Stocks Slightly Slower into Final Hour on Substantial Decline in Commodities

BOTTOM LINE: The Portfolio is slightly lower into the final hour as looses in my Medical longs, Semi longs and Biotech longs more than offset gains in my Commodity shorts. I added (EEM), (IWM) and (QQQQ) hedges today, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is heavy. "High School Dropout" copper is plunging another 7% today and is down 34.6% from its May 11, 2006, all-time high. Freeport-McMoRan Copper & Gold (FCX) is now down almost 10% since it announced its acquisition of Phelps Dodge (PD) and I said it made an excellent short. I continue to believe that this deal won't be accretive for years as FCX vastly overpaid for PD. At $4.07 per pound, copper was priced at absurd levels. Even as U.S. housing construction slowed dramatically and Chinese consumption decelerated meaningfully, copper bulls tried to justify ever higher prices. Copper quit trading on fundamentals quite some time ago as psychology and record speculation by investment funds, spurred by a massive historic influx of capital, drove the metal to astronomical levels. With most commodity funds posting double-digit losses last year, I suspect this flood of capital is receding significantly. Copper's demise is a function of the ending of a mania and does not indicate a substantial slowdown in global economic activity. In my opinion, the recent dramatic decline in copper even as the U.S. dollar weakened, inventories remained low by historic levels and economic data exceeded estimates unmasked the true fluff that had been propping up the commodity. I believe one of the big stories of 2007 will be the continuation of the stunning declines in many commodities as the CRB Index breaks down into bear market territory, which will have meaningful negative consequences for many commodity-dependent emerging market economies and stock markets. The CRB Index is already down 18.2% from record highs. Many of the same investment funds that had been speculating on ever higher commodity prices will likely switch sides and jump on the downside bandwagon, thus driving prices even lower than would otherwise be the case. I suspect energy and then gold will follow copper substantially lower over the coming months. I suspect many funds that came into the new year overweight commodity stocks, especially energy, are now hunkering down to re-evaluate strategy. This could last a few more days, but I still expect January to be a good month for U.S. stocks, excluding commodities. Overseas markets, especially emerging, will likely come under pressure tonight on the commodity drop and U.S. stock reversal. I expect US stocks to trade modestly higher into the close from current levels on short-covering, declining long-term rates and lower energy prices.