Monday Watch

Weekend Headlines
Bloomberg:
- The UN Security Council voted 15-0 to adopt a resolution that punishes North Korea for a suspected nuclear-bomb test Oct. 9 and demands that the communist nations not conduct any further tests.
- China’s agreement to vote for a UN resolution punishing North Korea for a suspected nuclear-bomb test is critical to US efforts to halt proliferation, US Secretary of State Condoleezza Rice said. “This is the toughest action that China has ever signed on to vis-à-vis North Korea,” Rice said in an interview on “Fox News Sunday.” “It sends a very strong signal to North Korea that it is now completely isolated. You cannot underestimate how big a blow it is.”
- OPEC will hold an emergency meeting Oct. 19 to discuss a 1 million barrel-a-day output cut, an OPEC delegate said. Qatar said OPEC will take preemptive measures to prevent a price crash.
- Saudi Arabia’s main stock market, the Tadawul All Share Index, has plunged 49% from its February highs.
- Malaysian Prime Minister Abdullah Ahmad Badawi called for greater understanding between Muslims and Western nations. There is nothing in the Koran that condones violence against those who don’t believe in Islam, Abdullah said.
- BP Plc(BP), Europe’s largest oil company, said production at Alaska’s Prudhoe Bay oilfield, the largest in the US, will probably be back to “normal” levels by Monday for the first time since a leak in early August.
- The US dollar advanced against the euro and yen for the third straight week as reports on retail sales and consumer confidence suggest that the US economy is more vibrant than analysts had forecast.
- Goldman Sachs(GS) elevated Thomas Montag to succeed Gary Cohn as head of securities trading in the Americas, the largest unit by revenue at Wall Street’s most-profitable firm.
- Two earthquakes of magnitude 6.3 and 5.8, occurring seven minutes apart, struck Hawaii this morning, the US Geological Survey said.
- Morgan Stanley(MS) says the US dollar will rally in the fourth quarter and investors should be on gains against currencies including the Canadian dollar.
- Samsung Electronics, Asia’s biggest maker of chips, flat screens and mobile phones, reported net income rose to 2.19 trillion won from 1.88 trillion won a year earlier. Analysts had expected net income of 1.9 trillion won.
- Japan’s five-year government notes dropped the most in two weeks after US reports showed retail sales and consumer confidence increased, suggesting exports may support growth in Japan’s economy.

Wall Street Journal:
- Oshkosh Truck Corp.(OSK) agreed to buy JLG Industries(JLG) for about $3 billion in cash. JLG holders will get $28 per share.

Barron’s:
- Merrill Lynch’s(MER) wealth-management division topped the annual Barron’s list of the 40 best private banks by assets with $879 billion in US client accounts.

Minyanville:
- Bernie Schaeffer, of Schaeffer’s Investment Research, thinks the S&P 500 could rally another 15% before year-end.

NY Times:
- Microsoft CEO Ballmer expects most software to be distributed through the Internet in the future.
- Iraqi Interior Minister Jawad al-Bolani intends to purge the ministry’s top commanders to remove the influence of Muslim sects and stem killings by Shiite Muslims.

AP:
- Former Democratic US Representative Gerry Studds, who was censured by the House for his relationship with a 17-year-old male page, died in Boston over the weekend at the age of 69.

NY Post:
- Democratic NY Representative Charles Rangel plans to examine the NCAA’s tax-free status next year.

Crain’s Chicago Business:
- Wal-Mart Stores(WMT) presented the city of Chicago with five sites in predominately black neighborhoods where it would like to build supercenters.

Financial Times:
- London house prices have risen nearly 10% in the past year, driving up the value of property throughout England and Wales, citing the FT house price index.

AFP:
- Iraq has resumed the export of crude oil from the northern part of the country to the Turkish port of Ceyhan.

Guardian:
- More than half British voters want Muslims in Britain to do more to integrate, and agree with the statement made by the House of Commons leader Jack Straw that full veils worn by Muslim women was a “visible statement of separation and difference,” citing a poll from ICM.

Frankfurter Allgemeine Sonntagszeitung:
- Black & Decker(BDK), the biggest US maker of power tools, is winning market share in Germany as it aims to replace rival Robert Bosch GmbH as the region’s leader.

