Thursday Watch

Late-Night Headlines
Bloomberg:
- US lawmakers and regulators should reduce penalties on companies and their auditors to help American financial markets compete globally, a group of prominent executives and academics backed by Treasury Secretary Henry Paulson said.
- Tom Purves, CEO of BMW’s North America unit, expects to introduce a hydrogen-gasoline car in 2007.

Wall Street Journal:
- More US mothers take time off to raise their children during their first years even as their financial contribution to family income rises, citing a US Labor Statistics Bureau study to be released within a few weeks. In 2004, 51% of married mothers of infants worked, down from about 59% in 1997. Mothers with bachelor’s degrees or higher had the largest drop in work-force participation. Wives contributed 34.8% of families’ income, on average, in 2004, up from 32.7% in 1997.

Financial Times:
- The market for investing in the global infrastructure industry is overheated due to overvaluation and excessive leverage, citing Standard & Poor’s infrastructure director Michael Wilkins. Increased demand has resulted in the infrastructure industry becoming “an asset bubble similar to the dotcom era,” Wilkins said.
- Signet Group Plc, the world’s largest specialty jewelry retailer, will seek acquisitions in the US, citing CEO Burman.

China Daily:
- NYSE Group(NYX) plans to open an office in Beijing to convince more Chinese companies to list shares publicly on the NYSE, citing CEO Thain.
- China’s production of aluminum, used in car and plane parts, rose 17% in October from a year earlier, the National Bureau of Statistics said.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (DKS), raised target to $62.

Night Trading
Asian Indices are +.75% to +1.25% on average.
S&P 500 indicated -.01%.
NASDAQ 100 indicated +.01%.

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Earnings of Note
Company/EPS Estimate
- (CAKE)/.28
- (PLCE)/1.20
- (DLM)/.13
- (FNSR)/.03
- (HRB)/-.32
- (HNZ)/.60
- (OVTI)/.30
- (SFD)/.46

Upcoming Splits
- (EAT) 3-for-2
- (NT) 1-for-10

Economic Releases
8:30 am EST
- Personal Income for October is estimated to rise .5% versus a .5% gain in September.
- Personal Spending for October is estimated to rise .1% versus a .1% rise in September.
- PCE Core for October is estimated to rise .1% versus a .2% increase in September.
- Initial Jobless Claims for last week are estimated to fall to 315K versus 321K the prior week.
- Continuing Claims are estimated to fall to 2440K versus 2454K prior.

10:00 am EST
- Chicago Purchasing Manager for November is estimated to rise to 54.4 versus a reading of 53.5 in October.

BOTTOM LINE: Asian indices are higher, boosted by automaker and technology shares 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 Highs After Positive Beige Book Comments

Indices
S&P 500 1,399.48 +.92%
DJIA 12,226.73 +.74%
NASDAQ 2,432.23 +.81%
Russell 2000 784.16 +1.21%
Wilshire 5000 14,048.63 +.97%
S&P Barra Growth 650.41 +.86%
S&P Barra Value 746.78 +.98%
Morgan Stanley Consumer 674.37 +.59%
Morgan Stanley Cyclical 880.99 +1.0%
Morgan Stanley Technology 574.11 +.61%
Transports 4,737.82 -.33%
Utilities 454.58 +1.17%
Put/Call .67 -27.96%
NYSE Arms .82 -19.81%
Volatility(VIX) 10.83 -6.80%
ISE Sentiment 134.0 -.74%
US Dollar 83.51 +.46%
CRB 318.17 +1.02%

Futures Spot Prices
Crude Oil 62.39 +2.30%
Unleaded Gasoline 167.06 +2.71%
Natural Gas 8.87 +3.63%
Heating Oil 179.25 +3.71%
Gold 642.0 +.03%
Base Metals 237.32 -1.62%
Copper 315.50 -1.62%
10-year US Treasury Yield 4.52% +.39%

