Stocks Finish Near Session Lows on Light Volume

Indices
S&P 500 1,254.42 -.30%
DJIA 10,784.82 -.11%
NASDAQ 2,218.16 -.48%
Russell 2000 677.96 -.31%
DJ Wilshire 5000 12,556.02 -.28%
S&P Barra Growth 599.71 -.39%
S&P Barra Value 650.43 -.20%
Morgan Stanley Consumer 596.14 -.17%
Morgan Stanley Cyclical 790.04 -.03%
Morgan Stanley Technology 525.39 -.72%
Transports 4,241.34 +.41%
Utilities 406.63 -.10%
Put/Call .90 +7.14%
NYSE Arms 1.19 +6.61%
Volatility(VIX) 11.61 +2.29%
ISE Sentiment 163.00 -17.68%
US Dollar 91.09 -.13%
CRB 329.32 unch.

Futures Spot Prices
Crude Oil 60.31 -.02%
Unleaded Gasoline 165.24 +3.85%
Natural Gas 11.19 -.25%
Heating Oil 170.10 -.11%
Gold 518.70 +.23%
Base Metals 152.98 -.52%
Copper 204.50 -.02%
10-year US Treasury Yield 4.36% -.31%

Leading Sectors
Gold & Silver +1.67%
Airlines +.75%
Steel +.75%

Lagging Sectors
Semis -.96%
Tobacco -1.38%
Oil Service -1.57%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on SPLS ,HD, ODP, DKS and PETM.

Afternoon/Evening Headlines
Bloomberg:
- US music album sales dropped about 7% this year as Internet sites such as Apple Computer’s iTunes store more than doubled their share of the market.
- Sumner Redstone placed his stake in Midway Games into a new company controlled by his daughter, Shari Redstone, as part of an effort to free him from debt.
- ConocoPhillioips, Marathon Corp. and Amerada Hess Corp. said they reached an agreement with the Libyan National Oil Corp. allowing them to return to Libya after a 19-year absence.
CNBC:
- Applied Digital Solutions’(ADSX) VeriChip Corp. subsidiary has filed papers for an IPO

BOTTOM LINE: The Portfolio finished slightly lower today as losses in my Medical longs and Computer longs more than offset gains in my Energy-related shorts. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was mildly negative today as the advance/decline line finished modestly lower, most sectors declined and volume was very light. Measures of investor anxiety were higher into the close. Overall, today's action was good for the bears as the major averages and breadth finished near session lows. It seems as though technology shares come under pressure any time a weak housing number is released. Time and signs of stabilizing home sales will cure this. I still expect any early January weakness to be shallow and short-lived.

Stocks Slightly Higher Mid-day on Light Volume

Indices
S&P 500 1,258.99 +.07%
DJIA 10,815.40 +.18%
NASDAQ 2,228.07 -.04%
Russell 2000 681.61 +.23%
DJ Wilshire 5000 12,603.29 +.10%
S&P Barra Growth 601.88 -.03%
S&P Barra Value 652.92 +.18%
Morgan Stanley Consumer 597.10 -.01%
Morgan Stanley Cyclical 793.56 +.42%
Morgan Stanley Technology 527.55 -.31%
Transports 4,264.08 +.95%
Utilities 408.33 +.32%
Put/Call .86 +2.38%
NYSE Arms .98 -12.44%
Volatility(VIX) 11.30 -.44%
ISE Sentiment 175.00 -11.62%
US Dollar 91.10 -.12%
CRB 329.13 -.06%

Futures Spot Prices
Crude Oil 60.20 +.64%
Unleaded Gasoline 165.00 +3.70%
Natural Gas 11.26 -3.15%
Heating Oil 170.50 +1.19%
Gold 518.00 +.33%
Base Metals 152.98 -.52%
Copper 204.40 -1.21%
10-year US Treasury Yield 4.37% -.05%

Leading Sectors
Gold & Silver +1.37%
Airlines +1.32%
Steel +1.18%

Lagging Sectors
Networking -.66%
Oil Service -.92%
Tobacco -1.25%

BOTTOM LINE: The Portfolio is slightly lower mid-day on losses in my Medical longs and Computer longs. I have not traded this morning, thus leaving the Portfolio 100% net long. The tone of the market is slightly positive as the advance/decline line is modestly higher, most sectors are higher and volume is light. Measures of investor anxiety are mixed. Overall, today’s market action is neutral considering positive economic data and lower natural gas prices. The AAII % Bulls fell to 37.30% this week from 41.03% the prior week. This reading is still at below-average levels and has declined 21.3 percentage points in seven weeks. The percentage bears rose to 36.51% from 28.21% the prior week. This reading is now at above-average levels and has increased 20.5 percentage points in five weeks. I expect bullish sentiment to rise modestly next week. My sense is that many funds that have been badly burned in recent Januarys have cut long exposure over the past few weeks. The fact that bullishness has declined to this extent with the market near a four-year high bodes very well for another push higher during first quarter 2006. I expect US stocks to trade mixed-to-higher into the close on short-covering, more optimism and seasonal strength.

Today's Headlines

Bloomberg:
- Holiday sales on the Internet soared 30% over last year as people shopped online for computers and electronic devices such as Apple Computer’s iPod music players.
- AT&T will spend hundreds of millions of dollars on a branding campaign that begins on New Year’s Eve and includes the music of UK rock band Oasis.
- Use of the so-called date-rape drug, gamma hydroxybutate dropped 76% over five years in California, a study says.

