Friday Watch

Late-Night Headlines
Bloomberg:
- Prices of coking coal, used to make steel, may fall 28% during the next two years as new mines start production, JPMorgan Chase said.
- Crude oil may decline again next week because of reduced global demand growth and surging stockpiles, a Bloomberg survey showed.
- Japan’s economy grew faster than expected in the third quarter, adding to signs spending by companies and consumers will sustain the longest expansion in eight years.
- A unit of J&J issued a warning on its birth control patch.

Business Week:
- Wachovia may consider buying Capital One Financial Corp., which issues Visa and MasterCard credit cards, to expand in the lucrative credit card market.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on NSM and CRL.

Night Trading
Asian Indices are -.25% to +1.0% on average.
S&P 500 indicated +.03%.
NASDAQ 100 indicated +.18%.

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Earnings of Note
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- None of note

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Economic Releases
8:30 am EST
- The Producer Price Index for October is estimated to remain unchanged versus a 1.9% increase in September.
- The PPI Ex Food & Energy for October is estimated to rise .2% versus a .3% gain in September.
- Advance Retail Sales for October are estimated to fall .6% versus a .2% increase in September.
- Retail Sales Less Autos for October are estimated to rise .3% versus a 1.1% gain in September.
- Empire Manufacturing for November is estimated to rise to 15.0 versus a reading of 12.1 in October.

BOTTOM LINE: Asian indices are mostly higher, spurred by gains in technology shares in the region. I expect US equities to open mixed and rally later in the day. The Portfolio is 100% net long heading into the day.

Stocks Finish Sharply Higher on Falling Energy Prices, Declining Long-term Rates and Less Irrational Pessimism

Indices
S&P 500 1,230.96 +.84%
DJIA 10,640.10 +.89%
NASDAQ 2,196.68 +.96%
Russell 2000 664.93 +.77%
DJ Wilshire 5000 12,295.55 +.78%
S&P Barra Growth 589.31 +.87%
S&P Barra Value 637.38 +.82%
Morgan Stanley Consumer 593.28 +1.08%
Morgan Stanley Cyclical 739.15 +.87%
Morgan Stanley Technology 514.80 +.57%
Transports 4,043.90 +.99%
Utilities 391.16 -1.19%
Put/Call .75 -8.54%
NYSE Arms .80 +4.79%
Volatility(VIX) 11.90 -7.03%
ISE Sentiment 156.00 +4.70%
US Dollar 92.04 -.04%
CRB 314.53 -.63%

Futures Spot Prices
Crude Oil 57.74 -.10%
Unleaded Gasoline 150.00 -.45%
Natural Gas 11.43 +.48%
Heating Oil 174.10 -.14%
Gold 467.40 -.06%
Base Metals 137.81 +.87%
Copper 187.05 -.05%
10-year US Treasury Yield 4.55% +.09%

Leading Sectors
Airlines +4.18%
Gaming +2.70%
Homebuilders +2.58%

Lagging Sectors
Coal -1.58%
Energy -3.12%
Oil Service -3.93%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on IMCL and LLL.
- Reiterated Underperform on TWMC and GM.

Afternoon/Evening Headlines
Bloomberg:
- IBM, Northrop Grumman, Computer Sciences and Accenture won contracts to develop models for a national system of electronic health information.
- The US dollar is headed for a second weekly advance versus the euro on improving fundamentals versus foreign currencies.
- Treasury 10-year notes rose the most since August after foreign investors bought a record amount of the securities at an auction.

The Age:
- Rio Tinto Group CEO Clifford said rising steel production in China is leading to an extreme shortage of iron ore.

BOTTOM LINE: The Portfolio finished substantially higher today on gains in my Internet longs, Retail longs, Airline longs, Semi longs and Energy shorts. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, most sectors rose and volume was above average. Measures of investor anxiety were mostly lower into the close. Overall, it was a good day for the bulls as the major indices and breadth finished near session highs on above-average volume even as energy stocks finished near session lows. The MS Tech Index has broken out of the trading range that has contained it over the last year and appears poised to make an assault on multi-year high levels. Falling long-term interest rates, healthy economic growth, declining energy prices and less pessimism are providing the catalysts.

Stocks Sharply Higher Mid-day on Falling Energy Prices and Long-term Rates

Indices
S&P 500 1,229.02 +.69%
DJIA 10,623.83 +.73%
NASDAQ 2,189.66 +.64%
Russell 2000 663.16 +.50%
DJ Wilshire 5000 12,275.17 +.61%
S&P Barra Growth 588.44 +.75%
S&P Barra Value 636.35 +.66%
Morgan Stanley Consumer 592.05 +.86%
Morgan Stanley Cyclical 737.55 +.66%
Morgan Stanley Technology 513.26 +.28%
Transports 4,042.38 +.97%
Utilities 389.95 -1.49%
Put/Call .88 +7.32%
NYSE Arms .84 +9.98%
Volatility(VIX) 11.93 -6.80%
ISE Sentiment 146.00 -2.01%
US Dollar 91.71 +.23%
CRB 314.35 -.69%

Futures Spot Prices
Crude Oil 57.90 -1.92%
Unleaded Gasoline 149.75 -3.47%
Natural Gas 11.43 -2.05%
Heating Oil 174.50 -2.49%
Gold 468.00 +.11%
Base Metals 137.81 +.87%
Copper 187.20 +2.21%
10-year US Treasury Yield 4.57% -1.45%

