Stocks Higher into Final Hour on Rising Economic Optimism

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Medical longs and Retail longs. I covered some of my (EEM) short and added to my (IWM)/(QQQQ) hedge today, thus leaving the Portfolio 75% net long. The tone of the market is slightly positive as the advance/decline line is higher, sector performance is mixed and volume is around average. NYSE short interest rose .62% from mid-December through mid-January to 9.68 billion shares. Short interest is now just off the all-time high of 9.74 billion shares set in October of last year. I suspect we will see another new record high next month.

Here are the 10 NYSE stocks with the largest percentage increase in short interest relative to their floats from mid-December through mid-January:

1. RGC +33.5%
2. NMX +23.7%
3. HEI +21.6%
4. EVR +11.3%
5. TOA +8.1%
6. CAO +6.9%
7. CCO +6.4%
8. NYX +6.2%
9. LNN +6.2%
10. WLK +6.2%

I expect US stocks to trade mixed into the close from current levels as rising oil prices and long-term rates offsets more economic optimism.

Today's Headlines

Bloomberg:
- President Bush plans to double the size of the country’s emergency oil reserves by 2027, Energy Secretary Bodman said. This would amount to only 100,000 barrels per day or .12% of daily global oil demand. Current global oil demand is 85.7 million barrels per day, however oil is rising $2.27/barrel on the report. Bush will also propose tonight cutting US gasoline consumption by 20% over the next 10 years through a combination of higher vehicle fuel efficiency and greater use of renewable fuels like ethanol.
- Shares of Texas Instruments(TXN) rose the most in 11 months after fourth-quarter profit topped analysts’ estimates and the company said it’s working through stockpiles of processors.

Wall Street Journal:
- Several pharmaceutical companies are in advanced-stage trials for drugs to treat lupus, the strongest sign of advancement in 50 years for the 1.5 million Americans suffering the autoimmune disorder.
- US pension plans have returned to financial health on improved investments gains and higher interest rates, citing studies by benefits consultants.
- Wal-Mart Stores(WMT) plans to adjust the merchandise its sells in some of its outlets to better meet local demand.
- Cisco Systems(CSCO) is testing new products including video conferencing in a bid to juice growth.
- MGM Mirage and other US casinos may be considering splitting their real estate interests from gambling to benefit from a rise in Las Vegas property prices.

NY Times:
- Blackstone Group LP, which took the parent company of Orbitz Inc. private in August, hired UBS AG to explore an IPO of Orbitz stock.
- Europe is seeing strong interest in business ventures that develop energy from less polluting or renewable sources.

International Herald Tribune:
- The British Broadcasting Corp.(BBC) is in talks about putting some of its programming on Google’s(GOOG) YouTube online video site.

Leading Indicators on the Rise

- Leading Indicators for December rose .3% versus estimates of a .2% increase and a downwardly revised unch. reading in November.

BOTTOM LINE: An index of leading US economic indicators rose last month for the first time since September, as job growth and rising stock prices pointed to a strong start for 2007, Bloomberg said. Jobless claims averaged 316,500 in December, down from 328,600 a month earlier. As well, the S&P 500 averaged 1,416 in December versus 1,388 in November. Housing related gauges also helped boost the index. I continue to believe the US economy is accelerating modestly from slightly below average rates to more average rates of growth as housing and auto production cutbacks subtract less, the job market remains healthy, energy prices fall further, long-term rates remain low, inflation decelerates further, consumer spending strengthens and confidence in the sustainability of the current expansion rises.

Links of Interest

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Crude oil is little change in NY after falling yesterday on forecasts for a mild end to the winter.
- Taiwan’s energy use fell in November from a year earlier, the third decline last year, because motorists used less fuel.
- Nariman Behravesh, chief economist at Global Insight Inc., says the US economic “soft patch is pretty much over.”
- SAC Capital Advisors LLC, the $10 billion hedge-fund firm run by Steven Cohen, reduced its stake in Phelps Dodge(PD) to 4% from 5.1%.
- China, diversifying its $1.07 trillion in currency reserves, may favor US bonds. The People’s Bank of China needs to be cautious because much of its reserves were created by “speculative inflows,” said Zhao Qingming, an analyst at China Construction Bank Corp., the nation’s fourth-biggest lender.

Chosun Ilbo:
- North Korea and US negotiators made progress in talks on financial sanctions against the North.

Xinhua News Agency:
- China extended a list of machinery that isn’t exempt from import duties to help domestic companies compete locally.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (LOW), top pick target $41. Sees inflection point in the housing market in 3Q07, believes the fundamentals of home improvement sector will turn favorable.
- Unsold home inventories should fall sharply this year as the pace of new construction plummeted in 2006, while demand fell only half as much. Housing’s drag on growth should get smaller as 2007 transpires. A small positive growth contribution for housing in 2008 is likely.

Night Trading
Asian Indices are -.50% to unch. on average.
S&P 500 indicated -.01%.
NASDAQ 100 indicated +.06%.

