Tuesday, October 16, 2007

Stocks Lower into Final Hour on Higher Energy Prices, Housing Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Medical longs and Software longs. I covered my (IWM)/(QQQQ) hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The overall tone of the market is negative today as the advance/decline line is lower, most sectors are falling and volume is about average. The U.S. Dollar Index is actually 0.22% higher despite Bernanke’s comments last night and the large outflows seen in the TIC data. I still expect a countertrend rally in the dollar beginning at any time. The 10-year yield is at session lows, falling 4 basis points. Thirty-day asset-backed commercial paper yields are falling another 8 basis points, to 5.12%. This is down 121 basis points from September highs. Weekly retail sales rose 2.6% this week, up from 2.0% the prior week and up from 1.4% in early July. I still see little evidence of a significant slowdown in consumer spending. Growth stock leaders are again outperforming the broad market today. Apple (AAPL) is rising 1.4% after saying it will release its Leopard operating system on Oct. 26. As well, BusinessWeek reports that Apple (AAPL) may announce in January that it is unlocking the iPhone, which will allow programmers to create applications for the device. This should be another driver of demand for the product, especially among the younger set. Piper Jaffray also made positive comments earlier today regarding Apple's upcoming earnings release, saying they could do EPS of 94 cents, 10 cents above consensus and near Caris' Street high of 98 cents. I still think Apple could see an initial "sell the news" reaction on its earnings report given how much it has risen but that any weakness will remain muted and short term in nature. I would add to my long position on any unexpected substantial weakness. It remains my second largest long position behind Google (GOOG) and just ahead of Intuitive Surgical (ISRG). Needham raised its target on Google (GOOG) to $690 and made the case for a stock split. I agree with that analysis and definitely think the stock should split. As I predicted a couple of days ago, Broadcom (BRCM) is starting to get some upgrades. Citi upgraded the shares this morning to buy, with a $52 target. I expect more upgrades soon. For the second day in a row, semis are outperforming tech and the broad market ahead of Intel's (INTC) earnings after the close. Yesterday, I said I thought there wasn't enough investor angst into the sell-off. We are getting higher levels of angst today. I expect earnings after the close to provide an upside catalyst for trading tomorrow. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting and short-covering.

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