Stocks Finish Modestly Lower on Profit-taking and Profit Worries

Indices
S&P 500 1,411.56 -.10%
DJIA 12,315.58 -.10%
NASDAQ 2,431.60 -.46%
Russell 2000 788.41 -.59%
Wilshire 5000 14,174.38 -.18%
S&P Barra Growth 652.06 -.14%
S&P Barra Value 757.72 -.07%
Morgan Stanley Consumer 687.0 +.10%
Morgan Stanley Cyclical 885.97 -.77%
Morgan Stanley Technology 568.76 -.50%
Transports 4,682.12 -1.24%
Utilities 458.87 +.33%
Put/Call .96 +29.73%
NYSE Arms 1.25 +5.21%
Volatility(VIX) 10.65 -.56%
ISE Sentiment 141.0 -10.76%
US Dollar 82.94 -.29%
CRB 310.83 -.40%

Futures Spot Prices
Crude Oil 60.95 -.44%
Reformulated Gasoline 159.54 -.03%
Natural Gas 7.49 +.82%
Heating Oil 172.15 -.16%
Gold 634.30 -.08%
Base Metals 243.98 +.36%
Copper 309.10 -1.36%
10-year US Treasury Yield 4.49% -.69%

Leading Sectors
Telecom +.90%
Foods +.63%
Insurance +.32%

Lagging Sectors
Alternative Energy -1.35%
Airlines -2.49%
Steel -4.25%

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Afternoon Recommendations
Bank of America:
- Rated (OMX) Buy, target $59.
- Rated (SPLS) Buy, target $31.

Afternoon/Evening Headlines
Bloomberg:
- Canon’s profit in 2006 is likely to rise about 16% from a year earlier on demand for its digital cameras and other products.
- Home Depot(HD) plans to sell $5 billion of bonds to finance the repurchase of shares.
- UBS AG was sued by NY state over allegations that Europe’s largest bank defrauded thousands of brokerage clients out of tens of millions of dollars by steering them into costly accounts they didn’t need.
- OPEC is split on whether further output cuts are needed to stabilize prices that have plunged 22% from their all-time highs.
- Cerberus Capital Management LP and Appaloosa Management LP may be nearing an agreement to acquire a joint stake in bankrupt auto-parts supplier Delphi Corp.
- Iran will be able to start its first nuclear power plant as scheduled next year after working out a payment plan to cover construction costs, said the president of Russia’s nuclear power-plant construction company, which is building the reactor.
- Russian police searched the office of former world chess champion Gary Kasparov, now in opposition to President Vladimir Putin, and took away newspapers and campaign documents to check if they were “extremist.”
- The SEC will propose more than doubling the net worth requirement for investing in hedge funds to $2.5 million, SEC Chairman Cox said.
- US companies plan to increase investment in plants and equipment in 2007 to keep up with rising sales, a twice-yearly survey by the ISM showed today.
- Barrett Resources LLC plans to develop one of its three oilfields in the Peruvian Amazon jungle, a $1 billion project that will involve processing facilities and an oil pipeline branch, said Daniel Saba, president of state oil contracting agency Perupetro.

LA Times:
- The US will use a new system for assessing fuel economy for cars and trucks that will reduce ratings starting with 2008 models.

BOTTOM LINE: The Portfolio finished slightly lower today as losses in my Computer longs and Retail longs more than offset gains in my Steel shorts. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was negative today as the advance/decline line finished lower, most sectors declined and volume was above average. Measures of investor anxiety were mostly higher into the close. I would classify today's overall market action as mildly bearish. The NYSE Arms registered above-average readings throughout the day and the ISE Sentiment Index plunged 17% to a below-average 131.0. I continue to believe that large funds are positioning now for what they believe will be a weak January for stocks. So far, this has resulted in relatively little broad market damage, while adding to the massive bull firepower that is already on the sidelines.

Stocks Modestly Lower into Final Hour on Profit-taking and Mildly Disappointing Earnings Reports

BOTTOM LINE: The Portfolio is slightly lower into the final hour as losses in my Computer longs and Retail longs more than offset gains in my Steel shorts. I took profits in an existing long, added to my (BBY) long and added (EEM), (IWM) and (QQQQ) hedges this morning, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are falling and volume is slightly above average. A recent Barclays report trumpets the massive amount of capital that has gone into commodity-related funds of late. I would just like to point out that global growth has been booming, the U.S. dollar has been weakening, yet, notwithstanding the mania for commodities, the CRB Index is down 6.7% over the last year. Moreover, the average commodity hedge fund is down double digits for the year. I see extraordinarily high bearish sentiment in the broad U.S. stock market, given recent gains. However, equity investor complacency regarding commodity-related stocks is exceptionally high. I remain overweight short these stocks. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, buyout speculation, lower energy prices, declining long rates and portfolio manager performance anxiety.

Today's Headlines

Bloomberg:
- US Treasuries rose after the Fed left its target for the overnight lending rate between banks unchanged at 5.25% for a fourth straight time and downgraded its assessment of the economy.
- Sabre Holdings, the owner of tourism Web site Travelocity.com, agreed to be acquired by buyout firms Texas Pacific Group and Silver Lake Partners for about $4.4 billion.
- OMV AG, central Europe’s largest oil and natural gas company, plans to invest $50 million to develop new energy technology like hydrogen filling stations and gas made from vegetable oils.
- China passed Mexico as the second-largest US trading partner in the first 10 months of this year, demonstrating a surge in commerce between the two countries since China joined the WTO.
- Merrill Lynch’s(MER) Chief Investment Strategist Richard Bernstein, one of Wall Street’s most bearish analysts during a four-year rally in US stocks, raised his 12-month forecast for the S&P 500’s Index by 5.5% to 1570.
- US retailers’ sales last week rose at their fastest pace so far this holiday season, helped by colder weather and increased gift-buying by consumers.
- Nucor(NUE), the second-biggest US steelmaker, said fourth-quarter profit will be less than anticipated because of rising inventories and lower prices.
- Best Buy(BBY) said earnings rose less than it estimated because the company was forced to cut prices to meet competition from Wal-Mart Stores(WMT) and Circuit City Stores(CC).
- Goldman Sachs(GS) capped the most profitable year ever for a Wall Street firm, almost doubling fourth-quarter earnings on trading, underwriting and investments in Asia.
- Needham, Mass., won’t publish its high school honor roll in the local newspaper to help reduce tension among students.

