Wholesale Inventories Hit Record Low as Sales Rise

- Wholesale Inventories for October were unch. versus a downwardly revised .6% gain in September.

BOTTOM LINE: Inventories at US wholesalers were little changed in October, Bloomberg reported. However, sales rose .7%. The rise in sales brought the supply of stockpiles down to an all-time low of 1.09 months worth at the current sales pace. I continue to believe inventory rebuilding will help boost overall US growth over the intermediate-term as companies gain confidence in the sustainability of the current expansion.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- US Senate Banking Committee Chairman Christopher Dodd will introduce a plan tomorrow to overhaul mortgage-lending practices.
- North Korea and South Korea begin a regular freight train service across their fortified border today, expanding economic cooperation and paving the way for a rail link with the rest of Asia.
- Israeli Prime Minister Ehud Olmert has suffered one political body blow after another: a rebuke for bungling the Lebanon war, multiple corruption probes and tepid Cabinet support for peace talks he has agreed to restart tomorrow. And he’s politically stronger than he has been in months.
- Credit-Based Asset Servicing and Securitization LLC, a subprime mortgage investor written off by its owners, completed the sale of its Litton Loan Servicing business and named Goldman Sachs Group(GS) as the buyer.
- The yen declined to a one-month low versus the dollar and the euro on speculation the Federal Reserve will cut interest rates today, encouraging investors to buy higher-yielding assets funded by loans in Japan.
- China’s inflation accelerated to the fastest pace in almost 11 years, supporting US Treasury Secretary Henry Paulson’s case that a stronger yuan is needed to help cool the economy. Consumer prices rose 6.9% in November from a year earlier, the National Bureau of Statistics said.

NY Times:
- For a Few Dollars More, Dining Improves on Longer Flights.
- European Automakers Likely to Build Plants in United States.

BusinessWeek.com:
- Apple(AAPL) Forecasts: Not Just Hype.
- Asia’s wireless operators are looking to the US market. Their experience in mobile data services could pay off stateside.

CNNMoney.com:
- Top 10 Blue Ribbon Companies.

IBD:
- AT&T(T) Enlists Cisco(CSCO) to Bolster Network Amid Traffic Boom.

USA Today.com:
- Fuel-efficiency gauges start appearing in non-hybrids.

Reuters:
- Activist hedge fund manager David Einhorn, well known fro his short bets on firms such as MBIA Inc.(MBI) and Allied Capital(ALD), said on Monday he is finding plenty of opportunities in the current market to take long positions.

Financial Times:
- Citigroup(C) has slashed the size of its struggling off-balance-sheet investment funds by more than $15 billion in two months through quiet side deals with some junior investors.
- The Federal Reserve is likely to cut interest rate by 25 basis points at its policy meeting on Tuesday and indicate its willingness to consider further rate cuts in the future by citing low growth as the main risk to the US economy, most analysts believe.

Business Standard:
- Global drug major Pfizer’s new HIV/AIDS drug Celzentry has become the first known HIV/AIDS treatment drug to get a patent in India, in a significant development against the backdrop of the patent battle between multinational drug companies and patient groups in India.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are unch. to +.50% on average.
S&P 500 futures +.12%.
NASDAQ 100 futures +.27%.

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Earnings of Note
Company/EPS Estimate
- (MGAM)/.01
- (KR)/.35
- (COO)/.68
- (ABM)/.32

Upcoming Splits
- (XTO) 5-for-4
- (DNR) 2-for-1

Economic Releases
10:00 am EST
- Wholesale Inventories for October are estimated to rise .5% versus a .8% gain in September.

2:15 pm EST
- The FOMC is expected to lower the benchmark fed funds rate 25 basis points to 4.25%.

Other Potential Market Movers
- The weekly retail sales reports, IDB/TIPP Economic Optimism Index, (ARM) analyst meeting, (HPQ) analyst meeting, (T) investor day, (VVC) analyst breakfast, (GNW) strategic update, (MRK) business briefing, (GMR) analyst meeting, (WLP) investor conference, (A) analyst meeting, (GNK) analyst meeting, (VRGY) analyst meeting, (ALTR) analyst meeting, (GE) outlook meeting, Goldman Sachs Financial Services Conference, CIBC Virtualization Conference and Wedbush Morgan California Dreamin’ Conference could also impact trading today.

