types of companies always look the cheapest before significant declines. This is just more evidence that the public remains very skeptical of U.S. stocks despite recent gains. I suspect a chain reaction of events has begun that will eventually lead to a bad ending to the mania for emerging market stocks and a dramatic increase in demand for U.S. stocks. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, lower energy prices, merger & acquisition speculation, portfolio manager performance anxiety and bargain-hunting.