Wall Street Journal:
- US and European scientists have identified certain proteins which may help detect the earliest stages of Alzheimer’s disease, citing a paper in the Annals of Neurology.
- Hedge funds are breaking with traditional lending practices by opting to take control of companies that fail to repay debt.
- San Francisco’s Soma neighborhood, home to hundreds of Web companies in the 1990s, is again attracting small technology companies.
- Harrah’s Entertainment(HET), the largest US casino operator by revenue, probably will get an $87-per-share increased bid from Apollo Management and Texas Pacific Group.
- PlusFunds Group Inc. is causing consternation among hedge fund managers by offering detailed trading histories of dozens of funds to whomever will pay $75,000.
- Salesforce.com(CRM) will today say that it will help other companies sell services through its Internet site in exchange for a share of the income.

NY Times:
- The largest of six American Muslim charities that the Treasury Dept. has said support terrorists is suing the agency.

Washington Post:
- Military experts told President Bush they didn’t agree with some Iraq Study Group recommendations, particularly the plan to withdraw American forces from Iraq.
- The House and Senate passed a bill to bolster the Bush administration’s $5.6 billion dedicated to countering bioterrorism by restructuring the program’s management and funding more research and testing.

Stratfor:
- Saudi Arabia’s ambassador to the US, Turki al-Faisal, resigned from his post yesterday.

Financial Times:
- A hedge fund and a fund of private-equity funds are being set up to invest in renewable energy as interest in green technologies grows.
- The bidding war for Corus Group Plc, the British steelmaker, may be showing that steel and other commodity prices are at their peak, “Lex” wrote.

China Oil News:
- China’s government will start implementing an oil-product pricing system that will reflect international prices on Jan. 1. China will link fuel prices to Brent, Dubai and Minas crude benchmarks.

US Trade Deficit Shrinks Most in Almost 5 Years

- The Trade Deficit for October shrunk to -$58.9 billion versus estimates of -$63.0 billion and -$64.3 billion in September.

BOTTOM LINE: The US Trade Deficit shrank the most in almost five years in October as the price of imported oil dropped and US exports surged, Bloomberg reported. Imports of goods and services dropped 2.7% in October, the most since December 2001. The average price per barrel of imported oil declined to $55.47 versus $62.52 the prior month. US exports rose to $123.6 billion on increasing demand for computers, drilling equipment and medicines. I expect the US trade deficit to only improve modestly over the intermediate-term as falling prices more than offsets an acceleration of US demand.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Nike Inc.(NKE) signed top-ranked golfer Tiger Woods to a new endorsement contract, both his agent and Nike(NKE) said.
- Gains in Japan’s producer prices slowed for a second month in November as oil costs fell, adding to evidence inflationary pressure is easing in the world’s second-largest economy.
- Shares of LG.Philips LCD Co., the world’s second-largest liquid-crystal display maker, dropped 7.6% after the company said it was raided by officials in South Korea, the US and Japan in an antitrust probe of screen makers.
- Pakistan’s agreements reached with groups in the tribal region bordering Afghanistan have boosted Taliban fighters sheltering in the area, the International Crisis Group said.
- BHP Billiton(BHP) said growth in production capacity of alumina refineries will outpace demand next year. China, the world’s top user and producer of aluminum, is cutting back on imports, BHP said.
- OPEC shouldn’t decide to cut crude oil output for a second time in two months, US Energy Secretary Bodman said in Tokyo.

Wall Street Journal:
- Toyota Motor(TM) may have rushed vehicle production without enough quality checks and relied too much on computer simulations, citing President Katsuaki Watanabe.

Mysteel.com:
- China boosted crude steel output by 24% in November from a year earlier. For the first eleven months of the year, the nation produced 381.5 million tons of steel, up 18% from a year earlier. The November production of hot-rolled sheets, used to make cold-rolled products, rose almost 300% from a year earlier. Iron ore production surged 44% in November to 59.3 million metric tons.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (SONS), raised target to $9.
- Reiterated Buy on (CCK), raised target to $25.

Morgan Stanley:
- Raised (JPM) to Overweight, target $53.
- Reiterated Overweight on (HIG), target $108.

Night Trading
Asian Indices are -1.0% to +.50% on average.
S&P 500 indicated -.06%.
NASDAQ 100 indicated -.06%.

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Earnings of Note
Company/EPS Estimate
- (ADCT)/.18
- (BBY)/.35
- (CKR)/.16
- (COO)/.79
- (DG)/.15
- (GS)/6.04
- (MATK)/.10

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Trade Deficit for October is estimated to shrink to -$63.0 billion versus -$64.3 billion in September.

2:00 pm EST
- The monthly budget deficit for November is estimated to shrink to -$73.0 billion versus -$83.1 billion in October.

2:15 pm EST
- The FOMC is expected to leave the benchmark Fed Funds rate at 5.25%.

BOTTOM LINE: Asian indices are mostly higher, boosted by exporting 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.