Leading Sectors
Oil Service +3.96%
Energy +2.97%
Steel +2.75%

Lagging Sectors
Semis -.43%
Oil Tankers -.43%
HMOs -.81%

Evening Review
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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- NYC subway and bus riders will be spared previously contemplated fare increases and service cuts for the next two years because the Metropolitan Transportation Authority will have a surplus this year of $938 million.
- Pfizer Inc.(PFE) should get US approval to market its Celebrex arthritis-pain pill for use in children because the benefits outweigh the risks, a FDA advisory panel said.
- Corporate profits from current production soared 31% in the year through September, the largest 12-month gain in 22 years, according to the Commerce Dept.’s 3Q GDP update.
- Most Federal Reserve districts reported “moderate growth” in October and November as gains in consumer spending and “solid” expansion in service industries offset weakness in housing and auto production, the Fed’s Beige Book said.
- Microsoft(MSFT) reiterated plans to sell 10 million Xbox 360 video game consoles by the end of the year, maintaining forecasts after Sony Corp. and Nintendo introduced competing machines.
- US farmers will plant 11% more acres of corn next year after rising demand for ethanol sent prices higher, agricultural broker Risk Management Commodities said.
- Alcan(AL) said it has no plans to bid for a titanium company.

CNBC:
- Home Depot(HD) may be a potential takeover target for private-equity firms.

San Francisco Business Journal:
- Microsoft Corp.(MSFT) is in talks to lease a large block of space at the new $460 million Westfield San Francisco Centre, which opened in September.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Biotech longs and Telecom longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished substantially higher, almost every sector rose and volume was above average. Measures of investor anxiety were mostly lower into the close. Today's overall market action was very bullish as the major averages and breadth finished near session highs. Today's midday weakness likely further trapped the near-record shorts. I still expect new all-time highs in the Dow over the next few weeks. The main negative today was the hot money jumping from market-leading growth stocks back to commodities. It is no wonder that the overwhelming majority of funds are badly lagging the S&P 500. I expect this momentum fund rotation to last a couple more days. Last night, Citigroup said steel imports into the U.S. were 3.5M tons in October, the fifth largest increase on record. For the year, steel imports have soared 44%, sending service-center inventories to records. Supplies are now 2.5-3.0M tons above normal. Citi expects this to continue to pressure pricing despite mill curtailments. They also said the U.S. market is already consolidated and that major players are unlikely acquisition targets. The Steel Index (STQ) rose 2.75% today as the mania for most commodities continues.

Stocks at Session Highs into Final Hour on Positive Beige Book Comments and Short-Covering

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Biotech longs and Telecom longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is about average. The Fed just released its Beige Book. It said consumer spending is increasing and that there is continued moderate growth in the economy. Most areas were cautiously optimistic on holiday sales. Housing and autos were weak areas of the report, however, manufacturing was positive and services were solid. It said that labor markets are tight, but wage growth is only moderate. Finally, most areas reported easing energy and construction costs. Overall, this report should be perceived as bullish for equities as it paints a picture of modest growth and inflation. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering and bargain-hunting.

Today's Headlines

Bloomberg:
- General Motors(GM) will introduce new hybrid gasoline-electric autos next year in an attempt to win sales from Toyota Motor(TM), the world leader in the fuel-saving technology.
- Tiffany & Co.(TIF) reported a 23% rise in earnings on increased sales of $20,000 rings and necklaces and boosted its profit forecast for the year because of holiday demand.
- Crude oil is rising to the highest in two months as speculators increased bets after a government reported showed distillate supplies unexpectedly fell.
- The US dollar is rising the most in three weeks against the euro after a government report showed US economic growth last quarter was quicker than previously estimated.
- NATO leaders agreed that future missions require a “fair sharing of the burden” in terms of military contributions as alliance members said allies need to do more to fight the Taliban in Afghanistan.
- Copper is falling to a one-week low on signs that demand continues to wane from US homebuilders as inventories rise.
- Oil prices “are very comfortable” and it’s too soon to tell whether OPEC will cut output at its next meeting, Kuwaiti Oil Minister Sheikh Ali-Jarrah al-Sabah said.

