DJIA Hits Another Record High on Positive Fed Comments

Indices
S&P 500 1,425.55 +.22%
DJIA 12,471.32 +.24%
NASDAQ 2,429.55 -.25%
Russell 2000 782.10 +.01%
Wilshire 5000 14,272.34 +.18%
S&P Barra Growth 658.18 +.32%
S&P Barra Value 765.61 +.11%
Morgan Stanley Consumer 694.30 +.25%
Morgan Stanley Cyclical 891.32 +.24%
Morgan Stanley Technology 571.64 -.28%
Transports 4,637.97 -.46%
Utilities 459.79 +.66%
Put/Call .95 -15.18%
NYSE Arms .86 -4.54%
Volatility(VIX) 10.30 -2.83%
ISE Sentiment 152.0 -17.39%
US Dollar 83.46 -.64%
CRB 312.46 +.67%

Futures Spot Prices
Crude Oil 63.30 +.81%
Reformulated Gasoline 170.0 +1.50%
Natural Gas 7.13 +.78%
Heating Oil 171.25 -.48%
Gold 625.80 +1.28%
Base Metals 240.11 -.27%
Copper 302.0 -.31%
10-year US Treasury Yield 4.59% +.26%

Leading Sectors
Gold & Silver +2.49%
Energy +1.47%
HMOs +1.17%

Lagging Sectors
Alternative Energy -.83%
REITs -.91%
Semis -1.41%

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Afternoon Recommendations
Banc of America:
- Upgraded (SPG), (MAC), (NXL), (VTR), (HCP), (BXP), (EXR) to Buy.
- Downgraded (DRE), (PKY), (CLI), (GCT) to Sell.

Deutsche Bank:
- Rated (GFIG) Buy, target $75.
- Rated (ITG) Buy, target $60.
- Rated (NITE) Buy, target $25.

Afternoon/Evening Headlines
Bloomberg:
- US stocks rose, pushing the Dow to another record high, as comments from the Fed’s Fisher quelled economic concerns.
- Emerging market stocks headed for the biggest drop in three months after Thailand imposed then rescinded currency controls on international investors, highlighting the risks of investing in developing economies.
- Copper fell in NY after a report showed US building permits dropped to a nine-year low in November.

CNBC:
- Harrah’s Entertainment(HET) has accepted a $16.7 billion buyout offer from Apollo Management LP and Texas Pacific Group.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Internet longs, Computer longs and Biotech longs. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was slightly negative today as the advance/decline line finished modestly lower, sector performance was mixed and volume was slightly above average. Measures of investor anxiety were mostly lower into the close. Today's overall market action was neutral. The Johnson Redbook same-store sales index rose 2.6% year-over-year this week vs. a 2.5% rise the prior week. The long-term average is a gain of about 3%. There is still no evidence, in my opinion, that a meaningful slowdown in consumer spending is underway, even as this remains a focal point for the many bears. Retail sales have decelerated recently on unseasonably warm weather and procrastination by shoppers in hopes of greater discounts. However, online sales will likely be even greater than raised expectations this holiday shopping season. I continue to believe a healthy labor market, falling energy prices, relatively low long-term interest rates, decelerating inflation, a rising stock market and less irrational pessimism will boost consumer spending back to above-average levels over the intermediate term as housing stabilizes at relatively high levels and auto production cutbacks subside. The Morgan Stanley Retail Index (MVRX) has soared 22.5% in less than five months vs. a 15.9% gain in the S&P 500 over the same time frame. I suspect the recent weakness in select retail is another buying opportunity.

Stocks Mixed into Final Hour, Recouping Morning Losses

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Computer longs and Biotech longs. I covered some of my IWM, QQQQ and EEM hedges today, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is modestly lower, most sectors are declining and volume is above average. The 15% decline in the Bangkok SET Index last night only resulted in around 2% declines in other emerging markets. Emerging market fund inflows are currently dwarfing all prior peaks. I continue to believe this mania will end very badly as commodities decline further. The major US averages and breadth are near session highs after the Fed's Fisher said that economic growth is above 2% now and will accelerate next year. I sense that the bears are losing control again as more potential catalysts failed to send stocks meaningfully lower. This should result in further short-covering into the close as the near-record shorts try to protect gains of the last couple of days. Fisher is now answering questions and saying that the Fed senses inflation expectations are contained and that he has no doubt the Fed’s anti-inflation effort. He also repeated that he is comfortable with the current Fed policy stance. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, stable long-term rates and bargain-hunting.

Today's Headlines

Bloomberg:
- China’s government said it plans to nurture up to 50 state-owned enterprises to become globally competitive companies to shield them from overseas rivals under the World Trade Organization.
- Delta Air Lines rejected a hostile $8.38 billion merger proposal from US Airways Group and said it plans to exit bankruptcy on its own with a value of as much as $12 billion.
- Common drugstore painkillers would have to carry warnings about risks of liver damage and stomach bleeding under a proposal from US regulators.
- The Fed’s Fisher said the risk of inflation is greater than slower US economic growth and reiterated his belief that he is comfortable with current Fed policy stance.
- Securities-industry employees in NYC will receive $23.9 billion in bonuses this year, surpassing last year’s record by 17%, NY State Comptroller Alan Hevesi forecast.
- Thai stocks may rebound from the biggest slump in 16 years after the government scrapped day-old currency controls on international equity investors.
- Iranian President Ahmadinejad’s opponents took a lead in municipal elections in Tehran, suggesting he may be challenged at the next presidential poll by politicians seeking a more liberal economy and a less confrontational approach to the US.

