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- Emerging market stocks headed for the biggest drop in three months after Thailand imposed then rescinded currency controls on international investors, highlighting the risks of investing in developing economies.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.

Stocks Finish Lower on Year-end Profit-taking

Indices
S&P 500 1,422.48 -.32%
DJIA 12,441.27 -.03%
NASDAQ 2,435.57 -.88%
Russell 2000 782.02 -1.35%
Wilshire 5000 14,246.92 -.47%
S&P Barra Growth 656.05 -.53%
S&P Barra Value 764.74 -.13%
Morgan Stanley Consumer 692.57 +.10%
Morgan Stanley Cyclical 889.18 -.53%
Morgan Stanley Technology 573.23 -.56%
Transports 4,659.19 -.89%
Utilities 456.76 -.76%
Put/Call 1.12%
NYSE Arms .91 -3.23%
Volatility(VIX) 10.58 +5.27%
ISE Sentiment 184.0 +35.29%
US Dollar 83.97 -.08%
CRB 310.39 -.94%

Futures Spot Prices
Crude Oil 62.11 -2.08%
Reformulated Gasoline 167.30 -1.81%
Natural Gas 7.01 -5.28%
Heating Oil 172.15 -3.38%
Gold 618.50 -.10%
Base Metals 240.77 -1.45%
Copper 302.75 +.72%
10-year US Treasury Yield 4.59% -.13%

Leading Sectors
Gaming +.94%
Banks +.30%
Semis +.16%

Lagging Sectors
Steel -2.53%
Energy -2.81%
Oil Service -3.92%

Evening Review
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Afternoon Recommendations
Bank of America:
- Rated (MNST) Buy, target $57.

Afternoon/Evening Headlines
Bloomberg:
- Delphi Corp. will receive $3.4 billion from five investment firms to help it emerge from bankruptcy.
- Oracle Corp.(ORCL) said fiscal second-quarter profit rose 21% on higher sales of programs to manage business tasks such as payroll and inventory.
- Serious crime in New York fell 7.2% in the first six months of this year.
- Crude oil fell more than $1/bbl. as warmer-than-normal weather curbed heating-fuel consumption and investment funds’ near record speculation in the commodity subsided further.
- New US Defense Secretary Robert Gates said America “cannot afford to fail” in the Middle East and he will visit Iraq “quite soon” to consult with military leaders there.
- Marijuana is the largest US cash crop, eclipsing corn and wheat combined, a study in the Bulletin of Cannabis Reform said.

BOTTOM LINE: The Portfolio finished lower today on losses in my Internet longs, Retail longs, Computer longs and Biotech longs. I added to my EEM, IWM and QQQQ hedges in the final hour, thus leaving the Portfolio 50% net long. The tone of the market was negative today as the advance/decline line finished substantially lower, most sectors declined and volume was slightly above average. Measures of investor anxiety were mostly higher into the close. Today's overall market action was bearish. Small caps and commodities underperformed throughout the day. Oil Service stocks were particularly weak as this over-owned group fell almost 4% for the day. Today's action appeared to be mainly a result of year-end profit-taking in the best performers this year. I added to my hedges into the close based on the likelihood that overseas markets will come under pressure tonight due to the weakness in commodities.

Stocks Lower into Final Hour on Year-end Profit Taking

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet longs, Computer longs and Biotech longs. I added to my commodity shorts and added 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 substantially lower, most sectors are declining and volume is below average. Broadbased weakness in commodity-related stocks is weighing on the overall market, especially small caps. However, a number of sectors are positive outside of commodities. I still firmly believe overall sentiment towards U.S. stocks is extraordinarily bearish given recent gains, while many commodity investors remain very complacent given the ongoing deterioration in the underlying fundamentals. I suspect the record speculation that has been boosting most commodity prices to absurd levels will work against them next year as more funds jump the short side. I expect US stocks to trade mixed-to-lower into the close from current levels on profit-taking.

Today's Headlines

Bloomberg:
- Confidence among US homebuilders fell slightly in December for the first time in three months, however the sales expectations component of the index rose again.
- Statoil ASA’s offer to buy Norsk Hydro ASA’s energy unit and Express Scripts’(ESRX) bid for Caremark Rx(CMX) led more than $75 billion of takeovers announced today, capping a record year for mergers and acquisitions.
- Crude oil fell more than $1/bbl. this morning as warmer-than-normal weather in most of the US curbed heating-fuel consumption and damped near-record speculation by investment funds.
- Natural gas is falling another 4% to the lowest in more than seven weeks in NY as near-record inventories and mild weather curb near-record speculation by investment funds.
- Biomet(BMET) agreed to be acquired for $10.9 billion by a private equity group including Blackstone Group and Goldman Sachs Capital Partners.
- Shaw Group(SGR) shares rose as much as 17% after China selected a team that included the company for the biggest international nuclear reactor contract in history.
- Home Depot(HD) said investor Ralph Whitworth wants independent directors to study “strategic alternatives” and evaluate CEO Nardelli’s performance.
- Apollo Management LP agreed to buy Realogy Corp., the owner of Century 21 and Coldwell Banker real-estate brokers, for $6.6 billion in another sign the US housing slump may have touched bottom.
- Traffickers are increasingly using Venezuela to export illegal drugs to the US, citing William Brownfield, the US ambassador to Venezuela. In the past five years, the volume of illegal drugs shipped to the US after touching Venezuelan soil has soared 1,000% to as much as 300 metric tons a year. Brownfield said Venezuela’s decision to break a drug-control accord with the US Drug Enforcement Administration led to the surge.
- World steel production surged 10% in November to 104.2 million metric tons, led by a 24% jump in China’s production, the International Iron and Steel Institute said.
- “Blood Diamond,” the new Leonardo DiCaprio movie about gems-for-weapons dealing in war-torn Sierra Leone during the 1990s, may hurt Christmas sales of diamonds, according to an author who has written a book about the issue.
- Iraq resumed pumping oil through the Kirkuk pipeline to Turkey last night, adding 300,000 bpd to production.

