Stocks Finish Modestly Lower on Profit-taking after Recent Sharp Gains

Indices
S&P 500 1,364.05 -.37%
DJIA 11,950.02 -.26%
NASDAQ 2,344.95 -.80%
Russell 2000 764.91 -.59%
Wilshire 5000 13,717.75 unch.
S&P Barra Growth 631.46 -.37%
S&P Barra Value 730.67 -.36%
Morgan Stanley Consumer 658.74 +.03%
Morgan Stanley Cyclical 854.95 -.90%
Morgan Stanley Technology 548.38 -1.29%
Transports 4,648.65 -1.68%
Utilities 439.33 +.61%
Put/Call .90 +13.92%
NYSE Arms 1.38 +28.41%
Volatility(VIX) 11.73 +5.77%
ISE Sentiment 104.0 -35.80%
US Dollar 86.83 -.20%
CRB 308.16 -.13%

Futures Spot Prices
Crude Oil 58.92 -1.70%
Unleaded Gasoline 146.06 -2.08%
Natural Gas 6.41 -.39%
Heating Oil 173.75 -1.08%
Gold 594.00 +.08%
Base Metals 247.40 +2.09%
Copper 348.60 -.29%
10-year US Treasury Yield 4.76% -.17%

Leading Sectors
Utilities +.61%
Drugs +.54%
Biotech +.23%

Lagging Sectors
Alternative Energy -1.52%
Networking -1.69%
Semis -2.46%

Evening Review
Detailed Market Summary
Market Gauges
Daily ETF Performance
Style Performance
Market Wrap CNBC Video(bottom right)
S&P 500 Gallery View
Economic Calendar
Timely Economic Charts
GuruFocus.com
PM Market Call
After-hours Movers
Real-time/After-hours Stock Quote
In Play

Afternoon/Evening Headlines
Bloomberg:
- Crude oil fell another $1/bbl. on forecasts that US inventories rose and skepticism OPEC will cut production by 1 million barrels per day.
- IBM(IBM) said third quarter profit surged 47%, beating analysts’ estimates as computer sales rose.
- Toyota Motor(TM), Honda Motor and Ford Motor(F) gasoline-electric vehicles led the US government’s fuel-efficiency rankings for 2007 models, as Toyota and Honda accounted for seven of the top 10.
- Carl Icahn bought an additional $200 million of Lear Corp.(LEA) stock, making him the biggest shareholder.
- Intel Corp.(INTC) said third-quarter profit fell 35% amid price cuts and market share losses.
- Yahoo!(YHOO) said third-quarter profit dropped 38% because of costs to expense employee stock options.

Financial Times:
- Vivendi SA’s Universal Music Group, the world’s largest music company, has filed suits against two user-generated Web sites, Sony’s(SNE) Grouper.com and Bolt.com.

CNBC:
- Harrah’s Entertainment(HET) may reject a $15.5 billion buyout offer from private-equity firms Apollo Management LP and Texas Pacific Group.

BOTTOM LINE: The Portfolio finished higher today on gains in my Biotech longs, Telecom 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 negative today as the advance/decline line finished lower, most sectors fell and volume was above average. Measures of investor anxiety were higher into the close. Today's overall market action was slightly bearish. The Saudi Tadawul All Share Index, which had been one of the booming emerging markets over the last few years, is down 49% since February and shows few signs of life as it approaches recent lows. Its weak technical state continues despite numerous calls recently for $100/bbl. oil and a rebound in many other emerging market indices. The decline in the Tadawul that began in February foreshadowed the peak in oil prices, in my opinion.

Stocks Modestly Lower into Final Hour on Profit-taking

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Telecom longs, Biotech longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is above average. The long-term average is a gain of about 2.9%. There is still no evidence, in my opinion, that a meaningful slowdown in consumer spending is underway, even as many investors continue to worry about such a decline. I still expect holiday shopping sales to exceed estimates. I continue to believe a healthy labor market, falling energy prices, relatively low long-term interest rates, decelerating inflation, a rising stock market and less irrational pessimism will continue to more than offset slowing housing over the intermediate term, in my opinion. The Morgan Stanley Retail Index (MVRX) has soared 20.9% in about 12 weeks vs. a 10.3% gain in the S&P 500 over the same timeframe. I still expect continued outperformance by the sector through year-end. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting, lower energy prices and investment manager performance anxiety.