Sunday Telegraph:
- Nasdaq Stock Market Inc.(NDAQ) favors listing shares in both London and New York should its succeed in a new bid to buy London Stock Exchange Plc.

Handelsblatt:
- Former European Central Bank Chief Economist Otmar Issing will join Goldman Sachs(GS) as an international adviser from next year.

Shanghai Securities News:
- China and Russia are working to make the yuan free convertible with the ruble to boost trade, citing Russian Finance Minister Alexei Kudrin.

Weekend Recommendations
Barron's:
- Made positive comments on (JNJ), (WTR), (PNR), (WTS) and (X).
- Made negative comments on (ENT).

Night Trading
Asian indices are unch. to +.75% on average.
S&P 500 indicated -.05%
NASDAQ 100 indicated -.13%.

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Earnings of Note
Company/Estimate
- (BSG)/.15
- (CBH)/.41
- (ETN)/1.59
- (LAB)/.11
- (MAT)/.61
- (SONC)/.28
- (TMA)/.57
- (WB)/1.19

Upcoming Splits
- (SAY) 2-for-1

Economic Releases
8:30 am EST
- Empire Manufacturing for October is estimated to fall to 11.2 versus a reading of 13.8 in September.

BOTTOM LINE: Asian Indices are higher, boosted by 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.

Weekly Outlook

Click here for The Week Ahead by Reuters

There are some economic reports of note and a number of significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. - Empire Manufacturing

Tues. - Producer Price Index, Net Foreign Security Purchases, Industrial Production, Capacity Utilization, NAHB Housing Market Index

Wed. - Consumer Price Index, Housing Starts, Building Permits

Thur. - Initial Jobless Claims, Leading Indicators, Philly Fed.

Fri. - None of note

Some of the more noteworthy companies that release quarterly earnings this week are:

Mon. - BISYS Group(BSG), Commerce Bancorp(CBH), Eaton Corp.(ETN), Mattel(MAT), Sonic Corp.(SONC), Wachovia(WB)

Tues. - American Standard(ASD), AmSouth Bancorp(ASO), Charles Schwab(SCHB), CSX Corp.(CSX), EMC Corp.(EMC), Forest Labs(FRX), Freeport-McMoRan(FCX), Intel Corp.(INTC), IBM(IBM), Johnson & Johnson(JNJ), KeyCorp(KEY), Linear Technology(LLTC), Merrill Lynch(MER), Motorola(MOT), Novellus Systems(NVLS), Office Depot(ODP), State Street(STT), United Technologies(UTX), Wells Fargo(WFC), Yahoo!(YHOO)

Wed. - Abbott Labs(ABT), Advanced Micro Devices(AMD), Allstate(ALL), AMR Corp.(AMR), Apple Computer(AAPL), Boston Scientific(BSX), CDW Corp.(CDWC), E*Trade(ET), eBay(EBAY), General Dynamics(GD), Gilead Sciences(GILD), Illinois Toolworks(ITW), JPMorgan Chase(JPM), Juniper Networks(JNPR), Occidental Petroleum(OXY), Ryland Group(RYL), Seagate Technology(STX), St. Jude Medical(STJ)

Thur. - Armor Holdings(AH), Bank of America(BAC), Baxter Intl.(BAX), Broadcom Corp.(BRCM), Cerner Corp.(CERN), Citigroup(C), Coca-Cola(KO), Comerica(CMA), Eli Lilly(LLY), Freescale Semi(FSL), Google(GOOG), Honeywell(HON), McDonald’s Corp.(MCD), Nucor(NUE), Peabody Energy(BTU), Pfizer(PFE), SanDisk(SNDK), Southwest Air(LUV), United Parcel Service(UPS), United Health(UNH), Wyeth(WYE), Xilinx(XLNX), 3M Co.(MMM)

Fri. - Arch Coal(ACI), Caterpillar(CAT), Cheesecake Factory(CAKE), Golden West(GDW), Merck(MRK), Schering-Plough(SGP), Schlumberger(SLB)

Other events that have market-moving potential this week include:

Mon. - (TGT) sales release

Tue. - None of note

Wed. - None of note

Thur. - Deutsche Bank Energy Conference, (JBL) mid-year analyst meeting

Fri. - Deutsche Bank Energy Conference

BOTTOM LINE: I expect US stocks to finish the week mixed as decelerating inflation readings, mostly positive economic data, mostly positive earnings reports, investment manager performance anxiety, short covering and less pessimism offsets profit-taking. My trading indicators are still giving bullish signals and the Portfolio is 100% net long heading into the week.

