Stocks Finish Modestly Higher on Merger Activity and Strong US Economic Growth

Indices
S&P 500 1,262.79 +.25%
DJIA 10,833.73 +.26%
NASDAQ 2,231.66 +.42%
Russell 2000 679.74 +1.03%
DJ Wilshire 5000 12,623.75 +.35%
S&P Barra Growth 604.78 +.24%
S&P Barra Value 653.59 +.27%
Morgan Stanley Consumer 600.89 +.27%
Morgan Stanley Cyclical 787.43 +1.16%
Morgan Stanley Technology 527.70 +.55%
Transports 4,198.69 +2.33%
Utilities 408.24 -1.21%
Put/Call .71 -37.72%
NYSE Arms .89 -21.66%
Volatility(VIX) 10.81 -3.40%
ISE Sentiment 204.00 -17.41%
US Dollar 91.00 +.24%
CRB 326.53 +.22%

Futures Spot Prices
Crude Oil 58.65 +.17%
Unleaded Gasoline 154.20 +.36%
Natural Gas 14.31 +.28%
Heating Oil 176.05 +.23%
Gold 497.70 +.48%
Base Metals 151.67 +.39%
Copper 201.50 -.12%
10-year US Treasury Yield 4.49% +.66%

Leading Sectors
Disk Drives +7.55%
Gold & Silver +2.48%
Gaming +1.90%

Lagging Sectors
Semis -.33%
Telecom -.52%
Utilities -1.21%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on WCC, IBM, PFE, CEM, FD, CCU and GNW.

Afternoon/Evening Headlines
Bloomberg:
- French Connection Group Plc, the owner of fashion stores in Europe, the US and Asia, has won a fight to continue using its FCUK logo on watches and jewelry, the BBC said on its Web site.
- Research In Motion said third-quarter profit rose 33%, beating analysts’ estimates and soothing concerns about customer defections.

BOTTOM LINE: The Portfolio finished higher today on gains in my Medical longs, Medical Information System longs and Computer longs. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, most sector rose and volume was slightly below average. Measures of investor anxiety were mostly lower into the close. Overall, I would classify today's action as neutral. The major averages and breadth are finishing modestly higher, however the afternoon weakness was disappointing for the bulls. My sense is that hedge funds, which now dominate trading, are very worried about a January swoon in stocks and have been positioning accordingly, which should benefit stocks in January. I expect stocks to put in a better showing to end the week.

Stocks Higher Mid-day on Merger Activity

Indices
S&P 500 1,264.47 +.38%
DJIA 10,855.42 +.47%
NASDAQ 2,232.42 +.45%
Russell 2000 678.50 +.85%
DJ Wilshire 5000 12,632.89 +.42%
S&P Barra Growth 605.62 +.38%
S&P Barra Value 654.38 +.39%
Morgan Stanley Consumer 601.07 +.31%
Morgan Stanley Cyclical 786.94 +1.09%
Morgan Stanley Technology 527.29 +.47%
Transports 4,197.43 +2.30%
Utilities 410.71 -.61%
Put/Call .58 -49.12%
NYSE Arms .79 -30.04%
Volatility(VIX) 11.67 -4.83%
ISE Sentiment 226.00 -8.50%
US Dollar 91.03 +.28%
CRB 325.69 -.04%

Futures Spot Prices
Crude Oil 58.35 +.45%
Unleaded Gasoline 151.70 +.54%
Natural Gas 14.11 +.21%
Heating Oil 175.20 +1.84%
Gold 495.30 -.34%
Base Metals 151.67 +.39%
Copper 201.75 -.12%
10-year US Treasury Yield 4.48% +.57%

Leading Sectors
Disk Drives +6.78%
Steel +1.75%
Gaming +1.62%

Lagging Sectors
Semis -.09%
Telecom -.37%
Utilities -.70%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Semi longs, Medical longs and Medical Information System longs. I covered the rest of my IWM and QQQQ shorts this morning and was stopped-out of a short, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are higher and volume is about average. Measures of investor anxiety are mostly lower. Overall, today’s market action is mildly positive considering recent trading. The Fed's Lacker is saying that he sees 3.5% real GDP growth next year, with household spending rising 3.5% as well. However, he said he sees "substantially faster" business investment. He said core inflation has been low and steady, but the Fed must respond vigorously to inflation signs. Finally, he says housing activity will cool next year. It is a positive that the Fed is acknowledging the slowing housing market. I expect US stocks to trade mixed-to-higher into the close on short-covering.

