Stocks Slightly Lower into Final Hour on Lingering Credit Worries

BOTTOM LINE: The Portfolio is about even into the final hour as gains in my Internet longs, Medical longs and Commodity shorts are offsetting losses in my Retail longs and Computer longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is negative today as the advance/decline line is lower, sector performance is negative and volume is above-average. Retail sales likely remained modestly below average in October as weather nationwide remained exceptionally warm. However, given how despised and beaten down many retail stocks have become, with more seasonal weather predicted, I expect to see some short-covering and bargain-hunting in the shares on the report. Google (GOOG) is pushing to another all-time high on details of its mobile strategy and an Oppenheimer target upgrade to $850. I still think analysts' forward estimates on Google are too low and that the stock is finally in the initial stages of moving toward a premium valuation. The Fed's Mishkin made several comments today, which were mostly positive on the economy. He said the Fed needs to be timely, decisive and flexible and that third-quarter GDP showed considerable underlying strength. He also said that it is remarkable how well anchored price expectations are but that the Fed can never take its eye off the inflation ball. I still see little evidence of the imminent recession thesis. Fed fund futures still imply a 70% chance for another 25-basis-point cut in December, up from 66% a week ago, despite today's data and Fed commentary. Goldman Sachs (GS) is now 6 points off its lows over the last hour. The firm denied rumors of an impending writedown or hidden losses to CNBC. I am actually surprised it isn't up more on the news. This is helping to lift the broker/dealer index, which is also boosting the broad market to session highs. I expect US stocks to trade mixed-to-higher into the close from current levels on bargain-hunting, lower energy prices and short-covering

Today's Headlines

Bloomberg:
- Google Inc.(GOOG) plans to create a mobile-phone operating system and work with 33 companies to build applications that could change how consumers find stores and download files form the Web on the go.
- Dell Inc. agreed to buy EqualLogic for $1.4 billion, expanding into the fastest-growing part of the storage market with its largest acquisition.
- IAC/InterActiveCorp(IACI), whose shares have dropped 20% this year, will split into five publicly traded companies, dismantling a media and Internet conglomerate Barry Diller spent more than a decade assembling.

Wall Street Journal:
- Gramercy Capital, a real-estate finance company, has agreed to buy American Financial Realty Trust, a real-estate investment trust that specializes in properties leased by financial institutions, for about $1.1 billion in cash and stock.
- Kraft Foods(KFT), the No. 3 US seller of breakfast cereal by sales, is nearing an agreement to sell its Post cereals unit to Ralcorp Holdings for about $2.8 billion.
- Rydex Investments plans to introduce six “leveraged” ETFs that will offer magnified or inverse-magnified returns of major stock benchmarks, with lower expense ratios than a popular family of ETFs from ProFunds Group.
- One of the pioneers in personal-computer plumbing is launching an ambitious campaign to improve laptop functions, including the ability to fire up software in seconds.
- The Easier Rider: Baby Boom Bikers Defect to the Trike.
- Citigroup Inc.(C) former CEO Sanford “Sandy” Weill said he’s not interested in coming back to run the company, although he’s “ready, willing and able and available to do whatever the board needs him to do in helping to right the ship.”
- Copper fell for the sixth straight session, the longest slump since August 2004, on speculation that rising inventories signaled easing demand.
- Crude oil is falling more than $1/bbl. after Kurdish fighters freed eight Turkish soldiers and investment fund speculation in the commodity subsided.

Financial Times:
- MySpace reveals ‘targeted’ ads.

Service Sector Still Healthy

- ISM Non-Manufacturing for October rose to 55.8 versus estimates of 54.0 and a reading of 54.8 in September.

BOTTOM LINE: Service industries in the US unexpectedly grew at a faster pace in October, signaling the slump in housing has yet to filter to other parts of the economy, Bloomberg said. The New Orders component of the index rose to 55.7 from 53.4. The Export Orders component jumped to 56 from 50. The Inventories component fell to 49.5 from 50. The Prices Paid component fell to 63.5 from 66.1. It is a large positive that this gauge of the service sector, which accounts for around 90% of the economy, remains healthy. I continue to see few signs of the imminent recession that so many have predicted. I still expect US growth to rise around 2-2.5% over the intermediate-term as strong exports, decelerating inflation readings and inventory rebuilding more than offset the drag from housing.

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Monday Watch

Weekend Headlines
Bloomberg:
- Citigroup Inc.(C) Chairman and CEO Charles Prince resigned after $6.5 billion of writedowns and losses from the credit markets and shares of the biggest US bank slumped to a four-year low.
- Ford Motor(F) and the union representing its 58,500 US factory workers reached a tentative contract agreement, the United Auto Workers said.
- Iraq will take “visible measures” to crack down on Kurdish guerrillas to dissuade Turkey from launching military operations against rebel bases in the country’s north, Iraqi Foreign Minister Hoshyar Zebari said.
- The hedge-fund industry is grappling with its first shakeout in a decade as investors increasingly recoil from startups considered susceptible to the toxic shocks of this year’s credit markets. New hedge funds are opening at the slowest pace since 2003 with almost all of the $164 billion of new investments going to managers with proven records, data compiled by Chicago-based Hedge Fund Research Inc. show.
- Former Prime Minister Benazir Bhutto accused President Pervez Musharraf of staging a “second coup” in Pakistan by imposing emergency rule and said judges, lawyers and opposition parties will protest the move today.
- Berkshire(BRK/A) Profit Surges 64% on Sale of PetroChina(PTR) Stake.