Market Week in Review

S&P 500 1,365.62 +1.19%*



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was very bullish as the Dow Jones Industrial Average made another new all-time high and is approaching 12,000. The advance/decline line rose, most sectors gained and volume was slightly above average on the week. Measures of investor anxiety were mostly lower. The AAII percentage of Bulls rose to 48.98% this week from 37.78% the prior week. This reading is now modestly above average levels. The AAII percentage of Bears fell to 37.76% this week from 46.67% the prior week. This reading is now above average levels. The 10-week moving average of the percentage of Bears is currently 36.97%. The 10-week moving-average of the percentage of Bears was 43.0% at the major bear market lows during 2002.

I continue to believe steadfastly high bearish sentiment is mind-boggling considering the recent rally and the fact that the DJIA is making new record highs. Bears remain stunningly complacent, in my opinion. As well, there are many other indicators registering high levels of investor skepticism regarding recent stock market gains. There is overwhelming evidence that investor sentiment regarding U.S. stocks has never been this poor in history with the DJIA registering all-time highs. There is still a very high wall of worry for stocks to climb substantially higher from current levels.

In my opinion, this is a direct result of the strong belief by the herd that the U.S. is in a long-term trading range or secular bear environment. I strongly disagree with this assessment. As I said last week, the bears' abuse of George Soros' Theory of Reflexivity(the theory basically states that the future outcome of an event can be altered by changing current perceptions regarding such an event) during the last few years has left most investors substantially underexposed to U.S. equities, specifically growth stocks, and many traders heavily leaning the wrong way. Short interest on the NYSE and Nasdaq is at all-time highs. The ISE Sentiment Index has bounced around depressed levels for months. Domestic stock mutual funds are still seeing outflows.

The average 30-year mortgage rate rose 7 basis points to 6.7%, which is 43 basis points below July highs. I still believe housing is in the process of slowing, but will stabilize at relatively high levels over the coming months. Former Fed Chairman Alan Greenspan said recently he believes the “worst may well be over” for the housing slowdown. Mortgage applications have turned higher recently with the decline in mortgage rates. The Case-Shiller housing futures are still projecting a 5% decline in the average home price over the next 7 months. Considering the average house has appreciated over 50% during the last few years, this would be considered a “soft landing.” The overall negative effects of housing on the US economy are currently being exaggerated by the bears, in my opinion. Housing has been slowing substantially for 14 months and has been mostly offset by many other very positive aspects of the economy. Americans’ median net worth is still very close to or at record high levels, energy prices have plunged, consumer spending remains very healthy, unemployment is low, interest rates are low, stocks are rising and most measures of income growth are almost twice the inflation rate, just to name a few.

The benchmark 10-year T-note yield rose 10 basis points on the week on profit taking and rising economic optimism. In my opinion, investors’ continuing fears over an economic “hard landing” are misplaced. Consumer spending is very important to the health of the US economy. Weekly retail sales rose an above-average 3.4% for the week. Spending is poised to remain strong on plunging energy prices, low long-term interest rates, a rising stock market, healthy job market, decelerating inflation and more optimism. The CRB Commodities Index, the main source of inflation fears, has now declined 7.8% over the last 12 months and is down 17.0% from May highs, approaching bear market territory. The average commodity hedge fund is down 13.8% for the year. I believe inflation fears have peaked for this cycle as global economic growth moderates to around average levels, unit labor costs remain subdued and the mania for commodities continues to reverse course.

