Stocks Higher into Final Hour on Positive Economic Data, Diminishing Credit Fears

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Medical longs, Internet longs and Retail longs. I covered my some of my (EEM) short and all of my (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 100% net long. The overall tone of the market is positive today as the advance/decline line is higher, every sector is rising and volume is below average. My intraday gauge of investor angst is still above average. Bloomberg is reporting that Google's (GOOG) chief economist is saying that the advertisers have not slowed Web spending. This is a positive for the stock and market. I expect Google to outperform the market substantially through year-end. There has been a lot of recession talk of late, mainly by those who know that the more the media talk about it, the more the consumer will retrench. A recession this year, defined by two consecutive quarters of negative growth, is virtually impossible, in my opinion. We would have to see a contraction this quarter. Based on my analysis, that is a very remote possibility. I also believe the likelihood of a recession beginning next year is fairly low. Recessions don't occur often. We never even saw two consecutive quarters of negative growth during the 2000-2002 bubble bursting and 9/11 terrorist attacks. I see few signs that point to a recession now, however, if we did start to get substantially weaker economic data, there is no doubt in my mind that the Fed would act and act vigorously. The Fed has a lot of ammunition to fire, and I strongly disagree with those who think that doesn't matter. We have heard for several years every time we get some weak data that the bulls are in a lose-lose situation. If the Fed cuts, it means the economy is too weak; if they don't, investors will sell because they will be disappointed. In my opinion, we are in a win-win situation. I think stocks rally if an imminent recession begins to be taken out of the equation, and I think we rally if the Fed cuts rates. We saw historic levels of investor angst in many gauges over the last few weeks as investors prepared for the worst. What if the worst doesn't happen? There is a mountain of cash on the sidelines, insiders are buying at levels last seen before we took off in 2003, fear is high, bears are partying likes it's 2000-2002, and the S&P 500 is just 4.8% off its record high. If the major averages continue to trade around current levels or even grind higher over the coming weeks as we get more negative news, investment manager performance anxiety will come back into play in a monstrous way. This could pave the way for an extraordinarily bullish fourth-quarter for stocks. Money market funds are at new record levels and have now seen $127.79 billion in cash inflows over the last two weeks, the most in several years. Asia will likely take today's U.S. economic data very well on Monday, especially the 9.8% surge in auto orders and decline in new home inventories. The average 30-year mortgage rate fell 10 basis points, to 6.52% this week, the largest weekly decline since Nov. 24, 2005. This is also down 22 basis points from mid-June highs. As well, the average 30-year jumbo mortgage rate has declined 7 basis points over the last week, to 7.21%. I expect rates to fall further over the intermediate term as credit fears subside and inflation decelerates further. The 10-year swap rate is falling another 3.25%, to 68.15 basis points over Treasuries. This is down from 83.75 on Aug. 17, which was the day after the S&P 500 bottomed. The Broker/Dealer Index, the source of much angst, is at session highs, rising 1.0%. Nikkei futures are indicating an up 220 open in Japan on Monday. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, diminishing credit fears, less economic pessimism and bargain hunting.