Wall Street Journal:
- China agreed to let Nasdaq Stock Market(NDAQ) and NYSE Group(NYX) expand their operations in the country.
- US big-truck sales may drop sharply next year because sales in 2006 have been artificially boosted by environmental regulations that will raise prices starting next month.
- Attributor Corp. started testing a system that can scan billions of Internet pages for audio, video, images and text and make it easier to find when copy is being used without authorization.
- Verizon Communications(VZ) and AT&T(T) plan high-speed cable links to Asia to handle the growing volume of intercontinental Internet and telephone traffic.
- Google’s(GOOG) earnings growth may slow as the California-based Internet-search service’s interest income drops.
- News Corp.(NWS) will say today that it’s starting a service to enable customers of Cingular Wireless LLC to view its MySpace social-networking site on their mobile phones.

NY Times:
- NBC Universal, News Corp., Viacom Inc. and possibly CBS Corp. are close to announcing a venture that would rival Google’s(GOOG) YouTube in distributing videos on the Internet.
- Air America, Piquant LLC’s bankrupt liberal talk radio network, has received a bid from a group including two original investors and an unidentified media partner.
- Comcast Corp.(CMCSK) is testing a program to supply films on demand when they’re released in DVD format.

Financial Times:
- Sony Corp.(SNE) plans to start a video downloading service for its PlayStation Portable in the first quarter of 2007, challenging Apple Computer’s(AAPL) i-Tunes downloading service for its iPod player.

Les Echos:
- The “rapid” rise of the euro is “bad for the economy,” French Finance Minister Thierry Breton said.

Containerisation International:
- The world’s shipping lines charged less to move containers in the three months ended September, as new vessels entering the fleet boosted capacity.

Donews.com:
- EBay(EBAY) will announce a merger of its China Web site with Tom Online this week.

Current Account Deficit Widens Modestly

- The Current Account Deficit for 3Q widened to -$225.6 billion versus estimates of -$225.0 billion and -$217.1 billion in 2Q.

BOTTOM LINE: The US current-account deficit widened to $225.6 billion last quarter as the trade gap grew and the country paid more interest to overseas investors, Bloomberg reported. The US needs to attract about $2.5 billion a day to fund the deficit, which has not been a problem. International investment in long-term securities rose again in October as stocks climbed and demand for US Treasuries surged. US investors received less income on their holdings of international investments which helped widen the deficit. I expect the current account deficit to only improve modestly over the intermediate-term as the US dollar firms and overseas economic growth slows relative to US growth.

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Monday Watch

Weekend Headlines
Bloomberg:
- US stocks rose last week, lifting the DJIA to a record, after reports showed inflation receded last month and earnings from companies such as Bear Stearns beat analysts’ estimates.
- European Central Bank President Jean-Claude Trichet told a newspaper that he shares the opinion of the US Federal Reserve that the US economy is showing only “slight” signs of weakness.
- Metals evoke bear market as production gains, hedge funds sell. At the Pacorini Group warehouses in New Orleans, the 15,000 metric tons of copper that have accumulated since September are enough to wire about 7 million refrigerators and make every short-seller salivate.
- Prime Minister Tony Blair said the UK will go “all the way” in its support for the elected government of Iraq, suggesting UK forces stationed in the southern province of Basra may stay beyond mid-2007.
- Natural gas in NY may fall because mild weather so far this winter has crimped demand for the furnace fuel and left inventories near record highs.
- China, the US, Japan, South Korea and India, which account for almost half of global energy use, will cooperate on energy conservation and stable oil supplies, China said as the five gathered for a summit. “We want to send a message to the world that the biggest oil consumers will be pushing ahead with energy saving, increasing energy efficiency,” Ma Kai, head of China’s top economic planning body, said in Beijing.
- China picked Toshiba’s Westinghouse Electric for the biggest international nuclear reactor contract in history, trumping Areva SA for a project worth about $5.3 billion.
- The US dollar posted the biggest weekly advance against the yen since August as reports showing US retail sales rebounded and jobless claims fell allayed concern the world’s biggest economy is losing momentum.
- President Bush, calling on the new Democratic-controlled Congress to restrain spending, said his administration will propose ways to curb wasteful government programs known as “earmarks.”
- The withdrawal of foreign forces from Iraq won’t be “sudden,” Prime Minister Nuri al-Maliki said, as UK Prime Minister Tony Blair pledged continuing support tot eh establishment of democracy and stability in the nation.
- Taiwan stocks, laggards in Asias since 2001, may catch up with markets elsewhere in the region next year as new products spur demand for video-game consoles, computers and semiconductors.
- France will withdraw 200 members of its special forces deployed in Afghanistan, French Defense Minister Alliot-Marie said. After initially operating in the south of the country, they were later deployed around Jalalabad, the largest city in the east, where clashes with Taliban fighters have accelerated.
- Time Warner’s(TWX) Time magazine named Internet users behind the self-made content on sites such as YouTube and MySpace.com as its “Person of the Year,” reflecting the Web’s “digital democracy.”
- Homeowners may give he biggest Treasury rally in four years a boost as falling bond yields trigger a rush to refinance mortgages and increase demand for government debt.

Wall Street Journal:
- Washington Mutual(WM) has slowed the pace of expansion after failing to gain share in fast-growing new markets.
- The 2002 Sarbanes-Oxley Act, an anti-fraud law, is costly to the US economy and unconstitutional, Pepperdine University School of Law Dean Ken Starr wrote.
- Apollo Management LP and Texas Pacific Group are expected to win the auction for Harrah’s Entertainment(HET) with their offer of at least $909 a share.

Fortune:
- How an Apple iPhone could rock wireless.

NY Times:
- Sprint Nextel Corp.(S) CEO Forsee said the mobile-phone company may work with cable operators to provide wireless products.
- Credit Suisse Group, Deutsche Bank AG, hedge funds and billionaire Warren Buffett are spending billions of dollars to buy life insurance policies from older people.

Washington Post:
- Democrats taking over the leadership of Senate and House committees are poised to launch investigations into the conduct of the war with Iraq and allegations of prisoner abuse.
- Democratic Senator Barack Obama called his purchase of land from indicted campaign contributor Antoin Rezko a “boneheaded” mistake.

Philadelphia Inquirer:
- The Pennsylvania Gaming Control Board is expected to pick the two companies that will hold licenses to run slot machines in Philadelphia on Dec. 20.

AP:
- The Wall Street Journal tomorrow plans to announce the creation of a free, stock market tracker on the paper’s Web site.

LA Times:
- Syntroleum’s(SYNM) alternative jet fuel will face cold-weather test and trials with US Air Force refueling tankers after successful runs in B-52 engines. The fuel, which has been tested on B-52 planes over the last year, is a 50-50 mix of oil-based jet fuel and a synthetic liquid made from natural gas, and could replace traditional jet fuel in military and commercial planes.