Wall Street Journal:
- The Federation of Islamic Organizations in Europe often identifies with radical fundamentalist groups, making it difficult for European officials to establish a dialogue to fight terrorism.
- Smith Barney plans to bring together some of its branch offices and Citigroup’s retail-banking operations in an attempt to leverage the parent company’s resources.
- German police have banned the association that ran a Muslim cultural center for allegedly promoting Islamic jihad.
- Retailers and manufacturers of flat-panel TVs are cutting prices as sales outstrip revenue earned from ordinary TVs.
- Venture capitalists are investing in companies that produce consumer electronics after years of focusing mainly on companies that supplied equipment for businesses.

NY Times:
- US homes are more affordable than they were two decades ago because of higher income and lower interest rates, loan fees and downpayment requirements, citing Economy.com.
- Semiconductor industry groups in the US, Europe, Japan, Korea and Taiwan outlined a plan to replace conventional silicon transistors in electronics with switches made from single molecules or electrons in a report to be issued Dec. 31.

NY Post:
- The number of crimes on NY’s subways has been cut in half since 1997, a result of the decision to add police officers to the system as part of increased anti-terrorism efforts.

Financial Times:
- Amazon.com’s UK unit had a record Christmas season this year, delivering 20% more gifts on its busiest day compared with 2004.

Labor Market Still Healthy, Chicago Manufacturing Strong, Home Sales Slow, Oil Supplies Rise

- Initial Jobless Claims rose to 322K last week versus estimates of 320K and 319K the prior week.
- Continuing Claims rose to 2715K versus estimates of 2625K and 2630K prior.
- Chicago Purchasing Manager for December rose to 61.5 versus estimates of 60.0 and a reading of 61.7 in November.
- Existing Home Sales for November fell to 6.97M versus estimates of 7.0M and 7.09M in October.
- The EIA reported crude inventories rose 118,000 barrels vs. estimates of a 500,000 barrel drawdown. Gasoline supplies fell 1.22 million barrels vs. estimates of a 250,000 decline. Distillate supplies fell 890,000 barrels vs. estimates of a 1.5-million-barrel fall. Refinery utilization rose 0.83% vs. estimates of a 0.63% rise. Natural gas supplies fell 162 bcf vs. estimates of a 160 bcf fall.

BOTTOM LINE: The number of Americans filing first-time claims for unemployment benefits rose last week, remaining below the average for 2005 and suggesting the labor market is still growing, Bloomberg reported. The four-week moving average rose to 325,000 from 324,750. The unemployment rate for those eligible for benefits, which tracks the US unemployment rate remained at 2.1%. I continue to believe the labor market will remain healthy over the intermediate-term as interest rates remain low and businesses increase spending.

An index of Chicago-area business conditions fell less than expected in December as orders increased, suggesting manufacturing in the region remained strong at year-end, Bloomberg said. The prices paid component of the index fell to 83.8 from 94.1 in November. The new orders component of the index rose to 66.7 from 61.6 in November. The employment component of the index rose to 51.7 from 50.3 the prior month. I continue to believe manufacturing will add to US economic growth over the intermediate-term on hurricane and inventory rebuilding.

US previously owned home sales declined in November to an eight-month low, Bloomberg reported. The median home price rose 13.2% from a year-ago to $215,000. The supply of homes for sale rose to 5 months’ worth from 4.9 months’ worth the prior month. Sales fell 3.7% in the West, 2.7% in the Northeast, 1.3% in the Midwest and .7% in the South. I continue to believe the housing market is slowing from its record-setting pace to healthy more sustainable levels.

Overall, the EIA inventory numbers are bearish for the energy complex considering how much talk there has been of substitution away from natural gas.

Links of Interest

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Thursday Watch

Late-Night Headlines
Bloomberg:
- South Korea’s industrial production rose 5% in November to a record as car companies and chipmakers expanded to meet export orders and rebounding domestic demand.
- Deutsche Bank AG advises betting on the dollar continuing its advance against the yen.
- South Korean laboratories used by scientist Hwang Woo Suk no longer have any stem cells created from patients’ tissues, the result of the researcher’s landmark May 2005 paper.

Financial Times:
- Public US companies may have to provide investors with valuations of senior executives’ pensions and stock options as part of an overhaul of disclosure rules on executive pay by the SEC.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on BSX.

Night Trading
Asian Indices are +.50% to +1.0% on average.
S&P 500 indicated +.10%.
NASDAQ 100 indicated +.12%.

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Earnings of Note
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FRE/1.02
NAV/3.06

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Initial Jobless Claims for last week are estimated to rise to 320K versus 318K the prior week.
- Continuing Claims are estimated to fall to 2625K versus 2638K prior.

10:00 am EST
- Chicago Purchasing Manager for December is estimated to fall to 60.0 versus a reading of 61.7 in November.
- Existing Home Sales for November are estimated to fall to 7.0M versus 7.09M in October.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude drawdown of 500,000 barrels. Gasoline inventories are estimated to fall 125,000 barrels, and distillate supplies are expected to fall 1,500,000 barrels. Finally, refinery utilization is expected to rise 0.63%.

BOTTOM LINE: Asian indices are higher, boosted by exporting shares in the region after US consumer confidence improved. I expect US equities to open mixed and to rally modestly into the afternoon. The Portfolio is 100% net long heading into the day.