Gauge of US Business Activity Jumps to 7-month High, Order Backlogs Soar to 10-year High, New Home Sales Fall

- The Chicago PMI for December rose to 56.6 versus estimates of 51.7 and a reading of 52.9 in November.

- New Home Sales for November fell to 647K versus estimates of 717K and 711K in October.

BOTTOM LINE: The Chicago PMI, a measure of US business activity, unexpectedly rose this month to the highest level since June as new orders increased and businesses reduced stockpiles of unsold goods, Bloomberg reported. Booming exports may help sustain growth in manufacturing, economists said. The New Orders component of the index rose to 58.4, the highest since August, versus 53.9 the prior month. Moreover, the Order Backlogs component soared to 60.7, the highest since January 1998, versus 45.9 in November. The Prices Paid component fell to 63.8 from 76.2 the prior month and the Employment component fell to 49 versus 54.4 in November. This report is a big positive. I continue to 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 record exports.

Sales of new homes in the US fell in November, Bloomberg reported. The median price of a new home fell .4% from year ago levels to $239,100. The number of homes for sale fell 1.8% to 505,000, the fewest in two years. The inventory to sales ratio rose to 9.3 months worth from 8.8 months worth in October. New Home Sales fell 28% in the Midwest, 19% in the Northeast and 6.4% in the South. They rose 4% in the West. I continue to believe new home construction will remain muted over the intermediate-term as builders work down inventories. I expect new home sales to bounce back next month, which should bring down inventories meaningfully with homes for sale at a 2-year low.

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Friday Watch

Late-Night Headlines
Bloomberg:
- The funeral of former Pakistani Prime Minister Benazir Bhutto was set for today after her assassination set off street protests and drew condemnations from leaders inside the country and around the world.
- France bans smoking in cafes, hotels and clubs on Jan. 1, stamping out the habit popularized by Jean-Paul Sartre puffing Gauloises in hazy brasseries.
- The perceived risk of Pakistan defaulting on its dollar-denominate debt rose to the highest in a month after former Prime Minister Benazir Bhutto was murdered at an election rally yesterday.

Wall Street Journal:
- Chinese securities regulators are preparing to outline new rules that would give global investment banks access to the country’s domestic exchanges.
- Companies in the S&P 500 paid a record $27.73 a share in dividends in 2007, and S%P expects that amount to rise 9.3% in 2008.

NY Times:
- A Post-Google Fraternity of Investors. A growing number of Google millionaires are hoping to parlay their newfound wealth into even greater riches by bankrolling technology start-ups.

CNNMoney.com:
- Beware the dreaded R word. You don’t know whether we’re in a recession until months after it starts. But investing successfully requires looking forward, not backword.
- Apple(AAPL) seen planning own Ne(x)tflix. Surging consumer tech company is developing rental components to iTunes that could dramatically boost digital movies, according to a report.

SmartMoney.com:
- iPhone Could Give Apple(AAPL) Inroad to Enterprise Sales.

IBD:
- With Housing Down, Some Buying Spots The Boom Bypassed.
- US online retail sales from November 23 through December 24 rose 22.4% from the year-earlier figure, Mastercard(MA) Advisor’s SpendingPulse reported on Thursday. And Chase(CCF) Paymentech’s Pulse Index, which uses transaction data from 10 top online merchants, says holiday sales through December 23 were up nearly 30%.

USA Today.com:
- Nike, Coke try to inspire with New Year’s ads.

Financial Times:
- Bhutto in her own words: ‘Only democracy can defeat Pakistan’s extremists.’

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Night Trading
Asian Indices are -1.25% to unch. on average.
S&P 500 futures +.26%.
NASDAQ 100 futures +.16%.

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Economic Releases
9:45 am EST
- The Chicago PMI for December is estimated to fall to 51.7 versus 52.9 in November.

10:00 am EST
- New Home Sales for November are estimated to fall to 717K versus 728K in October.

Other Potential Market Movers
- The weekly EIA natural gas inventory report could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by technology shares and automaker 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 at Session Lows on Pakistan News, Profit-Taking

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Stocks Lower into Final Hour on Pakistan News, Profit-taking and More Economic Pessimism

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Semi longs, Software longs and Medical 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 substantially lower, almost every sector is declining and volume is light. Investor anxiety is above average again. Today’s overall market action is bearish. The NYSE Arms is a very high 1.62, the VIX is surging 7% back to 20 and the total put/call is an above-average .97. Cyclicals and small-caps are under the most pressure today on another spike in economic pessimism and profit-taking after recent gains. As well, the 10-year yield is falling 8 basis points. The broad market appears to be tracking the (XLF) closely again today. Given recent gains and today’s news, weakness isn’t too surprising. With such light volume, elevated levels of investor pessimism and high NYSE Arms reading it wouldn’t take too much buying to boost the averages into the close. I am also seeing positive action today among some growth stock leaders such as (MA), (AMZN), (BIDU), (AAPL) and (DECK). I expect US stocks to trade modestly higher into the close from current levels on diminishing credit market angst, seasonal strength, bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- As the US savings and loan crisis worsened in the 1980s, analysts tried to top each other’s estimates of the debacle’s cost to the federal government. Much the same thing is happening now with losses linked to subprime mortgages, with figures of $300 billion to $400 billion being bandied about. A more realistic amount is probably half or less than those exaggerated projections – say $150 billion. That’s hardly chicken feed, though not nearly enough to sink the US economy.
- Pakistan’s Bhutto Assassinated in Attack at Rally.
- The cost of borrowing dollars, euros and pounds fell, adding to evidence that measures by central banks to east the gridlock in money markets are succeeding.
- The Fed will reduce interest rates at every policy setting meeting “for the next two to three quarters,” PIMCO’s Paul McCulley said in a note released today to clients. The central bank will act to “truncate both the length and the severity” of a contraction in lending, McCulley said.
- Crude oil is rising to a one-month high after as investment fund speculation rose after an EIA repot showed US inventories fell more than expected.
- Wheat fell to a two-week low as rising production in Argentina, the world’s fourth-largest exporter of the grain, eased speculation by investment funds for further price gains.
- Sotheby’s(BID), the world’s second-largest auction house, sold about 46% more art this year as US, Russian and Asian collectors bid up prices for contemporary artists such as Francis Bacon and Jeff Koons.
- Cirrus Logic(CRUS), the maker of computer chips for Bose Corp. and Pioneer Corp., rose more than 5% on the Nasdaq after a fund founded by billionaire George Soros boosted its stake in the company almost sevenfold.
- Pacific Crest analyst Andy Hargeaves said Apple Inc. will meet or exceed his earnings estimates, the Mac will continue to take market share and that Apple is still a good buy over $200.

Wall Street Journal:
- Even as plasma and LCD television screens flew off the shelves before Christmas, manufacturers were starting to roll out a new technology that they predict will produce the next generation of mass-market video displays.

BloggingStocks:
- Apple’s new price target: $300.

CNNMoney.com:
- Vestas Wind Systems Gets Order From AES For 52 Turbines.

AP:
- Acting New Jersey Governor Richard Codey will sign into law a bill he sponsored that restricts paroled sex offenders from surfing the Internet.

Trends-Tendances:
- European Central Bank council member Guy Quaden said the financial-market turmoil has yet to have a major effect on Europe’s economy, citing an interview.