Tuesday, October 30, 2007

Stocks Mixed into Final Hour as Weakness in Commodities is Offset by Strength in Technology Shares

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Software longs, Internet longs, Computer longs, Retail longs and Commodity shorts. 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 slightly lower, sector performance is mixed and volume is around average. A WSJ article suggested the Fed may remain on hold tomorrow. While no change in rates is possible, it is highly unlikely. Fed fund futures now imply a 94% chance for a 25 basis point cut and only a 6% chance of no change. I seriously doubt the Fed would blindside the market with no change in rates given the current macro backdrop and their recent comments. I still expect a 25 basis point cut tomorrow. The US dollar-based 3-month LIBOR rate is falling another 5 basis points today to 4.91%. This has now plunged 81 basis points from its September high and is at the lowest level since March 2006. As I suggested yesterday, Google (GOOG) appears to be embarking on another meaningful push higher. As well, another surge in Apple (AAPL) shares looks likely. A number of other market-leading stocks are posting gains today despite losses in the major averages. Under Armour (UA) beat estimates and boosted guidance despite very warm weather of late. I added shares during the most recent pullback and plan to continue doing so going forward. Goldman Sachs (GS) is recommending investors take profits in crude oil futures due to rising exports, a slowing U.S. economy and an adequate level of heating oil inventories. Goldman also said today that rising oil supplies will come from the Greater Plutonio oil field in Angola and the Genghis Khan field in the U.S. Gulf of Mexico, which will ramp up production over the next several weeks. Goldman said it was closing its long positions in oil, according to Bloomberg. I view this as significant. The much-loved commodity stocks are under pressure today on falling prices, but a number of other sectors are rising. Today's Consumer Confidence index fell more than expected, to 95.60, which is modestly below the 20-year average of 101.9. The Present Situation component of the index came in at 118.8 vs. the 20-year average of 113.2. This also corresponds with the most recent Rasmussen consumer survey, which indicates that 79% of Americans currently rate the economy as fair to excellent, while 29% rate it poor. Consumers still feel pretty good about their situation now, which doesn't indicate a meaningful decline in consumer spending is imminent. The Expectations component of today's confidence report fell, however, to a depressed 80.10 vs. the 20-year average of 94.4. The gap between consumer perceptions regarding their current situation and the future is near the largest in history. This isn't surprising given the current U.S. “negativity bubble.” The overwhelming majority of media outlets always paint a dire picture of the future, and it does affect consumer perceptions. In my opinion, many that want a U.S. bear market and recession, for both political and financial gain, are currently abusing George Soros' Theory of Reflexivity by attempting to scare businesses and consumers so much that they actually do retrench. Given that housing worries are the most extreme in the South Atlantic and Pacific regions of the country, it is very interesting that confidence remains high in the Pacific and healthy in the South Atlantic. In fact, confidence actually surged 11.6% in the Pacific region this month. Very depressed confidence in the Northeast Central and New England regions, where most media outlets and hedges funds are located, continues to negatively skew the entire confidence gauge.

Here is a breakdown of today's consumer confidence reading by region:

  • Northeast Central 61.8
  • New England 64.6
  • Mid Atlantic 85.10
  • Northwest Central 96.10
  • South Atlantic 102.7
  • Southeast Central 108.0
  • Pacific 119.7
  • Southwest Central 127.0
  • Mountain 141.80

I expect US stocks to trade mixed-to-higher into the close from current levels on bargain-hunting, falling energy prices and short-covering ahead of tomorrow’s Fed announcement.

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