Productivity Hit 4-Year High, Unit Labor Costs Fall, Wholesale Sales Jump

- Preliminary 3Q Non-farm Productivity rose 4.9% versus estimates of a 3.2% gain and a downwardly revised 2.2% increase in 2Q.

- Preliminary 3Q Unit Labor Costs fell .2% versus estimates of a 1.0% increase and an upwardly revised 2.2% in 2Q.

- Wholesale Inventories for September rose .8% versus estimates of a .2% gain and an upwardly revised .7% increase in August.

BOTTOM LINE: Worker productivity in the US accelerated more than forecast in the third quarter, leading to a decline in labor costs, Bloomberg reported. Productivity rose the most in four years at a 4.9% annual pace. The decline in unit labor costs was the first in more than a year. Productivity at non-financial corporations, a gauge watched closely by Greenspan, climbed at a 3.8% rate in the second quarter, versus a .7% gain the prior three months. I continue to believe unit labor costs, which make up about two-thirds of inflation, will remain muted over the intermediate-term.

Inventories at US wholesalers rose more than forecast in September, while a bigger increase in sales pointed to production gains in the fourth quarter, Bloomberg reported. Sales jumped 1.3% versus a .8% gain the prior month. The amount of inventory on hand is now down to a new record low of 1.1 months’ supply. Auto sales surged 4.1% during the month. Given the upward revision to August inventories and September’s gain, I suspect 3Q US GDP growth will be revised higher to above 4% from 3.9%. Record low inventories also bode well for increased production this quarter. I still think inventory rebuilding, strong exports and decelerating inflation will continue to more than offset the drag from housing over the intermediate-term, which should result in modestly below trend growth of around 2-2.5%.

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Wednesday Watch

Late-Night Headlines
Wall Street Journal:
- Europe, UK Expected To Hold Key Rates Steady.

CNNMoney.com:
- Going gaga over Google(GOOG) mobile.

MarketWatch.com:
- Being a contrarian takes guts, like buying Citigroup stock.

BusinessWeek:
- Google’s(GOOG) New Cell-Phone Universe. Its Open Handset Alliance, including Intel, Motorola, and T-Mobile, could threaten Symbian and Microsoft – and redouble investments in mobile software.
- Online Brokers Sidestep Subprime Woes.
- Venture Capital’s Clean Dreams for China.
- Is Hydrogen the Answer to Our Future Transport Needs?

CNBC.com:
- Hunting for the Hottest Stocks? Look at Debt Loads.

Reuters:
- Social network Facebook unveiled a new advertising system on Tuesday that will let companies introduce ads into the user pages of its 50 million member, and launch dedicated pages on the site for their brands.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (HOLX), raised target to $74.
- Upgraded (MCCC) to Buy, target $11.
- Upgraded (ALL) to Buy, target $66.
- Reiterated Buy on (CBI), raised target to $66.

Night Trading
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Earnings of Note
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Upcoming Splits
- (ATU) 2-for-1

Economic Releases
8:30 am EST
- Preliminary 3Q Non-farm Productivity is estimated to rise 3.2% versus a 2.6% gain in 2Q.
- Preliminary 3Q Unit Labor Costs are estimated to rise 1.0% versus a 1.4% gain in 2Q.

10:00 am EST
- Wholesale Inventories for September are estimated to rise .2% versus a .1% gain in August.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -1,500,000 barrels versus a -3,894,000 decline in the prior week. Gasoline supplies are expected to remain unch. versus a 1,295,000 barrel build the prior week. Distillate inventories are estimated to fall by -450,000 barrels versus an 808,000 barrel build the prior week. Finally, Refinery Utilization is expected to rise .6% versus a -.97% decline the prior week.

3:00 pm EST
- Consumer Credit for September is estimated to fall to $9.0 billion versus $12.2 billion in August.

Other Potential Market Movers
- The Fed’s Poole speaking, Fed’s Lockhart speaking, Fed’s Warsh speaking, Fed’s Lacker speaking, weekly MBA Mortgage Applications report, BOE Policy Meeting, (WM) Investor Day, (CCJ) analyst meeting, (EQIX) analyst meeting, (MKTX) Investor Day, (PHTN) analyst event, (STR) analyst meeting, (DNR) analyst meeting, (ABI) analyst meeting, Goldman Sachs Industrial Conference, CIBC Healthcare Conference, Goldman Sachs Software Retreat, Merrill Lynch Global Energy Conference, Global Crown Nanotech Conference, Pacific Growth Clean Tech & Industrial Growth Conference, Robert Baird Industrial Conference and Keefe Bruyette Woods Brokerage Conference could also impact trading today.

