Durable Goods Orders Decline, Existing Home Sales Fall Slightly

- Durable Goods for October fell .4% versus estimates of a .1% decline and a 1.4% fall in September.

- Durables Ex Transports for October fell .7% versus estimates of a .3% gain and an upwardly revised 1.1% gain in September.

- Existing Home Sales for October fell to 4.97M versus estimates of 5.0M and 5.03M in September.

BOTTOM LINE: Orders for US durable goods fell more than forecast in October, Bloomberg reported. Bookings for non-defense capital goods excluding aircraft, a gauge of future business investment, fell 2.3%, the most since February, after a 1.2% increase in September that was larger than previously thought. Boeing(BA) had orders for 56 aircraft in October versus 132 the prior month. However, demand this year so far for their planes reached a record 1,047. I expect durable goods order to bounce back next month on inventory rebuilding and better-than-expected demand.

Sales for previously owned homes fell slightly more than forecast last month, Bloomberg reported. The median home price is now $207,800. The number of homes for sale at the current sales pace is 10.8 months’ worth. Existing home sales fell 1.7% in the Midwest and 4.4% in the West. Sales were unchanged in the Northeast and the South. I expect sales to bounce higher next month as the average 30-year mortgage rate has declined 54 basis points since June and there is likely some pent-up demand at this point. Fed fund futures now imply a 94% chance for a 25 basis point rate cut at the upcoming December 11^th meeting and a 6% chance of a 50 basis point cut.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Mohamed Al-Hamli, president of OPEC, said producers are pumping enough oil to meet global demand. Al-Hamli said world economic data is “most important” to OPEC and that OPEC’s spare capacity is 3 million bbls./day. He also said OPEC is spending $50 billion on refining projects and $150 billion on capacity expansion by 2012. OPEC sees a “real risk” of “wasting” resources on expansion as spare capacity may not be needed.
- Samsung Electronics, the world’s second-largest mobile-phone maker, forecast shipments will rise by more than 25% next year, outpacing industry growth, on demand for handsets with faster download speeds.
- Online sales rose to a record $733 million yesterday as US consumer returned to work after Thanksgiving and continued holiday shopping online. Internet retail purchases increased 21%, with shoppers favoring Amazon.com(AMZN), Wal-Mart(WMT) and Target(TGT), ComScore said today.
- Florida and Chicago borrowed a total of almost $500 million for schools in today’s largest single sales of US municipal bonds, tapping the market as benchmark tax-exempt yields rose from an eight-month low.
- Japan’s retail sales rose at the fastest pace in more than a year as consumer bought new-model cars.
- BHP Billiton(BHP) got financing for its $120 billion proposal to buy rival Rio Tinto Group(RTP) from seven banks with a loan of as much as $70 billion.
- Crude oil fell for a third day in NY on speculation that OPEC will next month agree to raise output.

Wall Street Journal:
- Hedge funds came through the first three months of the credit crunch in reasonable shape. But November is turning out to be a different proposition. Average returns look likely to be back in negative territory for the first time since August.
- Verizon(VZ) to Open Cell Network to Others’ Phones.

NY Times:
- Oil Producers See the World and Buy It Up.
- Congressional negotiators are nearing agreement on a measure to set significantly higher fuel economy standards for cars and light trucks, according to aides and lobbyists following the talks.
- Google’s(GOOG) Next Frontier: Renewable Energy.

BusinessWeek:
- Abu Dhabi’s Citigroup(C) Bargain. The emirate’s investment arm grabs a chunk of the financial giant, as US woes offer tempting buys for cash-rich, Gulf state funds.

CNNMoney.com:
- $100 oil and the ‘S’ word. Is it growing demand and tight supply, or merely rampant speculation that has pushed crude to record highs?
- 25 most powerful business people.

CNBC.com:
- Dell(DELL) to Sell Google(GOOG) Business Search Devices.

ABCNews.com:
- California’s Gold Coast. No Sign of Real Estate Slump Among the Priciest Homes.

Reuters:
- GM(GM) to build hybrid cars in China from 2008: report.
- Insiders snapping up shares at Fannie Mae(FNM).
- Short interest on the NASDAQ rose 1.5% in mid-November, the exchange said on Tuesday, suggesting an increase in bearish sentiment in the stock market.

Financial Times:
- A derivatives index tracking subprime mortgage securities is up from record lows this week, after loan performance data showed the pace of deterioration in the mortgage market slowed slightly in October. An analysis of the ABX indices by Goldman Sachs last week showed the index was pricing in cumulative losses of $402 billion, or 29% of the subprime mortgage market, roughly double the $211 billion it has estimated. This figure assumes 32% of the losses priced into the ABX will come from loans issued in 2007, and 39% of losses will come from loans issued in 2006, with the balance relating to prior years. Goldman said the AAA-rated slice of the index had fallen too far, and should have no losses, regain their 22% losses and trade at par.
- Investment funds from the Middle East and Asia have invested an estimated $37 billion in shares of western financial companies this year in a sign the funds are taking a more optimistic view than other investors of the growth prospects for banks, exchanges and asset managers.
- Some 48% of Americans now believe the US military effort in Iraq is going well, compared with 30% in February, according to the latest poll by the Pew Research Center.