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

Stocks Finish Near Session Highs on Less Economic Pessimism

Indices
S&P 500 1,550.96 +.75%
DJIA 13,727.03 +.74%
NASDAQ 2,718.95 +.47%
Russell 2000 791.20 +.72%
Wilshire 5000 15,243.96 +.75%
Russell 1000 Growth 629.68 +.62%
Russell 1000 Value 826.24 +.92%
Morgan Stanley Consumer 762.82 +.38%
Morgan Stanley Cyclical 1,029.80 +.93%
Morgan Stanley Technology 638.05 +.82%
Transports 4,901.11 +.51%
Utilities 552.74 +.38%
MSCI Emerging Markets 159.26 -.22%

Sentiment/Internals
Total Put/Call .96 unch.
NYSE Arms .67 -27.70%
Volatility(VIX) 20.74 -.53%
ISE Sentiment 120.0 +8.11%

Futures Spot Prices
Crude Oil $87.95 -.36%
Reformulated Gasoline 224.90 -.88%
Natural Gas 7.05 -1.40%
Heating Oil 247.63 -1.13%
Gold 814.80 +1.82%
Base Metals 214.71 -1.58%
Copper 309.25 -1.07%

Economy
10-year US Treasury Yield 4.15% +5 basis points
US Dollar 76.04 -.33%
CRB Index 343.45 +.15%

Leading Sectors
Banks +2.77%
I-Banks +2.54%
REITs +2.14%

Lagging Sectors
Telecom -.64%
Oil Tankers -.73%
Papers -.74%

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Afternoon Recommendations
Oppenheimer:
- Reiterated Buy on (RATE), Top Small-cap Pick.

Citigroup:
- Added (EBAY) to CIR Recommended List, Maintain Buy.
- Reiterated Buy on (CELG).
- FCF yields in semis are >6%, a level that has only been seen two other times over the last 14 years(7/96 and 3/03). Historically, when this level has been achieved, semi stock returns are significant(+145% and +79% in the previous two instances). The FCF yield Buy signal augments Citi’s thesis of a new positive FCF cycle due to a combination of accelerating revenue growth, expanding gross margins and declining capex.

Afternoon/Evening Headlines
Bloomberg:
- Sharper Image(SHRP) holder Clinton Group boosted its stake to 7.2% from 1.04%.
- Texas Instruments(TXN), the biggest maker of mobile-phone chips, said fourth quarter sales will climb to at least $3.5 billion, raising the low end of its forecast. The shares advanced 5% in extended trading.
- Washington Mutual(WM) will write down the value of its home lending unit by $1.6 billion in the fourth quarter and cut 3,150 jobs as losses in the mortgage market increase. The stock is down 7% in after-hours trading.
- The Boeing(BA) board of directors today approved a 14% increase in the company’s dividend, the fifth increase in the past five years.

BOTTOM LINE: The Portfolio finished higher today on gains in my Biotech longs, Software longs, Retail longs and Semi longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished mildly higher, almost every sector rose and volume was about average. Measures of investor anxiety were about average into the close. Today's overall market action was bullish, considering recent gains. I would expect to see some near-term profit-taking on a 25 basis point cut in the fed funds rate tomorrow. A 50 basis point fed funds rate cut would likely lead to further near-term upside, depending on the accompanying policy statement. Any near-term market turbulence is likely to be mild and short-lived as short interest is back near record levels, hedge fund sentiment is still exceptionally bearish, retail options traders continue to display bearishness, large S&P 500 futures traders are still positioned near historically net short levels, and many large long only investors are still likely under invested. I suspect investment manager performance anxiety could also come back into play very soon as the S&P 500 is now 9% higher for the year, with the DJIA and Nasdaq each up 13%. Large-cap and mid-cap growth remains this year’s best performing styles, both rising 15% for the year.

Stocks Higher into Final Hour on Less Economic Pessimism, Falling Energy Prices

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Software longs and Retail longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is mildly positive today as the advance/decline line is slightly higher, most sectors are rising and volume is below average. Investor anxiety is about average. Today’s overall market action is bullish, considering recent gains. Fed fund futures now imply a 26% chance for a 50 basis point fed funds rate cut at tomorrow’s meeting, which is down from a 40% chance one week ago. While a 25 basis point fed funds rate cut seems likely now, given recent events, I suspect the odds of a 50 basis point cut are higher than the market perceives. Moreover, I believe a 50 basis point cut in the discount rate is likely. (LTD) saw notable insider buying over the last week. The Yale Crash Confidence Index for Individuals(the lower the index goes the more worried individuals are about a crash) just hit a record low last month, taking out the low seen in November 2002, which came right near the major bear market bottom in October 2002. This gauge of investor fear goes back to October 1989. This is just more evidence of the current “US negativity bubble,” in my opinion. Corporate insider activity remains exceptionally bullish. I expect US stocks to trade mixed into the close from current levels as less economic pessimism and lower energy prices offsets profit-taking and declining odds for a 50 basis point rate cut tomorrow.