Wall Street Journal:
- Intel(INTC), Wal-Mart(WMT), BP Plc(BP) and other companies plan to disclose next week a plan to provide digital health records for their employees.
- Home Depot(HD) is betting that a new line of products called Orange Works can help revive sales.
- Citigroup(C) is linking its Smith Barney and Citibank units more closely, so that it can act as both banker and broker for more customers.
- Hewlett-Packard(HPQ) is starting a business to cool computers using technology that the company says can cut energy expenses by 25% to 45%.
- Two US hedge funds that pushed out the CEO of Pep Boys – Manny, Moe & Jack(PBY), a car parts retailer, after building up stakes have continued to buy shares.
- Volkswagen AG and DaimlerChrysler AG are unveiling diesel engines at the LA Auto Show that are clean enough to meet California emission standards.
- Honda Motor’s cars topped the list of vehicle brands with the best resale value.

NY Times:
- Riverdeep Group Plc is close to buying textbook publisher Houghton Mifflin Holdings for about $3.5 billion including debt.

Detroit News:
- Ford Motor(F) persuaded more than 35,000 hourly workers in the US to take buyout or early retirement offers that will have them leave the company by September 2008.

AP:
- Data indicate that oil companies “slacked off” supplying oil and gasoline during the seven-year rally that saw prices reach a record in July. In 2003, for example, Royal Dutch Shell Plc proposed closing a profitable oil refinery at Bakersfield, California.

Financial Times:
- Microsoft Corp.(MSFT) shares could keep rising because its Windows Vista software may do better than some analysts expect.

Engineering News:
- De Beers Fuels Ltd. won South Africa’s first commercial license to produce bio-diesel.

3Q GDP Revised Higher, Inflation Reading Revised Lower, New Home Sales Decline, New Home Prices Rise

- Preliminary 3Q GDP rose 2.2% versus estimates of a 1.8% gain and prior estimates of a 1.6% increase.
- Preliminary 3Q GDP Price Index rose 1.8% versus estimates of a 1.8% gain and prior estimates of a 1.8% increase.
- Preliminary 3Q Personal Consumption rose 2.9% versus estimates of a 2.8% increase and prior estimates of a 3.1% gain.
- Preliminary 3Q Core PCE rose 2.2% versus estimates of a 2.3% gain and prior estimates of a 2.3% increase.
- New Home Sales for October fell to 1004K versus estimates of 1049K and a downwardly revised 1037K in September.

BOTTOM LINE: The economy expanded at a revised 2.2% annual rate from July through September, faster than forecast, Bloomberg said. The core PCE Index, the Fed’s favorite inflation gauge, rose 2.2% versus a 2.7% increase in the second quarter. Consumer spending, which provides about 70% of US economic growth, rose 2.9% versus a 2.6% increase in the second quarter. Residential construction fell 18% during 3Q. Business fixed investment, which includes commercial building and spending on equipment and software, rose at a 10% pace during 3Q. 3Q Nominal GDP rose 4.0%. I continue to believe 4Q GDP growth will exceed estimates of 2.5% as the deflator subtracts less than most expect.

Sales of new homes in the US fell more than forecast in October, Bloomberg reported. The supply of unsold homes at the current sales pace rose to 7 months’ worth. The median price of a new home rose 1.9% to $248,500 from 243,900 a year earlier. Sales fell 39% in the Northeast, 5.6% in the Mid-west and 1.7% in the South. They rose 3.2% in the West. I continue to expect housing to stabilize at relatively high levels over the coming months, which combined with subsiding auto production cutbacks, should help US economic growth accelerate back to around average levels over the intermediate-term.

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