Stocks Surge on Heavy Volume as Energy Prices Fall, Profits Remain Strong and Long-term Rates Fall

Indices
S&P 500 1,389.08 +.50%
DJIA 12,163.66 +.24%
NASDAQ 2,379.10 +.96%
Russell 2000 776.02 +1.16%
Wilshire 5000 13,907.14 +1.02%
S&P Barra Growth 644.28 +.48%
S&P Barra Value 742.70 +.51%
Morgan Stanley Consumer 672.42 +.35%
Morgan Stanley Cyclical 866.75 +.62%
Morgan Stanley Technology 554.82 +.66%
Transports 4,788.72 +.14%
Utilities 450.44 -.41%
Put/Call .78 -7.14%
NYSE Arms 1.14 +7.80%
Volatility(VIX) 10.56 -.94%
ISE Sentiment 166.0 +9.93%
US Dollar 85.89 -.57%
CRB 311.78 -.32%

Futures Spot Prices
Crude Oil 60.29 -1.81%
Unleaded Gasoline 156.70 -1.59%
Natural Gas 7.47 -2.85%
Heating Oil 169.85 -2.33%
Gold 599.90 +.02%
Base Metals 243.97 +.07%
Copper 339.50 -.15%
10-year US Treasury Yield 4.72% -.97%

Leading Sectors
Airlines +2.44%
HMOs +2.17%
Retail +1.90%

Lagging Sectors
Oil Tankers -.52%
Steel -.68%
Drugs -.93%

Evening Review
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Afternoon Recommendations
Bank of America:
- Rate (PEIX) Sell, target $12.50

Afternoon/Evening Headlines
Bloomberg:
- US stocks extended a weeklong rally, pushing the S&P 500 toward its best month since 2003 and sending the DJIA to another all-time high.
- Gasoline futures fell more than 2%, the biggest drop in three weeks, on speculation current inventories did not justify yesterday’s 3.6% rise.
- Crude oil fell over $1/bbl. on speculation that US inventories are adequate to meet demand in coming weeks.
- Microsoft(MSFT) said first quarter profit rose 11%, helped by higher revenue from server software.
- Shares of Home Inns & Hotels Management(HMIN), China’s second-largest budget hotel chain, surged 63% in their fist day of trading on the Nasdaq Stock Market today.

Nikkei English News:
- The NYSE proposed a financial and operational partnership with the Tokyo Stock Exchange.

BOTTOM LINE: The Portfolio finished higher today on gains in my Semi longs, Medical longs, Retail longs and Biotech longs. 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, most sectors rose and volume was heavy. Measures of investor anxiety were mostly lower into the close. Today's overall market action was very bullish. I especially liked the slow grind higher throughout the day rather than a sharp compressed move. As well, the NYSE Arms was at above-average levels again throughout the day. Tomorrow's GDP report and inflation reading will likely result in another move lower in long rates. Natural gas gave up all of this morning's gains and is now down about 2.7%. The recent surge in prices was related more to another bout of record speculation by investment funds than fundamental improvements. Natural gas storage is at all-time high levels heading into the commodity's seasonally weak period which begins over the next couple of weeks. I suspect natural gas has made another meaningful top.

Nasdaq Surging on Heavy Volume as Corporate Profits Exceed Estimates, Energy Prices Fall and Long-term Rates Decline

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semiconductor longs, Biotech longs, Retail longs and Computer longs. 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 gaining and volume is heavy. Intuitive Surgical (ISRG) is rising 3.2% today ahead of its earnings report after the close, however the stock is still well off highs. I suspect the company will once again beat estimates and give conservative guidance. In the past, the always-conservative guidance has, at times, spooked investors. However, bullish sentiment is more subdued heading into this evening's report. The short interest ratio has increased from a low of 1.47 in February to 3.46 recently. The Open Interest Put/Call for ISRG is currently .93 vs. a low of .57 in March. Implied volatility has risen from 38% in September to 68% currently. HSBC recently initiated the stock with an overweight rating and put a $136 price target on the shares. I suspect that if the company is able to exceed estimates, which I expect, that investors will finally ignore the conservative guidance as the sentiment towards pure growth stocks continues to improve. I remain long the stock and still expect it to exceed its all-time high of $139.50 this quarter. I expect US stocks to trade modestly higher into the close from current levels on short-covering, strong profit reports, lower long-term rates, lower energy prices and investment manager performance anxiety.

