Stocks Finish Mildly Higher on Positive Economic Data

Indices
S&P 500 1,478.55 +.43%
DJIA 13,363.35 +.44%
NASDAQ 2,614.32 +.32%
Russell 2000 792.92 +.31%
Wilshire 5000 14,863.57 +.40%
Russell 1000 Growth 598.0 +.45%
Russell 1000 Value 825.49 +.37%
Morgan Stanley Consumer 715.36 +.80%
Morgan Stanley Cyclical 1,027.64 +.71%
Morgan Stanley Technology 645.56 +.48%
Transports 4833.73 +.06%
Utilities 493.75 +1.15%
MSCI Emerging Markets 135.41 +1.20%

Sentiment/Internals
Total Put/Call .90 -21.74%
NYSE Arms .92 -42.51%
Volatility(VIX) 23.99 -2.40%
ISE Sentiment 152.0 +46.15%

Futures Spot Prices
Crude Oil 76.39 +.87%
Reformulated Gasoline 197.30 -1.18%
Natural Gas 5.59 -3.57%
Heating Oil 213.75 +1.79%
Gold 705.40 +2.11%
Base Metals 226.94 -2.58%
Copper 330.25 +1.21%

Economy
10-year US Treasury Yield 4.51% +4 basis points
US Dollar 80.46 -.20%
CRB Index 311.76 +.27%

Leading Sectors
Biotech +1.68%
Steel +1.45%
Utilities +1.15%

Lagging Sectors
Homebuilders -.77%
Airlines -1.05%
Tobacco -1.06%

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Afternoon Recommendations
RBC:
- Rated (TEL), target $41

Oppenheimer:
- Rated (PRM) Buy, target $20.

Afternoon/Evening Headlines
Bloomberg:
- US stocks resumed their late-summer recovery from a deepening housing slump after retailers’ August sales exceeded estimates and the government said worker efficiency is improving.
- Four regional Fed bank presidents declined to endorse a cut in the benchmark interest rate this month, as policy makers gauge the impact of the credit-market rout on the US economy.
- Apple Inc.(AAPL) CEO Jobs apologized to customers who bought the iPhone before he cut the device’s price by $200 yesterday.

BOTTOM LINE: The Portfolio finished about even today as losses in my Retail longs and Computer longs offset gains in my Medical longs and Biotech longs. I added to my (EEM) short and (IWM)/(QQQQ) hedges in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was slightly positive today as the advance/decline line finished mildly higher, most sectors rose and volume was below average. Measures of investor anxiety were slightly above average into the close. Today's overall market action was mildly bullish. Commodities and biotechs were sources of strength today. Growth stocks again outperformed value. Given some of the Fed's comments today, the market once again displayed resilience. Oil is 0.57 higher, but natural gas dropped another 3.5%. Gold broke higher today, which I believe is more a function of diminishing global credit worries rather than rising inflation concerns. Apple (AAPL) headed into positive territory this afternoon only to be knocked down after news broke of the $100 iPhone rebate to existing customers. While I don't think the rebate was necessary, it likely turned a PR negative into a PR positive. Apple will be perceived as a company that "did the right thing" at a time when that is viewed as unusual by most consumers. I still think the stock moves substantially higher from current levels.

Stocks Slightly Higher into Final Hour on Positive Economic Data

BOTTOM LINE: The Portfolio is about even into the final hour as losses in my Computer longs and Retail longs are being offset by gains in my Medical longs and Biotech 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 mildly higher, most sectors are rising and volume is below average. The market's initial reaction to tomorrow's jobs report will likely be negative. I still think non-farm payrolls will come in below estimates of 100,000. As well, the unemployment rate could tick slightly higher. This should further boost the chances of a Fed rate cut. Given the recent strong surge higher off the lows, however, stocks may initially weaken on worries that the economy will slow too much going forward. Moreover, a number that meets or beats expectations will likely lead to more talk that the Fed won't cut rates at the upcoming meeting, which will also probably pressure stocks initially. While the initial reaction will likely be a negative one, I wouldn't be surprised to see stocks rally later in the afternoon given how many bulls are underinvested and how many bears added to their shorts near the lows in anticipation of an imminent recession. The 10-year yield is moving to session highs over the last hour, in a delayed reaction to this morning's positive data. I expect US stocks to trade mixed into the close from current levels on rising apprehension ahead of tomorrow’s jobs report.

Today's Headlines

Bloomberg:
- Lowe’s Cos(LOW) increased the size of its proposed sale of senior bonds to $1.3 billion, making the offering its biggest ever.
- Federal Reserve Bank of Atlanta President Dennis Lockhart said he hasn’t seen conclusive signs that the US housing recession has harmed the wider economy.
- Nucor Corp.(NUE), the second-largest US-based steelmaker, said it plans to buy back as much as $1.66 billion of its shares after profit rose to a record.
- Lexmark Intl.(LXK), the second-largest US printer maker, gained the most in more than a year after Sanford C. Bernstein said “healthy” demand will fuel profit growth.
- Wal-Mart Stores(WMT), Macy’s Inc. and retailers catering to teenagers reported August sales that topped analysts’ estimates on purchases of clothing and electronics for the new school year.

Wall Street Journal:
- Seagate Technology(STX) is introducing drives for desktop computers that use special chips to encrypt information to make it unreadable if a computer equipped with the devices falls into the wrong hands.

NY Times:
- Amazon.com Inc.(AMZN) plans to release an electronic book reader in October named Kindle that will let users download books wirelessly through an e-book store on the retailer’s Web site.

Productivity Healthy, Unit Labor Costs Decline, Jobless Claims Below Estimates, Service Sector Healthy, Prices Paid Declines

- Final 2Q Non-farm Productivity rose 2.6% versus estimates of a 2.4% gain and a prior estimate of a 1.8% increase.

- Final 2Q Unit Labor Costs rose 1.4% versus estimates of a 1.5% gain and a prior estimate of a 2.1% increase.

- Initial Jobless Claims fell to 318K versus estimates of 330K and 337K the prior week.

- Continuing Claims rose to 2598K versus estimates of 2575K and 2573K prior.

- ISM Non-Manufacturing for August rose to 55.8 versus estimates of 54.5 and a reading of 55.8 in July.

BOTTOM LINE: Worker productivity in the US accelerated more than forecast in the second quarter and labor costs cooled, lowering the risk of a pickup in inflation as the Fed weights cutting interest rates, Bloomberg said. Productivity rose at a 2.6% annual rate, the most in 2 years. Productivity at non-financial companies, a gauge closely monitored by the Fed, jumped 3.5% in 2Q versus a .7% gain in 1Q. This data gives the Fed more leeway to cut rates if necessary.

The total number of Americans receiving unemployment benefits rose to a six-month high even as new applications fell more than forecast last week, Bloomberg reported. The four-week moving average for initial jobless claims rose to 325,750, the highest since April. As well, the unemployment rate among those eligible for benefits, which tracks the US unemployment rate, rose to 2% from 1.9%. While the job market has slowed a bit, it is still healthy by historical standards. I continue to believe it will remain healthy over the intermediate-term without generating substantially unit labor cost increases.

Service Industries that make up 90% of the US economy grew more than forecast in August, confirming the Fed’s view that the impact of the credit-market rout is “limited” outside of housing. The new orders component rose to 57 from 52.8, the biggest increase in 11 months. However, the employment component fell to 47.9 from 51.7 in July. The prices paid component fell to 58.6, the lowest since February, versus 61.3 in July. This report and better-than-expected retail sales in August illustrate the economy’s resilience. I still see little evidence of a substantial imminent economic slowdown even as investors continue to price this into stocks at current levels.

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