Financial Times:
- Skype Technologies SA’s founders plan to start an on-line broadband television service that allows users to personalize their content.

Daily Telegraph:
- British Airways Plc CEO Walsh wants some of the UK air passenger tax to go to renew able energy projects.

London-based Times:
- Tesco Plc plans to convert al of its 2,000 distribution trucks to use a fuel that is partly made from agricultural products, citing Tesco’s CEO.

Economic Daily News:
- Asustek Computer targets sales of $23 billion in 2007, about 40% higher than this year.

Shanghai Securities News:
- China is implementing more controls of fixed-asset investment by centrally supervising the investment budgets of all state-owned enterprises for the first time.
- China’s inflation may stay at around 1.5% this year.

Weekend Recommendations
Barron's:
- Made positive comments on (COP), (NFX) and (OVEN).
- Made negative comments on (NYB) and (HLYS).

Citigroup:
- The National Retail Federation is now projecting total retail sales to increase 5% during this holiday season versus a 10-year average of a 4.6% gain.

Night Trading
Asian indices are +.25% to +.1.0% on average.
S&P 500 indicated +.05%
NASDAQ 100 indicated -.01%.

Morning Preview
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Earnings of Note
Company/Estimate
- (CAO)/.15
- (HOV)/1.05
- (JOYG)/.66
- (ORCL)/.22
- (SCS)/.19

Upcoming Splits
- (AEOS) 3-for2

Economic Releases
8:30 am EST
- 3Q Current Account Deficit is estimated to widen to -$225.0 billion versus -$218.4 billion in 2Q.

1:00 pm EST
- The NAHB Housing Market Index for December is estimated to rise to 34 versus 33 in November.

BOTTOM LINE: Asian Indices are higher, boosted by automaker and technology shares in the region. I expect US stocks to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the week.

Weekly Outlook

Click here for The Week Ahead by Reuters

There are a number of economic reports of note and some significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. - 3Q Current Account Balance, NAHB Housing Market Index

Tues. - Producer Price Index, Housing Starts, Building Permits

Wed. - MBA Mortgage Applications

Thur. - Final 3Q GDP, Final 3Q GDP Price Index, Final 3Q Personal Consumption, Final 3Q Core PCE, Initial Jobless Claims, Leading Indicators, Philadelphia Fed.

Fri. - Personal Income, Personal Spending, PCE Deflator, Durable Goods Orders, Final Univ. of Mich. Consumer Confidence

Some of the more noteworthy companies that release quarterly earnings this week are:

Mon. - CSK Auto(CAO), Hovnanian Enterprises(HOV), Joy Global(JOYG), Oracle Corp.(ORCL), Steelcase(SCS)

Tues. - Chaparral Steel(CHAP), Christopher & Banks(CBK), Cintas(CTAS), Circuit City(CC), Darden Restaurants(DRI), Factset Research(FDS), FuelCell Energy(FCEL), Lennar Corp.(LEN), Morgan Stanley(MS), Palm Inc.(PALM), Scholastic Corp.(SCHL)

Wed. - 3Com Corp.(COMS), Accenture Ltd(ACN), Actuant Corp.(ATU), Bed, Bath & Beyond(BBBY), Biomet(BMET), Carmax(KMX), Family Dollar(FDO), FedEx Corp.(FDX), Finish Line(FINL), Herman Miller(MLHR), Nike Inc.(NKE), Paychex(PAYX)

Thur. - AG Edwards(AGE), American Greeting(AM), Carnival Corp.(CCL), Commercial Metal(CMC), ConAgra Foods(CAG), General Mills(IS), Micron Tech(MU), Red Hat(RHAT), Resources Connection(RECN), Rite Aid(RAD), Shuffle Master(SHFL), Solectron(SLR), Worthington Industries(WOR)

Fri. - None of note

Other events that have market-moving potential this week include:

Mon. - None of note

Tue. - None of note

Wed. - None of note

Thur. - The Fed’s Lacker speaks

Fri. - None of note

BOTTOM LINE: I expect US stocks to finish the week modestly higher on mostly positive economic data, lower energy prices, seasonal strength, strong corporate profits, bargain-hunting, investment manager performance anxiety and short-covering. My trading indicators are still giving bullish signals and the Portfolio is 100% net long heading into the week.

Market Week in Review

S&P 500 1,427.09 +1.22%



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was bullish. The advance/decline line rose, almost every sector gained and volume was above average on the week. Measures of investor anxiety were mostly lower. The AAII percentage of Bulls rose to 41.33% this week from 38.94% the prior week. This reading is still below above-average levels. The AAII percentage of Bears fell to 38.0% this week from 41.59% the prior week. This reading is still well above average levels. The 10-week moving average of the percentage of Bears is currently 36.1%, an above-average level. The 10-week moving average of the percentage of Bears was 43.0% at the major bear market low during 2002. Moreover, the 50-week moving average of the percentage of Bears is 36.50%, a very high level seen during only two other periods in U.S. history.

I continue to believe steadfastly high bearish sentiment in many quarters is mind-boggling, considering the S&P 500's 17.7% rise in less than six months, one of the best August/September/October runs in U.S. history, the fact that the Dow made another all-time high today and that we are in the early stages of what is historically a very strong period for U.S. stocks after a mid-term election. Despite recent gains, the forward P/E on the S&P 500 is a very reasonable 16.2 due to the historic run of double-digit profit growth increases, which are poised to continue this quarter. Bears still remain stunningly complacent, in my opinion. As I have said many times over the last few months, every pullback is seen as a major top and every move higher is just another shorting/selling opportunity.

As well, there are many other indicators registering high levels of investor skepticism regarding recent stock market gains. The 50-day moving average of the ISE Sentiment Index just recently crossed above the 200-day moving average for the first time since November 2005. Nasdaq and NYSE short interests are just off record highs. Moreover, public short interest continues to soar to records, and U.S. stock mutual funds have seen outflows for most of the year, according to AMG Data Services. Finally, investment blogger bullish sentiment just hit another new low. There is still a high wall of worry for stocks to climb substantially from current levels as the public remains very skeptical of this bull market.

