Tuesday Watch

Late-Night Headlines
Bloomberg:
- Treasury Secretary Henry Paulson said his department will soon issue a report with suggestions on how to lower US corporate taxes, which he called “relatively high.”
- Forest Labs(FRX) and Mylan Inc.(MYL) won US approval for a new medicine for high blood pressure after 2 ½ years of delays.
- China is studying extra lending curbs to prevent overheating in the world’s fastest-growing major economy, according to a central bank official.
- The Federal Reserve will make it harder for lenders to charge fees for early repayment of subprime mortgages, according to consumer advocates and a regulator.

MarketWatch.com:
- NetSuite IPO highlights hot software space. Dutch-auction method, Ellison backing expected to increase attention.
- When economic historians tally up the global winners and losers of the 2007 subprime mortgage meltdown, the dollar will be in the loser column – but it’s not likely to stay there throughout the year to come.
- Tech in 2008: Steady, solid growth. Analysts say tech will benefit from utility computing, virtualization trends.

BusinessWeek.com:
- Innovation Predictions 2008.
- Asia-Pacific to Spend $154 Billion on IT. China and India will lead the charge, says research firm IDC, with government spending and green IT initiatives fueling some of the momentum.

USA Today.com:
- Gasoline prices under $3 a gallon, government says.

Reuters:
- President Fidel Castro suggested he doesn’t intend to hold on to power in Cuba and will make way for younger leaders.

Financial Times:
- There is no limit to the amount of money the Federal Home Loan Bank System can lend to support the mortgage finance industry as long as investors are willing to keep on buying its debt at moderate prices, said the system’s regulator.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (GM), target $41.

Night Trading
Asian Indices are -.75% to +.50% on average.
S&P 500 futures +.38%.
NASDAQ 100 futures +.23%.

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Earnings of Note
Company/EPS Estimate
- (BBY)/.41
- (GS)/6.34
- (DRI)/.50
- (HOV)/-1.63
- (TTWO)/-.08
- (PRX)/.22
- (PAY)/.37
- (LDK)/.36
- (PALM)/-.10
- (FDS)/.58

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Housing Starts for November are estimated to fall to 1179K versus 1229K in October.
- Building Permits for November are estimated to fall to 1150K versus 1170K in October.

Other Potential Market Movers
- The Fed governors meeting on the mortgage situation, weekly retail sales reports, (CHH) analyst meeting, (ALO) analyst meeting, (CBLI) investor update and (BCR) analyst meeting could also impact trading today.

BOTTOM LINE: Asian indices are mixed as gains in financial shares are offsetting losses in commodity stocks in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the day.

Stocks Finish Near Session Lows on Overseas Weakness, Profit-taking

Indices
S&P 500 1,445.90 -1.50%
DJIA 13,167.20 -1.29%
NASDAQ 2,574.46 -2.32%
Russell 2000 739.06 -1.97%
Wilshire 5000 14,494.65 -1.60%
Russell 1000 Growth 601.60 -1.73%
Russell 1000 Value 784.40 -1.31%
Morgan Stanley Consumer 738.14 -1.15%
Morgan Stanley Cyclical 967.64 -2.10%
Morgan Stanley Technology 608.12 -2.41%
Transports 4,643.05 -.74%
Utilities 533.11 -1.15%
MSCI Emerging Markets 145.65 -3.76%

Sentiment/Internals
Total Put/Call 1.11 +6.73%
NYSE Arms 1.12 -32.75%
Volatility(VIX) 24.52 +5.37%
ISE Sentiment 106.0 -13.82%

Futures Spot Prices
Crude Oil $90.72 -.60%
Reformulated Gasoline 233.55 -.26%
Natural Gas 7.03 +.07%
Heating Oil 260.02 -.30%
Gold 796.0 -.25%
Base Metals 206.57 -1.23%
Copper 288.0 -2.59%

Economy
10-year US Treasury Yield 4.15% -8 basis points
US Dollar 77.40 -.05%
CRB Index 347.99 -.17%

Leading Sectors
Retail -.12%
Insurance -.58%
Disk Drives -.62%

Lagging Sectors
Steel -4.30%
Gold -4.40%
Airlines -5.27%

Evening Review
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In Play

Afternoon Recommendations
Bank of America:
- Rated (MFLX) Buy, target $23.

