Stocks Building on Yesterday's Sharp Gains into Final Hour on Rapidly Improving Credit Markets, Low Inflation Reading

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Medical longs and Computer longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is positive today as the advance/decline line is higher, almost every sector is gaining and volume is above average. Morgan Stanley (MS) reported disappointing results, however the brokers are surging another .65% today after yesterday’s huge move higher. This, along with Lehman's (LEH) report, just shows how much bad news is already priced into this sector. Moreover, Morgan Stanley said the worst of the credit crisis is over. Financial sector credit default swaps have plunged the last two days. The CPI for August came in below estimates and is rising at a 2.0% rate year-over-year, well below the long-term average of 3.1%. The 10-year/TIPS spread, a gauge of inflation expectations, is falling 6 basis points, to 2.32%. However, the 10-year yield is rising 5 basis points on a flight from safety. The dollar-based three-month Libor rate is plunging 35 basis points today, to 5.24%, the lowest since May 2006. The 10-year swap rate is plunging 12% today, to 60.25 basis points, over Treasuries. The 30-year average jumbo fixed-rate mortgage is dropping another 8 basis points today, to 7.03%, down 31 basis points in six days. Weekly mortgage applications rose 2.4%, boosted by a 4.6% surge in refis. According to Rasmussen, consumer confidence is beginning to improve, with only 17% rating their finances as poor. Oil inventories fell more than estimates, but gas supplies unexpectedly rose. According to the API, U.S. oil demand was down 2.2% in August. The yen is lower against the U.S. dollar again, which is a positive. A number of sectors are rising more than 1% again today. The VIX fell below 20 for the first time since Aug. 8. Despite the last two days gains, my intraday gauge of investor angst is only around average levels. The LCDX leveraged loan index, which tracks prices on credit derivative swaps for U.S. junk bonds, is improving rapidly. It is now back to levels seen in mid-July, right before the credit market turmoil began to accelerate. This is another large positive. A significant leveraged buyout right now certainly would catch many by surprise. Given the news over the last two days, I am actually surprised stocks aren't up more. Most U.S. stocks are still cheap given the macro backdrop. Back during August, I said that I strongly disagreed with those who said that a Fed rate cut wouldn't help the economy or stocks. The evidence over the last two days overwhelmingly backs up that view. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, performance anxiety, bargain-hunting and less economic pessimism.