Market Week in Review

S&P 500 1,188.00 -.27%

Click here for the Weekly Wrap by Briefing.com.

Bottom Line: U.S. stocks finished slightly lower last week, led down by semiconductors after disappointing reports from Xilinx, Altera and Cymer. However, significant gains in the homebuilding sector, spurred by a very positive report from Toll Brothers, helped minimize losses in the major indices. Taking into account the 25% gain in the Morgan Stanley Tech Index since Aug. 12, losses in the sector were relatively muted considering the news. After basing for several weeks, the homebuilders broke to ALL-TIME highs last week on heavy volume. The index has now returned 41.4% since the bears and pundits said the "bubble" burst in May. It is good to see the AAII % Bulls fall, however investor complacency remains elevated as a whole. The plunge in energy prices is very positive for the U.S. economy and remains underreported by the mainstream press. While oil is at technical levels normally associated with a short-term bounce, still lower prices are likely. A few months ago I forecast oil would reach $35-$40/bbl. during the fourth quarter. However, more supply from the Middle-East, less demand from Asia/Europe, a stabilizing US dollar, less speculation and a lower terrorism/war premium may lead oil prices to overshoot on the downside in the intermediate-term. I would not be surprised to see crude approach $30/bbl within the next six months. This would be a very positive development with respect to measures of inflation and consumer spending. Disposable personal income has risen 4.3% from a year earlier versus a 2.5% gain in the Consumer Price Index. A substantial fall in energy prices would further bolster the US consumer. Finally, it was also a big positive to see the US dollar rebound and interest rates fall last week. I expect the dollar to continue its rebound and interest rates to rise slightly from current levels over the coming weeks.

Economic Week in Review

ECRI Weekly Leading Index 133.00 +.45%

Final 3Q Non-farm Productivity rose 1.8% versus estimates of a 2.0% increase and a prior estimate of 1.9%. Final 3Q Unit Labor Costs rose 1.8% versus estimates of a 1.6% gain and a prior estimate of 1.6%. The productivity of U.S. workers grew in the third quarter at the slowest pace in almost two years, suggesting companies may need to boost hiring to meet demand, Bloomberg said. Moreover, hours worked rose at a 2.4% pace, the most since the third quarter of 1999. "Labor costs have moved from a downward influence on inflation to a neutral one," said Stephen Stanley, chief economist at RBS Greenwich Capital. "Fed officials have consistently noted that labor costs are the key to inflation, not material costs."

U.S. Household Net Worth advanced to another all-time high of $46.7 trillion as stock market and real estate values appreciated, the Fed said. Consumer Credit for October fell to $7.7B versus estimates of $6.0B and an upwardly revised $13.6B in September. The percentage of homeowners in foreclosure fell to 1.14%, the lowest level in 4 years. "Consumers are confident enough in the outlook for the economy to assume greater debt burdens," said Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi. Personal bankruptcy filings across the country declined 2.6% for the fiscal year ended Sept. 30, suggesting most consumers are able to handle their rising debt, and that spending will continue, Bloomberg reported. Sales at U.S. retailers rose 3.3% during the first full week of the holiday season.

The Import Price Index for November rose .2% versus estimates of 0.0% and a 1.6% increase in October. The dollar's decline this year against other currencies makes imported goods more expensive, Bloomberg said. The report "echoes what we've seen in the broader price measures – big run-ups in prices of crude and intermediate goods but only a limited pass-through to consumer prices," said Stephen Stanley. "There is still little evidence as of yet that the Fed is risking a substantial acceleration in core consumer price inflation." "Import competition, particularly from China, is keeping downward pressure on manufactured products, such as apparel and fabricated metals," the Dallas Fed said in its regional report.

Initial Jobless Claims for last week were 357K versus estimates of 335K and 349K the prior week. Continuing Claims were 2796K versus estimates of 2746K and 2705K prior. "As oil prices come down, that should make companies a little less reluctant to hire," said John Shin, an economist at Lehman Brothers. Claims have fallen to a weekly average of 344,102 so far this year from 402,000 for all of 2003, Bloomberg said.