Today's Headlines

Bloomberg:
- Bloomingdale’s employees outnumbered lunchtime shoppers in the New York store’s main floor cosmetic department yesterday as the city’s first full-scale transit strike in 25 years kept customers away.
- The trial of ousted dictator Saddam Hussein resumed in Baghdad today after a two-week break due to Saddam’s refusal to attend court on Dec. 7.
- Allergan, maker of the Botox anti-wrinkle treatment, agreed to buy Inamed for $3.42 billion in cash and stock, adding Inamed’s wrinkke-smoothing Juvederm and saline breast implants.
- IBM agreed to buy Micromuse, a provider of network management software, for about $865 million in cash.
- President Bush accused Senate Democrats of “inexcusable” obstruction for failing to extend provisions of the USA Patriot Act that are scheduled to lapse at year’s end.
- The US Senate approved a package of $39.7 billion in spending cuts with Vice President Chaney casting the tie-breaking vote.
- US Senate Democrats blocked a bid to allow oil drilling in Alaska.
- Boeing may boost annual output of the new 787 plane because of strong demand and is considering another long-range version of the aircraft.

Wall Street Journal:
- China wants to use its enormous appetite for raw materials to screw down prices paid to suppliers.
- Seagate Technology, a California-based maker of computer disk drives, agreed to buy Maxtor for $1.9 billion in stock.
- Bank of America will tie up with American Express to issue a new range of credit cards as it seeks to win more big spenders.
- Toyota Motor is using automotive components and technologies to develop products including wheelchairs and orthopedic mattresses for Japan’s elderly.
- General Electric is in advanced talks with unidentified partners to buy Arden Realty, a southern California real-estate investment trust worth more than $3.1 billion.
- Thomas H. Lee Partners LP, one of the world’s biggest private-equity firms, has been thrown into turmoil by the departure of its founding partner, after whom it’s named.
- GMAC, which has been the subject of takeover interest, is being targeted by companies including Wachovia and JPMorgan Chase.
- Time Warner Executive Vice President Olaf Olafsson took control of negotiations over the sale of a stake in AOL after AOL executives expressed reservations about Microsoft’s technology.

NY Times:
- Sling Media’s Slingbox has the potential to further fragment the television-viewing audience.

AFP:
- OPEC will let the world’s leading industrial nations build up their stockpiles of oil during the next three months.

Detroit News:
- Hyundai Motor, South Korea’s largest automaker, will invest $94 million and add 600 jobs to expand a new technical center near Ann Arbor, Michigan.

LA Times:
- Crime in Los Angeles has fallen by about 10% this year and is on target for a third consecutive year of significant decline, citing Police Chief William J. Bratton.

CNBC:
- Billionaire Kirk Kerkorian may restore his stake in GM to 9.9%.

US Economic Growth Streak Best Since 1986

- Final 3Q GDP rose 4.1% versus estimates of a 4.3% gain and prior estimates of a 4.3% increase.
- Final 3Q Personal Consumption rose 4.1% versus estimates of a 4.2% gain and prior estimates of a 4.2% increase.
- Final 3Q GDP Price Index rose 3.3% versus estimates of a 3.0% increase and prior estimates of a 3.0% gain.

BOTTOM LINE: The US economy grew at a 4.1% annual rate in the third quarter, substantially higher than the 20-year average of 3.1%, Bloomberg reported. The economy has now grown by 3% or more for 10 straight quarters, the best streak since 1986. I expect US growth to slow to average levels next year, which will be viewed positively by equity investors.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Chevron said hurricanes in the Gulf of Mexico that shut oil wells and the company’s biggest refinery probably cut fourth-quarter profit by more than $600 million.
- Crude oil in NY is little changed, after rising yesterday for the first day in five, on expectations a US government report will show supplies dropped.
- Billionaire investor Kirk Kerkorian, GM’s third-biggest shareholder, sold almost a fifth of his 9.9% stake in the company after the investment lost one-third of its value.
- Time Warner agreed to sell Google a stake in AOL to help revive the Web unit’s sales.
- Calpine, the US power plant owner saddled with more than $17 billion in debt, filed for bankruptcy protection after soaring natural gas prices left it unable to make loan and bond payments.
- Citigroup is leading a bid of at least $2.7 billion for 85% of Guangdong Development Bank, the first state-owned Chinese lender to offer investors a majority stake.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on TYC and GOOG.

Night Trading
Asian Indices are +.50% to +1.0% on average.
S&P 500 indicated +.09%.
NASDAQ 100 indicated +.18%.

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Earnings of Note
Company/EPS Estimate
BBBY/.45
BMET/.43
KMX/.212
CMC/1.18
FDO/.31
FDX/1.40
MLHR/.39
JOYG/.45
MU/.11
PAYX/.29
RHAT/.09

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Final 3Q GDP is estimated at 4.3% versus prior estimates of 4.3%.
- Final 3Q Personal Consumption is estimated at 4.2% versus prior estimates of 4.2%.
- The Final GDP Price Index is estimated at 3.0% versus prior estimates of 3.0%.

BOTTOM LINE: Asian indices are higher, boosted by exporters in the region after the US dollar rose. I expect US equities to open mixed and to trade modestly higher into the afternoon. The Portfolio is 75% net long heading into the day.