I continue to believe this is a direct result of the strong belief by the herd that the U.S. is in a long-term trading range or secular bear environment. There is still overwhelming evidence that investment sentiment by the general public regarding U.S. stocks has never been this poor in history, with the Dow registering all-time highs almost weekly. I still expect the herd to finally embrace the current bull market next year, which should result in another meaningful move higher in the major averages as the S&P 500 breaks out to an all-time high to join the Dow and Russell 2000. I continue to believe the coming bullish shift in long-term sentiment with respect to U.S. stocks will result in the "mother of all short-covering rallies."

The average 30-year mortgage rate rose 1 basis point to 6.12%, which is 68 basis points below July highs. I still believe housing is in the process of stabilizing at relatively high levels. Former Fed Chairman Alan Greenspan, current Fed Chairman Ben Bernanke and several current Fed members reiterated there belief recently that the “worst may well be over” for the housing slowdown. Mortgage applications surged 11.4% this week and continue to trend higher with the decline in mortgage rates. This is the second time in less than three months that mortgage applications have seen weekly double-digit percentage gains. The last time this happened was mid-2004. Moreover, the Mortgage Bankers Association said this week that the US housing market will “fully regain its footing” by the middle of 2007.

As well, housing inventories have been trending lower and homebuilding equities have been moving higher. The Housing Index(HGX) has risen 25.4% from July lows. The Case-Schiller housing futures have improved recently and are now projecting a 2.9% decline in the average home price over the next 6 months, up from projections of a 5.2% decline a couple of months ago. Considering the median house has appreciated over 50% during the last few years with record high US home ownership, this would be considered a “soft landing.” The overall negative effects of housing on the US economy and the potential for significant price drops are still being exaggerated by the bears in hopes of dissuading buyers from stepping in, in my opinion. Housing and home equity extractions have been slowing substantially for well over a year and have been mostly offset by many other very positive aspects of the US economy.

Home values are more important than stock prices to the average American, but the median home has barely declined in value after a record run-up, while the S&P 500 has risen 14.8% over the last year and 92.4% since the Oct. 4, 2002 low. Americans’ median net worth is still very close to or at record high levels, a fact that is generally unrecognized or minimized by the record number of market participants that feel it is in their financial and/or political interests to paint a bleak picture of America. Moreover, energy prices are down significantly, consumer spending remains healthy, unemployment is low by historic standards, interest rates are very low, inflation is below average rates, stocks are surging and wages are rising. The economy has created 644,000 jobs in the last four months. Challenger, Gray & Christmas reported recently that November job cuts were 22.7% lower than year-ago levels. As well, the Monster Employment Index hit another record high in November. The unemployment rate is a historically low 4.5%, down from 5.1% in September 2005, notwithstanding fewer real estate-related jobs and significant auto production cutbacks. Retail Sales ex autos for November rose the most since January. Consumer spending is still above long-term average levels and looks poised to remain healthy over the intermediate-term.

The Consumer Price Index for November rose 2.0% year-over-year, down from a 4.7% increase in September of 2005. This is substantially below the long-term average of around 3%. Moreover, the CPI has only been lower during 4 other periods since the mid-1960s. Many other measures of inflation have recently shown substantial deceleration. The Producer Price Index for October matched the largest decline in US history, falling 1.6% year-over-year. Most measures of Americans’ income growth are now more than twice the rate of inflation.

The benchmark 10-year T-note yield rose 4 basis points on the week on stronger economic data and diminishing recession worries. In my opinion, investors’ continuing fears over an economic “hard landing” are still misplaced, notwithstanding recent weak manufacturing data. Moreover, the ISM’s semi-annual forecast was released this week and gave an upbeat assessment expected manufacturing activity next year. The ISM Non-Manufacturing Index, which accounts for the vast majority of U.S. economic growth, rose to a very healthy 58.9 in November. Manufacturing accounts for roughly 12% of US economic growth, while consumer spending accounts for about 70% of growth. U.S. GDP growth came in at 1.1% and 0.7% during the first two quarters of 1995. The ISM Manufacturing Index fell below 50, which signals a contraction in activity, during May 1995. It stayed below 50, reaching a low of 45.5, until August 1996. During that period, the S&P 500 soared 31% as the P/E multiple expanded from 16.0 to 17.2. This was well before the stock market bubble began to inflate. As well, manufacturing was more important to US growth at that time. Stocks can and will rise as P/E multiples expand, even with more average economic and earnings growth. As I have said many times before, P/E multiple expansion is the bears' worst nightmare.

Weekly retail sales rose an above-average 3.2% for the week. Spending is poised to remain strong on lower energy prices, very low long-term interest rates, a rising stock market, healthy job market, decelerating inflation and more optimism. The current conditions component of the December Univ. of Mich. Consumer Confidence Index, which gauges whether or not consumers feel it is a good time to buy big-ticket items, rose to its highest level since March ahead of the holidays.

The CRB Commodities Index, the main source of inflation fears, has declined 4.65% over the last 12 months and is down 14.2% from May highs despite a historic flood of capital into commodity funds and numerous potential upside catalysts. Oil has declined $15/bbl from July highs. The average commodity hedge fund is down substantially for the year. I continue to believe inflation fears have peaked for this cycle as global economic growth stabilizes around average levels, unit labor costs remain subdued and the mania for commodities continues to reverse course.

The EIA reported this week that gasoline supplies fell more than expectations as refinery utilization fell. U.S. gasoline supplies are still at high levels for this time of the year. Gasoline futures fell for the week and have plunged 41.4% from September 2005 highs even as some Gulf of Mexico oil production remains shut-in and fears over future production disruptions persist. Gasoline demand is estimated to rise .8% this year versus a 20-year average of 1.7% demand growth. The still very elevated level of gas prices, related to crude oil production disruption speculation by investment funds, will further dampen global fuel demand, sending gas prices still lower over the intermediate-term.

US oil inventories are still near 7-year highs. Since December 2003, global oil demand is only up .7%, despite booming global growth, while global supplies have increased 6.3%, according to the Energy Intelligence Group. OPEC said recently that crude oil supply would exceed demand by 100 million barrels by the second quarter of next year. Moreover, worldwide oil inventories are poised to begin increasing at an accelerated rate over the next year. I continue to believe oil is priced at extremely elevated levels on fear and record speculation by investment funds, not fundamentals. The Amaranth Advisors hedge fund blow-up is a prime example of the extent to which many investment funds have been speculating on ever higher energy prices through futures contracts, thus driving the price of the underlying commodity to absurd levels. Amaranth, a multi-strategy hedge fund, lost about $6.5 billion of its $9.5 billion under management in less than two months speculating mostly on higher natural gas prices. I continue to believe a number of other funds will experience similar fates over the coming months after managers “press their bets” in hopes of making up for poor performance, which will further pressure energy prices as these funds unwind their leveraged long positions to meet investor redemptions.

