Stocks Finish Near Session Highs on Falling Energy Prices, Better Economic Data and More Optimism

Indices
S&P 500 1,207.01 +.72%
DJIA 10,440.07 +.36%
NASDAQ 2,120.30 +1.46%
Russell 2000 646.61 +1.78%
DJ Wilshire 5000 12,043.73 +.92%
S&P Barra Growth 577.40 +.68%
S&P Barra Value 625.43 +.75%
Morgan Stanley Consumer 587.19 +.43%
Morgan Stanley Cyclical 717.91 +1.19%
Morgan Stanley Technology 499.38 +1.52%
Transports 3,815.46 +1.97%
Utilities 401.11 +1.29%
Put/Call .88 +7.32%
NYSE Arms .92 +82.40%
Volatility(VIX) 15.32 +7.51%
ISE Sentiment 194.00 +55.20%
US Dollar 90.06 +.52%
CRB 316.29 -1.81%

Futures Spot Prices
Crude Oil 59.83 -2.27%
Unleaded Gasoline 152.61 -6.04%
Natural Gas 12.22 -6.37%
Heating Oil 176.98 -4.0%
Gold 467.40 -1.56%
Base Metals 135.03 +1.53%
Copper 181.10 -.49%
10-year US Treasury Yield 4.55% -1.41%

Leading Sectors
Airlines +3.91%
Retail +3.51%
Computer Hardware +2.39%

Lagging Sectors
Defense +.25%
Telecom +.19%
Foods -.16%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on DDR.
- Reiterated Underperform on LVLT.

Afternoon/Evening Headlines
Bloomberg:
- US stocks staged their biggest two-day rally in almost a year as oil prices fell and companies proposed more than $19 billion in acquisitions.
- Fidelity Investments said Robert Stansky will retire after nine years of managing its flagship Magellan Fund.
- Verizon and SBC Communications cleared the final federal hurdle to their multibillion-dollar acquisitions without having to sell assets.
- GM and Wal-Mart are helping convince some economists that the Federal Reserve can stop worrying about wage pressures driving inflation.
- Ralph Acampora, the former director of technical research at Prudential Equity Group whose department was shut down last month, was hired by Knight Capital Group.
- Dell said third-quarter sales missed forecasts because demand from US consumers and UK businesses fell short of its expectations.
- Crude oil and heating oil tumbled, and gasoline fell to the lowest in almost five months, as warmer-than-normal weather may cut consumption in the US Northeast.

BOTTOM LINE: The Portfolio finished substantially higher today on gains in my Retail longs, Semi longs, Computer longs and Airline longs. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished substantially higher, almost every sector rose and volume was above average. Measures of investor anxiety were mostly higher into the close. Overall, a very good day for the bulls as the major indices and breadth finished near session highs. Stabilizing long-term rates even with the strong stock rally and better-than-expected economic data are a big positive. Moreover, I sense a shift in psychology with respect to the positive implications of the sharp fall in energy prices. Unleaded gas futures have now collapsed close to 50% even as refinery utilization remains substantially lower than pre-hurricane levels. Hedge funds had one of their worst months in a long time during October as energy stocks fell and emerging markets faltered. I expect follow-through on today's gains as those funds pile on long to try and recoup recent losses.

Stocks Sharply Higher Mid-day on Falling Energy Prices and Stronger Economic Data

Indices
S&P 500 1,206.50 +.68%
DJIA 10,448.79 +.45%
NASDAQ 2,117.36 +1.31%
Russell 2000 645.83 +1.65%
DJ Wilshire 5000 12,037.22 +.86%
S&P Barra Growth 577.06 +.62%
S&P Barra Value 625.58 +.77%
Morgan Stanley Consumer 587.91 +.55%
Morgan Stanley Cyclical 717.79 +1.17%
Morgan Stanley Technology 499.10 +1.46%
Transports 3,815.90 +1.98%
Utilities 398.98 +.76%
Put/Call .94 +14.63%
NYSE Arms .79 +55.29%
Volatility(VIX) 14.53 +1.96%
ISE Sentiment 190.00 +52.00%
US Dollar 90.10 +.57%
CRB 315.91 -1.93%

Futures Spot Prices
Crude Oil 59.50 -2.81%
Unleaded Gasoline 153.50 -5.80%
Natural Gas 12.26 -6.09%
Heating Oil 177.00 -3.99%
Gold 466.90 -1.73%
Base Metals 135.03 +1.53%
Copper 180.90 -.60%
10-year US Treasury Yield 4.55% -.22%

Leading Sectors %
Retail +3.42%
Airlines +3.41%
Internet +2.12%

Lagging Sectors
Drugs +.15%
Foods -.15%
Gold & Silver -.37%

BOTTOM LINE: The Portfolio is substantially higher mid-day on gains in my Internet longs, Retail longs, Computer longs, Semi longs and Airline longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is substantially higher, almost every sector is rising and volume is slightly above average. Measures of investor anxiety are mostly higher. Today’s overall market action is positive considering the underperformance by energy stocks. Many are trying to espouse the notion that the weakness in the energy complex is a sign of a substantial economic slowdown. I see very little evidence of this. While economic growth is likely slowing from vigorous levels before the hurricanes to average levels during the 4Q, I see few signs of a significant slowdown. A U.S. recession anytime in the near future is highly unlikely. As I have said many times before, energy pricing has been in a fear-induced mania. The fundamentals do not support energy prices anywhere near current levels. Now that we are in the fourth quarter, have survived the greatest hit to the U.S. energy infrastructure in history and inventories are still above five-year averages heading into the winter, traders are re-pricing the entire energy complex. I do not believe this is a sign of significant economic weakness, but a return to saneness in the energy pit. I expect US stocks to trade modestly higher from current levels into the close on short covering and bargain hunting as energy prices remain weaker.