Today's Headlines

Bloomberg:
- Crude oil is falling again in NY on forecasts that US inventories rose and skepticism OPEC will cut production by 1 million barrels a day.
- The cost of transporting crude oil on supertankers may fall next year as 110 vessels enter service at a time of declining demand, Lorentzen & Stemoco AS said.
- Confidence among US homebuilders unexpectedly rose this month on optimism the housing market may be bottoming out, according to the NAHB.
- The Chicago Merc(CME) agreed to buy the Chicago Board of Trade(CBOT) for about $8 billion, crating the largest exchange for futures contracts on stocks, bonds, currencies and commodities.
- China’s government will uphold sanctions against North Korea imposed by the UN Security Council after the isolated state conducted a nuclear weapons test.
- Merrill Lynch(MER) said third quarter earnings rose 41% to a record as revenue from trading climbed at the fastest pace on Wall Street.
- Carlyle Group plans to raise as much as $15 billion for US buyouts as its seeks funds to rival competitors Blackstone Group LP and Texas Pacific Group.
- The European Union said its diplomacy is failing to curb Iran’s nuclear program and the UN should act on US-led demands for sanctions against the Islamic nation.
- Eli Lilly(LLY) will buy its partner ICOS Corp.(ICOS) for $2.1 billion, acquiring full marketing rights to Cialis, the world’s second-biggest-selling impotence drug after Viagra.
- President Bush signed into law legislation to allow the prosecution of suspected terrorists before military tribunals and continue aggressive interrogations of enemy prisoners.
- Level 3 Communications(LVLT) agreed to buy Broadwing Corp.(BWNG) for $1.4 billion to add larger corporate clients and a 19,000-mile fiber optic network.

Wall Street Journal:
- The European Central Bank may be ready to take a break from raising interest rates, after raising them five times in 10 months, some economists say.
- Ritchie Capital Management LLC, a Geneva, Illinois-based hedge fund with $2.8 billion in assets, said it avoided a flood of investor departures after investors approved a plan that would lock up some assets for more than three years.
- DaimlerChrysler AG’s(DCX) Chrysler Group Head Tom LaSorda said the automaker probably will gain about a full percentage point in market share next year as a result of new models.
- Criminals are using online job resumes to collect data for identity theft.
- The US economy will do fine so long as tax rates remain low, wrote Brian Westbury, chief economist at First Trust Advisors.

NY Times:
- India, which produces 400,000 engineers a year, has too few with the language, workplace and technical skills to satisfy high-tech companies’ growing need for employees.
- Some Latin American countries are losing as much as 8% of national economic growth to years of rampant violent crime, citing economists and World Banks officials.

Washington Post:
- About 53% of Virginians would vote for a constitutional amendment banning same-sex marriage, while 42% would vote against such a law.

AP:
- Democratic Senator Joe Lieberman of Connecticut, running for re-election as an independent, debated democratic opponent Ned Lamont yesterday over the war in Iraq. Lamont said Lieberman was a career politician in step with President Bush. Lieberman accused Lamont of running a negative campaign and said that pulling troops out of Iraq too soon will be disastrous. Lieberman leads Lamont in recent polling.

Focus:
- German solar-panel manufacturers face a price war as competition increases, citing Solarworld AG CEO Asbeck.

Vedomosti:
- OAO Lukoil, Russia’s biggest oil producer, plans to invest $115 billion by 2016 to expand its refining into the US and Europe, increase output and raise its market value.

Reforma:
- Mexico hosted 575,000 few foreign visitors in the first eight months of the year as drug-related violence, political unrest and storm damage discouraged tourists.

Producer Prices Plunge, International Demand for US Securities Soars to Record, Industrial Production Falls, Capacity Utilization Declines

- The Producer Price Index for September fell 1.3% versus estimates of a .7% decline and a .1% increase in August.
- The PPI Ex Food & Energy for September rose .6% versus estimates of a .2% gain and a .4% decline in August.
- Net Foreign Security Purchases for August rose to $116.8 billion versus estimates of $56.5 billion and $32.9 billion in July.
- Industrial Production for September fell .6% versus estimates of a .1% decline and unch. in August.
- Capacity Utilization for September fell to 81.9% versus estimates of 82.2% and 82.5% in August.

BOTTOM LINE: Prices paid to US producers fell last month by the most since April 2003 as energy costs plunged, Bloomberg reported. The core ppi rose .6%, due to a temporary jump in auto costs. Excluding cars and trucks, the core ppi rose .1%. The PPI rose .9% over the last 12 months versus a 3.7% gain reported in August. Energy prices fell 8.4%, the largest decline since 1986. The price of gasoline plummeted a record 22%. In my opinion, the surge in auto prices that led to the above-expectations core ppi report is either incorrect, and will be revised lower, or temporary. I continue to believe most measures of inflation will decelerate over the intermediate-term.

International investment in US securities surged to a record $116.8 billion in August, Bloomberg reported. Demand for US assets by foreigners soared after the Fed ended two years of rate hikes and reports showed inflation decelerated ad consumer spending rose. Purchases of US Treasury securities rose a net $46.3 billion versus $6.6 billion the prior month. I expect international demand for US assets to remain strong over the intermediate-term as the dollar remains firm, stocks rise, interest rates remain low and commodities continue to fall.