The EIA reported this week that gasoline supplies rose more than expectations even as refinery utilization fell. U.S. gasoline supplies are still at the highest level since 1991 for this time of the year. Unleaded Gasoline futures fell again for the week and are 49.40% below September 2005 highs even as refinery utilization remains below normal as a result of the hurricanes last year, some Gulf of Mexico oil production remains shut-in and fears over future production disruptions persist. Gasoline demand is estimated to rise .8% this year versus a 20-year average of 1.7% demand growth. Moreover, distillate stocks are 18% above the five-year average for this time of the year as we head into the winter heating season. The still elevated level of gas prices related to crude oil production disruption speculation by investment funds will further dampen global fuel demand, which will send gas prices still lower over the intermediate-term.

US oil inventories are back at 7-year highs. Since December 2003, global oil demand is only up .7%, while global supplies have increased 4.8%, according to the Energy Intelligence Group. Moreover, worldwide inventories are poised to begin increasing at an accelerated rate over the next year. I continue to believe oil is priced at extremely elevated levels on fear and record speculation by investment funds, not fundamentals. The Amaranth Advisors hedge fund blow-up is a prime example of the extent to which many investment funds have been speculating on ever higher energy prices through futures contracts, thus driving the price of the underlying commodity to absurd levels. Amaranth, a multi-strategy hedge fund, lost about $6.5 billion of its $9.5 billion under management in less than two months speculating mostly on higher natural gas prices. I suspect a number of other funds will experience similar fates over the coming months, which will further pressure energy prices as these funds unwind their leveraged positions to meet investor redemptions.

Oil has clearly broken its uptrend and is now entering its seasonally weak period. A major top in oil is likely already in place. Recent OPEC production cuts will likely result in a complete technical breakdown in crude over the coming weeks. Demand destruction is already pervasive globally. Moreover, many Americans feel as though they are helping fund terrorism or hurting the environment every time they fill up their gas tanks. I do not believe we will ever again see the demand for gas-guzzling vehicles that we saw in recent years, even if gas prices continue to plunge. An OPEC production cut with oil at still very high levels and weakening global growth only further deepens resentment towards the cartel and will result in even greater long-term demand destruction. Finally, as the fear premium in oil dissipates back to more reasonable levels, global growth slows and supplies continue to rise, crude oil should continue heading meaningfully lower over the intermediate-term, notwithstanding OPEC production cuts.

Natural gas inventories rose slightly less than expectations this week, however prices for the commodity plunged again. Supplies are 11.8% above the 5-year average, a record high level for this time of year, even as some daily Gulf of Mexico production remains shut-in. Natural gas prices have collapsed 63.9% since December 2005 highs. It is quite possible US natural gas storage will become full sometime over the next few weeks, creating the distinct possibility of a “no-bid” situation for the physical commodity. Colorado State recently reduced its forecast from two to zero major hurricanes for this season versus seven last year. The peak of hurricane season was September 10. Natural gas prices are still in their seasonally strong period despite recent losses.

Gold rose on the week on short-covering and North Korea’s nuclear test. The US dollar gained on more economic optimism, a flight to safety and somewhat more hawkish Fed commentary. I continue to believe there is very little chance of another Fed rate hike anytime soon. An eventual cut is more likely next year as inflation continues to decelerate.

Steel stocks outperformed for the week on takeover speculation and economic optimism. Healthcare stocks underperformed as investors sought more economically sensitive shares. S&P 500 profit growth for the second quarter came in a strong 16.3% versus a long-term historical average of 7%, according to Thomson Financial. This is the 16th straight quarter of double-digit profit growth, the best streak since recording keeping began in 1936. Moreover, another double-digit gain is likely in the third quarter. Earnings pre-announcements are running below average levels heading into the brunt of earnings season next week. Despite an 83.4% total return(which is equivalent to a 16.3% average annual return) for the S&P 500 since the October 2002 bottom, its forward p/e has contracted relentlessly and now stands at a very reasonable 15.7. The 20-year average p/e for the S&P 500 is 24.4. The S&P 500 is now up 11.02% and the Russell 2000 Index is up 14.34% year-to-date. The DJIA made another new all-time high this week and is 210 points above its January 14, 2000 record close. I expect the Dow to break convincingly above 12,000 over the coming weeks.