Recently, Cambridge Energy Research, one of the most respected energy research firms in the world, put out a report that drills gaping holes in the belief by most investors of imminent "peak oil" production. Cambridge said that its analysis indicates that the remaining global oil base is actually 3.74 trillion barrels, three times greater than "peak oil" theory proponents say and that the "peak oil" theory is based on faulty analysis. I suspect the contango that currently exists in energy futures, which encourages hoarding, will begin to reverse over the coming months as more investors come to the realization that the "peak oil" theory is hugely flawed, global storage fills, and Chinese/US demand slows.

A major top in oil is likely already in place as global crude oil storage capacity utilization is running around 97%. Recent OPEC production cuts will likely result in a complete technical breakdown in crude. Demand destruction is already pervasive globally and will only intensify over the coming years as alternative energy projects come to the fore. Moreover, many Americans feel as though they are helping fund terrorism or hurting the environment every time they fill up their gas tanks. I do not believe we will ever again see the demand for gas-guzzling vehicles that we saw in recent years, even if gas prices plunge from current levels, as I expect. OPEC production cuts, with oil still at very high levels and weakening global growth, only further deepens resentment towards the cartel and will result in even greater long-term demand destruction. Finally, as the fear premium in oil dissipates back to more reasonable levels, global growth slows and supplies continue to rise, crude oil should continue heading meaningfully lower over the intermediate-term, notwithstanding OPEC production cuts. Oil will likely begin another significant downturn before year-end. Finally, I suspect crude will eventually fall to levels that most investors deemed unimaginable just a few months ago during the next significant global economic downturn.

Natural gas inventories fell more than expectations this week. However, prices for the commodity declined as record investment fund speculation continues to subside with supplies now 7.5% above the 5-year average and near all-time high levels for this time of year, even as some daily Gulf of Mexico production remains shut-in. Natural gas prices have collapsed 53.0% since December 2005 highs.

Gold fell again on the week as the US dollar rose. Gold, natural gas and copper all look both fundamentally and technically weak. The US dollar gained on stronger economic data and short-covering. I continue to believe there is very little chance of another Fed rate hike anytime soon. An eventual cut is likely next year as inflation continues to decelerate substantially. A Fed rate cut should actually boost the dollar as currency speculators anticipate faster US growth. Moreover, this month’s net long-term TIC flows report showed foreign investors’ demand for US securities remains very strong.

Paper stocks outperformed for the week on investment bank upgrades. Steel stocks underperformed as fundamentals continue to weaken for the group and buyout speculation subsides. S&P 500 profit growth for the third quarter came in around 20% versus a long-term historical average of 7%, according to Thomson Financial. This marks the 17th straight quarter of double-digit profit growth, the best streak since recording keeping began in 1936. Moreover, another double-digit gain is likely in the fourth quarter. Just a few months ago many investors expected profit growth to fall to the low single digits this year. Despite an 92.4% total return(which is equivalent to a 16.9% average annual return) for the S&P 500 since the October 2002 bottom, its forward p/e has contracted relentlessly and now stands at a very reasonable 16.2. The 20-year average p/e for the S&P 500 is 24.4. The S&P 500 is now up 16.4% and the Russell 2000 Index is up 19.1% year-to-date. Historically, if the S&P 500 is up at least 10% going into the final two months of the year, which it was, it continues to climb the last two months 84% of the time.

Current stock prices are still providing longer-term investors very attractive opportunities, in my opinion. In my entire investment career, I have never seen the best “growth” companies in the world priced as cheaply as they are now relative to the broad market. By contrast, “value” stocks are quite expensive in many cases. A CSFB report earlier this year confirmed this view. The report concluded that on a price-to-cash flow basis growth stocks are cheaper than value stocks for the first time since at least 1977. The entire decline in the S&P 500’s p/e, since the bubble burst in 2000, is attributable to growth stock multiple contraction. I still expect the most overvalued economically sensitive and emerging market stocks to continue underperforming over the intermediate-term as the manias for those shares subside and global growth slows to more average rates. I continue to believe a chain reaction of events has begun that will result in a substantial increase in demand for US stocks.

In my opinion, the market is still factoring in way too much bad news at current levels, notwithstanding recent gains. One of the characteristics of the current “negativity bubble” is that most potential positives are undermined, downplayed or completely ignored, while almost every potential negative is exaggerated, trumpeted and promptly priced in to stock prices. Furthermore, this “irrational pessimism” by investors has resulted in a dramatic decrease in the supply of stock this year as companies bought back shares, IPOs were pulled and secondary stock offerings canceled. Booming merger and acquisition activity is also greatly constricting the supply of stock. Many commodity funds, which have received huge capital infusions this year, will likely see significant outflows at year-end. Some of this capital will likely find its way back to US stocks. As well, money market funds are brimming with cash. I continue to believe there is massive bull firepower available on the sidelines for US equities at a time when the supply of stock has contracted.

Rising optimism for a Fed rate cut, a stronger US dollar, lower commodity prices, seasonal strength, decelerating inflation readings, a strong holiday shopping season, lower long-term rates, increased consumer/investor confidence, short-covering, investment manager performance anxiety, rising demand for US stocks and the realization that economic growth is only slowing to around average levels should provide the catalysts for another substantial push higher in the major averages over the intermediate-term as p/e multiples expand further. The S&P 500 has now met my early year prediction of a 15% total return for the year. However, further gains are possible through year-end even as the bears and many bulls continue to position for an imminent pullback after recent sharp gains. Another strong performance by US equities is likely next year. Finally, the ECRI Weekly Leading Index surged this week to new cycle highs and is forecasting a modest acceleration in US economic activity.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,427.09 +1.22%
DJIA 12,445.52 +1.12%
NASDAQ 2,457.20 +.81%
Russell 2000 792.71 +.02%
Wilshire 5000 14,314.37 +1.0%
S&P Barra Growth 659.53 +1.12%
S&P Barra Value 765.72 +1.32%
Morgan Stanley Consumer 691.83 +.79%
Morgan Stanley Cyclical 893.90 +.07%
Morgan Stanley Technology 576.45 +1.02%
Transports 4,701.04 -.40%
Utilities 460.25 +.95%
MSCI Emerging Markets 113.60 +1.52%
S&P 500 Cum A/D Line 11,609 +3.0%
Bloomberg Crude Oil % Bulls 33.0 -31.25%
CFTC Oil Large Speculative Longs 167,097 unch.
Put/Call .73 -6.4%
NYSE Arms .94 +11.9%
Volatility(VIX) 10.05 -16.7%
ISE Sentiment 136.0 -8.11%
AAII % Bulls 41.3 +6.1%
AAII % Bears 38.0 -8.6%
US Dollar 84.03 +.92%
CRB 313.3 +.31%
ECRI Weekly Leading Index 140.80 +1.4%