Industrial production in the US fell more than forecast last month as auto, furniture and electronic equipment makers scaled back and cooler weather reduced demand for electricity, Bloomberg said. Capacity utilization is now back near the long-term average of 81%, which is a positive for a further deceleration in inflation readings. Cooler than average temperatures in the US cut electricity demand. Auto and parts production declined 2.1% versus a 1.9% gain the prior month. I expect industrial production to rise modestly next month as inventory rebuilding accelerates.

Links of Interest

Market Snapshot
Detailed Market Summary
Market Internals
Economic Commentary
Movers & Shakers
Today in IBD
NYSE OrderTrac
I-Watch Sector Overview
NYSE Unusual Volume
NASDAQ Unusual Volume
Hot Spots
NASDAQ 100 Heatmap
DJIA Quick Charts
Chart Toppers
Option Dragon
Real-time Intraday Chart/Quote

Tuesday Watch

Late-Night Headlines
Bloomberg:
- South Korea’s government is aware North Korea may be preparing to conduct a second nuclear explosion, after a report said US satellites picked up activity at the site of the country’s first test last week.
- Schlumberger Ltd.(SLB), the world’s largest provider of oilfield services, and companies that drill wells and haul pipe are beating energy producers in the stock market. Falling oil prices mean the trend may not last. Services companies are so stretched and rental prices for rigs and exploration equipment so high that things can only go downhill from here, said Steven Yuan, an analyst at Sun Hung Kai Securities, in Hong Kong.

Wall Street Journal:
- Sears Holdings Corp.(SHLD), a discount retailer, opened 99 stores devoted to its preppy Lands’ End clothing unit within its department stores.

Financial Times:
- Morgan Stanley(MS) is near to an agreement that will see its investment and private bankers rewarded for referring business, citing retail brokerage head James Gorman.
- NetJets Europe Ltd., a unit of NetJets Inc., the business-jet fleet operator owned by Warren Buffett’s Berkshire Hathaway Inc., has ordered 30 jets from Raytheon Co.(RTN)

Kyodo News Service:
- Bank of China Ltd., the nation’s second-largest lender, has halted fund remittances to North Korea in at least some of its branches since yesterday.

Shanghai Securities News:
- China’s land prices grew .87% in the second quarter of this year, slower than the .92% first-quarter growth, citing the Ministry of Land and Resources’ research arm.

China Daily:
- Learning to play golf will be made compulsory for students taking business courses at Xiamen University in eastern China.

China Securities Journal:
- China will let state-owned companies listed on domestic markets give stock options to their executives as incentives to improve earnings.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (SCHW), target $22.

CSFB:
- US sheet steel supply is exceeding demand by 5M-7M tonnes. Mill capacity utilization has declined to 83.2% from 87.9% the prior week. Lower utilization rates are often met with lower prices. September steel imports are set to rise 75.3% y-o-y. Service center steel inventories, which are released Oct. 18th, are poised to show a sharp increase.

Night Trading
Asian Indices are -.75% to -.25% on average.
S&P 500 indicated -.14%.
NASDAQ 100 indicated -.19%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Before the Bell CNBC Video(bottom right)
Global Commentary
Asian Indices
European Indices
Top 20 Business Stories
In Play
Bond Ticker
Daily Stock Events
Macro Calls
Rasmussen Consumer/Investor Daily Indices
CNBC Guest Schedule

Earnings of Note
Company/EPS Estimate
- (ASD)/.82
- (ASO)/.53
- (CGNX)/.21
- (CSX)/.51
- (EMC)/.12
- (FRX)/.65
- (FCX)/1.59
- (INTC)/.17
- (IBM)/1.35
- (JEF)/.32
- (JNJ)/.93
- (KEY)/.72
- (LLTC)/.37
- (MAN)/1.03
- (MER)/1.47
- (MOT)/.34
- (NVLS)/.51
- (ODP)/.44
- (STT)/.79
- (SYK)/.46
- (STI)/1.46
- (TSS)/.27
- (UTX)/.96
- (USB)/.66
- (WFC)/.63
- (YHOO)/.11

Upcoming Splits
- (SAY) 2-for-1

Economic Releases
8:30 am EST:
- The Producer Price Index for September is estimated to fall .7% versus a .1% increase in August.
- The PPI Ex Food & Energy for September is estimated to rise .2% versus a .4% decline in August.

9:00 am EST:
- Net Foreign Security Purchases for August are estimated to rise to $56.5 billion versus $32.9 billion in July.

9:15 am EST:
- Industrial Production for September is estimated to fall .1% versus a .1% decline in August.
- Capacity Utilization for September is estimated to fall to 82.2% versus 82.4% in August.

1:00 pm EST:
- The NAHB Housing Market Index for October is estimated at 30 versus a reading of 30 in September.

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