Stocks Soar on Plunging Gas Prices, Lower Interest Rates and Less Irrational Pessimism

Indices
S&P 1,313.11 +1.04%
DJIA 11,498.09 +.89%
NASDAQ 2,215.82 +1.96%
Russell 2000 724.48 +2.39%
Wilshire 5000 13,125.83 +1.18%
S&P Barra Growth 611.25 +1.13%
S&P Barra Value 699.58 +.96%
Morgan Stanley Consumer 651.52 +.63%
Morgan Stanley Cyclical 814.15 +1.95%
Morgan Stanley Technology 519.32 +2.41%
Transports 4,369.85 +3.33%
Utilities 428.06 -.85%
Put/Call .94 -6.93%
NYSE Arms .89 -14.72%
Volatility(VIX) 11.92 -8.24%
ISE Sentiment 117.0 +23.16%
US Dollar 85.91 -.01%
CRB 310.71 -.96%

Futures Spot Prices
Crude Oil 63.77 -2.82%
Unleaded Gasoline 156.50 -1.94%
Natural Gas 5.56 -1.85%
Heating Oil 176.65 -2.15%
Gold 594.60 +.05%
Base Metals 227.99 -.52%
Copper 335.50 -.53%
10-year US Treasury Yield 4.76% -.70%

Leading Sectors
Airlines +4.88%
Homebuilders +3.84%
Networking +3.77%

Lagging Sectors
Energy -.71%
Gold & Silver -.83%
Oil Service -.99%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- US stocks had their biggest advance in a month, pushing the Dow Jones Industrial Average within 225 points of its all-time high, as revenue at Goldman Sachs(GS) set a Wall Street record and retailers rallied on a plunge in oil prices.
- Crude oil fell below $64/bbl., clearly breaking its long-term uptrend at $66.33, after the IEA cut its global consumption estimates.
- The company that produces “Girls Gone Wild” videos pleaded guilty to violating a law, aimed at protecting minors, that requires makers of sexually explicit films to document the ages of their performers.
- The US will raise the monthly bill for most people who get basic health care through Medicare by 5.6% next year, and by as much as 83% for rich Americans.
- New York chose Northrop Grumman(NOC) to build a $500 million wireless network which will enable public-safety workers and first-responders to get information more quickly.
- Apple Computer(AAPL) said it will start selling 75 full-length Walt Disney(DIS) films including the first “Pirates of the Caribbean” over the Internet today, and introduced iPod players with a brighter screen and more storage.
- Treasury 10-year notes posted their biggest gains in about two weeks after the government sold $8 billion of the benchmark securities at a yield lower than forecast by bond-trading firms.

BOTTOM LINE: The Portfolio finished higher today on gains in my Semi longs, Retail longs, Internet longs, Medical longs and Commodity shorts. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was very 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 lower into the close. Overall, today's market performance was very bullish. The 10-year yield is finished near session lows, down 3 basis points, despite today's sharp stock gains. With a number of sectors posting 3%+ gains today and the over-owned commodity stocks falling again, I suspect portfolio manager performance anxiety is rising at a rapid rate. Moreover, many of the best growth stocks, which are the cheapest relative to value in at least 30 years, rose 5%-7% today. Oil has now broken clearly below its long-term uptrend line at $66.33 during its seasonally strongest period. My intraday gauges of investor angst were slightly above-average levels throughout the day, which also bodes well for further gains in the near-term.

Stocks Soaring into Final Hour on Plunging Gas Prices, Lower Interest Rates and Less Irrational Pessimism

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Internet longs, Semi longs, Medical longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, most sectors are higher and volume is above average. The Johnson Redbook same-store sales index rose 3.8% year over year last week vs. a 3.9% rise the prior week. The long-term average is a gain of around 2.8%. There is mounting evidence that the anticipated collapse in consumer spending won't materialize anytime soon, even as investors continue to price this into stocks. As I said last week, mortgage resets and the other negative effects of housing were supposed to send consumer spending plunging already, and they have not. A healthy labor market, falling energy prices, lower long-term interest rates, decelerating inflation, a rising stock market and less irrational pessimism will continue to more than offset housing over the intermediate-term. The Morgan Stanley Retail Index (MVRX) has surged 11.8% in less than two months. I expect continued outperformance by the sector during the fourth quarter. I expect US stocks to trade mixed-to-higher into the close from current levels on bargain hunting, short covering, lower long-term rates and declining energy prices.

Today's Headlines

Bloomberg:
- Crude oil is falling for a seventh straight day, the longest stretch since October 2003, after the International Energy Agency cut its global consumption estimates.
- Best Buy(BBY) said second-quarter profit increased 22%, beating analysts’ estimates, as consumers bought flat-panel televisions and installed home-entertainment systems.
- Goldman Sachs(GS), Wall Street’s most profitable firm, set aside an average of $542,000 in pay per employee so far this year, already beating the total for the whole of 2005.
- AT&T(T), the largest US telephone company, is heating up competition with cable-TV rivals with a new live-television service for broadband Internet users.
- Bristol-Myers Squibb(BMY) CEO Dolan quit after bungling an agreement to keep a generic version of the drugmaker’s top-selling heart pill Plavix off the market.
- US farmers will harvest the second-biggest soybean and corn crops ever as August rains revived plants.
- President Bush, ending a day marking the fifth anniversary of the Sept. 11 attacks, called on Americans to unite behind the war against terrorism and said victory in Iraq was crucial to the nation’s safety.

