Friday Watch

Late-Night Headlines
Bloomberg:
- Federal Reserve Chairman Ben S. Bernanke said volatility in credit markets has “affected” the economy’s prospects and policy makers must decide whether the risks between growth and inflation have now shifted.
- UMC Japan rose 22%, the most in almost nine years, after the Japanese unit of Taiwan’s United Microelectronics Corp. said it expected to post a narrower full-year loss on increased output of higher-value memory chips and lower production costs.
- India’s gold production in the seven months to October rose 16.8% to 8 metric tons from 6.85 tons a year earlier.
- Crude oil was little changed near $91 a barrel in New York as Enbridge Inc. re-opened three out of four pipelines closed after an explosion cut shipments of Canadian oil to US refiners.
- The yen fell against the dollar after a rally in Asian stocks prompted investors to buy higher-yielding assets with funds borrowed in Japan.
- The US dollar is headed for its biggest weekly gain in two months against the euro.

Wall Street Journal:
- Sprint Nextel(S) rejected a $5 billion investment offer from a group led by South Korea’s SK Telecom that would have made former Chairman Tim Donahue the company’s CEO.
- The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled subprime loans, according to people familiar with the matter.
- Bernanke Hints Rate Cut Possible.
- Why Citadel Pounced On Wounded E*Trade.

MarketWatch.com:
- China aims to play a stabilization rose in global markets through its $200-billion sovereign wealth fund, the China Investment Corp., Lou Jiwei, the fund’s chairman, said Thursday.

BusinessWeek:
- Move Over, ‘Cyber Monday’ Online retailers, bracing for a record holiday season, say their business day will come in December’s second week; eBay calls it “Green Monday”
- Honda’s Home Hydrogen Fueling Station. Honda has come up with a way to get around the problem of fueling its hydrogen cars – do it at home.

CNBC.com:
- Which Home Renovations Really Pay Off?

Morningstar.com:
- The credit crisis: Chicken Little or a game of chicken? Investors are running for the hills – or at least for safer havens including cash and gold. Yet at Morningstar, our analysts are recommending an unprecedented number of financial-services stocks, even names that have been badly beaten up such as Countrywide Financial(CFC), PMI Group(PMI) and Citigroup(C).
- US revised oil demand in September was .8% below year-ago levels, at 20.385 million barrels a day and the lowest for any month since April 2006, federal data released Thursday show. Demand was revised down from an earlier estimate, which would have shown a .3% decline from a year ago.

USA Today.com:
- Rates on 30-year mortgages fall to lowest point in 2 years.
- China dropping subsidies that aided exporters.

Economic Times:
- Temasek Holdings Pte, Singapore’s state-owned investment company, may be selling shares in Chinese companies to buy stakes in US and European financial institutions. Temasek has recently held discussions with US and European financial institutions and “the pricing is reasonable,” citing people familiar with the situation. The talks prompted it to pare its holdings to raise capital for potential acquisitions, it added. Temasek manages more than $100 billion in assets.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (INTC), target $33. Dell(DELL) reported their October quarter results Thursday after the close. While much of the conference call’s focus was on Dell’s strategic initiatives, their commentary reinforces our positive view of Intel. We continue to see upside margin surprise and market share momentum.
- Reiterated Buy on (BRCD), target $10.

Morgan Stanley:
- Reiterated Overweight on (OVTI), target $28.

Night Trading
Asian Indices are +.25% to +1.75% on average.
S&P 500 futures -%.
NASDAQ 100 futures -%.

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Economic Releases
8:30 am EST
- Personal Income for October is estimated to rise .4% versus a .4% gain in September.
- Personal Spending for October is estimated to rise .3% versus a .3% gain in September.
- The PCE Deflator for October is estimated to rise .2% versus a .2% gain in September.

9:45 am EST
- The Chicago Purchasing Manager report for November is estimated to rise to 50.5 from 49.7 in October.

10:00 am EST
- Construction Spending for October is estimated to fall .3% versus a .3% gain in September.

Other Potential Market Movers
- The Fed’s Poole speaking, Fed’s Kroszner speaking, Fed’s Plosser speaking, NAPM-Milwaukee, (NVO) analyst meeting and UBS Global Real Estate Conference could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by gains in financial and mining 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 Slightly Higher on Healthy Consolidation of Recent Sharp Gains

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Stocks Mixed into Final Hour on Healthy Consolidation of Recent Gains

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Medical longs and Software longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is mixed today as the advance/decline line is mildly lower, sector performance is mixed and volume is above average. Investor anxiety is above average. Today’s overall market action is very healthy given the recent two-day advance that was the largest since near the major bear market low in 2002. The latest NYSE short interest data figures show a meaningful increase in short interest in the already heavily-shorted and beaten up financials and retailers. If I were one of the many bears that increased short positions meaningfully right near the lows, I would be very concerned by recent market action. The fact that the dollar is rallying nicely on today’s economic data and increased expectations for Fed rate cuts bodes well for my belief that the despised currency has at the very least put in place an intermediate-term bottom. This is one of the main reasons that oil is trading so poorly and failed to maintain this morning’s large gains related to the pipeline explosion. I continue to believe any meaningful decline in the price of oil would be a much larger positive for the broad US stock market than most investors perceive. The 10-year swap spread is falling again today and has declined 16% over five days, which is a large positive. As well, the investment grade credit default swap index has declined 9% over the last week and the Goldman Sachs(GS) credit default swap has plunged 31% over the last five days, which are big positives. I expect US stocks to trade mixed-to-higher into the close from current levels on bargain hunting and short-covering ahead of Fed chief Bernanke’s speech and Dell’s(DELL) earnings report tonight.

