Stocks Lower into Final Hour on Higher Energy Prices, Profit-taking

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet longs, Medical longs and Software longs. I added back (IWM)/(QQQQ) hedges and added to my (EEM) short. I also was stopped out of my (USO) short and took profits in a trading long today, thus leaving the Portfolio 75% net long. The overall tone of the market is negative today as the advance/decline line is substantially lower, most sectors are falling and volume is about average. Thompson Financial now expects third-quarter S&P 500 earnings growth to come in slightly negative. I will be very surprised if earnings growth doesn't handily beat that expectation. The S&P 500 is now 11.7% higher year-to-date and technically overbought near term. I still expect a total return of about 17% for the S&P 500 by year-end. As well, the Russell 1000 Growth Index is 15.8% higher year-to-date, and I still expect it to return a total of about 25% this year. Fed fund futures now imply a 32% chance for a 25-basis-point cut at the upcoming meeting. This is down from 40% on Friday and 48% one week ago. I anticipate Fed commentary this week to continue to be somewhat more hawkish to lower expectations for a cut further. This should provide support for the much-hated U.S. dollar. According to Intrade.com, the percentage chance of the U.S. heading into recession next year has fallen to 35.5%. This is down from 58.9% just last month. As I said back when recession fears were peaking, I continue to believe that an imminent recession is highly unlikely. The drag from U.S. housing problems, combined with booming global growth, will continue to result in modestly below-trend U.S. growth over the intermediate term, in my opinion. I think this is one of the main reasons for recent growth stock multiple expansion. Overall, I still see housing as a net positive for all U.S. stocks. Without housing, investors would have faced above-average inflation, higher long-term rates and multiple Fed rate hikes, which would have greatly increased the odds of a hard landing. That said, given housing, long-term rates should remain relatively low, inflation should stay below average rates, and the Fed is, at the very least, on hold indefinitely and may even cut again. The macro backdrop for investing in U.S. stocks is still very good. I expect US stocks to trade mixed into the close from current levels as higher energy prices and profit-taking offset less economic pessimism.

Today's Headlines

Bloomberg:
- Cancer is killing a lower percentage of Americans, according to a report that suggest screening and medicines such as Genentech’s(DNA) Avastin and ImClone Systems’ Erbitux are making a difference.
- Crude oil is rising above $85/bbl. for the first time in NY on concern Turkish forces may pursue Kurdish militants in Iraq.
- Wheat plunged 3%, to a five-week low, dropping the most permitted by the Chicago Board of Trade, as rain in the southern Great Plains improved prospects for fields in the US, the world’s largest exporter of the grain.
- Coffee plunged 6.5%, the most in two years, as rains in Brazil and forecasts for more moisture this week eased concern that a prolonged dry spell will damage the nation’s crop, the world’s largest.

Wall Street Journal:
- Discovery Communications, looking to jump-start a stalled Internet strategy, agreed to acquire the HowStuffWorks.com Web site for $250 million.
- Broadcom Corp.(BRCM), a latecomer to chips for cellphones, said it has developed an unusual multifunction product that could sharply reduce the price of high-end handsets.
- Danaher Corp.(DHR), an industrial company based in Oregon, is poised to buy Tektronix Inc.(TEK), an electronic test and measurement firm, for $2.8 billion.

Washington Post:
- The US military believes it has dealt devastating and perhaps irreversible blows to al-Qaeda in Iraq in recent months, leading generals to advocate a declaration of victory over the group, which the Bush administration has long described as the most lethal US adversary in Iraq.

NY Post:
- US in-theater advertising increased 15% to $456 million last year as retailers and consumer products companies entered the category, citing the Cinema Advertising Council.

Financial Times:
- The US dollar should fall to reduce the US deficit, boost exports and induce American consumers to buy domestic rather than overseas-produced goods, said Martin Feldstein, a Harvard University economics professor.

New York Manufacturing Gauge Surges to 3-Year High

- Empire Manufacturing for October rose to 28.8 versus estimates of 13.1 and a reading of 14.7 in September.

BOTTOM LINE: Manufacturing in New York unexpectedly shot up in October, reaching the highest level in three years, as orders and sales gained, Bloomberg said. The Future Outlook component rose to 50.6, the highest since August 2005, versus 48.8 in September. The New Orders component rose to 25 from 13.6 in September. The prices paid component rose to 36.1 versus 35.1 the prior month. I continue to expect manufacturing to help boost overall US economic growth as companies gain confidence in the sustainability of the current expansion and rebuild depleted inventories.

