Stocks Finish Slightly Lower on GM Worries and a Bounce in Energy Prices

Indices
S&P 500 1,259.62 -.02%
DJIA 10,805.55 -.29%
NASDAQ 2,222.42 -.01%
Russell 2000 672.78 +.08%
DJ Wilshire 5000 12,580.03 +.02%
S&P Barra Growth 603.35 -.09%
S&P Barra Value 651.84 +.05%
Morgan Stanley Consumer 599.25 -.21%
Morgan Stanley Cyclical 778.43 -.23%
Morgan Stanley Technology 524.81 -.20%
Transports 4,103.12 -.12%
Utilities 413.22 +.26%
Put/Call 1.14 +22.58%
NYSE Arms 1.13 +25.54%
Volatility(VIX) 11.19 -1.67%
ISE Sentiment 247.00 +6.01%
US Dollar 90.79 +1.02%
CRB 325.81 -.09%

Futures Spot Prices
Crude Oil 58.18 +.15%
Unleaded Gasoline 151.32 +.29%
Natural Gas 14.12 +.30%
Heating Oil 172.20 +.10%
Gold 494.90 -.42%
Base Metals 151.09 -.68%
Copper 202.00 unch.
10-year US Treasury Yield 4.46% +.49%

Leading Sectors
Oil Service +2.07%
Gaming +1.75%
HMOs +1.37%

Lagging Sectors
Disk Drives -.79%
Networking -1.19%
Gold & Silver -1.39%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on S.

Afternoon/Evening Headlines
Bloomberg:
- The Transport Workers Union may try to take over its striking NY Local 100 and seek a settlement with the Metropolitan Transport Authority.
- Richard McCabe is retiring as chief market analyst at Merrill Lynch after 43 years with the NY-based company. Mary Ann Bartels, Merrill’s equity-trading strategist, will succeed him.
- Electronic Arts cut its sales and profit forecasts for this quarter and next.
- Gold fell to $495 an ounce, down $50 in just over a week, after US producer prices tumbled in November by the most since April 2003, reducing the appeal of the precious metal as a hedge against inflation.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Energy-related shorts. I did not trade in the afternoon, thus leaving the Portfolio 75% net long. The tone of the market was slightly negative today as the advance/decline line finished lower, sector performance was mixed and volume was average. Measures of investor anxiety were mixed into the close. Overall, today's action was mildly bearish. Investors likely need to see GM stabilize, natural gas fall further, some more positive holiday shopping data points and a quick end to the NY transit strike before a meaningful push higher in stocks can occur.

Stocks Mixed Mid-day as Bounce in Energy Prices Offsets More Positive Economic Data

Indices
S&P 500 1,260.17 +.02%
DJIA 10,813.79 -.21%
NASDAQ 2,224.70 +.09%
Russell 2000 675.49 +.48%
DJ Wilshire 5000 12,589.06 +.09%
S&P Barra Growth 603.67 -.04%
S&P Barra Value 652.05 +.08%
Morgan Stanley Consumer 599.76 -.12%
Morgan Stanley Cyclical 780.01 -.03%
Morgan Stanley Technology 524.68 -.23%
Transports 4,117.59 +.24%
Utilities 413.59 +.35%
Put/Call 1.13 +21.51%
NYSE Arms 1.14 +24.91%
Volatility(VIX) 11.15 -1.85%
ISE Sentiment 252.00 +8.15%
US Dollar 90.84 +1.07%
CRB 325.74 -.11%

Futures Spot Prices
Crude Oil 57.90 +.98%
Unleaded Gasoline 151.40 -.84%
Natural Gas 13.98 -.45%
Heating Oil 172.20 +1.10%
Gold 495.80 -2.0%
Base Metals 151.09 -.68%
Copper 202.10 +.40%
10-year US Treasury Yield 4.46% +.53%

Leading Sectors
Oil Service +2.13%
Gaming +1.87%
HMOs +1.68%

Lagging Sectors
Disk Drives -.84%
Telecom -.89%
Gold & Silver -1.94%

BOTTOM LINE: The Portfolio is slightly lower mid-day on losses in my Energy-related shorts. I covered some of my IWM and QQQQ shorts this morning and added to my ELOS, ANF and BRCM longs, thus leaving the Portfolio 75% net long. The tone of the market is slightly positive as the advance/decline line is slightly higher, most sectors are higher and volume is about average. Measures of investor anxiety are mixed. Overall, today’s market action is neutral considering more positive economic data and the bears inability to extend yesterday’s sell-off. The Johnson Redbook same-store sales index rose 3.4% year-over-year last week vs. a 3.3% rise the prior week. This week's gain is up from a 1.5% increase in late April, and it's the 33rd week in a row that the index has risen 3% or more. The Morgan Stanley Retail Index (MVRX) has returned 14.3% since late October vs. a 7.6% gain for the S&P 500. I expect US stocks to trade mixed-to-higher into the close on short-covering.