Today's Headlines

Bloomberg:
- The scandal-plagued United Nations, which urges the world’s companies to follow anti-pollution, labor rights and other standards of corporate responsibility, often ignores those aims when investment its own $29 billion employee pension fund.
- Merrill Lynch is earning the most money managing assets for individual investors since the stock market bubble’s peak five years ago.
- Crude oil is falling, heading for its first two-month decline in NY this year, as production recovers, supplies build and demand falls with the US hurricane season nearing an end.
- President Bush has chosen Samuel Alito, a federal appellate judge, as his nominee for the Supreme Court.
- Barrick Gold said it made an offer for rival Placer Dome valued at $9.2 billion in cash and stock.
- Chemicals in certain vegetables and herbs, such as broccoli sprouts, cabbage and gingko biloba, may help prevent cancer, according to five studies presented at a research conference today.
- The US dollar is gaining, reaching the highest in more than two years against the yen, as an index of Chicago-area business activity unexpectedly surged.
- Novartis AG, Europe’s second-largest drugmaker by market value, agreed to pay $5.1 billion to take control of US vaccine maker Chiron as governments raised spending on treatments for ailments such as avian influenza.

Wall Street Journal:
- Saks Inc. is expected to announced that it will sell its Northern department-store group to Bon-Ton Stores for $1.1 billion.
- Kraft’s decision to halt advertising of certain products to children to help curb obesity has gained favor with some officials.
- Janus Capital Group of the US, which manages $130 billion, may be the subject of a takeover after a non-executive director quit last week because of a disagreement over a “strategic option” the company is pursuing.
- Sprint Nextel plans to introduce an over-the-air music downloading service today.
- The indictment of I. Lewis Libby on perjury and related charges may be difficult to prove.
- The SEC plans to check a sample of investment advisory companies randomly each year rather than visit each of them every five years.

NY Times:
- NBC reporter Tim Russert, whose testimony was used to indict I. Lewis Libby is uneasy about being involved in a subject he’s reporting on.
- Atticus Capital, Third Point LLC, York Capital and other hedge funds face losses of 5-10% for October, as investments in energy stocks, takeovers and overseas stocks falter.
- The economic interaction between China and Japan has been increasing while diplomatic relations worsen.
- Sean McManus, appointed last week as the president of CBS News, faces a challenge in his new role after a flawed report last year on President Bush’s Vietnam-era National Guard service and the ensuing retirement of Dan Rather.
- Small Internet access companies are trying to find new ways to connect with consumers as bigger companies dominate the market for high-speed services and they say they may have found the answer in wireless technology.

NY Post:
- The Port Authority of NY & New Jersey will test smart cards next month on the PATH railroad linking Manhattan to New Jersey.

San Francisco Chronicle:
- California wineries expect to reap 3.15 million tons of grapes this year, the second-largest harvest in state history.

USA Today:
- US federal lawmakers have ordered an investigation into the increasing costs of repairing and maintaining machines that check luggage for bombs at airports.

Financial Times:
- Carlyle Group, which manages the fourth-largest US buyout fund, may join a group of bidders considering an offer for Computer Sciences, the No. 5 US computer-services company.

Basler Zeitung:
- Roche Holding AG wants to issue licenses allowing companies and governments to produce the Tamiflu flu drug on the condition that the product is kept for use in a possible pandemic and not sold.

Il Messaggero:
- Italy aims to eliminate the use of oil in the production of electricity in the next five years, citing Industry Minister Claudio Scajola.

Incomes Rebound Strongly, Spending Remains Healthy, Inflation Modest, Chicago Manufacturing Strong

- Personal Income for September rose 1.7% versus estimates of a .3% increase and a downwardly revised .9% decrease in August.
- Personal Spending for September rose .5% versus estimates of a .5% increase and a .5% decline in August.
- PCE Core for September rose .2% versus estimates of a .1% gain and a .1% increase in August.
- Chicago Purchasing Manager for October rose to 62.9 versus estimates of 57.4 and a reading of 60.5 in September.

BOTTOM LINE: US consumer spending rose in September and incomes rebounded after plunging in August because of uninsured losses from Hurricane Katrina, Bloomberg reported. The 2.0%(YoY) rise in the PCE core, the Fed’s favorite inflation gauge, was within their forecast at the beginning of the year of a 1.75%-2.0% increase. Excluding the effects of the hurricanes, personal income rose .5% in September versus a .3% increase in August. Moreover, American incomes rose 6.3%(Year-over-Year) in September, about twice the rate of most inflation readings. I expect income growth to decelerate and spending to remain strong into year-end as economic growth slows to average rates and energy price declines accelerate.