Wholesale Inventories rose 1.1% in October versus estimates of a .5% gain and a .6% increase in September. Consumer purchases rose the most in almost three years last quarter and business investment accelerated, recent reports have shown. Gains in spending caused inventories to rise at almost half the previous quarter's pace, leaving businesses room to add to stockpiles, boosting the economy this quarter, Bloomberg reported. "If you have sales booming, you have to have inventories keep pace," said Tom Rogers, chief economist at Briefing.com. Wholesalers had enough supply on hand to last 1.15 months at the current sales pace, the same as the prior month and up from an all-time record low of 1.12 months in April, Bloomberg said.

The Producer Price Index for November rose .5% versus estimates of a .1% increase and a 1.7% gain in October. The PPI Ex Food & Energy for November rose .2% versus estimates of a .2% increase and a .3% gain in October. "So far, businesses have been more successful in passing along cost increases to other business, but with consumers it's been much more difficult," said Nigel Gault, research director at Global Insight. The 26.4% decline in oil, the 31.9% plunge in natural gas and the 23.6% drop in heating oil should help restrain producer prices going forward, Bloomberg reported.

The preliminary Univ. of Mich. Consumer Confidence reading for December rose to 95.7 versus estimates of 93.5 and a reading of 92.8 in November. Job growth is helping bolster consumer spending and confidence and consumers have benefited from the decline in oil and gasoline prices, economists said. The U.S. economy has added 2.2 million jobs since August of last year, Bloomberg said. The current-conditions component of the index, which reflects Americans' perception of their financial situation and whether it's a good time to buy big-ticket items, rose to 106.8 from 104.7 in November. The expectations component of the index, based on optimism about the next one to five years, rose to 88.8 from 85.2, Bloomberg said. "With the recent drop in energy prices consumer spending will give us a good holiday season," said Lynn Reaser, chief economist at Banc of America Capital.

Bottom Line: Overall, last week's economic data were positive. Productivity has fallen to levels normally associated with increased hiring. However, mitigating forces should hold unit labor costs in check in the intermediate-term. A modest increase in the rate of US job creation, a stabilizing US dollar, deflationary forces in Asia, continuing overcapacity in some areas of the US economy and falling commodity prices should lead to decelerating inflation readings in 2005. This will allow the Fed to slow the pace of rate hikes. With Americans' net worth at ALL-TIME high levels, a modest rise in interest rates next year should not significantly damage consumer spending or the US economy. Inventories are rising to keep up with brisk demand and should contribute meaningfully to 4Q GDP. It is very good to see Consumer Confidence rebound from recent disappointments. A very strong housing market, rising stock market, declining energy prices, good labor market, elections in Iraq, less pessimism from politicians, relatively low interest rates and diminished domestic terrorism fears should lead to new highs in consumer sentiment for this cycle in the next few months. The Weekly Leading Index is now at its highest level since late June.

Weekly Scoreboard*

Indices
S&P 500 1,188.00 -.27%
Dow 10,543.22 -.46%
NASDAQ 2,128.07 -.93%
Russell 2000 632.24 -1.55%
S&P Equity Long/Short Index 999.51 -.85%
Put/Call .62 -10.14%
NYSE Arms 1.38 +.73%
Volatility(VIX) 12.76 -1.54%
AAII % Bulls 51.35 -9.53%
US Dollar 82.67 +2.15%
CRB 276.62 -2.74%

Futures Spot Prices
Gold 435.30 -4.83%
Crude Oil 40.71 -4.12%
Unleaded Gasoline 107.99 -4.43%
Natural Gas 6.84 +.34%
Heating Oil 122.57 -.83%
Base Metals 114.20 -2.56%
10-year US Treasury Yield 4.15% -2.38%
Average 30-year Mortgage Rate 5.71% -1.72%

Leading Sectors
Homebuilders +4.53%
HMOs +4.21%
Hospitals +3.27%

Lagging Sectors
Airlines -3.19%
Iron/Steel -4.79%
Semis -5.06%

*% Gain or loss for the week

Mid-day Report

S&P 500 1,190.97 +.15%
NASDAQ 2,133.15 +.23%

Leading Sectors
Homebuilders +3.31%
Airlines +1.43%
I-Banks +1.10%

Lagging Sectors
Broadcasting -.88%
Oil Service -1.07%
Wireless -1.16%

Other
Crude Oil 41.15 -3.24%
Natural Gas 6.86 -.38%
Gold 436.10 -.25%
Base Metals 114.20 +.55%
U.S. Dollar 82.64 +.65%
10-Yr. T-note Yield 4.17% +1.31%
VIX 13.04 -1.14%
Put/Call .71 -20.22%
NYSE Arms .86 -29.51%

Market Movers
CBON +21.5% on strong demand for IPO.
HOV +10.7% on positive comments from multiple analysts.
MATK +8.9% after beating 4Q estimates.
FFIV +5.7% on comments from Citi SmithBarney.
ADIC -11.6% on disappointing 4Q results.
*Homebuilder up across the board on continuing optimism over fundamentals.

