Stocks Lower into Final Hour on Weakness in Financials

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Biotech longs, Medical longs and Internet longs. I have not traded today, thus leaving the Portfolio 75% net long. The overall tone of the market is negative today as the advance/decline line is substantially lower, most sectors are falling and volume is above average. Investor anxiety is above average again. Today’s overall market action is bearish. The US dollar-based 3-month LIBOR rate is falling another 7 basis points to 4.99% today and is down 74 basis points from September highs. As well, the 30-day asset backed commercial paper yield is falling another 4 basis points today to 5.97%, down 36 basis points from September highs. The 10-year swap spread is falling slightly today and is now 66 basis points over treasuries, which is down from 87 basis points three weeks ago. The Bear Stearns High Yield Index and JPMorgan Emerging Market bond indices are up .39% and .18%, respectively, over the last five days. These are all positives. The rise in the 10-year yield today is more related to the strong retail sales report, rather than inflation worries, in my opinion. The decline in oil is mainly related to US dollar strength. I continue to believe the US dollar has at the very least put in place an intermediate-term bottom. Market leading stocks and the financials(XLF) are cutting losses rapidly. Given how pessimistic the environment has become and the overwhelming belief that a recession is just around the corner, I suspect US stocks can rise meaningfully during the first quarter if such an outcome fails to materialize. I continue to believe modestly below trend economic growth of around 2% on average is likely over the intermediate-term. I expect US stocks to trade modestly higher into the close from current levels on falling energy prices, less economic pessimism, bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- Red Kite Metals, the hedge fund that almost tripled investors’ money last year, lost about 22% in November as copper prices fell, according to two investors in the fund.
- Blackstone Group LP, manager of the world’s biggest buyout fund, raised $1.3 billion to invest in debt securities hurt by this year’s credit-market turmoil.
- The turmoil roiling credit markets is creating “great and unique” opportunities as banks are forced to sell debt, said Beat Wittmann, CEO of investment products at Julius Baer Holding AG.
- Gold is falling $16/oz. on US dollar strength and a decline in oil.
- Oil is falling $2/bbl. on worries over slowing global demand and a rising US dollar.
- The US House of Representatives approved legislation to bar CIA agents from using waterboarding during the questioning of suspected terrorists.
- Major League Baseball players and management ignored a flood of drug use in the sport, according to findings of a 20-month investigation that said All-Stars such as Roger Clemens and Andy Pettitte used steroids.

Wall Street Journal:
- Motorola Inc.(MOT) is living on the Razr’s edge these days, but slicing up the company may not be so easy.
- The US economy has long benefited from foreign investment since Dutch capital helped President George Washington and Scottish trusts financed the 19^th century railway boom, Steve Forbes wrote.

NY Times:
- Deutsche Lufthansa AG, Europe’s second-largest airline, is in talks to buy just under 25% of Jetblue Airways(JBLU).
- Paramount Pictures said the “Jackass 2.5” movie will be the world’s first studio-backed film to have its premiere online.

WashingtonPost.com:
- Democrats Blaming Each Other For Failures.

Silicon Alley Insider:
- Will Google(GOOG) Force Time Warner(TWX) to Take AOL Public?

Financial Times:
- The New York Times(NYT) may suffer if News Corp.(NWS/A) Chairman Rupert Murdoch aggressively challenges its flagship newspaper by cutting the Wall Street Journal’s cover price and boosting its national distribution.

AFP:
- The Iraqi Foreign Minister announced that Iraq will reopen its oil pipeline connecting Baniyas to Kirkuk which was closed after the US-led liberation of Iraq four years ago. It is significant that the two sister countries are close to naming ambassadors and economic relations developed between the two countries in November 2006 after they were broken by the Saddam Hussein regime over Syrian support for Iran in its eight-year war with Iraq.

Interfax:
- Kazakhstan increased oil production 2.1% in the first 11 months of the year form the same period in 2006, citing government statistics. Production rose to 1.1 million barrels per day.

Bear Radar

Style Underperformer:

Small-cap Value (-1.29%)

Sector Underperformers:

Gold (-3.30%), Biotech (-2.85%) and Steel (-2.65%)

Stocks Falling on Unusual Volume:

PLT, MOD, TTO, ELN, EEFT, ASYS, FTEK, BIIB, CIEN, NETC, HAYN, SHPGY, NIHD, RNOW, CCBL, ACMR, IPSU, BUSE, DPTR, OTEX and MICC

PPI Surges on Rise in Energy and Light Trucks, Retail Sales Double Estimates

- The Producer Price Index for November rose 3.2% versus estimates of a 1.5% increase and a .1% gain in October.

- The PPI Ex Food & Energy for November rose .4% versus estimates of a .2% gain and unch. in October.

- Advance Retail Sales for November rose 1.2% versus estimates of a .6% gain and a .2% rise in October.

- Retail Sales Less Autos for November rose 1.8% versus estimates of a .6% gain and an upwardly revised .4% increase in October.

- Initial Jobless Claims for this week fell to 333K versus estimates of 335K and 340K the prior week.

- Continuing Claims rose to 2639K versus estimates of 2599K and 2601K prior.

BOTTOM LINE: Prices paid to US producers climbed more than economists expected in November, pushed up by surging energy prices. Core prices rose .4%, the most since February, on a rise in the cost of light trucks. Core producer prices are rising at a 2% rate over the last year, just above the long-term average of 1.8% and down from 2.8% in July 2005. Energy costs rose 14.1%, a record one-month gain versus a .8% decline in October. Food prices were unchanged for the month. Computer prices fell 2.4% versus a 1.3% decline the prior month. Producer Price increases should show meaningful deceleration next month on the pullback in energy prices. The 10-year TIPS spread, a gauge of inflation expectations, is only 2 basis points higher on the news and is still down 15 basis points from levels seen two weeks ago. I continue to believe inflation fears have peaked for this cycle and that the secular trend of disinflation remains firmly in tact.

Retail sales exceed forecasts, rising twice as much as economist predicted in November, Bloomberg reported. Purchases at furniture, electronics, building-material, and department stores all increased. Morgan Stanley boosted their 4Q GDP growth estimate to 1.2% from .2% after the report. Excluding gasoline, autos and building materials, the number used to compute GDP, sales still gained a strong 1.1% versus a .2% gain the prior month. I continue to believe retail sales, including online sales, will exceed estimates for the entire holiday shopping season as low unemployment, strong wage growth, record consumer net worth and low interest rates more than offset the drag from energy and housing.

Bull Radar

Style Outperformer:

Large-cap Growth (-.65%)

Sector Outperformers:

Software (+.92%), HMOs (+.18%) and Road & Rail (+.16%)

Stocks Rising on Unusual Volume:

MGI, KNM, MMA, IOSP, RIGL, SVNT, MATK, EMKR, ADCT, JOSB, IOSP, MRTN, XRAY, CYNO, UMBF, FCSX, FSLR, FSIN, LTRE, XMSR, CRDC, PRAI, ACAP, DOW, HON, FALC, PAS, CCE, NKE and HES

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