Stocks Finish Lower on Year-end Profit-taking

Indices
S&P 500 1,422.48 -.32%
DJIA 12,441.27 -.03%
NASDAQ 2,435.57 -.88%
Russell 2000 782.02 -1.35%
Wilshire 5000 14,246.92 -.47%
S&P Barra Growth 656.05 -.53%
S&P Barra Value 764.74 -.13%
Morgan Stanley Consumer 692.57 +.10%
Morgan Stanley Cyclical 889.18 -.53%
Morgan Stanley Technology 573.23 -.56%
Transports 4,659.19 -.89%
Utilities 456.76 -.76%
Put/Call 1.12%
NYSE Arms .91 -3.23%
Volatility(VIX) 10.58 +5.27%
ISE Sentiment 184.0 +35.29%
US Dollar 83.97 -.08%
CRB 310.39 -.94%

Futures Spot Prices
Crude Oil 62.11 -2.08%
Reformulated Gasoline 167.30 -1.81%
Natural Gas 7.01 -5.28%
Heating Oil 172.15 -3.38%
Gold 618.50 -.10%
Base Metals 240.77 -1.45%
Copper 302.75 +.72%
10-year US Treasury Yield 4.59% -.13%

Leading Sectors
Gaming +.94%
Banks +.30%
Semis +.16%

Lagging Sectors
Steel -2.53%
Energy -2.81%
Oil Service -3.92%

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Afternoon Recommendations
Bank of America:
- Rated (MNST) Buy, target $57.

Afternoon/Evening Headlines
Bloomberg:
- Delphi Corp. will receive $3.4 billion from five investment firms to help it emerge from bankruptcy.
- Oracle Corp.(ORCL) said fiscal second-quarter profit rose 21% on higher sales of programs to manage business tasks such as payroll and inventory.
- Serious crime in New York fell 7.2% in the first six months of this year.
- Crude oil fell more than $1/bbl. as warmer-than-normal weather curbed heating-fuel consumption and investment funds’ near record speculation in the commodity subsided further.
- New US Defense Secretary Robert Gates said America “cannot afford to fail” in the Middle East and he will visit Iraq “quite soon” to consult with military leaders there.
- Marijuana is the largest US cash crop, eclipsing corn and wheat combined, a study in the Bulletin of Cannabis Reform said.

BOTTOM LINE: The Portfolio finished lower today on losses in my Internet longs, Retail longs, Computer longs and Biotech longs. I added to my EEM, IWM and QQQQ hedges in the final hour, thus leaving the Portfolio 50% net long. The tone of the market was negative today as the advance/decline line finished substantially lower, most sectors declined and volume was slightly above average. Measures of investor anxiety were mostly higher into the close. Today's overall market action was bearish. Small caps and commodities underperformed throughout the day. Oil Service stocks were particularly weak as this over-owned group fell almost 4% for the day. Today's action appeared to be mainly a result of year-end profit-taking in the best performers this year. I added to my hedges into the close based on the likelihood that overseas markets will come under pressure tonight due to the weakness in commodities.

Stocks Lower into Final Hour on Year-end Profit Taking

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet longs, Computer longs and Biotech longs. I added to my commodity shorts and added IWM, QQQQ and EEM hedges today, 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 declining and volume is below average. Broadbased weakness in commodity-related stocks is weighing on the overall market, especially small caps. However, a number of sectors are positive outside of commodities. I still firmly believe overall sentiment towards U.S. stocks is extraordinarily bearish given recent gains, while many commodity investors remain very complacent given the ongoing deterioration in the underlying fundamentals. I suspect the record speculation that has been boosting most commodity prices to absurd levels will work against them next year as more funds jump the short side. I expect US stocks to trade mixed-to-lower into the close from current levels on profit-taking.

Today's Headlines

Bloomberg:
- Confidence among US homebuilders fell slightly in December for the first time in three months, however the sales expectations component of the index rose again.
- Statoil ASA’s offer to buy Norsk Hydro ASA’s energy unit and Express Scripts’(ESRX) bid for Caremark Rx(CMX) led more than $75 billion of takeovers announced today, capping a record year for mergers and acquisitions.
- Crude oil fell more than $1/bbl. this morning as warmer-than-normal weather in most of the US curbed heating-fuel consumption and damped near-record speculation by investment funds.
- Natural gas is falling another 4% to the lowest in more than seven weeks in NY as near-record inventories and mild weather curb near-record speculation by investment funds.
- Biomet(BMET) agreed to be acquired for $10.9 billion by a private equity group including Blackstone Group and Goldman Sachs Capital Partners.
- Shaw Group(SGR) shares rose as much as 17% after China selected a team that included the company for the biggest international nuclear reactor contract in history.
- Home Depot(HD) said investor Ralph Whitworth wants independent directors to study “strategic alternatives” and evaluate CEO Nardelli’s performance.
- Apollo Management LP agreed to buy Realogy Corp., the owner of Century 21 and Coldwell Banker real-estate brokers, for $6.6 billion in another sign the US housing slump may have touched bottom.
- Traffickers are increasingly using Venezuela to export illegal drugs to the US, citing William Brownfield, the US ambassador to Venezuela. In the past five years, the volume of illegal drugs shipped to the US after touching Venezuelan soil has soared 1,000% to as much as 300 metric tons a year. Brownfield said Venezuela’s decision to break a drug-control accord with the US Drug Enforcement Administration led to the surge.
- World steel production surged 10% in November to 104.2 million metric tons, led by a 24% jump in China’s production, the International Iron and Steel Institute said.
- “Blood Diamond,” the new Leonardo DiCaprio movie about gems-for-weapons dealing in war-torn Sierra Leone during the 1990s, may hurt Christmas sales of diamonds, according to an author who has written a book about the issue.
- Iraq resumed pumping oil through the Kirkuk pipeline to Turkey last night, adding 300,000 bpd to production.