Economic Data
Producer Price Index for November rose .5% versus estimates of a .1% increase and a 1.7% gain in October.
PPI Ex Food & Energy for November rose .2% versus estimates of a .2% increase and a gain of .3% in October.
Preliminary Univ. of Mich. Consumer Confidence for December rose to 95.7 versus estimates of 93.5 and a reading of 92.8 in November.

Recommendations
-Goldman Sachs reiterated Outperform on MO. Goldman reiterated Underperform on WIN and CR.
-Citi SmithBarney reiterated Buy on GE, target $44. Citi reiterated Buy on TOL, target $94. Citi reiterated Buy on TYC, target $40. Citi reiterated Buy on MO, target $68. Citi reiterated Buy on BEAS, target $11.50. Citi reiterated Buy on BJ, target $34. Citi reiterated Buy on BBW, target $43. Citi reiterated Buy on NSM, target $21.
JP Morgan raised GYI to Overweight. JP Morgan rated FLSH Overweight.
-Banc of America rated DHI Buy, target $42. BofA rated HOV Buy, target $50.
-UBS downgraded AMD to Reduce, target $20.
-Thomas Weisel raised FHRX to Outperform, target $29. Thomas Weisel raised NVDA to Outperform. Thomas Weisel raised ATYT to Outperform.
-Legg Mason rated NIHD Buy, target $58.
-CSFB cut FLR to Underperform, target $45. CSFB cut EME to Underperform, target $35.
-Morgan Stanley rated MHS Overweight, target $45.

Mid-day News
U.S. stocks are modestly higher mid-day on optimism over better consumer sentiment and lower energy prices. A journalist from the Chattanooga Times Free Press was behind a U.S. National Guard's question to Defense Secretary Donald Rumsfeld on the shortage of vehicle armor available to the army, the Washington Post reported. OPEC agreed to cut output to end a six-week slide in prices, Dow Jones reported. Senator Grassley plans to introduce a new bill next year to require pharmaceutical companies to report drug trials on a public database, the NY Times reported. Gemstar-TV Guide Intl. CEO Shell, who resigned yesterday, may join Comcast to oversee the cable-tv operator's channels, the LA Times reported. The European Central Bank isn't as worried about inflation as it was a month ago, reducing pressure for an increase in interest rates, Swedish news service Direkt reported. The US dollar is heading for its biggest gain against the yen in almost six years amid speculation the Bank of Japan's Tankan survey will show business confidence is waning, Bloomberg reported. U.S. consumer sentiment rose for a second month in December as oil prices plunged and the government reported continued job creation in November, Bloomberg said. Carlyle Group may raise $6.5 billion for what would be the world's biggest buyout fund, Bloomberg reported. General Electric said it will increase its dividend by 10% and authorized the repurchase of $15 billion of its shares over three years, Bloomberg reported. Southwest Airlines is offering more than $100 million in cash and loans for ATA Holdings assets including Chicago airport gates, Bloomberg reported. The Core PPI had its smallest gain in four months, Bloomberg said.

Bottom Line: The Portfolio is higher mid-day on gains in my homebuilding, security, Chinese ADR and semi longs. I added a few longs this morning, bringing the Portfolio's market exposure to 100% net long. One of my new longs is DRIV and I am using a $39.75 stop-loss on this position. The tone of the market is moderately positive today notwithstanding the mixed performance of the major indices. Many market leaders are higher. The Weekly Leading Index rose again this week and is now at its highest level since late June. Moreover, the continuing decline in energy prices, low interest rates and a stabilizing US dollar bode well for stocks. I expect U.S. equities to rise modestly into the close on short-covering and bargain-hunting.

Friday Watch

Earnings of Note
Company/Estimate
COO/.72
NT/.00

Splits
None of note.