Today's Headlines

Bloomberg:
- Japan’s stock market will be among the world’s “worst performers” in the next three months as a strengthening yen lowers the value of exporters’ overseas sales, according to Goldman Sachs’ Kenneth Courtis.
- New Yorkers woke up to a transit strike and set out to travel to work without public transportation for the first time in a quarter of a century.
- A Pennsylvania school district cannot require the teaching of intelligent design in high school biology classes, a federal judge ruled in a case that may influence other challenges to the theory of evolution.
- Chevron said it discovered oil in the deepest well ever drilled in the Gulf of Mexico in a joint effort with three other companies including Canada’s Nexen, the field operator.
- Shares of GM fell as much as 6.8% to a 23-year low.
- The US dollar climbed the most in six months against the euro and advanced versus the yen as a report showing gains in US housing spurred optimism for US assets.
- Exxon Mobil and BP Plc were sued by a local development agency in Alaska that alleged the companies withheld natural gas from US markets.
- Morgan Stanley increased bets in commodity markets by 53% in the fiscal fourth quarter, faster than in any other market.
- Gold is falling below $500/oz. for the first time since Nov. 30.

Wall Street Journal:
- Ford Motor plans to support efforts by environmental groups to stabilize global carbon dioxide emissions, becoming the first automaker to back such programs.
- Apollo Advisers, a private equity firm, is close to agreeing to buy the plastics and adhesives unit of Tyco International for about $1 billion.
- News Corp.’s Fox Film Entertainment said yesterday it will start a unit making films and other entertainment distributed via the Internet and cell phones for teenagers and young adults.

NY Times:
- Google will experiment with advertisements using logos and graphics on its Web site, a change of policy prompted by talks with Time Warner’s AOL unit.

Reuters:
- US Defense Secretary Donald Rumsfeld ordered a cut in the number of American troops in Afghanistan to about 16,000 from the current 19,000 by next spring.

CNBC:
- Steve Forbes, CEO of Forbes Inc., said the US economy will enter a recession by 2008 if Congress doesn’t extend tax cuts on dividends and capital gains.
- Sprint Nextel agreed to buy Nextel Partners for about $28.50 a share.

Producer Prices Fall the Most in Almost 3 Years, Housing Starts Exceed Estimates

- The Producer Price Index for November fell .7% versus estimates of a .5% decline and a .7% gain in October.
- The PPI Ex Food & Energy for November rose .1% versus estimates of a .2% increase and a .3% decline in October.
- Housing Starts for November rose to 2123K versus estimates of 2018K and 2017K in October.
- Building Permits for November rose to 2155K versus estimates of 2091K and 2103K in October.

BOTTOM LINE: US producer prices fell in November by the most since April 2003 as energy prices receded, a government report showed, Bloomberg reported. Core prices are rising at a 1.8% annual pace this year versus a 2.2% rate at the same time last year. The cost of energy fell 4.0% last month, the largest fall in 2 ½ years. As well, car prices fell .8%, computers fell 1.1% and capital equipment prices declined .1%. I continue to believe most measures of inflation will continue to decelerate through next year.

US housing starts in November rose by the most in seven months as a pickup in jobs and reconstruction after the hurricanes reignited the homebuilding market. Home sales have set four consecutive annual records. The National Assoc. of Realtors is forecasting a 4.8% decline in home starts next year. New housing starts increased 12.3% in the Midwest, 11.5% in the West and 11% in the Northeast. Starts declined 1.3% in the South. I continue to believe housing is slowing to more healthy sustainable levels.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- About 500 pounds of commercial explosives were stolen yesterday from an Albuquerque business licensed by the US government.
- President Bush’s job-approval rating rose 8 percentage points in one month to 47%, with the public viewing his handling of the war in Iraq more favorably, according to an ABC News/Washington Post poll.
- Honda Motor said its auto sales may rise 4% next year in the US, helped by demand for its redesigned Civic and other new vehicles.
- Japan’s government, the world’s biggest debtor, will reduce bond sales for the first time in nine years as it cuts spending and economic growth boosts tax receipts.

Financial Times:
- Average company dividend pay-out ratios are to rise by 60% over the next four years, citing a report by Eaton Vance, the largest US manager of funds designed to minimize taxes.
- US hotels may report record profits on higher room rates, tighter supply of accommodation and a recovery in business travel since September 2001, citing research by PricewaterhouseCoopers LLP.

Xinhua News:
- Wuhan Iron & Steel Group, China’s third-largest steelmaker, acquired Liiuzhou Iron & Steel Group as the industry consolidates amid an oversupply of steel.

Interfax:
- The al-Qaeda terrorist network has lost 70% of its highest-ranking members in the international war against terrorism, citing Sergei Lebedev, director of Russia’s Foreign Intelligence Service.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on CFC, UVN and EBAY.
- Reiterated Underperform on HRB, STXS and TCO.

Night Trading
Asian Indices are -.25% to +.50% on average.
S&P 500 indicated -.05%.
NASDAQ 100 indicated -.06%.

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Earnings of Note
Company/EPS Estimate
PLB/.05
BSG/.17
FDS/.34
FLS/.28
JBL/.42
KEGS/.20
MWD/1.08
NKE/1.03
PALM/.43

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Producer Price Index for November is estimated to fall .5% versus a .7% rise in October.
- The PPI Ex Food & Energy for November is estimated to rise .2% versus a .3% fall in October.
- Housing Starts for November are estimated to rise to 2020K versus 2014K in October.
- Building Permits for November are estimated to fall to 2090K versus 2103K in October.

BOTTOM LINE: Asian indices are mixed as gains in financial shares are offsetting losses in commodity stocks in the region. I expect US equities to open mixed and to trade modestly lower into the afternoon. The Portfolio is 50% net long heading into the day.