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

Stocks Finish at Session Highs on Heavy Volume, Led by Tech, Financial and Commodity Shares

Indices
S&P 500 1,520.27 +1.2%
DJIA 13,660.94 +.87%
NASDAQ 2,825.18 +1.07%
Russell 2000 801.77 +1.43%
Wilshire 5000 15,285.47 +1.20%
Russell 1000 Growth 633.31 +1.19%
Russell 1000 Value 824.75 +1.21%
Morgan Stanley Consumer 742.66 +.70%
Morgan Stanley Cyclical 1,052.39 +1.34%
Morgan Stanley Technology 675.98 +1.01%
Transports 4,818.84 +.85%
Utilities 529.19 -.07%
MSCI Emerging Markets 160.79 +2.21%

Sentiment/Internals
Total Put/Call 1.0 -1.96%
NYSE Arms .69 -31.15%
Volatility(VIX) 21.39 -12.01%
ISE Sentiment 161.0 +7.33%

Futures Spot Prices
Crude Oil $96.96 +3.19%
Reformulated Gasoline 243.71 +2.35%
Natural Gas 7.93 -.75%
Heating Oil 261.87 +2.94%
Gold 827.40 +2.05%
Base Metals 246.16 +1.02%
Copper 335.45 +1.59%

Economy
10-year US Treasury Yield 4.37% +4 basis points
US Dollar 76.01 -.54%
CRB Index 355.63 +1.68%

Leading Sectors
Alternative Energy +3.92%
Oil Service +3.24%
Hospitals +2.60%

Lagging Sectors
Utilities -.07%
Computer Hardware -.40%
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Afternoon Recommendations
Bank of America:
- Rated (JASO) Buy, target $73.
- Rated (TSL) Buy, target $76.

Afternoon/Evening Headlines
Bloomberg:
- US Stocks Advance, Led by Oil, Metals Producers.
- Philly Fed President Charles Plosser said economic growth would have to slump below his own forecast of 1.5% this quarter for him to support another cut in interest rates, according to an interview in the NYT. Plosser told the NYT he “would not be surprised” if fourth-quarter growth was 1% to 1.5%.
- The risk of companies defaulting on their debt fell today, according to traders of credit-default swaps.
- First Solar, SunPower Corp. and Suntech Power Holdings, makers of solar-power equipment, rose to records as surging oil prices boost demand for renewable energy sources.
- General Motors(GM) will take a $39 billion non-cash charge against deferred tax assets as part of third-quarter results scheduled to be reported tomorrow.
- Australia’s central bank increased its benchmark interest rate a quarter percentage point to an 11-year high today to quell inflation sparked by an accelerating domestic economy and increases in fuel and foods costs.

BOTTOM LINE: The Portfolio finished higher today on gains in my Computer longs, Internet longs, Medical longs and Software longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, most sectors gained and volume was heavy. Measures of investor anxiety were about average into the close. Today's overall market action was very bullish. The move higher in financials was the main upside catalyst for the broad market. As well, the surge to a record in Apple (AAPL) shares seemed to ignite tech. I suspect today's gains will also lead to strength in Asia tonight and Europe tomorrow morning. Nikkei futures are indicating an up 170 open in Japan.

Stocks Surging into Final Hour on Strength in Commodities and Tech, Bounce in Financials

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Medical longs, Software longs and Computer 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 gaining and volume is heavy. The U.S. Dollar Index is dropping another 0.5%, which is contributing to the $2.85-per-barrel jump in oil. I think oil needs to display some signs of topping before the broad market can mount a significant rally into year-end. This will likely occur over the coming weeks as investors begin to price out another rate cut at the December meeting, which should lead to some firming in the dollar. As well, the upcoming hype surrounding oil's likely push to $100 per barrel could provide the last burst of excessive long speculation necessary to provide the catalyst for a major reversal. Fed fund futures now imply a 58% chance for another 25-basis-point cut at the December meeting, down from 62% yesterday and 64% one week ago. Briefing.com is reporting that rumors are floating around that Apple (AAPL) is working on a partnership with a Chinese company for iPhone distribution. Apple is less than a point away from its record high. If this rumor is confirmed, I suspect the shares will hit $200 before week's end. I still see substantial upside to the stock over the intermediate term. It remains my second largest long position, just behind Google (GOOG) and just ahead of Intuitive Surgical (ISRG). I expect US stocks to trade mixed-to-higher into the close from current levels on bargain-hunting and short-covering.