Stocks Slightly Lower into Final Hour on Bounce in Oil and Subprime Lending Worries

BOTTOM LINE: The Portfolio is about even into the final hour as losses in my Telecom longs and Energy shorts are being offset by gains in my Retail longs and Networking longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly negative as the advance/decline line is modestly lower, sector performance is mixed and volume is above-average. After the hurricanes in the fourth quarter of 2005, I surmised that stocks deserved a higher multiple given the U.S. economy's bulletproof disposition. At that time U.S. economic growth was in the middle of the longest streak of 3%+ GDP quarters since 1986. This occurred during a time of terrorism fears, war, multiple natural disasters, soaring commodity prices, pandemic worries, numerous Fed rate hikes, corporate scandals, historically bitter politics and many hangover effects from the bubble years. Last year, many of these same concerns were still present and some intensified. Oil almost hit $80/bbl. as calls for $100/bbl. crude were commonplace, U.S. dollar collapse calls were numerous as the dollar weakened, inflation fears soared with commodities, housing saw one of the sharpest downturns in history and auto manufacturers drastically cut production. All of these potential downside economic catalysts and the U.S. economy never grew below 2%. In fact, growth was an above-average 3.4% for the year. Moreover, U.S. corporate profit growth extended its historic string of double-digit increases throughout the year. The S&P 500 P/E has contracted for three consecutive years despite the amazing performance of the U.S. economy and most companies. It has only contracted 4 consecutive years twice since 1905. I continue to believe that the U.S. economy will grow around 3% for the year, notwithstanding the many perceived headwinds. More than ever before, U.S. stocks deserve higher multiples. I still expect stocks to return a total of around 17% for the year due to earnings growth still exceeding average levels and P/E multiple expansion. I expect US stocks to trade modestly higher into the close from current levels on stable long-term rates, bargain hunting and short-covering.