Economic Data
Producer Price Index for November estimated to rise .1% versus a 1.7% increase in October.
PPI Ex Food & Energy for November estimated to rise .2% versus a .3% gain in October.
Preliminary Univ. of Mich. Consumer Confidence for December estimated at 93.5 versus a reading of 92.8 in November.
Monthly Budget Statement for November estimated at -$54.1B versus -$43.0B in October.

Recommendations
Goldman Sachs reiterated Outperform on DTV and A. Goldman reiterated Underperform on CIEN and CVC.

Late-Night News
Asian indices are mostly lower, led down by China and North Korea. AO VimpelCom, the second-largest mobile-phone operator in Russia, and Systema, another Russian cellular-phone service provider, are in talks with BPL Mobile Communications to buy a stake in the Indian company, the Economic Times reported. Gucci Group NV's new CEO, Robert Polet, is aiming to double sales of the company's brand-name merchandise within the next seven years, the NY Times said. China reported the slowest inflation in nine months as improved harvests boosted food supply, easing pressure on the central bank to raise interest rates, Bloomberg reported. Saudi Arabia supports an oil output cut of 1M barrels/day, Al-Hayat reported.

Late-Night Trading
Asian Indices are -1.25%. to unch. on average.
S&P 500 indicated -.07%.
NASDAQ 100 indicated -.15%

BOTTOM LINE: I expect U.S. equities to open modestly lower on weakness in Asia and concerns over comments from OPEC. However, I expect stocks to rise from morning lows on a better-than-expected consumer confidence report and lower oil prices. The Portfolio is 75% net long heading into tomorrow.

Thursday Close

S&P 500 1,189.24 +.54%
NASDAQ 2,129.01 +.14%

Leading Sectors
Homebuilders +4.80%
Oil Service +1.88%
HMOs +1.70%

Lagging Sectors
Airlines -.84%
Drive -1.01%
Semis -1.49%

Other
Crude Oil 42.54 +.02%
Natural Gas 6.95 +.94%
Gold 438.90 +.39%
Base Metals 113.57 -.46%
U.S. Dollar 82.05 +.18%
10-Yr. T-note Yield 4.17% +1.31%.
VIX 12.88 -2.35%
Put/Call .77 -13.48%
NYSE Arms .80 -34.43%

After-hours Movers
AMTD -4.8% said it's in talks with U.S. regulators about whether it had sufficient capital.
SHFL -4.3% after beating 4Q estimates and lowering 1Q outlook.

Recommendations
Goldman Sachs reiterated Outperform on BAX, PG, TYC, NSM and FON. Goldman reiterated Underperform CR and SAY. Usana Health Sciences(USNA), the maker of nutritional supplements and weight-care products, will likely see its sales grow as new items are introduced, Business Week reported. Sipex Corp.(SIPX), whose President and CEO Maghribi quit this week, may be poised to be sold or taken over, Business Week reported. Ingersoll-Rand(IR), the world's biggest maker of refrigeration equipment for trucks, will benefits from increased demand for its products as the U.S. economy grows, Business Week reported.

After-hours News
U.S. stocks finished modestly higher today on optimism over the U.S. housing market, merger news and a rebound in technology shares from morning lows. After the close, deep tremors along the San Andreas fault in California might be a sign a large earthquake is coming, according to a study by scientists at the Univ. of California. Shares of Sprint and Nextel rose after reports that the U.S. mobile-phone companies are in merger talks, Bloomberg reported. Acer Inc. may sell its personal computers in the U.S. through Wal-Mart Stores to try and gain market share, the Commercial Times reported. DaimlerChrysler AG's Chrysler Group was asked by the U.S. government to recall about 600,000 vehicles, the Wall Street Journal reported.

BOTTOM LINE: The Portfolio finished slightly higher today and I added a few new longs from various sectors in the afternoon, leaving the Portfolio 75% net long. One of my new longs is PHM and I am using a $56.25 stop-loss on this position. The tone of the market improved throughout the afternoon with the major indices finishing near their highs for the day. As well, the advance/decline line, while negative, improved substantially from morning lows. The homebuilding index broke out of its recent trading range and closed at an ALL-TIME high, confounding the skeptics once again. It was also very positive to see semis rebound from morning lows on bad news and finish with minor losses. Finally, the weekly AAII % Bulls fell 9.5%, which is also a positive.