Wednesday, October 31, 2007

Stocks Surging into Final Hour on Less Economic Pessimism, Fed Rate Cut

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Computer longs, Software longs and Medical 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 rising and volume is heavy. Mastercard (MA) reported excellent results and boosted its stock buyback program. I have heard many bears say that the company's positive results of late are just a function of how strapped the U.S. consumer is. However, Mastercard attributed these strong results to strong international and emerging market demand. The stock, with short interest near record levels, is soaring 22% on the report. As I have said a number of times, I don't usually highlight the Investors Intelligence survey because I don't think it is a good contrary indicator. I choose to highlight the AAII survey, which recently showed exceptional bearishness, given how close the S&P 500 is to a record. Many others have been pointing to the Investors Intelligence survey, however, as recent evidence that investors were too complacent. That survey came out today and shows a seven-week low in investor optimism. I haven't heard anyone even mention this. The Fed cut the fed funds rate and discount rate 25 basis points, as expected. The Fed also explicitly stated that the balance of risks are now equal with respect to inflation and growth. I think, overall, the policy statement was slightly more hawkish than many investors expected. I view those statements as a positive, however. The odds of another 25-basis-point cut at the December meeting are now 51.8%, down from 60.7% before the meeting. I still think the market is in a win-win situation as the Fed has massive firepower available if needed. If growth remains extraordinarily resilient, many companies will continue to post stellar earnings results -- even with the drag from housing on a few sectors. Google (GOOG) is already back near session highs and I agree with those who think that the company should split its stock. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, less economic pessimism, investment manager performance anxiety and short-covering.

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