Wall Street Journal:
- US businesses haven’t cut back on borrowing even though the US Fed has raised interest rates 17 times since June 2004.
- Ticketmaster, which sells the majority of US sports and concert tickets, is using auctions and resale programs as it seeks to thwart competition from rivals and scalpers.
- A US educator group, which in the past recommended the use of calculators in kindergarten, is now prodding schools to focus heavily and early on math basics such as long division.
- IMG Fashion, the producer of the NY Fashion Week, gave 40 so-called bloggers press passes to the city’s September fashion show as designers see them as a new marketing opportunity.
- Vanguard Group is expanding its range of exchange-traded funds to appeal to financial intermediaries such as brokers and advisers.
- US regional banks are buying investment-banking expertise, to give them the capacity to offer clients advice as the pace of mergers and acquisitions continues unabated.
- A new commission of corporate executives and financial experts supported by US Treasury Secretary Henry Paulson plans to recommend changes to the 2002 Sarbanes-Oxley Act and other rules to make US capital markets more competitive.

Reuters:
- Exxon Mobil(XOM) expects Russia to allow it to expand its Sakhalin-1 development in the Pacific Ocean, citing the CEO.
- John Bolton, the US ambassador of the UN, said the US may stop paying its full dues to the UN if reforms aren’t implemented before the end of the year.

AP:
- An Arizona law that requires voters show identification at the polls was upheld by a federal judge.

Washington Post:
- Freddie Mac(FME) said it expects “no further action” on a US Justice Dept. criminal investigation.

San Francisco Chronicle:
- The San Francisco police will begin enforcing a curfew on children 13 and younger to curb violence.

Containerisation International:
- Shipping lines charged lower fees to move cargo by containers in the three months ended June, a fourth straight quarterly decline, as more vessels were put into service.

Interfax:
- The US may agree to Russia’s membership in the World Trade Organization by the end of next month, citing the US Ambassador to Russia.

Trade Deficit Widens on US Economic Strength

- The trade deficit for July widened to -$68.0 billion versus estimates of -$65.5 billion and -$64.8 billion in June.

BOTTOM LINE: The US trade deficit widened more than forecast in July to a record $68 billion as imports reached an all-time high and exports declined for the first time in five months, Bloomberg reported. The trade deficit with China fell to $19.6 billion from $19.7 billion in June. A US economy that is still outpacing those economies of most of its major trading partners may keep the trade deficit elevated even as the price of energy declines. I expect the trade deficit to improve slightly over the coming months as falling commodity prices offset some of the effects of relative US economic strength.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- President Bush, capping a day of ceremonies marking the anniversary of the Sept. 11 terrorist attacks, said the war against terrorists that began that day must be won in Iraq and elsewhere to ensure that future generations will live in freedom.
- Oil may extend its two-month slide after OPEC kept its production at current levels amid waning demand. “If OPEC doesn’t do anything, oil will continue to fall,” said Fadel Gheit, an analyst at Oppenheimer. “If we cross $55 a barrel, OPEC will panic and they will reduce supply. They aren’t afraid of $55 oil per se, but what’s below that.”
- Royal Dutch Shell Plc. and other companies independent of Petroleo Brasileiro SA, Brazil’s state-controlled oil company, plan to spend $8 billion hunting for oil in Brazil by 2011, Shell Brasil’s exploration chief said.
- Asian-American women have the top life expectancy in the US of 86.7 years.
- NYSE Group(NYX) said its share of trading in the stocks it lists had the biggest monthly drop since 2004 after the exchange raised some transaction fees.
- China, whose record trade surplus has fueled tension with trading partners including the US, may cut tax rebates for exporters to rein in overseas sales, Commerce Minister Bo Xilai said.
- China reported the slowest growth in government and corporate spending this year, the strongest indication so far that a government clampdown on investment is starting to bite.

Wall Street Journal:
- Most Americans want electronic health-care services, such as scheduling doctor visits online, which a majority say aren’t available to them.

Australian Broadcasting Corp.:
- A former commander in the Southeast Asian terrorist group Jemaah Islamiyah warned that one of the alleged masterminds of the 2005 Bali suicide bombings is planning more attacks this year. Noordin Mohammad Top has ordered supporters to carry out attacks every year since the 2002 bombings on Bali, which killed more than 200 people, 88 of them Australians.

Dong-a Ilbo:
- The US suggested holding multi-nation talks on North Korea’s nuclear weapons program at a UN meeting in New York as soon as this month.

Xinhua:
- China’s money supply slowed “significantly” last month after the central bank took measures to reduce liquidity, citing Deputy Central Bank Governor Su Ning.

Wall Street Journal Asia:
- Zhang Guobao, vice chairman of the National Development & Reform Commission, said China and the US should jointly develop oil fields to minimize risks of supply disruptions and rising costs of production.

Late Buy/Sell Recommendations
Citigroup:
- The Softline retail sector is due for a rally given our belief that sales trends continue to strengthen against a backdrop of negative investor sentiment and peak short interest. We recommend broad ownership of the stocks. Buy ARO, CHS, PLCE, GPS, HOTT, JCG, LTD, ROST, TJX and URBN.
- Reiterated Buy on (MNST), target $48.

CSFB:
- Reiterated Buy on (TXN), target $42.

Morgan Stanley:
- Reiterated Overweight on (AAPL), target $90. Top pick into year-end.

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NASDAQ 100 indicated +.03%.

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Earnings of Note
Company/EPS Estimate
- (BBY)/.44
- (CBRL)/.78
- (ENER)/-.15
- (GS)/2.97
- (JW/A)/.36
- (KR)/.29
- (PLL)/.46

Upcoming Splits
- (CXW) 3-for-2

Economic Releases
8:30 am EST
- The Trade Deficit for July is estimated to widen to -$65.5 billion versus -$64.8 billion in June.

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