Today's Headlines

Bloomberg:
- Natural gas is falling in NY, ending the recent rally, amid record inventories in underground storage.
- Crude oil is falling more than $1/bbl. on speculation that US stockpiles, near 7-year highs, are adequate to meet demand in coming weeks.
- The Dow Jones Industrial Average is making another all-time high on strong earnings reports and a better-than-expected new home sales report.
- Goldman Sachs(GS) promoted 262 executives to managing director a day after adding 115 partners, the firm’s top rank.
- Federal Reserve officials may leave interest rates alone until the middle of next year, confident of “moderate” economic growth and abating inflation.
- ExxonMobil(XOM) said third quarter profit rose 5.7% because crude prices climbed to an all-time high and production increased for a third straight quarter.
- China and Russia said they would oppose a draft resolution imposing UN sanctions on Iran over its nuclear program, as the Security Council’s five permanent members prepared for their first meeting on the text.

Wall Street Journal:
- Private-equity and hedge funds are considering taking stakes in the bankruptcy-plagued US auto-parts industry.
- Blackstone Group LP, which announced recently that it had raised the biggest-ever private-equity fund, with $15.6 billion, wants to increase that amount to $20 billion.
- Clear Channel Communications(CCU) may get bids from a group of investors led by Thomas H. Lee Partners that includes Texas Pacific Group and Bain Capital LLC.
- Wild Oats(OATS) has been a lackluster performer, with annual sales growth of 3-5% at established outlets, against 7-9% for the industry as a whole. That, however, could change under new leadership, and the company’s stock has risen twice in the past week, first on the news that CEO Odak’s contract wouldn’t be renewed, and again when it was announced that he’d resigned.
- Cold Stone Creamery, Marble Slab Creamery and MaggieMoo’s Intl. are trying to develop a niche within the ice cream market by offering high-end versions of a common product.

NY Times:
- Democratic bloggers are targeting about 50 Republican candidates in an effort to make particular articles or Web sites appear at the top of a Google search list. After embedding a candidate’s name with a hyperlink to a negative article about the person, blogger Chris Bowers, who devised the plan, has been distributing the links to others with left-wing blogs.

Boston Globe:
- McDonald’s(MCD) restaurants in New England are getting a makeover that features leather chairs, plasma televisions and wireless Internet access.

Durable Goods Orders Soar, Help-Wanted Index at 45-year Low, New Home Sales Rise Again

- Durable Goods Orders for September rose 7.8% versus estimates of a 2.0% gain and a .1% decline in August.
- Durables Ex Transports for September rose .1% versus estimates of a 1.0% increase and a 1.5% decline in August.
- Initial Jobless Claims for last week rose to 308K versus estimates of 307K and 300K the prior week.
- Continuing Claims rose to 2449K versus estimates of 2440K and 2446K prior.

BOTTOM LINE: US Durable Goods Orders rose last month by the most in more than six years on demand for commercial aircraft and business equipment, Bloomberg reported. Bookings for commercial aircraft surged 183% in September, the largest increase since July 2002. Unfilled orders for non-defense capital goods excluding aircraft rose 2.3%, the largest increase since June 2000, implying production increases in coming months. Business spending is projected to surge 7.8% this year, according to a recent survey from Blue Chip Economic Indicators. I expect Durable Goods Orders Ex Transports to rise more next month.

