Tuesday Watch

Late-Night Headlines
Bloomberg:
- Shanghai built more skyscrapers in 15 years than New York did in a century, Beijing has the equivalent of three Manhattans under construction, and China’s government says it’s concerned about a property bubble.
- China, the world’s largest iron ore importer, needs to clear the backlogs at ports that handle commodities used for steelmaking to reduce vessel delays and help sustain the nation’s economic growth, according to analysts attending this week’s World Shipping Summit in Shanghai.

South China Morning Post:
- Sinochem Corp., a state-owned petroleum company, was among 85 Chinese companies named in a United Nations investigative report as illegally paying $6 million to Saddam Hussein’s Iraqi government.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on EBAY.
- Reiterated Underperform on PFG and WPT.

Night Trading
Asian Indices are unch. to +1.0% on average.
S&P 500 indicated -.36%.
NASDAQ 100 indicated -.47%.

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Earnings of Note
Company/EPS Estimate
AGN/.79
BJS/.42
CEPH/.70
CL/.67
EDS/.14
ERTS/.04
EMR/.99
HTCH/.12
IACI/.26
MMC/.38
MBI/1.38
MHS/.60
MLS/-.19
PNRA/.36
PG/.76
PDLI/-.03
RDC/.41
SIRI/-.16
SYMC/.20
TIE/.64
TXU/2.45
UNA/.17
VIA/.45
ZBRA/.36

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- Construction Spending for September is estimated to rise .5% versus a .4% gain in August.
- ISM Manufacturing for October is estimated to fall to 57.1 from a reading of 59.4 in September.
- ISM Prices Paid for October is estimated to fall to 75.0 versus a reading of 78.0 in September.

2:15 am EST
- The FOMC is expected to raise the Fed Funds rate by 25 basis points to 4.0%.

Afternoon
- Total Vehicle Sales for October are estimated to fall to 15.5M versus 16.4M in September.
- Domestic Vehicle Sales for October are estimated to fall to 12.5M versus 13.0M in September.

BOTTOM LINE: Asian indices are mostly higher on strength in exporting shares in the region after US economic reports boosted optimism. I expect US equities to open modestly lower and to rise later in the day. The Portfolio is 100% net long heading into the day.

Stocks Finish Near Session Highs on Falling Energy Prices, Better Economic Data and More Optimism

Indices
S&P 500 1,207.01 +.72%
DJIA 10,440.07 +.36%
NASDAQ 2,120.30 +1.46%
Russell 2000 646.61 +1.78%
DJ Wilshire 5000 12,043.73 +.92%
S&P Barra Growth 577.40 +.68%
S&P Barra Value 625.43 +.75%
Morgan Stanley Consumer 587.19 +.43%
Morgan Stanley Cyclical 717.91 +1.19%
Morgan Stanley Technology 499.38 +1.52%
Transports 3,815.46 +1.97%
Utilities 401.11 +1.29%
Put/Call .88 +7.32%
NYSE Arms .92 +82.40%
Volatility(VIX) 15.32 +7.51%
ISE Sentiment 194.00 +55.20%
US Dollar 90.06 +.52%
CRB 316.29 -1.81%

Futures Spot Prices
Crude Oil 59.83 -2.27%
Unleaded Gasoline 152.61 -6.04%
Natural Gas 12.22 -6.37%
Heating Oil 176.98 -4.0%
Gold 467.40 -1.56%
Base Metals 135.03 +1.53%
Copper 181.10 -.49%
10-year US Treasury Yield 4.55% -1.41%

Leading Sectors
Airlines +3.91%
Retail +3.51%
Computer Hardware +2.39%

Lagging Sectors
Defense +.25%
Telecom +.19%
Foods -.16%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on DDR.
- Reiterated Underperform on LVLT.

Afternoon/Evening Headlines
Bloomberg:
- US stocks staged their biggest two-day rally in almost a year as oil prices fell and companies proposed more than $19 billion in acquisitions.
- Fidelity Investments said Robert Stansky will retire after nine years of managing its flagship Magellan Fund.
- Verizon and SBC Communications cleared the final federal hurdle to their multibillion-dollar acquisitions without having to sell assets.
- GM and Wal-Mart are helping convince some economists that the Federal Reserve can stop worrying about wage pressures driving inflation.
- Ralph Acampora, the former director of technical research at Prudential Equity Group whose department was shut down last month, was hired by Knight Capital Group.
- Dell said third-quarter sales missed forecasts because demand from US consumers and UK businesses fell short of its expectations.
- Crude oil and heating oil tumbled, and gasoline fell to the lowest in almost five months, as warmer-than-normal weather may cut consumption in the US Northeast.