Wall Street Journal:
- China agreed to let Nasdaq Stock Market(NDAQ) and NYSE Group(NYX) expand their operations in the country.
- US big-truck sales may drop sharply next year because sales in 2006 have been artificially boosted by environmental regulations that will raise prices starting next month.
- Attributor Corp. started testing a system that can scan billions of Internet pages for audio, video, images and text and make it easier to find when copy is being used without authorization.
- Verizon Communications(VZ) and AT&T(T) plan high-speed cable links to Asia to handle the growing volume of intercontinental Internet and telephone traffic.
- Google’s(GOOG) earnings growth may slow as the California-based Internet-search service’s interest income drops.
- News Corp.(NWS) will say today that it’s starting a service to enable customers of Cingular Wireless LLC to view its MySpace social-networking site on their mobile phones.

NY Times:
- NBC Universal, News Corp., Viacom Inc. and possibly CBS Corp. are close to announcing a venture that would rival Google’s(GOOG) YouTube in distributing videos on the Internet.
- Air America, Piquant LLC’s bankrupt liberal talk radio network, has received a bid from a group including two original investors and an unidentified media partner.
- Comcast Corp.(CMCSK) is testing a program to supply films on demand when they’re released in DVD format.

Financial Times:
- Sony Corp.(SNE) plans to start a video downloading service for its PlayStation Portable in the first quarter of 2007, challenging Apple Computer’s(AAPL) i-Tunes downloading service for its iPod player.

Les Echos:
- The “rapid” rise of the euro is “bad for the economy,” French Finance Minister Thierry Breton said.

Containerisation International:
- The world’s shipping lines charged less to move containers in the three months ended September, as new vessels entering the fleet boosted capacity.

Donews.com:
- EBay(EBAY) will announce a merger of its China Web site with Tom Online this week.

Current Account Deficit Widens Modestly

- The Current Account Deficit for 3Q widened to -$225.6 billion versus estimates of -$225.0 billion and -$217.1 billion in 2Q.

BOTTOM LINE: The US current-account deficit widened to $225.6 billion last quarter as the trade gap grew and the country paid more interest to overseas investors, Bloomberg reported. The US needs to attract about $2.5 billion a day to fund the deficit, which has not been a problem. International investment in long-term securities rose again in October as stocks climbed and demand for US Treasuries surged. US investors received less income on their holdings of international investments which helped widen the deficit. I expect the current account deficit to only improve modestly over the intermediate-term as the US dollar firms and overseas economic growth slows relative to US growth.