Current stock prices are still providing longer-term investors very attractive opportunities, in my opinion. In my entire investment career, I have never seen the best “growth” companies in the world priced as cheaply as they are now relative to the broad market. By contrast, “value” stocks are quite expensive in many cases. A recent CSFB report confirmed this view. The report concluded that on a price-to-cash flow basis growth stocks are now cheaper than value stocks for the first time since at least 1977. Almost the entire decline in the S&P 500’s p/e, since the bubble burst in 2000, is attributable to growth stock multiple contraction. I still expect the most overvalued economically sensitive and emerging market stocks to continue underperforming over the intermediate-term as the manias for those shares subside and global growth slows to more average rates. I continue to believe a chain reaction of events has begun that will result in a substantial increase in demand for US stocks.

In my opinion, the market is still factoring in way too much bad news at current levels, notwithstanding recent gains. One of the characteristics of the current “negativity bubble” is that most potential positives are undermined, downplayed or completely ignored, while almost every potential negative is exaggerated and promptly priced in to stock prices. Furthermore, this “irrational pessimism” by investors has resulted in a dramatic decrease in the supply of stock as companies bought back shares, IPOs were pulled and secondary stock offerings canceled. Commodity and emerging market funds, which have received huge capital infusions this year, will likely see significant outflows at year-end. I continue to believe there is massive bull firepower available on the sidelines for US equities at a time when the supply of stock has contracted.

Over the coming months, an end to the Fed rate hikes, lower commodity prices, seasonal strength, the November election, decelerating inflation readings, a strong holiday shopping season, lower long-term rates, increased consumer/investor confidence, short-covering, investment manager performance anxiety, rising demand for US stocks and the realization that economic growth is only slowing to around average levels should provide the catalysts for another substantial push higher in the major averages through year-end as p/e multiples expand further. I still expect the S&P 500 to return a total of at least 15% for the year. The ECRI Weekly Leading Index fell this week and is forecasting healthy US economic activity.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,365.62 +1.19%
DJIA 11,960.51 +.93%
NASDAQ 2,357.29 +2.49%
Russell 2000 762.65 +3.10%
Wilshire 5000 13,667.53 +1.48%
S&P Barra Growth 631.78 +.82%
S&P Barra Value 731.96 +1.55%
Morgan Stanley Consumer 655.58 +.41%
Morgan Stanley Cyclical 855.18 +2.10%
Morgan Stanley Technology 554.83 +3.19%
Transports 4,657.89 +1.93%
Utilities 435.16 +1.40%
MSCI Emerging Markets 101.90 +3.03%
S&P 500 Cum A/D Line 8,350.0 +5.0%
Bloomberg Crude Oil % Bulls 29.2 -33.8%
CFTC Oil Large Speculative Longs 159,359 unch.
Put/Call .84 +5.0%
NYSE Arms .89 -19.82%
Volatility(VIX) 10.75 -7.0%
ISE Sentiment 147.0 +37.3%
AAII % Bulls 48.98 +29.65%
AAII % Bears 37.76 -19.09%
US Dollar 87.16 +.75%
CRB 303.39 +1.06%
ECRI Weekly Leading Index 135.60 -.59%

Futures Spot Prices
Crude Oil 58.67 -1.92%
Unleaded Gasoline 146.75 -2.43%
Natural Gas 5.69 -12.33%
Heating Oil 172.00 +1.18%
Gold 593.30 +1.85%
Base Metals 241.29 +4.55%
Copper 341.45 -.07%
10-year US Treasury Yield 4.79% +2.13%
Average 30-year Mortgage Rate 6.37% +1.11%

Leading Sectors
Steel +6.74%
Semis +4.42%
Computer Hardware +4.16%
Gold & Silver +3.89%
Papers +3.20%

Lagging Sectors
Drugs -.10%
Broadcasting -.50%
I-Banks -.87%
Hospitals -1.04%
HMOs -1.05%

One-Week High-Volume Gainers
One-Week High-Volume Losers

*5-Day % Change

Stocks Mostly Higher into Final Hour as DJIA Approaches 12,000

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Telecom longs and Retail longs. I took profits in my (EEM) short, added to my (LVLT) long and took profits in a couple of trading longs, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, sector performance is mixed and volume is about average. The inflation component of this morning's confidence report, which measures consumers' expectations for inflation over the next year fell to 2.9% vs. expectations of a 3.1% gain the prior month. This is down from a cycle high of 4.6% in October 2005. Consumers are expecting the lowest inflation over the next 12 months since April 2005. This is significant considering inflation expectations are a large component of inflation itself. The bears' attempts to ingrain problematic inflation into consumers' psyches appear to have failed at this point. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, earnings optimism and investment manager performance anxiety.