BOTTOM LINE: The Portfolio finished substantially higher today on gains in my Retail longs, Semi longs, Computer longs and Airline longs. 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 substantially higher, almost every sector rose and volume was above average. Measures of investor anxiety were mostly higher into the close. Overall, a very good day for the bulls as the major indices and breadth finished near session highs. Stabilizing long-term rates even with the strong stock rally and better-than-expected economic data are a big positive. Moreover, I sense a shift in psychology with respect to the positive implications of the sharp fall in energy prices. Unleaded gas futures have now collapsed close to 50% even as refinery utilization remains substantially lower than pre-hurricane levels. Hedge funds had one of their worst months in a long time during October as energy stocks fell and emerging markets faltered. I expect follow-through on today's gains as those funds pile on long to try and recoup recent losses.

Stocks Sharply Higher Mid-day on Falling Energy Prices and Stronger Economic Data

Indices
S&P 500 1,206.50 +.68%
DJIA 10,448.79 +.45%
NASDAQ 2,117.36 +1.31%
Russell 2000 645.83 +1.65%
DJ Wilshire 5000 12,037.22 +.86%
S&P Barra Growth 577.06 +.62%
S&P Barra Value 625.58 +.77%
Morgan Stanley Consumer 587.91 +.55%
Morgan Stanley Cyclical 717.79 +1.17%
Morgan Stanley Technology 499.10 +1.46%
Transports 3,815.90 +1.98%
Utilities 398.98 +.76%
Put/Call .94 +14.63%
NYSE Arms .79 +55.29%
Volatility(VIX) 14.53 +1.96%
ISE Sentiment 190.00 +52.00%
US Dollar 90.10 +.57%
CRB 315.91 -1.93%

Futures Spot Prices
Crude Oil 59.50 -2.81%
Unleaded Gasoline 153.50 -5.80%
Natural Gas 12.26 -6.09%
Heating Oil 177.00 -3.99%
Gold 466.90 -1.73%
Base Metals 135.03 +1.53%
Copper 180.90 -.60%
10-year US Treasury Yield 4.55% -.22%

Leading Sectors %
Retail +3.42%
Airlines +3.41%
Internet +2.12%

Lagging Sectors
Drugs +.15%
Foods -.15%
Gold & Silver -.37%

BOTTOM LINE: The Portfolio is substantially higher mid-day on gains in my Internet longs, Retail longs, Computer longs, Semi longs and Airline 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 substantially higher, almost every sector is rising and volume is slightly above average. Measures of investor anxiety are mostly higher. Today’s overall market action is positive considering the underperformance by energy stocks. Many are trying to espouse the notion that the weakness in the energy complex is a sign of a substantial economic slowdown. I see very little evidence of this. While economic growth is likely slowing from vigorous levels before the hurricanes to average levels during the 4Q, I see few signs of a significant slowdown. A U.S. recession anytime in the near future is highly unlikely. As I have said many times before, energy pricing has been in a fear-induced mania. The fundamentals do not support energy prices anywhere near current levels. Now that we are in the fourth quarter, have survived the greatest hit to the U.S. energy infrastructure in history and inventories are still above five-year averages heading into the winter, traders are re-pricing the entire energy complex. I do not believe this is a sign of significant economic weakness, but a return to saneness in the energy pit. I expect US stocks to trade modestly higher from current levels into the close on short covering and bargain hunting as energy prices remain weaker.

Today's Headlines

Bloomberg:
- The scandal-plagued United Nations, which urges the world’s companies to follow anti-pollution, labor rights and other standards of corporate responsibility, often ignores those aims when investment its own $29 billion employee pension fund.
- Merrill Lynch is earning the most money managing assets for individual investors since the stock market bubble’s peak five years ago.
- Crude oil is falling, heading for its first two-month decline in NY this year, as production recovers, supplies build and demand falls with the US hurricane season nearing an end.
- President Bush has chosen Samuel Alito, a federal appellate judge, as his nominee for the Supreme Court.
- Barrick Gold said it made an offer for rival Placer Dome valued at $9.2 billion in cash and stock.
- Chemicals in certain vegetables and herbs, such as broccoli sprouts, cabbage and gingko biloba, may help prevent cancer, according to five studies presented at a research conference today.
- The US dollar is gaining, reaching the highest in more than two years against the yen, as an index of Chicago-area business activity unexpectedly surged.
- Novartis AG, Europe’s second-largest drugmaker by market value, agreed to pay $5.1 billion to take control of US vaccine maker Chiron as governments raised spending on treatments for ailments such as avian influenza.

