Stocks Mildly Lower into Final Hour on Healthy Consolidation of Recent Gains

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Internet longs, Semi longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is mildly negative today as the advance/decline line is lower, sector performance is mixed and volume is around average. Goldman Sachs (GS) blew away estimates by 40% and posted its second highest revenue in history. Bear Stearns (BSC) disappointed, but did say the "worst is likely behind us." The Goldman report is mind-boggling. Overall, so far, I would say that the broker reports are much better than feared and provide more evidence that, in the current U.S. negativity bubble, the worst case is almost always priced into stocks rather than the most likely scenario. The dollar-based three-month Libor rate is falling another 3 basis points and is now down 22 basis points in nine days, which is a big positive. The 10-year TIPS spread, which is a gauge of inflation expectations, is currently at 2.328%. This is down from 2.35% on Monday, before the Fed cut rates, and down from 2.5% as recently as June. Inflation expectations, as measured by this indicator, are well off the highs seen during March 2005 (at 2.78%) and May 2006 (at 2.74%). Gold hit its recent low on Aug. 16, the day the stock market hit its low as investor worries over credit market turmoil bringing down the global economy, specifically emerging markets, peaked. In my opinion, gold is much more correlated with perceptions of emerging market demand than inflation expectations. Every main gauge of inflation that I follow is below long-term average rates. I think the recent rise in the 10-year yield is more a function of investors taking out the recession that they were pricing in rather than a meaningful increase in inflation expectations. Based on market action during August, I am more convinced than ever that the secular trend of disinflation remains firmly in tact. I plan to add back to my long iShares Lehman 20+ Year Treasury Bond (TLT) position on any unexpected move in the 10-year yield back near 5%. One of the funniest things about the current excessively pessimistic backdrop is how quickly we move from worries over inflation to deflation back to inflation. I expect US stocks to trade mixed into the close from current levels as short-covering, bargain-hunting and less economic pessimism offsets higher oil prices and long-term rates.