Futures Spot Prices
Crude Oil 63.35 +2.2%
Reformulated Gasoline 170.50 +5.5%
Natural Gas 7.41 -1.66%
Heating Oil 178.39 +1.36%
Gold 618.90 -1.62%
Base Metals 244.30 +.35%
Copper 301.0 -3.15%
10-year US Treasury Yield 4.59% +.9%
Average 30-year Mortgage Rate 6.12% +.16%

Leading Sectors
Papers +3.3%
Banks +2.57%
Software +2.43%
Telecom +2.07%
Networking +2.03%

Lagging Sectors
REITs -1.15%
Hospitals -1.46%
Biotech -1.49%
Coal -1.93%
Steel -2.39%

One-Week High-Volume Gainers
One-Week High-Volume Losers

*5-Day % Change

DJIA Making Another Record High into Final Hour on Positive Economic Data

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Telecom longs, Biotech longs, Retail longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly positive as the advance/decline line is about even, most sectors are rising and volume is heavy. Level 3 Communications (LVLT) is trading 2.2% higher today, near session highs on good volume, even as the major averages and breadth are near session lows. Level 3 is my favorite low-priced speculative stock for 2007 as it becomes increasingly obvious that it is one of the main beneficiaries of the explosion in video over the net. I expect the stock to rise at least 50% next year. The ECRI Weekly Leading Index (ECRWWLI Index on Bloomberg) broke out to a new cycle high this week. It has surged from 135.1 in August to 140.8 currently. It had been bouncing around 135 to 139 for 17 months. The growth rate of the weekly leading index is now 2.8%, up from -1.7% in mid-August. I continue to believe economic growth will come in around 2.5% for this quarter. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, more economic optimism, buyout speculation and portfolio manager performance anxiety.

Today's Headlines

Bloomberg:
- The euro will fall versus the dollar and the yen after reaching a record high in the first quarter of 2007, according to strategists at Lehman Brothers(LEH). They expect the euro to decline 10% against the dollar, and 21% against the yen, by 2008.
- The US dollar is rising to a three-week high against the euro after a report foreign investors boosted purchases of US securities in October.
- Facebook, the social-networking Web site courted by Yahoo!, isn’t for sale, board member Peter Thiel said.
- Natural gas extended this month’s decline in NY as mild weather covers the eastern half of the US, curbing demand from utilities for the furnace fuel with supplies near record levels.
- Gold fell the lowest in five weeks as a gain in the value of the dollar reduced the appeal of the precious metal as an alternative investment.
- Copper tumbled to the lowest price since June as rising inventories signal demand is slowing.

Wall Street Journal:
- General Motors(GM) CFO Henderson said it’s “feasible” for the US automaker to reach an agreement with Delphi Corp. over pension and benefits costs by the end of the first quarter next year.
- FAO Schwarz, a US toy retailer, is using glitz, exclusive toys and attention to detail to help spur sales and to distinguish itself from discount rivals.
- Penn National Gaming(PENN) made a mostly cash offer for Harrah’s Entertainment(HET), a bigger casino competitor.
- Tradebot Systems, JPMorgan Chase’s(JPM) Citadel Derivatives Group and other brokers are striving to shave fractions of a second from times taken to trade stocks.

NY Times:
- American military commanders are talking about asking for as many as 35,000 new troops to deploy to Iraq.

NY Sun:
- The New York Taxi and Limousine Commission on Dec. 18 will unveil cabs that allow passengers to pay with credit or debit cards, watch television and show electronic maps of their trips through the city.

Philadelphia Inquirer:
- Philadelphia’s City Council is considering legislation to ban trans fats in restaurants by September 2008, following similar action in New York.

LA Times:
- US and California officials are investigating a recent series of scams in Los Angeles that used homeless people to defraud government health-care and food-stamp programs.

Financial Times:
- Saudi Aramco, which is in charge of Saudi Arabia’s oil reserves, is the world’s biggest company, dwarfing Exxon Mobil(XOM), citing its own research, carried out together with McKinsey & Co.

Inflation Below Average Rates, Foreign Demand for US Securities Surges, Industrial Production Rises, Capacity Utilization Stable

- The Consumer Price Index for November was unch. versus estimates of a .2% gain and a -.5% decline in October.
- The CPI Ex Food & Energy for November was unch. versus estimates of a .2% gain and a .1% increase in October.
- Net Long-term TIC Flows rose to $82.3 billion versus estimates of $70.0 billion and an upwardly revised $70.2 billion.
- Industrial Production for November rose .2% versus estimates of unch. and a downwardly revised unch. in October.
- Capacity Utilization for November remained at 81.8% versus estimates of 82.1% and a downwardly revised 81.8% in October.

BOTTOM LINE: US consumer prices held steady in November after falling for two months, reassuring Fed policy makers, Bloomberg reported. The CPI is now rising 2.0% year-over-year, well below the long-term average of 2.9%. Gasoline prices fell 1.6% in November. New vehicle costs declined .7% and clothing prices fell .3%. Airfares fell 4.8%, the largest decline since 1999. Food prices fell .1%. Inflation is clearly not a problem and the 10-year T-note, the best predictor of long-term inflation, agrees with the yield falling another 8 basis points. I continue to believe inflation has peaked for this cycle as commodities fall further and unit labor costs remain subdued.

International investment in US long-term securities rose in October as stocks climbed and demand for Treasury notes surged, Bloomberg reported. Official institutions, such as central banks, bought $18.5 billion of US Treasury Notes, the most in almost 2 years. Foreign purchases of US securities have averaged $73.8 billion over the last 12 months. The US trade deficit was $58.9 billion in October, which shows how easily the US can finance its external obligations. International purchases of US stocks rose to $21.0 billion in October versus $8.6 billion the previous month. I expect foreign demand for US assets to continue to remain strong over the intermediate-term as economic growth accelerates, the US dollar firms and the mania for emerging market securities reverses course.