The number of Americans filing first-time claims for unemployment benefits rose last week to a level that still suggests a healthy job market, Bloomberg reported. The four-week moving-average of jobless claims fell to 305,250, the lowest level in eight months. The unemployment rate among those eligible to collect benefits, which tracks the US unemployment rate remained steady at a low 1.9%. The Help Wanted Index fell to 30, a 45-year low. I continue to believe the labor market will remain healthy without generating substantial unit labor cost increases over the intermediate-term.

New Home Sales in the US unexpectedly rose for a second month in September, Bloomberg reported. Purchases increased at a 5.3% annual rate from the prior month. The median price of a new home fell to $217,100. The report suggests that builder incentives, lower mortgage rates and lower prices will keep the slowdown from deepening, Bloomberg said. Alan Greenspan reiterated his view this morning that the worst of the housing slowdown is behind us. Inventories of new homes fell meaningfully. The supply of homes at the current sales rate dropped to 6.4 months’ worth from 6.8 months the prior month. Freddie Mac recently said the average 30-year fixed mortgage rate fell from 6.8% in July to 6.36%. New Home Sales soared 24% in the West and rose 6.9% in the South. Sales fell 35% in the Northeast and 6.3% in the Midwest. I continue to believe the housing market is in the process of stabilizing at relatively high levels. The median US home has still appreciated over 50% since 2000.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- Ford Motor(F) said it will almost double its purchasing of China-made components this year to cut production costs.
- El Nino weather conditions, which can cause drought in the Asia-Pacific region and flooding in the Americas, intensified during October, Australia’s Bureau of Meteorology said today.

Financial Times Deutschland:
- German hedge funds have shown low returns of about 3% during the first nine months of this year, citing a survey of local investment companies.

China News Agency:
- Xinjiang, in northwestern China, plans to increase its oil and gas output to 60 million tons within 3 years, citing an official. The region will become China’s leading oil-producing region.

Economic Times:
- Genpact, an Indian computer services company, is planning to sell shares in the US in what could be the biggest initial public offering from the South Asian nation.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (FFIV), target $64.
- Reiterated Buy on (PSYS), target $42.

Night Trading
Asian Indices are +.25% to +.75% on average.
S&P 500 indicated -.02%.
NASDAQ 100 indicated +.01%.

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Earnings of Note
Company/EPS Estimate
- (AET)/.72
- (AKAM)/.22
- (AYE)/.54
- (APA)/1.89
- (ANDW)/.13
- (AVID)/.39
- (BOW)/-.16
- (BYD)/.52
- (BMY)/.20
- (CELG)/.14
- (CHK)/.72
- (CB)/1.25
- (CMCSA)/.19
- (DECK)/.54
- (DRIV)/.38
- (DOW)/.91
- (ELX)/.24
- (XOM)/1.59
- (FII)/.45
- (GT)/.24
- (ISRG)/.41
- (IRBT)/.09
- (K)/.65
- (LLL)/1.27
- (LSCC)/.05
- (LEA)/-.58
- (LIZ)/.99
- (MEE)/.04
- (MBI)/1.44
- (MFE)/.30
- (MEDI)/-.30
- (WFR)/.51
- (MCRS)/.40
- (MSFT)/.31
- (OMX)/.55
- (RTN)/.64
- (SOHU)/.16
- (S)/.33
- (STA)/1.32
- (SPF)/.68
- (HOT)/.50
- (SUNW)/-.04
- (WEN)/.64
- (XEL)/.48

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Durable Goods Orders for September are estimated to rise 2.0% versus a .5% decline in August.
- Durables Ex Transports for September are estimated to rise 1.0% versus a 2.0% decline in August.
- Initial Jobless Claims for last week are estimated to rise to 307K versus 299K the prior week.
- Continuing Claims are estimated to fall to 2440K versus 2453K prior.

10:00 am EST
- New Home Sales for September are estimated to fall to 2440K versus 2453K in August.

BOTTOM LINE: Asian indices are higher, boosted by 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.