CSFB:
- Rated (SUNH) Outperform, target $20.
- Rated (PSYS) Underperform, target $30.

Afternoon/Evening Headlines
Bloomberg:
- Treasury Secretary Henry Paulson said Fannie Mae(FNM) and Freddie Mac(FRE), the largest sources of finance for American mortgages, may help “jump start” the market for the largest home loans.
- The US dollar may extend its rally against the euro on speculation the US government will come up with measures to mitigate subprime mortgage losses.
- General Electric(GE) won an order for 200 wind turbines from EDF Energies Nouvelles SA to help the Paris-based company expand US operations.
- Adobe Systems(ADBE), the biggest maker of graphic-design software, reported a 21% increase in profit and issued a forecast that beat analysts’ estimates on increased demand for its Creative Suite program.
- Bill Gross said mortgage-backed securities guaranteed by government-chartered companies such as Fannie Mae(FNM) and Freddie Mac(FRE) “offer very compelling value.”
- Research In Motion(RIMM), the maker of the BlackBerry e-mail device, will open a US headquarters in Irving, Texas, stepping up efforts to reach American consumers and businesses.

CNBC:
- The boards of directors at Citigroup Inc.(C), Merrill Lynch(MER), UBS AG(UBS) and “possibly” JPMorgan(JPM) may make emergency injections into the companies’ bonus pools. The firms are concerned that Goldman Sachs(GS), with its “intact bonus pool,” will try to hire away their “top people.”

BOTTOM LINE: The Portfolio finished lower today on losses in my Internet longs, Computer longs, Medical longs and Retail longs. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was very negative today as the advance/decline line finished substantially lower, every sector fell and volume was slightly below average. Measures of investor anxiety were above average into the close. Today's overall market action was bearish. Goldman Sachs(GS) reports earnings before the open in the morning. As well, we get more housing data. I want to gauge the market’s reaction to these market movers before further shifting market exposure. Gauges of credit market angst fell today and financials displayed relative strength. Recent market bottoms have been preceded by the type of severe negative action that took place today in market leading stocks. Nikkei futures are indicating a down 125 open in Japan.

Stocks Sharply Lower into Final Hour on Overseas Losses and Profit-taking

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Computer longs, Internet longs and Medical longs. I have not traded today, thus leaving the Portfolio 75% net long. The overall tone of the market is very negative today as the advance/decline line is substantially lower, most sectors are falling and volume is below average. Investor anxiety is above average again. Today’s overall market action is bearish. Long-biased hedge funds have, in general, had very good years. I suspect that many of those funds are now locking in gains. This is likely the main reason for the severe underperformance today in this year’s biggest winners. The TED spread, which has been the source of much angst of late, is falling 15 basis points today to 195 basis points. It has declined 26 basis points in five days, which is a big positive. As well, the 30-day asset backed commercial paper yield is falling 18 basis points today to 5.79%. This is down 37 basis points in five days, which is also a big positive. I still expect stocks to finish the week on a positive note. I expect US stocks to trade modestly higher into the close from current levels on falling energy prices, bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- Goldman Sachs(GS) may start its newest stock hedge fund with as much as $10 billion in what would be the biggest debut in the industry’s history.
- Oil is falling $1.42/bbl. to $89.85/bbl. in NY on worries over rising global supplies, decelerating global demand and a stronger US dollar.
- Copper is falling to a nine-month low on worries over rising global stockpiles and slowing demand.
- Former President Bill Clinton’s decision to reconsider a business relationship with California billionaire Ron Burkle reflects concern those financial dealings may embarrass his wife’s presidential candidacy.
- Insider Buying of Retailers, Led by Dillard’s, Climbs.
- Ambac Financial Group(ABK) rose as much as 26%, and MBIA Inc.(MBI) climbed after Moody’s Investors Service affirmed the Ass credit ratings on the companies’ bond insurance units.

