Stocks Finish Lower After Housing Index Unexpectedly Declines

Indices
S&P 500 1,259.92 -.58%
DJIA 10,836.53 -.36%
NASDAQ 2,222.74 -1.32%
Russell 2000 672.25 -1.59%
DJ Wilshire 5000 12,577.35 -.71%
S&P Barra Growth 603.91 -.43%
S&P Barra Value 651.53 -.74%
Morgan Stanley Consumer 600.51 +.20%
Morgan Stanley Cyclical 780.26 -.83%
Morgan Stanley Technology 525.84 -1.64%
Transports 4,108.15 -.83%
Utilities 412.14 -1.36%
Put/Call .93 +16.25%
NYSE Arms .88 -7.90%
Volatility(VIX) 11.38 +6.55%
ISE Sentiment 230.00 +23.66%
US Dollar 89.88 +.21%
CRB 326.06 -.08%

Futures Spot Prices
Crude Oil 57.40 +.10%
Unleaded Gasoline 152.69 -2.68%
Natural Gas 14.18 +.98%
Heating Oil 170.75 +.25%
Gold 506.60 +.10%
Base Metals 152.12 -.76%
Copper 201.10 -.10%
10-year US Treasury Yield 4.43% +.09%

Leading Sectors
Drugs +2.56%
Disk Drives +.01%
Telecom -.07%

Lagging Sectors
Steel -1.65%
Biotech -1.84%
Semis -2.30%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on KR.

Afternoon/Evening Headlines
Bloomberg:
- El Paso said it agreed to sell the majority of its remaining wholesale power trading portfolio to Morgan Stanley Capital Group for $442 million.
- Ford Motor was cut to junk by Fitch Ratings amid falling sales, forcing the bonds of its finance unit out of Lehman Brothers Holdings’ investment-grade index.
- New York’s economy has been hurt by a threatened bus and subway strike as negotiations between transit workers and the state-run Metropolitan Transportation Authority approach a midnight deadline.
- Crude oil and heating oil fell to the lowest this month on forecasts that a warm weather system will move across the northern US.

Dow Jones Newswire:
- The NY Merc, the word’s largest energy market, received an expression of interest from the Chicago Merc for a possible investment stake.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Semi longs and Airline longs. I added to my IWM and QQQQ shorts in the afternoon and took profits in a few existing longs, thus leaving the Portfolio 50% net long. The tone of the market was negative today as the advance/decline line finished substantially lower, almost every sector fell and volume was average. Measures of investor anxiety were mixed into the close. Overall, today's action was bearish as the major indices and breadth finished near session lows. This is even more disappointing for the bulls, considering another drop in oil and stable long-term rates. It appears as though investors are factoring in a substantial slowdown in consumer spending on technology products. I believe this fear will prove unfounded. However, the technical action of late leads me to conclude more sideways action is in store.

Stocks Lower Mid-day on Weakness in Small-caps

Indices
S&P 500 1,262.57 -.37%
DJIA 10,849.91 -.23%
NASDAQ 2,234.73 -.79%
Russell 2000 674.14 -1.31%
DJ Wilshire 5000 12,607.76 -.47%
S&P Barra Growth 605.68%
S&P Barra Value 652.54 -.58%
Morgan Stanley Consumer 601.40 +.35%
Morgan Stanley Cyclical 781.18 -.71%
Morgan Stanley Technology 529.77 -.91%
Transports 4,116.76 -.62%
Utilities 412.55 -1.25%
Put/Call .99 +23.75%
NYSE Arms .79 -17.43%
Volatility(VIX) 11.12 +4.12%
ISE Sentiment 226.00 +21.51%
US Dollar 89.94 +.27%
CRB 326.23 -.04%

Futures Spot Prices
Crude Oil 57.40 -1.14%
Unleaded Gasoline 153.10 -2.42%
Natural Gas 13.98 +2.62%
Heating Oil 171.20 -1.15%
Gold 506.70 +.16%
Base Metals 152.12 -.76%
Copper 201.40 -.74%
10-year US Treasury Yield 4.43% unch.

Leading Sectors
Drugs +2.88%
Papers +.15%
Telecom -.11%

Lagging Sectors
Homebuilders -1.36%
Steel -1.53%
HMOs -1.56%

BOTTOM LINE: The Portfolio is slightly lower mid-day on losses in my Semi longs and Medical longs. I covered my IWM and QQQQ shorts this morning and added back to them, 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 lower and volume is slightly below average. Measures of investor anxiety are mixed. Overall, today’s market action is negative considering the decline in energy prices and recent positive economic reports. The fact that Yahoo! (YHOO) is approaching a 52-week high notwithstanding the Google (GOOG)/AOL news illustrates the magnitude of the opportunity for both parties in my opinion. Google is trading at another all-time high, up $4.50. I expect US stocks to trade mixed-to-lower into the close on fears that a slowing housing market will damage consumer spending.

Today's Headlines

Bloomberg:
- Norfolk Southern is buying new locomotives and Audi AG is investing in new models, part of a worldwide corporate spending spree that may take over the US consumer’s role in driving global growth next year.
- US health officials are preparing new hospital infection control guidelines to slow the growing spread of bacteria that has become resistant to antibiotics.
- FPL Group agreed to buy Constellation Energy Group for about $11 billion, doubling its number of nuclear power plants and expanding in deregulated electricity markets.
- DaimlerChrysler’s Chrysler will operate its North American factories at full capacity for the first time since 19999 as 10 new models help to increase US market share, the unit’s chief said.
- Shares of Pfizer rose as much as 12%, the most in more than 20 years, after a US court ruling blocked generic competition until 2011 for Lipitor, the world’s best-selling prescription drug.