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Monday Watch

Weekend Headlines
Bloomberg:
- US stocks rose last week, lifting the DJIA to a record, after reports showed inflation receded last month and earnings from companies such as Bear Stearns beat analysts’ estimates.
- European Central Bank President Jean-Claude Trichet told a newspaper that he shares the opinion of the US Federal Reserve that the US economy is showing only “slight” signs of weakness.
- Metals evoke bear market as production gains, hedge funds sell. At the Pacorini Group warehouses in New Orleans, the 15,000 metric tons of copper that have accumulated since September are enough to wire about 7 million refrigerators and make every short-seller salivate.
- Prime Minister Tony Blair said the UK will go “all the way” in its support for the elected government of Iraq, suggesting UK forces stationed in the southern province of Basra may stay beyond mid-2007.
- Natural gas in NY may fall because mild weather so far this winter has crimped demand for the furnace fuel and left inventories near record highs.
- China, the US, Japan, South Korea and India, which account for almost half of global energy use, will cooperate on energy conservation and stable oil supplies, China said as the five gathered for a summit. “We want to send a message to the world that the biggest oil consumers will be pushing ahead with energy saving, increasing energy efficiency,” Ma Kai, head of China’s top economic planning body, said in Beijing.
- China picked Toshiba’s Westinghouse Electric for the biggest international nuclear reactor contract in history, trumping Areva SA for a project worth about $5.3 billion.
- The US dollar posted the biggest weekly advance against the yen since August as reports showing US retail sales rebounded and jobless claims fell allayed concern the world’s biggest economy is losing momentum.
- President Bush, calling on the new Democratic-controlled Congress to restrain spending, said his administration will propose ways to curb wasteful government programs known as “earmarks.”
- The withdrawal of foreign forces from Iraq won’t be “sudden,” Prime Minister Nuri al-Maliki said, as UK Prime Minister Tony Blair pledged continuing support tot eh establishment of democracy and stability in the nation.
- Taiwan stocks, laggards in Asias since 2001, may catch up with markets elsewhere in the region next year as new products spur demand for video-game consoles, computers and semiconductors.
- France will withdraw 200 members of its special forces deployed in Afghanistan, French Defense Minister Alliot-Marie said. After initially operating in the south of the country, they were later deployed around Jalalabad, the largest city in the east, where clashes with Taliban fighters have accelerated.
- Time Warner’s(TWX) Time magazine named Internet users behind the self-made content on sites such as YouTube and MySpace.com as its “Person of the Year,” reflecting the Web’s “digital democracy.”
- Homeowners may give he biggest Treasury rally in four years a boost as falling bond yields trigger a rush to refinance mortgages and increase demand for government debt.

Wall Street Journal:
- Washington Mutual(WM) has slowed the pace of expansion after failing to gain share in fast-growing new markets.
- The 2002 Sarbanes-Oxley Act, an anti-fraud law, is costly to the US economy and unconstitutional, Pepperdine University School of Law Dean Ken Starr wrote.
- Apollo Management LP and Texas Pacific Group are expected to win the auction for Harrah’s Entertainment(HET) with their offer of at least $909 a share.

Fortune:
- How an Apple iPhone could rock wireless.

NY Times:
- Sprint Nextel Corp.(S) CEO Forsee said the mobile-phone company may work with cable operators to provide wireless products.
- Credit Suisse Group, Deutsche Bank AG, hedge funds and billionaire Warren Buffett are spending billions of dollars to buy life insurance policies from older people.

Washington Post:
- Democrats taking over the leadership of Senate and House committees are poised to launch investigations into the conduct of the war with Iraq and allegations of prisoner abuse.
- Democratic Senator Barack Obama called his purchase of land from indicted campaign contributor Antoin Rezko a “boneheaded” mistake.

Philadelphia Inquirer:
- The Pennsylvania Gaming Control Board is expected to pick the two companies that will hold licenses to run slot machines in Philadelphia on Dec. 20.

AP:
- The Wall Street Journal tomorrow plans to announce the creation of a free, stock market tracker on the paper’s Web site.

LA Times:
- Syntroleum’s(SYNM) alternative jet fuel will face cold-weather test and trials with US Air Force refueling tankers after successful runs in B-52 engines. The fuel, which has been tested on B-52 planes over the last year, is a 50-50 mix of oil-based jet fuel and a synthetic liquid made from natural gas, and could replace traditional jet fuel in military and commercial planes.

Financial Times:
- Skype Technologies SA’s founders plan to start an on-line broadband television service that allows users to personalize their content.

Daily Telegraph:
- British Airways Plc CEO Walsh wants some of the UK air passenger tax to go to renew able energy projects.

London-based Times:
- Tesco Plc plans to convert al of its 2,000 distribution trucks to use a fuel that is partly made from agricultural products, citing Tesco’s CEO.

Economic Daily News:
- Asustek Computer targets sales of $23 billion in 2007, about 40% higher than this year.

Shanghai Securities News:
- China is implementing more controls of fixed-asset investment by centrally supervising the investment budgets of all state-owned enterprises for the first time.
- China’s inflation may stay at around 1.5% this year.

Weekend Recommendations
Barron's:
- Made positive comments on (COP), (NFX) and (OVEN).
- Made negative comments on (NYB) and (HLYS).

Citigroup:
- The National Retail Federation is now projecting total retail sales to increase 5% during this holiday season versus a 10-year average of a 4.6% gain.

Night Trading
Asian indices are +.25% to +.1.0% on average.
S&P 500 indicated +.05%
NASDAQ 100 indicated -.01%.

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Earnings of Note
Company/Estimate
- (CAO)/.15
- (HOV)/1.05
- (JOYG)/.66
- (ORCL)/.22
- (SCS)/.19

Upcoming Splits
- (AEOS) 3-for2

Economic Releases
8:30 am EST
- 3Q Current Account Deficit is estimated to widen to -$225.0 billion versus -$218.4 billion in 2Q.

1:00 pm EST
- The NAHB Housing Market Index for December is estimated to rise to 34 versus 33 in November.

BOTTOM LINE: Asian Indices are higher, boosted by automaker and technology shares in the region. I expect US stocks to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the week.