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Earnings of Note
Company/EPS Estimate
- (ADTN)/.23
- (AMD)/.10
- (AKS)/.18
- (AV)/.13
- (AVY)/1.0
- (BAC)/1.18
- (BLK)/1.53
- (EAT)/.39
- (BNI)/1.39
- (CTX)/-2.00
- (CTXS)/.38
- (COH)/.58
- (DHI)/.33
- (EMC)/.16
- (HYSL)/.44
- (IDTI)/.28
- (JNJ)/.79
- (MCHP)/.33
- (NBIX)-.76
- (PNC)/1.30
- (QLGC)/.26
- (STX)/.32
- (SUNW)/.00
- (TMA)/.59
- (UAUA)/-.35
- (UTX)/.85
- (WB)/1.18
- (XRX)/.37
- (YHOO)/.13

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- Leading Indicators for December are estimated to rise .2% versus a .1% gain in November.

BOTTOM LINE: Asian indices are mostly lower, weighed down by technology shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Finish Lower on Weakness in Cyclicals

Indices
S&P 500 1,422.95 -.53%
DJIA 12,477.16 -.70%
NASDAQ 2,431.07 -.83%
Russell 2000 777.96 -.92%
Wilshire 5000 14,271.25 -.54%
Russell 1000 Growth 561.27 -.69%
Russell 1000 Value 816.38 -.35%
Morgan Stanley Consumer 708.22 -.49%
Morgan Stanley Cyclical 911.69 -1.11%
Morgan Stanley Technology 558.09 -.92%
Transports 4,812.85 -.96%
Utilities 447.39 -.16%
Put/Call .95 +15.85%
NYSE Arms 1.31 +37.37%
Volatility(VIX) 10.77 +3.56%
ISE Sentiment 116.0 -33.71%
US Dollar 85.05 +.22%
CRB 289.98 -.17%

Futures Spot Prices
Crude Oil 52.63 -1.44%
Reformulated Gasoline 137.94 -1.33%
Natural Gas 7.33 +6.45%
Heating Oil 151.14 -.14%
Gold 632.60 -.60%
Base Metals 224.91 +1.85%
Copper 252.25 -.22%
10-year US Treasury Yield 4.76% -.38%

Leading Sectors
Alternative Energy +.41%
Foods +.25%
Gaming +.03%

Lagging Sectors
Papers -1.10%
HMOs -1.13%
Airlines -2.03%

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Afternoon Recommendations
Morgan Stanley:
- Rated (ACN) Outperform, target $44.

Afternoon/Evening Headlines
Bloomberg:
- Texas Instruments(TXN) said fourth-quarter profit rose 2%. The stock is rising 3% after-hours.
- American Express(AXP) said profit surged 23% as defaults declined and holiday spending by cardmembers reached a record. The stock finished little changed.
- Angelo Haligiannis, the fugitive hedge-fund manager who defrauded investors in Sterling Watters Group LP, was ordered by a federal court to pay more than $30.6 million in fines and forfeited profit.
- The mild weather that blanketed most of the northern US during the first two months of the heating season will return next month, setting up a warmer-than-normal end to winter, forecasters at WSI Corp. said.
- US gasoline at the pump fell 6.4 cents to a nationwide average of $2.16/gallon the week ended today, the lowest price since Dec. 5, 2005, a government report showed.
- Gap Inc.(GPS) CEO Paul Pressler resigned form the largest US clothing chain after failing to bring the company’s stock back to its historic highs.
- Microsoft’s(MSFT) Zune music and video player, intended as a rival to Apple’s(AAPL) market-dominating iPod, can’t share some songs, potentially eroding a key advantage over iPod.

Nikkei English News:
- Mitsubishi Heavy Industries Ltd., Japan’s biggest heavy-machinery maker, will produce motors and lithium-ion batteries to power electric and hybrid cars.

AP:
- Chinese officials in Beijing assured a visiting US envoy that a test of an anti-satellite weapon should not be viewed as a threat, citing State Dept. spokesman Sean McCormack.

BOTTOM LINE: The Portfolio finished lower today on losses in my Computer longs, Retail longs and Internet longs. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was negative today as the advance/decline line finished lower, sector performance was mostly negative and volume was above average. Measures of investor anxiety were mostly higher into the close. Today's overall market action was bearish. With all the talk of how bad things are by the many bears, the major averages are all higher year to date, with the exception of the Russell 2000, which is down only 1%. An ABCNews.com report that raised terrorism concerns was likely the reason for the slight dip over the last hour of trading. Oil is near session lows, falling another .70 after an early morning spike higher, however natural gas is surging 6.5% today on "cold weather" despite the fact that inventories are now 85% of their pre-season capacity vs. usual levels of 60% at this time of the year. Essentially full natural gas storage is even more likely this year. After some more early morning weakness, I expect to see US stocks rally modestly tomorrow afternoon.