Stocks Finish Higher on More Economic Optimism After FOMC Comments

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Stocks Building on Yesterday's Sharp Gains into Final Hour as Fed Leaves Rates Unch., Emphasizes Economic Strength

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Biotech longs and Internet longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is slightly positive today as the advance/decline line is slightly higher, most sectors are higher and volume is heavy. My intraday gauge of investor angst is still elevated. The ISE Sentiment Index hit an all-time low of 39.0 this morning. It is extraordinary that this gauge of retail option trader sentiment this morning was showing more bearishness than during the major bear market lows during late 2002/early 2003. As well, the CBOE total put/call hit a very high 1.39 again this morning. The 10-day moving average remains near record levels. The VIX is down today but is still near levels last seen in 2003. Stocks are building on yesterday's strong gains. A Luminent Mortgage Capital (LUM) bankruptcy looks likely, and Goldman Sachs (GS) said that its Global Alpha fund is down 16% year-to-date, yet the financials are solidly higher. The financials ignoring new negative news is a significant positive for the broad market and a prime example of how much bad news is already factored into stock prices at current levels. The S&P 500 forward P/E is now 15.5, down from 16.1 at the beginning of the year despite earnings substantially beating estimates once again. Median S&P 500 earnings growth for second quarter is on pace to exceed first quarter's rate and come in at double-digit rates once again. As well, it is interesting to note the very positive comments recently from Harrah's Entertainment (HET) and Wynn Resorts (WYNN) regarding Las Vegas traffic trends. Urban Outfitters (URBN) said that second-quarter sales jumped 22%, with same-store-sales up 5%. Last night, after the close, Citigroup (C) had positive comments regarding the prospects for a better-than-expected back-to-school selling season. Finally, a Rasmussen poll today showed 70% of consumers think economic conditions are fair-to-excellent vs. 28% that view them as poor. This corresponds with the recent cycle high reached in the Conference Board's Confidence Index. These are just more data points that don't indicate the imminent collapse in consumer spending that is partially being factored into stocks at current levels. “Growth” stock leaders are especially strong again today, with many posting 1%-3% gains. I expect US stocks to trade modestly higher into the close from current levels on short-covering, more economic optimism and bargain hunting.

Stocks Slightly Higher into Final Hour as Fed Remains on Hold, Emphasizing Economic Strength

Bloomberg:
- The Federal Reserve kept the benchmark Fed Funds rate at 5.25%. The Fed said that the US expansion is supported by “solid” job growth and incomes, as well as strong global growth. They also said core inflation has improved modestly.
- Francois Trahan, Wall Street’s top-ranked strategist, is one of the most bullish as he sees the S&P 500 rising to 1,700.
- Apple Inc.(AAPL) CEO Steve Jobs introduced three sleeker versions of the iMarc desktop computer to win over back-to-school shoppers.
- Countrywide Financial(CFC) and CIT Group(CIT) said they’ll be able to ride out the mortgage industry’s credit crunch.
- Billionaire investor Warren Buffett will host a fund-raising event for Democratic presidential candidate Barack Obama in Nebraska this month.
- Lenovo Group Ltd. said it is in talks with an independent third party to buy Packard Bell BV.
- The risk of owning corporate bonds is falling on speculation the US government may seek to contain losses on subprime mortgage securities, according to traders of credit-default swaps.
- Brushfield Capital, a unit of ABN Amro Holding NV, raised $1.25 billion from investors for a collateralized debt obligation including US subprime mortgage securities.
- Paulson & Co., the NY-based hedge-fund manager whose assets more than doubled this year to $20 billion, is posting among the industry’s highest returns by wagering that declines in subprime mortgages are far from over.

Wall Street Journal:
- Eric Dinallo, NY’s top insurance regulator, is looking at reviving the defunct NY Insurance Exchange as a rival to Lloyd’s of London, citing Dinallo.
- US technology entrepreneurs have set up a Web site to evaluate venture capitalists.
- Mutual funds designed to produce returns whether the market goes up or down haven’t performed as billed in recent turmoil. So-called long-short funds, which are supposed to lose less in a stock-market slump, lost 5.3% in the month ended Aug. 3. “Market-neutral” funds lost 1.24%.

NY Times:
- US Democratic presidential candidates Hillary Clinton and Barack Obama have barely spoken to each other in months, though their paths sometimes cross several times a day.

NY Post:
- The NY Times(NYT) will stop charging for access to online content including columnists and archived stories.

Washington Post:
- The House ethics committee is suspending its investigation of Democratic Representative William Jefferson after the Justice Dept. indicated that a congressional inquiry could conflict with a criminal investigation.

USA Today:
- The US government’s decision to send additional troops to Iraq is “making the situation better,” according to a USA Today/Gallup Poll.

Financial Times:
- US advertising online is expected to overtake that in newspapers by 2011, citing a study by Veronis Suhler Stevenson.
- Russia’s bid to gain control of the seabed at the North Pole highlights the potential wealth of the area, which may contain a quarter of the world’s undiscovered oil and gas reserves according to Bernstein Research.

Vedomosti:
- Russian billionaire Oleg Deripaska bought about 5% of General Motors(GM) late last year.

Haaretz:
- Israeli Prime Minister Ehud Olmert is examining a new peace proposal in which Israel would transfer to a future Palestinian state areas equivalent to 100% of the land conquered in 1967.

Productivity Jumps, Unit Labor Costs Decelerate

- Preliminary 2Q Non-farm Productivity rose 1.8% versus estimates of a 2.0% gain and a .7% increase in 1Q.

- Preliminary 2Q Unit Labor Costs rose 2.1% versus estimates of a 1.8% gain and an upwardly revised 3.0% increase in 1Q.

BOTTOM LINE: US worker productivity gained less than forecast in the second quarter and labor costs rose, Bloomberg said. Unit labor costs, which comprise two-thirds of inflation, rose 2.9% in 2006, revised down from a prior estimate of 3.3%. The pick-up in 2Q productivity reflected the strong surge in economic growth to above trend rates from 1Q’s sluggish performance. I continue to believe productivity will trend at above average rates long-term, while unit labor cost increase remain subdued.

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