Tuesday Watch

Late-Night Headlines
Bloomberg:
- North Korea started disabling its nuclear program under the supervision of US inspectors, a State Department spokesman said.
- The falling dollar isn’t cause for alarm and is part of a “global rebalancing process,” according to David Rosenberg, chief North American economist at Merrill Lynch(MER). “The dollar is no lower today than it was in 1997 – we don’t remember that being a particular Armageddon-type time period,” Rosenberg said.
- Former Fed Chairman Greenspan said the US currency isn’t likely to weaken further against the euro, though over the long term it will fall against Asian currencies.
- Alibaba.com Ltd. more than doubled on its first day of trading in Hong Kong, pushing its market value past South Korea’s NHN Corp. to become Asia’s second-biggest Internet company after Yahoo Japan Corp.
- Hedge-fund managers should toughen internal rules for valuing securities and preventing insider trading while giving clients more information about investment risks, according to the industry’s main US lobbying group. The Managed Funds Assoc., whose members include SAC Capital and DE Shaw, called in a new report today for “significantly heightened standards” for preventing trading abuses and preparing for financial crises.
- China is likely to increase gold output by 8% this year, overtaking the US as the world’s second-biggest producer and challenging South Africa’s century-long dominance.
- China may become a net exporter of stainless steel next year as output rises faster than demand growth, said Baoshan Iron & Steel, the nation’s second-largest producer of the alloy. Rising output from China, which overtook Japan as the world’s biggest stainless steelmaker last year, may prolong a domestic glut until at least 2010, the China Special Steel Enterprise Association said yesterday.

Wall Street Journal:
- In a sign of the gradual recovery of the corporate loan market, Wall Street investment banks plan to launch on Wednesday an offering of up to $10 billion in loans for Chrysler LLC’s automotive business.

New York Times:
- The Bush administration on Tuesday will propose a significant expansion of the authority of the federal drug and consumer product safety agencies to inspect and certify imports, White House and other administration officials said Monday.

IBD:
- Growth Led Value Stock Funds For Solid Gains In Volatile Month.

USA Today.com:
- Airlines improve on-time performance in September.

Commercial Times:
- Google Inc.(GOOG) has orders 1 million mobile phones from High Tech Computer Corp. Mobile phones using its operating system will be available by the second half of next year.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (GILD), target $51.

Night Trading
Asian Indices are unch. to +1.25% on average.
S&P 500 futures +.29%.
NASDAQ 100 futures +.25%.

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Earnings of Note
Company/EPS Estimate
- (CTSH)/.31
- (ADM)/.61
- (EXPD)/.34
- (JOE)/.10
- (THC)/-.06
- (ISE)/.52
- (JEC)/.65
- (VLO)/1.36
- (EMR)/.75
- (EP)/.22
- (BTU)/.32
- (LEA)/.17
- (TAP)/.93
- (RUTH)/.08
- (BMC)/.42
- (CHK)/.61
- (MTZ)/.19
- (CAR)/.66
- (ONXX)/-.21
- (GBX)/.69
- (PDLI)/.14
- (PSUN)/.13
- (MM)/1.06
- (GLBC)/-1.57
- (NILE)/.18
- (AES)/.28
- (ZOLT)/.23
- (PFGC)/.38
- (GBE)/.08
- (FMCN)/.43

Upcoming Splits
- (ATU) 2-for-1

Economic Releases
- None of note

Other Potential Market Movers
- The Fed’s Bernanke speaking, weekly retail sales reports, (FLEX) analyst meeting, (LLL) investor conference, (SPWR) analyst meeting, (DECK) analyst meeting, (CCJ) analyst meeting and (STR) analyst meeting could also impact trading today.

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

Stocks Finish Mildly Lower on Credit Worries

Indices
S&P 500 1,502.17 -.50%
DJIA 13,543.40 -.38%
NASDAQ 2,795.18 -.54%
Russell 2000 790.44 -.92%
Wilshire 5000 15,104.48 -.59%
Russell 1000 Growth 625.87 -.52%
Russell 1000 Value 814.86 -.63%
Morgan Stanley Consumer 737.49 +.02%
Morgan Stanley Cyclical 1,038.44 -.60%
Morgan Stanley Technology 669.20 -.63%
Transports 4,778.09 -.51%
Utilities 529.58 +.71%
MSCI Emerging Markets 157.51 -2.07%

Sentiment/Internals
Total Put/Call 1.02 -11.30%
NYSE Arms 1.0 -9.59%
Volatility(VIX) 24.31 +5.65%
ISE Sentiment 150.0 +10.29%

Futures Spot Prices
Crude Oil $94.68 -1.31%
Reformulated Gasoline 239.65 -1.76%
Natural Gas 7.96 -5.43%
Heating Oil 255.42 -.76%
Gold 808.90 +.05%
Base Metals 243.68 -.88%
Copper 330.30 -.66%

Economy
10-year US Treasury Yield 4.33% +2 basis points
US Dollar 76.44 +.13%
CRB Index 349.76 -1.08%

Leading Sectors
Utilities +.71%
Internet +.48%
HMOs +.12%

Lagging Sectors
Papers -2.0%
Retail -2.13%
I-Banks -2.73%

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Afternoon Recommendations
Goldman Sachs:
- Added (AAP) to Americas Conviction Buy List.

Citigroup:
- Reiterated Buy on (IACI), target $37.