Wall Street Journal:
- Ingersoll-Rand(IR) has agreed to acquire Trane in a cash-and-stock deal valued at approximately $10.1 billion that would create one of the world’s largest makers of air conditioners and other climate-control systems.
- Will a Twist on an Old Vow Deliver for Domino’s Pizza(DPZ)?
- The Senate appears poised to hand the White House another victory with a measure that would make permanent an expansion of government spy powers and shield phone companies from liability for assisting government eavesdropping.

NY Times:
- Faster Chips Are Leaving Programmers in Their Dust.
- Can an untested Silicon Valley startup with the slightly embarrassing name Ribbit take on corporate giants like Microsoft(MSFT) and Avaya(AV)?

Reuters:
- China Eastern Airlines Corp. aims to buy 40 Airbus SAS A320s and is in talks to buy about 40 Boeing Co.(BA) 737s to expand domestic routes, citing the company’s chairman, Li Fenghua.

China Securities Journal:
- China will “actively and prudently” use interest-rate policy to stabilize inflation next year, citing People’s Bank of China Vice Governor Liu Shiyu.

al-Hayat:
- Syria and Iraq discussed plans to build a new oil pipeline to carry crude from Baghdad through Syrian territories. The two countries also discussed resuming operations on the Kirkuk-Baniyas oil pipeline from northern Iraq to the Syrian Mediterranean coast.

Bear Radar

Style Underperformer:

Large-cap Growth (-1.29%)

Sector Underperformers:

Airlines (-4.04%), Gold (-3.59%) and Oil Service (-3.11%)

Stocks Falling on Unusual Volume:

IR, BSI, NOV, ACIW, HAYN, COMV, ASFI, LIFC, FSTR, RIGL, PCLN, MTRX, RIGL and BDC

Current Account Deficit Shrinks, NY Manufacturing Decelerates, Prices Paid Falls, International Demand for US Assets Surges

- The 3Q Current Account Deficit fell to -$178.5 billion versus estimates of -$183.0 billion and a downwardly revised -$188.9 billion in 2Q.

- Empire Manufacturing for December fell to 10.3 versus estimates of 20.0 and a reading of 27.4 in November.

- Net Long-term TIC Flows for October rose to $114.0 billion versus estimates of $50.0 billion and a downwardly revised $15.4 billion in September.

BOTTOM LINE: The US current-account deficit narrowed in the third quarter to the smallest in two years, as the trade deficit shrank and Americans earned more on overseas investments, Bloomberg reported. The gap amounted to 5.1% of the economy, the smallest since the first quarter of 2004. I expect the current-account deficit to narrow further this quarter.

Manufacturing in New York expanded this month at a slower pace as companies cut inventories, Bloomberg reported. The Outlook component of the index, which measures the manufacturing outlook for the next six months, rose to 32.4 from 30.5 the prior month. The New Orders component fell to 14.3 from 24.5 the prior month. The Inventories component fell to -10 from -1.2 the prior month. The Prices Paid component fell to 35.0 from 42.9 the prior month. I still believe manufacturing will help boost overall US growth over the intermediate-term as companies gain confidence in the sustainability of the current expansion and rebuild depleted inventories as a result of booming exports.

International buying of US financial assets accelerated to the fastest pace in five months in October, when financial-market strains diminished as Federal Reserve policy makers lowered interest rates, Bloomberg said. The increase came as foreign investors bought more Treasuries than in any month in almost two years and bought the most US equities since May. International holdings of US equities rose a net $30.2 billion in October versus $2.6 billion in September. Foreign investors’ demand for US Treasuries rose by $49.8 billion versus $26.3 billion the prior month. International demand for US assets will likely increase further over the intermediate-term.