Economic Daily News:
- High Tech Computer, the world’s largest maker of mobile phones using Microsoft’s(MSFT) Windows operating system, may post record monthly sales of $433 million this month on demand for its handsets. High Tech said sales will rise at least 10% next year as the company releases models with more features. Handset shipments will increase about 20% in 2008 from the estimated 11 million phones to be sold this year.

China Daily:
- China’s ruling Communist Party will continue to guide the government to strengthen macroeconomic controls next year in order to promote “sound and rapid” economic growth, particularly by limiting fixed asset investments.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (SPW), target $115.
- Maintained Buy on (ADBE), target $56.
- Maintained Buy on (ATVI), target $29.
- Reiterated Buy on (DELL), target $35.
- Reiterated Buy on (TECD), target $56.
- Buy (SNPS) ahead of earnings report on 12/6, target $35.

Night Trading
Asian Indices are -.50% to +.50% on average.
S&P 500 futures -.13%.
NASDAQ 100 futures -.16%.

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Earnings of Note
Company/EPS Estimate
- (BWS)/.66
- (CBRL)/.66
- (DLTR)/.37
- (MW)/.69
- (ARO)/.47
- (SIGM)/.53
- (JAS)/.25
- (CWTR)/-.12

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Durable Goods Orders for October are estimated to fall .1% versus a 1.7% decline in September.
- Durables Ex Transports for October are estimated to rise .3% versus a .3% increase in September.

10:00 am EST
- Existing Home Sales for October are estimated to fall to 5.0M versus 5.04M in September.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -1,000,000 barrels versus a -1,071,000 barrel decline the prior week. Gasoline supplies are estimated to rise by 500,000 barrels versus a 163,000 barrel increase the prior week. Distillate Inventories are expected to fall by -1,200,000 barrels versus a -2,407,000 barrel decline the prior week. Finally, Refinery Utilization is expected to rise by .55% versus a .66% decline the prior week.

2:00 pm EST
- Fed’s Beige Book

Other Potential Market Movers
- The Fed’s Mishkin speaking, Fed’s Fisher speaking, Fed’s Kohn speaking, weekly MBA Mortgage Applications report, weekly EIA energy inventory report, (ROH) analyst day, (ERF) analyst meeting, Bear Stearns Commodities & Capital Goods Conference, CSFB Tech Conference, CSFB Aviation Conference, FBR Investor Conference, JPMorgan Homebuilding Conference, CIBC Mid & Small Cap “Best Ideas” Conference, Lazard Healthcare Conference, Piper Jaffray Healthcare Conference and Merrill Lynch Health Services Conference could also impact trading today.

BOTTOM LINE: Asian indices are mixed as gains in technology stocks are being offset by losses in commodity shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Sharply Higher on Strength in Financial Sector, Falling Energy Prices

Indices
S&P 500 1,428.23 +1.49%
DJIA 12,958.44 +1.69%
NASDAQ 2,580.80 +1.57%
Russell 2000 743.27 +1.12%
Wilshire 5000 14,343.23 +1.35%
Russell 1000 Growth 595.33 +1.4%
Russell 1000 Value 773.09 +1.43%
Morgan Stanley Consumer 738.35 +1.3%
Morgan Stanley Cyclical 947.63 +1.2%
Morgan Stanley Technology 602.08 +1.97%
Transports 4,466.78 +1.88%
Utilities 523.36 +.62%
MSCI Emerging Markets 146.54 +.15%

Sentiment/Internals
Total Put/Call .81 -16.49%
NYSE Arms .70 -64.47%
Volatility(VIX) 26.28 -9.1%
ISE Sentiment 132.0 +28.16%

Futures Spot Prices
Crude Oil $94.58 -3.19%
Reformulated Gasoline 237.10 -2.88%
Natural Gas 7.56 -2.10%
Heating Oil 265.95 -1.74%
Gold 810.50 -1.94%
Base Metals 220.43 -1.03%
Copper 297.85 -2.36%

Economy
10-year US Treasury Yield 3.95% +11 basis points
US Dollar 75.13 +.36%
CRB Index 347.77 -1.58%

Leading Sectors
I-Banks +3.31%
Banks +2.6%
REITs +2.21%

Lagging Sectors
Gold -.25%
Energy -.73%
Oil Service -1.4%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Wells Fargo(WFC) will take a $1.4 billion pretax charge in the fourth quarter because of increased losses on home equity loans.
- Freddie Mac(FRE) plans to sell $6 billion in preferred stock and cut its dividend in half to shore up capital.
- Youths fought police for a second night in suburbs north of Paris, injuring more than 60 officers, as unrest triggered by the death of two teenagers spread.
- Crude oil fell more than $3 a barrel in NY after Saudi Arabia’s oil minister, Ali al-Naimi, said the country increased production to the highest this year.

globeandmail.com:
- Movie rental chain Blockbuster Inc. is in talks with all the major mobile phone makers about partnerships aimed at making it easier for consumers to watch movies on the go, CEO Keyes said.