Afternoon/Evening Headlines
Bloomberg:
- Robert Friedman, the former chief investment officer of Michael Pirce’s mutual-fund company, is shutting down his global stock hedge fund after two years, according to a letter sent to investors.
- Ford Motor(F) will pay $15.4 billion to create a union retiree health-care fund with the UAW under an agreement approved by UAW officials today.
- More than 1,200 of NYC’s public schools received report cards today in the city’s first attempt to compare and rate each school’s efforts to educate and improve performance of students and teachers.

BOTTOM LINE: The Portfolio finished about even today as losses in my Computer longs and Retail longs offset gains in my Internet longs, Medical 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 negative today as the advance/decline line finished lower, most sectors fell and volume was above average. Measures of investor anxiety were above average into the close. Today's overall market action was mildly bearish. Today's trading was very jerky on both the up and downsides. I saw many stocks both significantly outperforming and underperforming the averages, but few around the averages. HMO, Internet, defense and utility shares were relatively strong throughout the day. Anything related to the housing downturn was once again a source of meaningful weakness. Most of my longs fared pretty well today, led by Google (GOOG), which closed at another record high. Under Armour (UA), however, remains under pressure. I may add to that long again on any further meaningful weakness.

Stocks Slightly Lower into Final Hour on Lingering Credit Worries

BOTTOM LINE: The Portfolio is about even into the final hour as gains in my Internet longs, Medical longs and Commodity shorts are offsetting losses in my Retail longs and Computer longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is negative today as the advance/decline line is lower, sector performance is negative and volume is above-average. Retail sales likely remained modestly below average in October as weather nationwide remained exceptionally warm. However, given how despised and beaten down many retail stocks have become, with more seasonal weather predicted, I expect to see some short-covering and bargain-hunting in the shares on the report. Google (GOOG) is pushing to another all-time high on details of its mobile strategy and an Oppenheimer target upgrade to $850. I still think analysts' forward estimates on Google are too low and that the stock is finally in the initial stages of moving toward a premium valuation. The Fed's Mishkin made several comments today, which were mostly positive on the economy. He said the Fed needs to be timely, decisive and flexible and that third-quarter GDP showed considerable underlying strength. He also said that it is remarkable how well anchored price expectations are but that the Fed can never take its eye off the inflation ball. I still see little evidence of the imminent recession thesis. Fed fund futures still imply a 70% chance for another 25-basis-point cut in December, up from 66% a week ago, despite today's data and Fed commentary. Goldman Sachs (GS) is now 6 points off its lows over the last hour. The firm denied rumors of an impending writedown or hidden losses to CNBC. I am actually surprised it isn't up more on the news. This is helping to lift the broker/dealer index, which is also boosting the broad market to session highs. I expect US stocks to trade mixed-to-higher into the close from current levels on bargain-hunting, lower energy prices and short-covering

Today's Headlines

Bloomberg:
- Google Inc.(GOOG) plans to create a mobile-phone operating system and work with 33 companies to build applications that could change how consumers find stores and download files form the Web on the go.
- Dell Inc. agreed to buy EqualLogic for $1.4 billion, expanding into the fastest-growing part of the storage market with its largest acquisition.
- IAC/InterActiveCorp(IACI), whose shares have dropped 20% this year, will split into five publicly traded companies, dismantling a media and Internet conglomerate Barry Diller spent more than a decade assembling.

Wall Street Journal:
- Gramercy Capital, a real-estate finance company, has agreed to buy American Financial Realty Trust, a real-estate investment trust that specializes in properties leased by financial institutions, for about $1.1 billion in cash and stock.
- Kraft Foods(KFT), the No. 3 US seller of breakfast cereal by sales, is nearing an agreement to sell its Post cereals unit to Ralcorp Holdings for about $2.8 billion.
- Rydex Investments plans to introduce six “leveraged” ETFs that will offer magnified or inverse-magnified returns of major stock benchmarks, with lower expense ratios than a popular family of ETFs from ProFunds Group.
- One of the pioneers in personal-computer plumbing is launching an ambitious campaign to improve laptop functions, including the ability to fire up software in seconds.
- The Easier Rider: Baby Boom Bikers Defect to the Trike.
- Citigroup Inc.(C) former CEO Sanford “Sandy” Weill said he’s not interested in coming back to run the company, although he’s “ready, willing and able and available to do whatever the board needs him to do in helping to right the ship.”
- Copper fell for the sixth straight session, the longest slump since August 2004, on speculation that rising inventories signaled easing demand.
- Crude oil is falling more than $1/bbl. after Kurdish fighters freed eight Turkish soldiers and investment fund speculation in the commodity subsided.

Financial Times:
- MySpace reveals ‘targeted’ ads.

Service Sector Still Healthy

- ISM Non-Manufacturing for October rose to 55.8 versus estimates of 54.0 and a reading of 54.8 in September.

BOTTOM LINE: Service industries in the US unexpectedly grew at a faster pace in October, signaling the slump in housing has yet to filter to other parts of the economy, Bloomberg said. The New Orders component of the index rose to 55.7 from 53.4. The Export Orders component jumped to 56 from 50. The Inventories component fell to 49.5 from 50. The Prices Paid component fell to 63.5 from 66.1. It is a large positive that this gauge of the service sector, which accounts for around 90% of the economy, remains healthy. I continue to see few signs of the imminent recession that so many have predicted. I still expect US growth to rise around 2-2.5% over the intermediate-term as strong exports, decelerating inflation readings and inventory rebuilding more than offset the drag from housing.

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