An index of Chicago-area business activity unexpectedly rose this month adding to evidence that the US economy snapped back after Hurricane Katrina and Rita, Bloomberg reported. The backlog component of the index surged to the highest in a year. The new orders component spiked to 72.6, the highest since March, from 68.3 in September. As well, the prices paid component rose to 79.6 from 76.3 in September. Finally, the employment component of the index rose to 51.3 from 48.4 last month. I continue to believe manufacturing will add to economic growth over the next few months on inventory rebuilding spurred by more confidence in US economic growth.

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Monday Watch

Weekend Headlines
Bloomberg:
- Wal-Mart Stores said October same-store sales rose about 4.3%, beating its forecast.
- OPEC said there have been no buyers for the extra oil it began offering on Oct. 1, when it effectively suspended its quota system for the first time since the 1990 Gulf War after prices surged following Hurricane Katrina.
- Japan’s Prime Minister Koizumi, who plans to step down in September, will select his final cabinet today. The choices are expected to reflect his drive to cut public spending, sell state-owned assets and lower the nation’s debt, analysts say.
- Wall Street’s biggest bond-trading firms say Ben Bernanke will be as zealous in fighting inflation as Alan Greenspan when he takes over as chairman of the Federal Reserve on Feb. 1.
- The Bill & Melinda Gates Foundation has announced $258.3 million in grants to find ways to combat malaria, which kills 2,000 African children every day.
- Hiring rebounded this month and manufacturers turned out more goods as the US economy shook off the effects of two hurricanes, economists expect reports this week will show.
- Orix Corp., Japan’s largest non-bank finance company, will buy closely held investment bank Houlihan Lokey Howard & Zukin for $500 million to start offering advisory and restructuring services in the US.

Wall Street Journal:
- The US Treasury Dept. is prepared to incorporate recommendations from a tax panel into a policy-revision plan by the start of the next year should the president approve the group’s suggestions.
- Microsoft, battling perceptions that it’s lost the lead in technology innovation to Web-based companies, will disclose new plans this week to make its software better suited to the Internet.

NY Times:
- Wal-Mart Stores is preparing to announce an “ambitious plan” to improve business in Japan that will include upgrading about 200 stores.
- Two genes have been identified that contribute to dyslexia, citing a meeting of the American Society of Human Genetics yesterday.
- “Concierge” doctors, who are paid a large annual fee to provide more attention, time and care to patients, delight their clients.
- Google is becoming one of the leading players in the world of advertising, citing Goldman Sachs.
- Shares of publicly traded water companies have surged as large amounts of water controlled by municipalitites will soon come under the purview of private companies.
- Venezuela’s President Chavez is establishing socialism by founding state companies, seizing private factories and establishing cooperatives and worker-run businesses.
- Venezuela’s opposition said the government’s policy of seizing large farming estates is benefiting government officials. Land from the seizures is being given or sold to backers of President Chavez and his Fifth Republic Movement, and not landless peasants. The seizures are especially benefiting the country’s military.

Star-Ledger of Newark:
- New Jersey slipped to 44th in a national ranking of state business climates, hurt by taxes and over-regulation.

Washington Post:
- US Defense Secretary Donald Rumsfeld is asking Congress for $750 million and expanded authority to support counterrorism, border security and law enforcement in other countries.

AP:
- Viacom’s Paramount Pictures is removing some billboards that promote the 50 cent film “Get Rich or Die Tryin” after complaints they promoted gun violence.
- President Bush will reveal on Nov. 1 how his administration plans to fight any global influenza outbreak at the National Institute of Health.

Computer World:
- Consumers are expected to spend approximately 25% more online this holiday season than they did last year, several analysts said.

Financial Times:
- Kroger Co. will continue with its strategy of cutting prices to increase sales.
- Intel wants electronic medical equipment-makers to fit standard plug and cable sizes so equipment is interchangeable in the way computers are, citing CEO Otellini.

Sunday Telegraph:
- Wal-Mart Stores may expand in India.

Sunday Times:
- Walt Disney may start a mobile-phone company in the UK next year.

Weekend Recommendations
Barron's:
- Had positive comments on BUD, STA, SSW, DFG and EDS.

Goldman Sachs:
- Reiterated Outperform on GE and CEM.
- Reiterated Underperform on FSS.
- Reiterated bearish view of slot manufacturers, reiterated Underperform on IGT.

Night Trading
Asian indices are +.75% to +1.75% on average.
S&P 500 indicated +.08%.
NASDAQ 100 indicated +.19%.

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Economic Releases
8:30 am EST
- Personal Income for September is estimated to rise .3% versus a .1% fall in December.
- Personal Spending for September is estimated to rise .5% versus a .5% decline in August.
- The PCE Core for September is estimated to rise .1% versus a .2% increase in August.

BOTTOM LINE: Asian Indices are higher, led by exporting companies in the region after a government report last week showed strong US growth. I expect US stocks to open higher and maintain gains throughout the day. The Portfolio is 100% net long heading into the week.