Wall Street Journal:
- Saks Inc. is expected to announced that it will sell its Northern department-store group to Bon-Ton Stores for $1.1 billion.
- Kraft’s decision to halt advertising of certain products to children to help curb obesity has gained favor with some officials.
- Janus Capital Group of the US, which manages $130 billion, may be the subject of a takeover after a non-executive director quit last week because of a disagreement over a “strategic option” the company is pursuing.
- Sprint Nextel plans to introduce an over-the-air music downloading service today.
- The indictment of I. Lewis Libby on perjury and related charges may be difficult to prove.
- The SEC plans to check a sample of investment advisory companies randomly each year rather than visit each of them every five years.

NY Times:
- NBC reporter Tim Russert, whose testimony was used to indict I. Lewis Libby is uneasy about being involved in a subject he’s reporting on.
- Atticus Capital, Third Point LLC, York Capital and other hedge funds face losses of 5-10% for October, as investments in energy stocks, takeovers and overseas stocks falter.
- The economic interaction between China and Japan has been increasing while diplomatic relations worsen.
- Sean McManus, appointed last week as the president of CBS News, faces a challenge in his new role after a flawed report last year on President Bush’s Vietnam-era National Guard service and the ensuing retirement of Dan Rather.
- Small Internet access companies are trying to find new ways to connect with consumers as bigger companies dominate the market for high-speed services and they say they may have found the answer in wireless technology.

NY Post:
- The Port Authority of NY & New Jersey will test smart cards next month on the PATH railroad linking Manhattan to New Jersey.

San Francisco Chronicle:
- California wineries expect to reap 3.15 million tons of grapes this year, the second-largest harvest in state history.

USA Today:
- US federal lawmakers have ordered an investigation into the increasing costs of repairing and maintaining machines that check luggage for bombs at airports.

Financial Times:
- Carlyle Group, which manages the fourth-largest US buyout fund, may join a group of bidders considering an offer for Computer Sciences, the No. 5 US computer-services company.

Basler Zeitung:
- Roche Holding AG wants to issue licenses allowing companies and governments to produce the Tamiflu flu drug on the condition that the product is kept for use in a possible pandemic and not sold.

Il Messaggero:
- Italy aims to eliminate the use of oil in the production of electricity in the next five years, citing Industry Minister Claudio Scajola.

Incomes Rebound Strongly, Spending Remains Healthy, Inflation Modest, Chicago Manufacturing Strong

- Personal Income for September rose 1.7% versus estimates of a .3% increase and a downwardly revised .9% decrease in August.
- Personal Spending for September rose .5% versus estimates of a .5% increase and a .5% decline in August.
- PCE Core for September rose .2% versus estimates of a .1% gain and a .1% increase in August.
- Chicago Purchasing Manager for October rose to 62.9 versus estimates of 57.4 and a reading of 60.5 in September.

BOTTOM LINE: US consumer spending rose in September and incomes rebounded after plunging in August because of uninsured losses from Hurricane Katrina, Bloomberg reported. The 2.0%(YoY) rise in the PCE core, the Fed’s favorite inflation gauge, was within their forecast at the beginning of the year of a 1.75%-2.0% increase. Excluding the effects of the hurricanes, personal income rose .5% in September versus a .3% increase in August. Moreover, American incomes rose 6.3%(Year-over-Year) in September, about twice the rate of most inflation readings. I expect income growth to decelerate and spending to remain strong into year-end as economic growth slows to average rates and energy price declines accelerate.

An index of Chicago-area business activity unexpectedly rose this month adding to evidence that the US economy snapped back after Hurricane Katrina and Rita, Bloomberg reported. The backlog component of the index surged to the highest in a year. The new orders component spiked to 72.6, the highest since March, from 68.3 in September. As well, the prices paid component rose to 79.6 from 76.3 in September. Finally, the employment component of the index rose to 51.3 from 48.4 last month. I continue to believe manufacturing will add to economic growth over the next few months on inventory rebuilding spurred by more confidence in US economic growth.

Links of Interest

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