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Monday Watch

Weekend Headlines
Bloomberg:
- Citigroup Inc.(C), Bank of America(BAC) and JPMorgan Chase(JPM) will announce as soon as tomorrow that they are establishing a fund of about $80 billion aimed at reviving the asset-backed commercial paper market, said people familiar with the plan.
- Paulson & Co., the hedge fund that profited from bets on rising foreclosures this year, will donate $15 million to consumer groups backing bankruptcy legislation that would further reduce the value of subprime laons.
-Biogen Idec(BIIB) is considering a sale of the company after billionaire investor Carl Icahn and unspecified potential buyers expressed interest.
- China ordered banks to set aside more money as reserves for the eighth time this year to cool speculation in stocks and real estate and curb the fastest inflation in 10 years.
- US stocks rose for a fifth straight week, the longest stretch of gains since May, after minutes from the Federal Reserve and better-than-expected retail sales bolstered expectations that the economy will keep expanding.
- Citigroup cut its forecasts for the yen and Swiss franc because gains in global stocks will encourage investors to borrow money from Japan and Switzerland and invest in higher-yielding assets.
- Treasuries fell after minutes of the Fed’s Sept. 18 meeting suggested policy makers are in no hurry to cut borrowing costs further.
- Advantest Corp., the world’s biggest maker of memory-chip testers, rose the most in almost 21 months in Tokyo trading after Samsung Electronics said it will increase planned investment on chip production.
- Majority Leader Steny Hoyer said he expects the House to pass a non-binding resolution that labels the World War I-era killing of Armenians by Turks as genocide before Nov. 16, when Congress is slated to recess for the year. Hoyer and Speak Nancy Pelosi, appearing today on separate news shows, said the threat of Turkish reprisals would not stop the vote.
- Alibaba.com Ltd., operator of China’s largest trading Web site for businesses, and its parent may raise as much as $1.3 billion in a Hong Kong IPO.
- European Central Bank council member Nout Wellink said the credit market “turbulence” isn’t over and European economic growth will slow next year.

NY Times:
- Iran’s Supreme Leader Ayatollah Ali Khamenei called yesterday for a Muslim nation boycott of a US-led conference planned for last November intended to spur Middle East peace.
- Some States Consider Leasing Their Lotteries.
- A Need for a Will? Often, There’s an Online Way.

CNBC.com:
- Surprise! Americans Set to Open Wallets This Holiday.
- Genzyme(GENZ) Reports Progress on Multiple Sclerosis Drug.

MarketWatch.com:
- Lord Abbett skipper rides a strong tailwind from smaller, fast-moving firms.
- As Nasdaq nears 3,000, a fresh confidence prevails.
- BEA(BEAS) learns lessons from past Oracle(ORCL) battles.

IBD:
- Oracle Bid For Rival May Spark A Battle With SAP, HP, IBM.
- GPS Leader Garmin(GRMN) May Be Headed In Cell Phone Direction.
- Semiconductor Manufacturing: Suddenly, A Chipper Outlook.

NY Post:
- Over the last six months, Jimmy Cayne went from being the only billionaire head of a Wall Street bank to nearly being forced to go globe-trotting, hat in hand, seeking out financial backers for his floundering Bear Stearns(BSC).

TheStreet.com:
- Galloping Google(GOOG) Propels Tech Funds.

CNNMoney.com:
- Big oil getting squeezed on refining margins.
- Hitachi: 4 terabyte hard drives by 2011.

Business Week:
- Marcial: This Market Rally Has Legs. Recession fears are misplaced, and despite some sluggish sectors in the US, worldwide growth should keep pushing the numbers up.

USA Today:
- Google’s(GOOG) GPhone strategy could keep user costs low.
- Once thought a sure bet, Fed rate cut is uncertain.
- Fat is beautiful – and profitable – to biodiesel makers.

AP:
- Arrowcopter Inc., and other small US toymakers are expanding production as retailers look for alternatives to stock Christmas shelves following the recalls of Chinese-made products.

Financial Times:
- Citigroup(C) is planning to restore links between its stock research analyst and its institutional securities business five years after they were separated under pressure from regulators investigating Wall Street conflicts of interest.
- Pfizer will on Monday lead Big Pharma into internet-based social networking, as the world’s biggest drugmaker unveils a collaboration with Sermo, the fast-growing US networking site for doctors.
- Carl Icahn, the US activist investor, has signaled the possible launch of a new campaign against Motorola(MOT) if performance at the telecommunications equipment maker does not improve.
- SAP has sought to allay investor fears about a new bidding rivalry between the German business software maker and US rival Oracle(ORCL) by pledging big acquisitions only to enter new markets rather than to consolidate existing ones.

Daily Telegraph:
- British Airways Plc insisted on a minority stake in its bid with TPG Inc. for Iberia Lineas Aereas de Espana SA because it wants to retain the option of making a major US purchase, citing CEO Willie Walsh.

Interfax:
- Russian President Vladimir Putin may face an assassination attempt by suicide terrorists while on a visit to Iran this week, citing the Russian intelligence services.

Weekend Recommendations
Barron's:
- Made positive comments on (CVS) and (FTEK).

Citigroup:
- Reiterated Buy on (VFC), target $101. .

Night Trading
Asian indices are unch to +.25% on average.
S&P 500 futures -.10%.
NASDAQ 100 futures -.11%

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Earnings of Note
Company/Estimate
- (HUB/B)/.95
- (JNC)/.67
- (MAT)/.70
- (C)/.44
- (ETN)/1.67
- (DNA)/.72
- (SONC)/.33
- (BMET)/.51
- (CNK)/.24
- (GWW)/1.26

Upcoming Splits
- (CTSH) 2-for-1
- (DKS) 2-for-1

Economic Data
8:30 am EST
- The Empire Manufacturing report for October is estimated to fall to 13.1 versus 14.7 in September.

Other Potential Market Movers
- The Fed’s Bernanke speaking and (ISV) analyst meeting could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by commodity and technology shares in the region. I expect US stocks to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the week.