Wall Street Journal:
- Ford Motor(F) told labor leaders at its Jaguar and Land Rover units to be ready to meet potential buyers as soon as Nov. 20 after receiving three “firm bids.”
- With two months left in 2007, the winners and losers on Wall Street are shaping up. Technology stocks have taken the lead down the stretch. At the back of the pack: financials.

NY Times:
- Citigroups’s(C) board is highly likely to name Robert E. Rubin, the former Treasury secretary and an influential adviser to its embattled leader, as its interim chairman at an emergency meeting today, according to a person briefed on the situation.
- Why Google(GOOG) Turned Into a Social Butterfly.
- Wireless Workplaces, Touching the Sky.

CNBC.com:
- American International Group(AIG) shareholder and former CEO Maurice “Hank” Greenberg said on Friday he was considering “strategic alternatives” for the world’s largest insurer.
- Fink Considers Merrill Lynch(MER) CEO Position.

MarketWatch.com:
- Citigroup(C) shares open 5.8% higher in Tokyo debut.
- Excess body weight, even just a little, increases your risk of cancer, according to a study released this week by the American Institute for Cancer Research. But staying active and following six rules for good eating can turn the odds back in your favor, researchers says.
- Legg Mason’s Miller: Buy financials, housing stocks. Fund manager says today’s battered sectors are market’s next leaders.

IBD:
- 166,000 New Jobs Created Last Month, Double Expectations.
- Living In a Networked World. Video is a voracious consumer of network capacity. YouTube – and other “Web 2.0”-oriented sites – are driving demand for more gear to handle that growing traffic.

Time:
- Invention Of the Year: The iPhone.

Zacks.com:
- Third-quarter growth remains strong thus far and has held above double digits for the past week. The median company has reported growth of 11.1%. The surprise ratio is at 2.73:1 and the median surprise is just under 3%. At last report, these three metrics stood at 11.8%, 2.68:1, and 3% respectively. Every sector currently boasts more positive surprises than negatives and the surprise ratio has continued its steady rise over the past week.

Business Week:
- Oil or gas? Prices may lead to switch. With his furnace sputtering its final gasps, Charles Comito decided its was time to trade in his heating oil system for natural gas this year. The switch cost $4,400, a price he says will be worthwhile.

CNNMoney.com:
- Big solar power plant planned for California’s central coast.

Oil & Gas Journal:
- Doubling of oil recovery efficiency seen possible.

Financial Times:
- Britons may buy as many as 200,000 Apple Inc.(AAPL) iPhones over Christmas and the New Year, citing Telefonica SA’s 02 unit, one of the retailers.
- Democrats wake up to being the party of the rich. A legislative proposal that was once on the fast track is suddenly dead. The Senate will no consider a plan to extract billions in extra taxes from mega-millionaire hedge fund managers.

TimesOnline:
- Saudi Arabia is hub of world terror. The desert kingdom supplies the cash and the killers. Saudis make up half of foreign fighters in Iraq.

Reuters:
- Google Inc.(GOOG) will announce its mobile phone strategy next week, including an operating system and deals with several service providers and handset makers.
- Oil prices fell on Monday, pulling back from previous session’s 2.5% surge, as easing tensions in the Middle East encouraged investors to take profits.
- Canada’s CIBC said on Sunday it would sell a major part of its US capital markets business to Oppenheimer Holdings as it focuses on its core operations.

Mainichi:
- Toyota Motor(TM) plans to develop robots to help with household chores and nursing care as part of its “Global Vision 2020” plan unveiled yesterday. Toyota aims to make the home-use robot business a center of future growth in light of Japan’s aging society and the growing prominence of women in society.

MEED:
- Arab Gulf states offered to provide enriched uranium to Iran, aiming to resolve the international standoff over the country’s nuclear program, citing a top Saudi official. Under the plan, Saudi Arabia, Bahrain, Kuwait, Oman, the United Arab Emirates and Qatar will set up a nuclear enrichment plant in a “neutral” country, citing Saudi Arabian Foreign Minister Prince Saud Al-Faisal.

Weekend Recommendations
Barron's:
- Made positive comments on (NTRS), (GRMN), (AAPL), (GOOG), (RIMM), (AKAM) and (KCP).
- Made negative comments on (DPTR), (BIDU) and (MAT).

Citigroup:
- Reiterated Buy on (RIMM), Top handset pick.
- Reiterated Buy on (BRCM), target $49.
- Reiterated Buy on (INTC), target $33. Despite some suggestion that Intel would build inventory in 4Q07, we now view this as an unlikely scenario. Essentially, at the mid-point of Intel’s revenue guidance, we now expect inventories to decline q/q, marking the 3^rd quarter in a row of falling inventories to decline q/q, marking the 3^rd quarter in a row of falling inventories.
- Reiterated Buy on (ATVI), raised estimates, target $29.

Morgan Stanley:
- Reiterated Overweight on (ERTS), raised estimates.

Night Trading
Asian indices are -1.50% to -1.0% on avg.
S&P 500 futures -.42%.
NASDAQ 100 futures -.38%

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Earnings of Note
Company/Estimate
- (BKC)/.33
- (MVL)/.29
- (CAH)/.87
- (DNB)/1.01
- (DIVX)/.12
- (SIE)/.59
- (CUZ)/.08
- (FST)/.55
- (CECO)/.23
- (ATVI)/-.02
- (WMS)/.19
- (SYY)/.41
- (JAVA)/.03

Upcoming Splits
- (ATU) 2-for-1

Economic Data
10:00 am EST
- ISM Non-Manufacturing for October is estimated to fall to 54.0 versus 54.8 in September.

Other Potential Market Movers
- The (NUS) analyst meeting, JPMorgan SMid Cap Conference, CIBC Healthcare Conference and UBS Building Conference could also impact trading today.

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