Today's Headlines

Bloomberg:
- Bank of England policy maker David Blanchflower said the UK’s benchmark interest rates should “come down now” as growth is poised to slow.
- The subprime crisis that’s caused so much trauma for hedge funds and investment banks has brought only good news for John Paulson. He’s the manager of more than $7 billion in hedge fund money keyed to mortgage credit.
- Treasury Secretary Henry Paulson met with mortgage companies including Wells Fargo(WFC) as regulators press the biggest lenders to change terms of existing subprime home loans before they default.
- The LCDX index, a benchmark of investor confidence in the US leveraged loan market, reached a three-week high on speculation that a Federal Reserve rate cut next month will buoy the market for the rest of the year.
- Goldman Sachs(GS) advised investors to sell gold on expectations turmoil in financial markets will ease and a slump in the dollar will slow. Gold may decline 15-20% next year, Goldman Chief Economist Jim O’Neill said.
- Oil rose $4/bbl. this morning after an explosion cut Canadian oil shipments through Enbridge Inc. pipelines that supply US refiners. However, the commodity plunged into the afternoon on US dollar strength and is $.41/bbl. higher on the day.
- Trex Co.(TWP), the maker of composite decking and fencing materials, posted its biggest gain in NY trading after the company raised forecasts for year-end sales.
- Holiday spending at US retailers climbed 6.5% to $20 billion over the Thanksgiving, according to ShopperTrak RCT Corp.

Wall Street Journal:
- E*Trade Financial(ETFC) said it is getting a $2.55 billion cash infusion from Citadel Investment Group, in a bid to restore confidence and liquidity in the discount brokerage sector.

CNNMoney.com:
- Credit Crunch Doesn’t Slow Small Business Growth.
- Venture investments in American clean technology firms reach a new high.

BusinessWeek.com:
- Skeptic abound, but Hank Paulson says a breakthrough is near that could rescue troubled homeowners.

Washington Post:
- Bill Clinton’s Claim of Opposing Iraq War From Outset Disputed.

Agencia Estado:
- The US may eliminate trade restrictions on Brazilian ethanol by 2009, citing US Representative Gregory Meeks.

3Q GDP Growth Surges 4.9%, Price Index Rises at Slowest Pace Since 1998, Jobless Claims Rise, New Home Sales Bounce as Inventories Fall

- Preliminary 3Q GDP rose 4.9% versus estimates of a 4.9% gain and prior estimates of a 3.9% increase.

- Preliminary 3Q Personal Consumption rose 2.7% versus estimates of a 2.9% gain and prior estimates of a 3.0% increase.

- Preliminary 3Q GDP Price Index rose .9% versus estimates of a .8% gain and prior estimates of a .8% increase.

- Preliminary 3Q Core PCE rose 1.8% versus estimates of a 1.8% gain and prior estimates of a 1.8% increase.

- Initial Jobless Claims for this week rose to 352K versus estimates of 330K and 329K the prior week.

- Continuing Claims rose to 2665K versus estimates of 2575K and 2553K prior.

- New Home Sales for October rose to 728K versus estimates of 750K and a downwardly revised 716K the prior month.

BOTTOM LINE: Economic growth in the US surged in the third quarter to the most in 4 years, Bloomberg reported. A shrinking trade deficit, inventory rebuilding and more business investment than previously forecast were the primary contributors to the upward revision to third quarter growth. US I continue to believe inventory rebuilding, booming exports and decelerating inflation will more than offset the drag from housing over the intermediate-term, which will produce US economic growth has averaged a healthy 3.1% so far this year, despite the substantial drag from housing that began over 2 years ago. growth on average of around 2-2.5%.

The number of Americans filing first-time claims for unemployment benefits rose more than expected, Bloomberg reported. The four-week moving average of claims rose to 335,250 from 329,500 the prior week. The unemployment rate among those eligible to collect benefits, which tracks the US unemployment rate, rose to 2% from 1.9% the prior week, but remains historically low. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

New Home Sales rebounded in October after September sales fell more than previously thought, Bloomberg reported. The median price of a new home was $217,800. The number of new homes for sale at the current sales pace fell to 8.8 months’ worth from 9 months in September. New Home Sale rose 14% in the Midwest, 6.8% in the South and 1.8% in the Northeast. Sales fell 16% in the West. I expect New Home Sales to move higher next month as a result of the recent drop in mortgage rates and pent-up demand.

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