Wall Street Journal:
- PepsiCo has started growing potatoes in China as part of a risky gambit to dominate the global market for snacks and other packaged foods.
- THQ Inc., the publisher of video games such as “SpongeBob SquarePants,” plans to announce today an agreement with Massive Inc. to deliver advertisements over the Internet to its games.
- The US is boosting training of dogs that can sniff explosives as part of a broader program to boost security on the nation’s transportation systems.
- AG Edwards has started a subsidiary that will sell investment services for third parties, such as mutual funds and insurance companies.
- SEC Chairman Cox has left intact new mutual fund governance rules, hedge fund registration requirements and other changes introduced by his predecessor.
- Southwest Air CEO Kelly said the carrier has six US cities, including Charlotte, North Carolina, that are “high on the list” for possible expansions to its route network.

Barron’s:
- Microsoft may be developing a digital media player to challenge Apple’s iPod.

NY Times:
- Some US minors create pornographic Web sites, displaying themselves through Web cameras, as they seek to earn money.
- US companies are helping filmmakers distribute movies to consumers through Internet downloads or direct DVD sales.

Lloyd’s List:
- A 12% overcapacity of liquefied natural gas tankers during the next two years may spur freight rates to fall and shop operators to cut costs by trimming crews and maintenance.

AFP:
- The Shiite Muslim-led United Iraqi Alliance won 58% of the vote in the province of Baghdad in the Dec. 15 parliamentary elections.

Economic Releases

- None of note

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Monday Watch

Weekend Headlines
Bloomberg:
- Wal-Mart Stores said December same-store sales at its US stores are rising within its forecast.
- Vice President Dick Cheney made a surprise visit to Iraq, landing at Baghdad International Airport last night for meetings with local officials and hailing the “tremendous results” of last week’s elections there.
- Afghanistan will inaugurate its first parliament since 1969 at a ceremony today, following elections for the assembly held in September.
- Goldman Sachs, the world’s leading adviser on corporate mergers, reclaimed the top spot in a record year for takeovers in Asia outside Japan after arranging the biggest transactions in China.

Wall Street Journal:
- The US Patent and Trademark Office plans to accelerate its reexamination of five patents held by NTP that could be used to ban Research in Motion’s Blackberry device and e-mail service in the US.
- Vonage Holdings plans to raise another $250 million in a private sale of convertible debt, bringing the total raised by the Internet-based telephone carrier to $658 million.

NY Times:
- Chinese authorities have beaten, bribed and threatened residents of the southern village of Dongzhou to try to prevent them from disclosing details about a clash with security services on Dec. 6.
- The city of New Orleans will soon begin demolishing thousands of the homes most severely damaged by the flooding following Hurricane Katrina in the next several weeks.
- New Jersey awarded $5 million in grants for stem-cell research, becoming the first state to use public funds for that purpose.
- US Airways Group’s merger with America West Holdings may prompt further consolidation in the airline industry.
- eBay’s PayPal has grown to service more than 86.6 million accounts in 55 countries and it expects to process $25 billion in money transfers this year.

NY Post:
- Sirius Satellite Radio on average has spent more than $150 for each of the 1.06 million subscribers it’s gained as of Jan. 1.

San Francisco Chronicle:
- Google receives 150,000 resumes a month and uses perks including free food and annual ski trips to lure new hires.

San Jose Mercury News:
- Random security screening of passengers will return at airports Dec.22, two years after they were dropped.

Philadelphia Inquirer:
- United Parcel Service’s discount shipping offered on the Internet is undercutting the profit its UPS Store franchisees make on in-store fees.

LA Times:
- More victims of Hurricane Katrina came from middle-class neighborhoods than was previously thought, citing data from the state of Louisiana.

Financial Times:
- Music downloads are beginning to offset the decline in compact disc sales, citing unidentified record company executives.
- Lehman Brothers Holdings, Goldman Sachs Group and Bear Stearns will increase staff levels in 2006 after all three investment backs reported record profits.

AP:
- Most Americans favor leaving troops in Iraq until the country is stabilized, citing a Dec. 13-15 AP-Ipsos poll.

Nihon Keizai:
- Japan’s government expects the world’s second-largest economy to grow 1.9% in real terms next fiscal year.

Commercial Times:
- Acer Inc. forecasts its notebook computer sales will expand 50% in 2006 from this year, citing Chairman JT Wang.

Sunday Times:
- The value of acquisitions made by buyout firms this year will increase 12% to $41 billion, the most since 2000.

Iranian Republic News Agency:
- China and Iran may complete an agreement in January on the purchase of liquefied natural gas and investment in an Iranian oilfield, citing Iran’s deputy oil minister.

Weekend Recommendations
Barron's:
- Had positive comments on BA, NAPS, TRB, TIF, FDX, OSG, UTX, GE, ITT and AIG.

Goldman Sachs:
- Reiterated Outperform on PFE.

Night Trading
Asian indices are +.50% to +1.0% on average.
S&P 500 indicated +.20%.
NASDAQ 100 indicated +.12%.

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1:00 pm EST
- The NAHB Housing Market Index for December is estimates to rise to 61 versus a reading of 60 in November.

BOTTOM LINE: Asian Indices are higher, led by technology shares in the region after oil fell the most in three months last Fri. I expect US stocks to open modestly higher and build on gains throughout the day. The Portfolio is 75% net long heading into the week.