Leading Sectors
Airlines +3.83%
Gaming +2.47%
Homebuilders +2.17%

Lagging Sectors
Coal -1.64%
Energy -2.07%
Oil Service -2.23%

BOTTOM LINE: The Portfolio is substantially higher mid-day on gains in my Internet longs, Energy-related shorts, Retail longs, Airline longs and Semi longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is above average. Measures of investor anxiety are mostly higher. Overall, market action is positive given terrorism, disappointing earnings from CSCO and recent gains. My sense is that the 10-year T-note yield will head lower through at least year-end as the dollar remains firm, commodity prices weaken further, government deficits improve, demand for U.S. assets increases and inflation reading continue to decelerate. I expect US stocks to trade modestly higher from current levels into the close on short-covering, lower long-term rates, more optimism and lower energy prices.

Today's Headlines

Bloomberg:
- Yahoo! dropped out of talks to purchase a stake in Time Warner’s AOL unit, leaving Microsoft and Google as potential bidders.
- al-Qaeda claimed responsibility for three hotel bombings yesterday that killed at least 56 people in Amman Jordan. Thousands of Jordanians marched against the bombings and expressed support for their monarch, King Abdullah. “The Radisson SAS hotel, the Grand Hyatt Amman and the Days Inn hotels had been turned by the dictator of Jordan into a garden for the enemies of our religion, the Jews and the Crusaders,” AFP quoted al-Qaeda’s al-Zarqawi as saying. Casualty figures show the dead included 15 Jordanians, five Iraqis, three Chinese, a Saudi, a Palestinian and an Indonesian, while the bodies of 30 people have yet to be identified.
- US Treasuries surged after demand from overseas investors rose to a record in an auction of 10-year notes.
- Man Group Plc won an auction for parts of bankrupt futures broker Refco.
- Intel Corp. plans to spend $25 billion buying back stock, the second-largest share repurchase in the US behind Microsoft’s record $30 billion buyback.
- Crude oil and heating oil are falling to the lowest in more than three months after the IEA reduced its forecast for world oil demand for a fourth straight month.

Wall Street Journal:
- About half of all US seniors say they are likely to sign up for the new Medicare drug benefit, citing a poll.
- Bridgestone’s US tire-making unit has recommended a maximum life span, of 10 years, for passenger and light-truck tires.
- US drug companies are more reluctant than other industries to invest in China and India, because of concern about security and intellectual property, citing a survey by E&Y.

NY Times:
- Some US home-based entrepreneurs are seeking commercial real estate because of lack of room.
- King Pharmaceuticals will pay $150 million initially and as much as $150 million more to Pain Therapeutics for the rights to an abuse-resistant version of the painkiller OxyContin.

AP:
- The Chicago Merc will offer investors the opportunity to trade housing-price futures contracts, beginning in April.

NY Post:
- Median apartment prices in Manhattan fell 4.2% in the month of October.
- The NY Police Department plans to give 200 officers hand-held digital devices with data on arrest warrants and photos of wanted suspects.

Trade Deficit Widens, Import Prices Fall, Jobless Claims Steady, Consumer Confidence on the Rebound

- The Trade Deficit for September widened to -$66.1B versus estimates of -$61.5B and -$59.3B in August.
- The Import Price Index for October fell .3% versus estimates of a .2% decline and a 2.3% increase in September.
- Initial Jobless Claims for last week rose to 324K versus estimates of 320K and 324K the prior week.
- Continuing Claims rose to 2818K versus estimates of 2792K and 2795K prior.
- Preliminary Univ. of Mich. Consumer Confidence for November rose to 79.9 versus estimates of 76.5 and a reading of 74.2 in October.

BOTTOM LINE: The US trade deficit widened more than expected to a record $66.1 billion in September as oil imports surged and exports dropped by the most in four years, Bloomberg reported. Disruptions from the hurricanes on the Gulf Coast likely contributed meaningfully to the decline in exports. I expect the Trade Deficit to shrink modestly over the intermediate-term as the decline in energy prices more than offsets slightly decreasing demand for our exports as global growth slows.

Prices of goods imported into the US fell last month for the first time since May, reflecting cheaper crude oil, business equipment and consumer goods, Bloomberg reported. Excluding energy prices, import prices rose at the same rate as the prior month which is likely the result of companies’ limited ability to pass on higher commodity prices. As I forecast a few weeks ago, I still believe import prices will fall over the intermediate-term as commodity prices continue to weaken.

The number of Americans filing first-time claims for unemployment insurance rose last week as more workers displaced by hurricanes sought benefits. The US economy has created jobs at the second best pace since the peak of the stock market bubble in 1999 notwithstanding losses related to the hurricanes. The four-week moving-average of jobless claims dropped to 334,250 from 350,500 the prior week. The insured employment rate, which tracks the US unemployment rate, remained at 2.2%. I continue to believe the job market will improve slowly from depressed levels seen after the hurricanes, but not reach the levels seen prior.

Consumer Confidence rose this month as gasoline prices plunged from the record levels seen after the hurricanes hit. Unleaded Gasoline futures have now collapsed almost 50% since post-hurricane highs. The current conditions component of the index rebounded sharply to 100.3 from 91.2 the prior month. The International Council of Shopping Centers recently predicted same-store sales to rise 3-3.5% this holiday season versus a 2.3% increase last year. I continue to believe Consumer Confidence will rebound sharply from post-hurricane lows.

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