BOTTOM LINE: The Portfolio finished higher today on gains in my Medical longs, Biotech longs, Semi longs and Retail 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 higher, almost every sector rose and volume was above average. Measures of investor anxiety were about average into the close. Today's overall market action was bullish. Market leading growth stocks gained meaningful traction on the close with many substantially outperforming the broad market once again. I continue to believe true “growth” stocks will outperform “value” stocks for the foreseeable future. The 10-year swap spread fell another 1.9 basis points today to 69.6 basis points over Treasuries. This is down from 87.5 basis points over Treasuries just five days ago, which is a big positive. It is also interesting to note that the yen remained weak throughout the day, notwithstanding the intraday pullback we experienced in the broad US stock market, which is a positive. As well, the G-7 Currency volatility index reversed lower today and is close to breaking down, which is also a positive. Nikkei futures are indicating a +50 open in Japan.

Stocks Higher into Final Hour on Falling Oil and Financial Sector Strength

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Medical longs, Biotech longs and commodity shorts. I covered some of my (EEM) short and my (IWM)/(QQQQ) hedges this morning, thus leaving the Portfolio 100% net long. The overall tone of the market is positive today as the advance/decline line is slightly higher, most sectors are rising and volume is above average. Investor anxiety is above average. The NYSE reported last Wednesday that total short interest on the exchange rose another 3.8% over the first two weeks of the month, to 12.38 billion shares. Moreover, short interest on the Amex, where many ETFs trade, jumped 11.9%. Short interest in the Financial Select Sector SPDR (XLF) rose by 18,739,906 shares, to 116,045,478 shares. It is still the second most heavily shorted security on the exchange and the most heavily shorted sector ETF. The (XLF) is rising 1.6% on today’s Citigroup news. Breadth is weaker than I would like to see and we have given back too much of today’s earlier gains. I expect US stocks to trade mixed into the close from current levels as financial sector strength and lower energy prices offset global economic concerns.

Today's Headlines

Bloomberg:
- Google Inc.(GOOG) created a research group aimed at developing cheaper renewable energy sources, focusing on solar, wind and other alternative forms of power.
- MBIA Inc.(MBI) and Ambac Financial(ABK), the two largest bond insurers, are considering raising capital through reinsurance or sales of debt or stock to maintain their AAA ratings, executives said.
- Cheng Jian Wei, on a 24-hour visit to NY from China, was willing to risk missing his bus to the airport for the chance to buy his son an iPod at Apple’s(AAPL) Fifth Avenue store.
- Treasury two-year notes fell the most in more than three years after Abu Dhabi agreed to invest $7.5 billion in Citigroup(C), boosting stocks and easing demand for the relative safety of government debt.
- Carlyle Group’s Blue Wave hedge fund has lost 9.3% since being started in March by the Washington-based firm to expand beyond buyouts. The fund, overseen by former Deutsche Bank AG executives Rick Goldsmith and Ralph Reynolds, fell 9.5% in October after beginning the month with $690 million in assets.
- Thornburg Mortgage(TMA) will reinstate its dividend, possibly as early as next month, said COO Larry goldstone.
- The Baltic Dry Index, a measure of the cost of hauling commodities, posted its longest losing streak since May amid a decline in Chinese iron-ore imports and expectations that global economic growth with slow.
- Crude oil is falling more than $3/bbl. in NY after Saudi Arabia’s oil minister said the country increased production to the highest this year.
- Gold is falling the most in a week after a decline in energy costs reduced demand for the precious metal as a hedge against inflation.

Wall Street Journal:
- NBC Universal agreed to become the first major television broadcaster to use TiVo’s viewership data and ad products.

NY Times:
- California’s Orange County Water District plans to start the world’s largest plant to purify sewer water enough for it to be drinkable.

Boston Herald:
- Massachusetts may become the first state in the nation to make it illegal for parents to slap or spank their children.

USA Today:
- The Department of Homeland Security is creating new technologies including camera systems and chemical sensors to detect improvised explosive devices.

Dow Jones:
- OPEC is discussing a 750,000-barrel-a-day increase in production because of concerns about the effect of oil prices on the US economy, citing an OPEC delegate.