Industrial Production in the US unexpectedly rose in November, reflecting a jump in auto manufacturing, Bloomberg reported. Auto output rebounded 3.7% versus a 3.4% decline in October. Production of business equipment rose 1.2% versus a .1% increase in October. The gain was spurred by a 2.4% increase in computer production and a 2.6% rise in semiconductors. I suspect auto production cutbacks are subsiding, but there are more to come. This will likely weigh on industrial production until the 2nd quarter of next year. As well, while I believe the housing market is stabilizing and the worst is over, home construction will not pick up until inventories decline further from current levels.

Links of Interest

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Real-time Intraday Chart/Quote

Friday Watch

Late-Night Headlines
Bloomberg:
- Royal Dutch Shell Plc, BP Plc, ConocoPhillips(COP) and Marathon Oil(MRO) reached agreement with the US Minerals Management Service to pay oil and gas royalties under botched Gulf of Mexico leases from 1998 and 1999.
- Samsung Electronics of South Korea and liquid-crystal display makers in Taiwan and Japan my face the largest antitrust penalty ever after a probe of possible price-fixing in the $69 billion industry.
- Confidence among Japan’s largest manufacturers rose to a two-year high in December and companies said they plan to increase spending at the fastest pace in 15 years.
- Cosan SA Industria e Comercio, the world’s largest sugarcane processor, reported a record profit as ethanol and sugar sales rose, driven by higher demand in Brazil and the US.
- The Dept. of Homeland Security will propose requiring chemical makers such as DuPont(DD) and railroads such as CSX Corp.(CSX) to better secure shipments of dangerous chemicals, a department official said.
- OPEC shouldn’t target high oil prices by restricting output, Japan’s Trade Minister Akira Amari said. “Oil consuming nations should work on energy conservation and efficiency to reduce demand for oil,” Amari told reporters. The reduction in demand may equal the 500,000 barrel-a-day output cut decided by OPEC yesterday.

Late Buy/Sell Recommendations
Morgan Stanley:
- Reiterated Overweight on (ET), target $30.

Business Week:
- Fortune Brands’(FO) shares may rise 12% in the next year, citing Gregory Gieber of AG Edwards.
- Shanda Interactive(SNDA), China’s second-biggest provider of online games, will benefit from growth in Internet and broadband usage.

Night Trading
Asian Indices are +.50% to +1.0% on average.
S&P 500 indicated +.04%.
NASDAQ 100 indicated +.12%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
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Asian Indices
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Earnings of Note
Company/EPS Estimate
- (OHI)/.17

Upcoming Splits
- (AFG) 3-for-2
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Economic Releases
8:30 am EST
- The Consumer Price Index for November is estimated to rise .2% versus a -.5% decline in October.
- The CPI Ex Food & Energy for November is estimated to rise .2% versus a .1% increase in October.

9:00 am EST
- Net Long-term TIC Flows for October are estimated to rise to $70.0 billion versus $65.1 billion in September.

9:15 pm EST
- Industrial Production for November is estimated to remain unch. versus a .2% gain in October.
- Capacity Utilization for November is estimated to rise to 82.1% versus a reading of 82.0% 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.

DJIA Makes Another All-Time High on Economic Optimism, a Stronger US Dollar, Positive Earnings Reports and Short-Covering

Indices
S&P 500 1,425.49 +.87%
DJIA 12,416.76 +.81%
NASDAQ 2,453.85 +.88%
Russell 2000 794.21 +.69%
Wilshire 5000 14,303.77 +.81%
S&P Barra Growth 659.14 +.93%
S&P Barra Value 764.47 +.81%
Morgan Stanley Consumer 691.91 +.46%
Morgan Stanley Cyclical 894.00 +1.11%
Morgan Stanley Technology 575.75 +1.03%
Transports 4,729.68 +1.54%
Utilities 461.63 +.21%
Put/Call .65 -26.97%
NYSE Arms .52 -40.02%
Volatility(VIX) 9.97 -2.06%
ISE Sentiment 139.0 +5.30%
US Dollar 83.68 +.44%
CRB 314.40 +.91%

Futures Spot Prices
Crude Oil 62.52 +1.87%
Reformulated Gasoline 167.0 +2.95%
Natural Gas 7.51 -2.01%
Heating Oil 177.60 +2.54%
Gold 629.80 -.41%
Base Metals 245.60 +1.67%
Copper 306.20 +.96%
10-year US Treasury Yield 4.59% +.30%

Leading Sectors
Networking +1.94%
Semis +1.86%
Retail +1.72%

Lagging Sectors
Hospitals -.12%
Coal -.20%
Airlines -.93%

Evening Review
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Afternoon Recommendations
Oppenheimer:
- Rated (COH) Buy, target $50.

Afternoon/Evening Headlines
Bloomberg:
- US stocks resumed their fourth-quarter rally, pushing the DJIA to a record, after companies reported profits that beat analysts’ estimates and the number of claims for jobless benefits fell.
- Ford Motor(F) announced an executive reorganization that includes centralizing product development as new CEO Mulally reshapes the second-largest US automaker.
- The New Jersey Assembly passed a Democratic proposal to allow same-sex civil unions, a measure gay people have said fails to grant them rights equal to married heterosexual couples.
- Adobe Systems(ADBE) said fourth-quarter profit rose 16% on higher sales of its Acrobat PDF software and products from its acquisitions of Macromedia.
- The US dollar surged to a three-week high against the yen after a government report showed a drop in US workers filing first-time jobless claims in the past week.
- Manufacturing growth in NY state fell less than forecast this month as orders picked up, the Federal Bank of NY said in an early release of the figures.
- The NYMEX(NMX) will expand its floor-trading hours beginning in February, the exchange said.
- Agco Corp.(AG), the second-largest US maker of farm equipment, plans to eliminate two-thirds of its brands to shore up profit and will sell more fuel-efficient tractors.