Wall Street Journal:
- US Democrats remain divided over free trade, balanced budgets and other economic issues they once promoted as the party comes under pressure from organized labor and populists.
- AT&T(T) which started television services in the Texas cities of San Antonio and Houston, will expand the offering to San Francisco, New Haven and Hartford, Connecticut, and add high-definition channels.
- Wal-Mart Stores(WMT) has allowed employees to install a Communist Party branch at its headquarters in Shenzhen, China, in keeping with Chinese government regulations.

AP:
- Anheuser-Busch(BUD) will end its title sponsorship of Nascar’s second-tier racing series after the 2007 season.

PPI Bounces After Recent Declines, Housing Starts Jump

- The Producer Price Index for November rose 2.0% versus estimates of a .5% gain and a -1.6% decline in October.
- The PPI Ex Food & Energy for November rose 1.3% versus estimates of a .2% gain and a -.9% decline in October.
- Housing Starts for November rose to 1588K versus estimates of 1540K and 1488K in October.
- Building Permits for November fell to 1506K versus estimates of 1540K and 1553K in October.

BOTTOM LINE: Prices paid to US producers bounced back in November, led by rebounds in the costs of energy and light trucks, Bloomberg reported. So far this year, producer prices are rising at a .3% annual rate versus a 5.3% increase at this time last year. Core prices are rising at a 2% annual rate versus a 1.6% increase at this time last year. The price of gasoline surged 17.9%, while natural gas prices rose 5.9% in November. Both have since declined. Prices for raw materials jumped 15.7%, but are down 8.5% over the last year. Excluding food and energy, intermediate goods prices declined .3% versus unch. the prior month. Costs for light trucks jumped a record 13.7% after falling a record 9.7% the prior month. The 10-year yield, the best predictor of long-term inflation is unch. on this report. I expect Producer Prices to continue their longer-term trend of deceleration next month.

Housing starts in the US rebounded in November, jumping 6.7% from October’s rate. The increase in housing starts was led by a 19% surge in the South and an 8.5% gain in the Northeast. Starts fell 8.1% in the West and 6.3% in the Midwest. I continue to believe the worst of the housing slowdown is over and it is stabilizing at relatively high levels. However, new home construction will likely remain subdued over the intermediate-term as builders continue to work down inventoriesP.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- The California Public Employees’ Retirement System, the largest US public pension, will for the first time let investment managers take short positions in US stocks. As well, Calper’s investment committee approved allowing stock investments in China, Colombia, Egypt, Morocco, Pakistan, Russia, and Venezuela, which had until now been prohibited under the fund’s permissible market policy. Last month, the fund agreed to speculate in commodities for the first time.
- China, the largest source of overseas children adopted in the US, plans to bar would-be parents who are obese, single or over 50, according to notices posted on the Web sites of three leading US adoption agencies. Under rules effective from May 1, applicants must be married for more than two years with a high school education. The measures also ban multiple divorcees, the blind and those taking depression medication from becoming parents.
- Dirty Wall Street Secret: Hedge Funds of Funds Pay T-Bill Rates.
- South Korea’s won “has peaked” and is poised to weaken versus the US dollar in 2007 as increased overseas investment fuels demand for foreign currencies, a senior central bank official said.
- The Thai baht had the biggest two-day decline since May 2004, resulting in a 9% plunge in the country's stock market, after regulators yesterday required banks to lock up 30% of new foreign currency deposits for a year to curb speculation.
- EBay(EBAY) will close its primary China Web site and form a partnership with Beijing-based Tom Online to boost traffic in the world’s second-biggest Internet market.
- Crude oil was little changed in NY after posting yesterday its biggest decline in more than a month on signs mild weather will curb demand with supplies in the US near 7-year highs.

Nihon Keizai:
- Japan’s economy will grow by 2.0% in the year that begins in April 2007 in real terms and 2.2% on a nominal basis, citing a forecast the Cabinet is to approve today.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (CAG), raised target to $31.

CSFB:
- We maintain our view the US steel market is at risk of a prolonged de-stocking period characterized by low capacity utilization and continued high inventories. According to the Metals Service Center Institute, steel service center inventories totaled 3.8 months of supply at the end of November versus 3.6 months at the end of October and 2.8 months in November of last year. Absolute inventories are 33% above prior year levels. Shipments, an indication of demand, continued to slow. Total shipments of all steel products declined 6.3% sequentially and 3.3% year-over-year in November, marking the 3rd consecutive month of year-over-year declines in steel shipments(-1.1% on average during past three months following average year-over-year growth in shipments of 5.8% during the January-August period).

Night Trading
Asian Indices are -.75% to -.25% on average.
S&P 500 indicated -.01%.
NASDAQ 100 indicated -.01%.

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Earnings of Note
Company/EPS Estimate
- (CHAP)/1.26
- (CBK)/.24
- (CTAS)/.52
- (CC)/.05
- (DRI)/.40
- (FDS)/.46
- (MS)/1.77
- (PALM)/.15
- (SCHL)/1.71

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Producer Price Index for November is estimated to rise .5% versus a 1.6% decline in October.
- The PPI Ex Food & Energy for November is estimated to rise .2% versus a -.9% decline in October.
- Housing Starts for November are estimated to rise to 1540K versus 1486K in October.
- Building Permits for November are estimated to fall to 1540K versus 1553K in October.

BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and automaker shares in the region. I expect US equities to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.