Today's Headlines

Bloomberg:
- Oil may fall further on speculation that OPEC will fail to cut production enough to stem a 27% plunge in prices, a Bloomberg survey of analysts shows.
- The Washtington-based Industrial Energy Consumers of America wants federal regulators to subpoena the trading records of Amaranth Advisors LLC, the hedge fund manager that lost $6.5 billion betting on natural gas.
- Craigslist Inc., which operates online bulletin boards in more than 50 countries, may generate $50 million in 2007 sales, helped by job posting fees in four additional US cities.
- Treasuries fell, pushing 10-year note yields to the highest in more than three weeks, after reports showed a surge in consumer confidence and spending.
- The UN Security Council will vote tomorrow morning on a draft resolution sanctioning North Korea, US Ambassador John Bolton said.
- Microsoft(MSFT) said it will meet its deadline for shipping the Windows Vista operating system after making changes demanded by regulators in Europe and South Korea.
- General Electric(GE) said profit in the third quarter rose 10% as power-plants turbines and locomotives drove sales.

Wall Street Journal:
- President Bush’s series of tax cuts boosted the US economy, and historians will give him credit that he doesn’t get today, said Lawrence Lindsey. Lindsey said that tax cuts helped the US economy pull out of recession caused by the Sept. 11, 2001, terrorist attacks, and the collapse of technology stocks that began before Bush took office.
- Avenue Capital Group, a hedge-fund firm that specializes in the debt of struggling companies, is in advanced talks to sell 20% of itself to Morgan Stanley’s(MS) asset management unit.
- A power struggle in Iran between hardline politicians including President Ahmadinejad and clerical groups, aging revolutionaries and businessmen has added to the difficulty of coping with that country’s nuclear ambitions.
- The FTC and FCC want Congress to make pretexting for phone records a federal crime, a move that would give the two agencies stronger enforcement powers against it.
- ING Groep NV’s ING Funds and UBS AG’s Global Asset Management unit are among mutual funds that are trying hedge-fund-like strategies of mixing buying stocks with selling some short.
- Cypress Semi(CY), Atmel(ATML) and STMicroelectronics(STM) are among chip-making companies that may be targets for private-equity buyouts, as buyers become attracted by the chipmakers’ relative lack of debt.
- Goldman Sachs(GS) will announce a new class of partner managing directors, destined to amass “huge riches,” on Oct. 25.

Washington Post:
- The American Psychiatric Assoc. is considering classifying compulsive shopping as a disorder.

LA Times:
- A $ 1 billion park to be created in Irvine, California will be nearly twice the size of NYC’s Central Park and one of the largest in the country.

Reuters:
- China halted duty-free imports of refined copper and aluminum used to make finished products for exports. Processors will have to pay a 2% duty for refined copper imports, 5% for purchases of aluminum, and a 17% value-added tax for the two metals.

AP:
- Liberal talk and news radio network Air America Radio has filed for Chapter 11 bankruptcy protection, citing spokesman Jami Horn.
- North Koea is prepared to implement a year-old accord that involves abandoning its nuclear plans in exchange for aid and security guarantees, citing a Russian envoy.

Times-Picayune:
- Valero Energy(VLO), the largest US refining company, applied for a permit to expand the capacity of its refinery in Norco, Louisiana, to 380,000 barrels of oil a day.

NY Post:
- NY has 18 registered lobbyists for every state lawmaker, the highest ratio in the US, citing a report by the Washington-based Center for Public Integrity.

Financial Times Deutschland:
- Seagate Technology(STX) may enter the market for flash memory chips used in digital cameras and MP3 music players, citing Seagate CEO Watkins.

Interfax:
- Russian Deputy Foreign Minister Alexander Alexeyev flew to North Korea today to try to avoid the “worst confrontational scenario” over the nation’s nuclear program.