Today's Headlines

Bloomberg:
- MBIA Inc.(MBI) will receive as much as $1 billion from private equity firm Warburg Pincus LLC. Shares of MBIA, the world’s largest bond insurer, soared as much as 27% after the company said it will sell as much as $500 million of common stock to Warburg Pincus.
- Thornburg Mortgage(TMA), the lender forced to halt loans earlier this year, was removed from “creditwatch” by S&P’s Rating Services, saying the company has “sufficient funding for current business volumes.” The change “reflects the success of Thornburg’s ongoing efforts to stabilize its funding and liquidity,” S&P said.
- The risk of companies defaulting on their debt fell as UBS AG’s plan to sell stakes to investors in Singapore and the Middle East lifted optimism that financial companies will weather the subprime turmoil.
- US banks and insurers make “attractive” investments after a mortgage market slump depressed their shares, an official at Qatar’s $60 billion sovereign wealth fund said.
- Energy and metals prices may fall by as much as 20% next year as a slowing US economy curbs demand for oil and industrial metals, said Tiberius Asset Management AG, which manages $1.4 billion in commodities. Demand from speculators accounts for about $15 to $20 of the oil price, Tiberius said.
- Crude oil is falling another $.64/bbl. to $87.64/bbl. and is down almost $12/bbl. from recent highs on worries over slowing global demand and a firmer US dollar.
- Nickel fell the most in a week on concern that demand in China and Japan, the world’s largest consumers of the stainless-steel ingredient, may take months to recover.
- Higher US food prices have little to do with the ethanol boom, according to a study by Informa Economics. Food costs, which the US government says will rise 3%-4% in 2008, are affected more by rising energy prices and traditional supply and demand influences such as weather and exports.
- Treasuries are falling again as concern eased that subprime mortgage losses will deepen, reducing demand for the safety of US government debt.
- Harvard University will cut costs by one-third to one-half, depending on income, for families of students making between $120,000 and $180,000 a year.
- Michael Pickens, son of billionaire investor Boone Pickens, was sentenced to probation and continued drug and alcohol treatment for using fake stock tips to dupe investors out of $1.2 million.
- Democratic NY Governor Eliot Spitzer’s approval rating dropped to the lowest ever as a majority of members of his own party said they wouldn’t vote to re-elect him in 2010, a new poll by the Siena Research Institute found.
- McDonald’s(MCD), the world’s largest restaurant company, said November sales rose 8.2% as an increase in burgers and chicken sandwiches in Europe bolstered revenue more than analysts estimated.
- Bankrate Inc.(RATE), the online provider of personal financial services, forecast 2008 revenue to exceed analysts’ estimates, sending its shares up as much as 18% in Nasdaq trading.

Wall Street Journal:
- Caterpillar(CAT) Takes to Road in China for Publicity.
- Race Is on for the Next Blood Thinner.
- Failed talks between striking screenwriters and film and television producers may shut down much of the entertainment industry and result in sweeping change in the TV business.

NY Times:
- The New York Philharmonic plans to perform in North Korea in February, the first major cultural visit by Americans to the country.
- Slot Machines Attract Younger Players.
- Yahoo! Inc.(YHOO) plans to start an online service for investors next month to report on technology stocks and offer some live coverage of news, daily streaming-video segments and blog postings, citing Brian Nelson, a Yahoo spokesman.

Business Daily:
- Starbucks Corp.(SBUX) will double its coffee imports from east Africa by 2009.

WashingtonPost.com:
- Even as Democratic House Majority Leader Steny H. Hoyer has joined in steps to clean up pork-barrel spending, the Maryland congressman has tucked $96 million worth of pet projects into next year’s federal budget, including $450,000 for a campaign donor’s foundation.
- Citi subprime ills could spark takeover by JPMorgan: analysts.

USA Today:
- Housing market is stabilizing, optimistic Realtors say.

Forbes.com:
- The Next Bubble? Where to find the next market meltdown? Perhaps half a world away. Some fund managers believe that emerging market stocks, which have provided great returns are perilously overvalued.

Portfolio.com:
- LinkedIn, an Internet social network for professionals, will open up its services on Monday to outside software developers, starting with BusinessWeek magazine, to transform itself from an online contracts and referral database into an indispensable daily tool for business users.

Reuters:
- European Central Bank Governing Council member John Hurley said euro-area inflation may slow to below the bank’s 2% ceiling in 2009.

Pacific Epoch:
- Apple(AAPL), Shenzhen in Talks For iPhone Deal.

La Repubblica:
- Assicurazioni Generali SpA plans to make cash acquisitions in the US, taking advantage of the euro’s strength against the dollar, Co-CEO Giovanni Perissinotto said. “We aim to go shopping, but not in Europe where the prices are too high and the future prospects for earnings are limited,” Perissinotto said.