AP:
- Breast cancer rates in the US dropped 7.2% in 2003 after many women stopped taking hormone pills, citing a new analysis of federal stats.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs, Retail longs, Semi 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 higher, almost every sector rose and volume was slightly above average. Measures of investor anxiety were mostly lower into the close. Today's overall market action was bullish. Cyclicals were especially strong as the "recession is imminent" cries are rapidly fading. The U.S. dollar strengthened throughout the day, which could begin taking its toll on commodities. "High-school drop-out" copper looks especially vulnerable near-term as Comex inventories continue to surge. The 10-year yield remained stable throughout the day. I suspect today's action is leading to another serious bout of performance anxiety by the near-record shorts and underinvested bulls. I expect stocks to build on today's gains into year-end.

DJIA Making Another New All-Time High into Final Hour on More Economic Optimism

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Semi longs, Retail longs and Telecom longs. I covered my (QQQQ), (IWM), (EEM) hedges this morning, took profits in a few longs and added to my (BRCM), (ISRG) longs today, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, almost every sector is rising and volume is above average. Global Internet information provider comScore just issued a press release, stating that Apple Computer's (AAPL) iTunes revenue soared 84% during the first three quarters of 2006 vs. the same period last year. Moreover, it reported that the number of iTunes buying transactions have surged 67% on a 10% increase in the dollars spent per transaction.I continue to believe that too much emphasis is being placed on the iPod and not enough on Macs or new products, however, this completely refutes the recent Forrester report. Apple remains my second-largest long position behind Google (GOOG), and I expect substantial gains in the stock next year from current levels. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, more economic optimism, buyout speculation and portfolio manager performance anxiety.

Today's Headlines

Bloomberg:
- Iraq will offer contracts to load crude oil in 2 million barrel consignments starting in January, after it re-opens its Kirkuk pipeline, the country’s oil minister said. Resuming Kirkuk oil sales should increase Iraq’s exports by 300,000 barrels a day, or 19%. Iraq currently pumps 2.3 million barrels of oil a day.
- Crude oil is $1/bbl. higher after OPEC agreed to another 500,000 bpd output cut to bolster prices.
- Rofer Corrado, vice chairman of the New York Board of Trade, said record hedge fund speculation is driving orange juice prices higher.
- Commissioner Paul Atkins said the SEC conducted research that showed just 1.3% of US households would meet the proposed criteria for hedge fund investing. The SEC made a proposal Wednesday that raised the minimum net worth needed to be a hedge fund investor from $1 million to $2.5 million.
- Advanced Micro Devices(AMD), Intel’s largest rival in personal-computer processors, forecast shipments will rise about 20% in 2007, twice the rate the company expects for the market.
- US commercial real estate investment is likely to set a record this year, driven by rising rents and occupancies in office and industrial buildings, the National Assoc. of Realtors said.
- 7-Eleven Inc., the biggest US convenience-store company, said it plans to add 30% more North American outlets and will start selling hot meals to fend off rival chains and supermarkets encroaching on its territory.
- EnCana Corp., Canada’s largest natural-gas producer, said it plans to spend $5.8 billion on oil and natural gas projects in 2007.
- US corn planting next year will cover the largest area in almost 60 years as farmers seek to benefit from surging prices and record demand for grain-based ethanol, Informa Economics said in a report to clients.
- Iraq, holder of the world’s third-largest oil reserves, will offer contracts to develop 60 oil fields, in several batches, starting next year, said Iraqi Oil Minister Sharistani.
- US duties on imports of two types of steel from 14 countries will be lifted after an independent US trade panel ruled that ending them wouldn’t harm American producers.

Wall Street Journal:
- Incoming Democratic US House Speaker Nancy Pelosi plans to set up a House panel that will have the authority to monitor funding for US intelligence agencies.
- The news that UAL Corp. and Continental Airlines are in merger talks lent wings to all carriers’ shares yesterday, and they might fly high for some time.
- Google(GOOG) the biggest seller of advertising on the Internet, is looking to extend its growth beyond search-engine ads by convincing clients to try new products including newspaper, radio and video ads.
- Pfizer(PFE), Sanofi-Aventis and other drugmakers may be making progress in developing new treatments for depression that combat mood problems in new ways.

NY Times:
- The US Mint banned the melting or export of coins after their monetary worth was exceeded by the value of the metals they contain, citing Mint director Edmund C. Moy. The value of the copper and zinc used in a penny is more than 1 cent, and the copper and nickel found in a 5-cent coin are worth as much as 7 cents.
- NYC has almost 4,200 surveillance cameras in Manhattan below 14th Street, a more than fivefold increase since 1998.

AP:
- Democratic Senator Tim Johnson of South Dakota was in critical condition early today after recovering from surgery. If Johnson’s seat were to become vacant, a Republican may take his place, which would shift the partisan balance to 50-50 and give Republicans control through the tie-breaking vote of VP Cheney.

Le Figaro:
- France Telecom SA, together with Apple Computer(AAPL), will offer monthly laptop rentals as part of a bid to attract young customers.

Vilaggazdasag:
- Apple Computer(AAPL) will open three retail shops in Hungary next year to take advantage of demand for its computers and music players.

Import Prices Rise Only Slightly After Record Declines, Job Market Still Healthy

- The Import Price Index for November rose .2% versus estimates of a .1% gain and a downwardly revised -2.3% decline in October.
- Initial Jobless Claims for last week fell to 304K versus estimates of 320K and 324K prior.

BOTTOM LINE: Prices of goods imported into the US rose for the first time in three months because of a jump in the cost of natural gas, Bloomberg reported. Outside of natural gas, price gains were minimal. Import prices fell 2.3% in October and 2.2% in September, the largest declines since record-keeping began in 1989. Imports account for roughly 17% of all goods and services. Import prices rose 1.2% from year-ago levels. I continue to believe inflation fears have peaked for this cycle and long-term rates will remain low over the intermediate-term.

Fewer US workers filed first-time applications for state unemployment benefits for a second consecutive week, a sign that demand for labor is holding up, Bloomberg said. The four-week moving-average of jobless claims fell to 327,250 versus 328,750 the prior week. Claims have been distorted the last three weeks by seasonal adjustments even as unemployment remains near a five-year low. The unemployment rate among those eligible for jobless benefits, which tracks the US unemployment rate, held steady at 1.9% last week. Job growth has averaged about 149,000/month so far this year, well above the rate necessary to keep unemployment from rising, notwithstanding housing and auto-related job cuts. Moreover, hourly wage growth is rising at the fastest pace in five years and almost 4 times the rate of inflation. I continue to expect the job market to remain healthy without generating substantial unit labor cost increases over the intermediate-term