Stocks Surging into Final Hour on Positive Earnings Reports, Short-Covering, Fed Comments

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Software longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive today as the advance/decline line is higher, most sectors are rising and volume is above average. I was recently asked how it is possible for me to be bullish on the market and bearish on energy. First of all, I participated greatly in the early years of the energy stock advance, so I am not the energy permabear that some think. Admittedly, I got out too early, but my small energy-related short position has served its purpose in my portfolio. I am only bearish on the shares now because they are so overwhelmingly loved by investors, and I don't buy into the belief by many that global growth will remain at extraordinary levels for years without significant turbulence along the way. I believe the fundamentals for oil are much worse than is commonly perceived, worse than last year at this time, and that the recent rise has been solely a function of record "paper" demand by funds, not real demand by users of the commodity. Large speculative longs, or funds, have never been more net long crude oil futures in history, just like they were last year before the plunge. I expect oil to begin a substantial decline over the next six weeks as the peak in hurricane season approaches, and this decline should provide the catalyst for another surge in the broad U.S. stock market.

Here are 14 of the hugely positive effects I see from a significant decline in energy prices:

1. lower inflation readings, less hawkish Fed;
2. lower long-term rates, taking some pressure off housing;
3. broad market P/E multiple expansion;
4. lower gold prices, less doomsday talk from the gold bugs;
5. a boost to U.S. growth, a drag on global growth, which is heavily commodity-dependent;
6. an increase in global demand for broad U.S. market;
7. accelerating outperformance by growth style over value style;
8. a lower U.S. trade deficit;
9. a lower U.S. budget deficit;
10. a firmer U.S. dollar;
11. less pessimism by investors, consumers, CEOs, etc.;
12. a pick-up in consumer spending;
13. a rotation out of commodity stocks and into technology, retail, biotech, medical, health care, i-banking, restaurant, gaming and airline shares;
14. less demand for low correlation or negative correlation stock strategies.

I realize that some investors won't view a few of these outcomes as positive. However, in my opinion, a meaningful decline in energy prices would be a large positive for the broad market, as it was last year. Last year, oil peaked at $78.40 on July 14. It then proceeded to plunge $28 in less than six months. The S&P 500 rocketed 16.5% higher over that time frame. The fall in energy prices, in my opinion, was the predominant catalyst for the huge move higher in the S&P 500. While a firmer dollar and lower-than-expected earnings from the energy sector will subtract from earnings growth to an extent, the huge boost to consumer spending, which is significantly more important, more than offsets those drags on earnings. The bottom line is that a meaningful decline in energy prices boosts overall global demand for U.S. stocks during a time of shrinking supply. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, lower long-term rates, investment manager performance anxiety, earnings optimism and bargain-hunting.

Today's Headlines

Bloomberg:
- Federal Reserve officials said risks to economic growth last month were “more balanced” than in May and reiterated that inflation remains the biggest policy concern.
- The Robin Hood Foundation, a poverty fighting NYC charity that was criticized by lawmakers for investing in hedge funds run by board members and donors, said it would stop the practice.
- Viacom Inc.(VIA/B) shares rose the most in 11 months on speculation that a rift between Chairman Sumner Redstone and daughter Shari Redstone may lead to a sale of the company.
- Federal Reserve Chairman Ben Bernanke is preparing the ground for the longest freeze in interest rates in two decades.

Wall Street Journal:
- Clearwire Corp.(CLWR) and Sprint Nextel(S) are close to an agreement to allow each other’s customers access to their wireless roaming services.
- The National Hockey League will broadcast games live on the Internet next season to try and make up for dwindling television ratings in the US.
- US consumers can pay once to buy voice-over-Internet-protocol hardware from Ooma that enables phone calls through the Internet with no more monthly bills, Walt Mossberg wrote.
- Walt Disney(DIS) plans to use some of its star performers on its cable television Disney Channel and record labels.

NY Times:
- Former Tennessee Senator Fred Thompson is expected to enter the US presidential race with a national announcement tour after Labor Day in early September, citing aides.
- Cerberus Capital Management LP, the private equity firm that bought Chrysler Group from DaimlerChrysler AG in May, is expected to make a bid for Ford Motor’s(F) Jaguar and Land Rover units today.
- Method Products, a seller of environmentally friendly household cleaners, this week began the largest advertising campaign in its seven-year history.

NY Post:
- Foot Locker(FL) is exploring a possible sale of the company, and has hired Lehman Brothers Holdings(LEH) to advise it.

Seattle Times:
- Kevin Durant, the second pick in last month’s NBA draft, signed a seven-year, $60 million endorsement contract with Nike Inc.(NKE).

Business Week:
- The board at Motorola Inc.(MOT) started discussions to replace CEO Zander.

AP:
- The European Union endorsed the mobile-television standard, known as DVB-H, or Digital Video Broadcasting for Handhelds, which is backed by a group of companies headed by Nokia Corp.(NOK).

Australian:
- Australia’s BHP Billiton(BHP) isn’t interested in making a bid to buy part or all of Alcoa Inc.(AA).

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Thursday Watch

Late-Night Headlines
Bloomberg:
- Freddie Mac(FRE) CEO Richard Syron predicted the sub-prime mortgage crisis may deepen before housing prices improve in about 18 months. The crisis doesn’t threaten “the stability of our financial system” and won’t have “a highly major impact on the economy as a whole,” Syron said.
- A US congressional subcommittee is investigating whether Google’s(GOOG) $3.1 billion purchase of DoubleClick will stifle competition in the online ad market.
- Asian chemical makers may more than double processing of liquefied petroleum gas because it’s cheaper than naphtha, an alternative raw material for plastics, said industry consultant Purvin & Gertz Inc.
- A steam pipe explosion near Manhattan’s Grand Central Terminal during the evening rush hour sent plumes of steam and debris into the air, killing one person and injuring at least a dozen more.
- China may strengthen the yuan by as much as 3.5% in a single day to cool the economy and appease US lawmakers, said Glenn Maguire, chief Asia economist at Societe Generale SA.
- India will maintain a “fairly tight” monetary policy to curb inflation that may be stoked by rising crude oil prices and consumer demand, Finance Minister Palaniappan Chidambaram said.
- China’s economy expanded 11.9% from a year earlier, the statistics bureau said today, up from 11.1% in the first quarter. Inflation climbed to 4.4% in June, breaching the central bank’s annual 3% target for a fourth month.

USA Today:
- AT&T(T) is supporting rules for spectrum auctions proposed by the US Federal Communications Commission, citing Jim Cicconi, senior executive president of public policy.

Late Buy/Sell Recommendations
Morgan Stanley:
- Reiterated Overweight on (IBM), target raised to $125. Clearly IBM(IBM) presents a positive data point on global enterprise spending trends. While IBM’s small and medium business (SMB) growth remained steady from 1Q, the large enterprise segment accelerated by 2-3 points with particular strength in Public and Communications sectors. We’d point to (EMC), (NTAP), (ISLN), (SUNW), (NCR) as vendors with the most enterprise exposure in our group.

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Asian Indices are +.25% to +.75% on average.
S&P 500 futures +.12%.
NASDAQ 100 futures +.08%.

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Earnings of Note
Company/EPS Estimate
- (AMD)/-.84
- (BAC)/1.20
- (BK)/.61
- (BAX)/.68
- (BRCM)/.27
- (COF)/1.63
- (CAL)/1.85
- (CY)/.14
- (DHR)/.92
- (DJ)/.44
- (FCS)/.14
- (FDC)/.31
- (FSL)/.52
- (GPC)/.76
- (GILD)/.40
- (GOOG)/3.57
- (HOG)/1.13
- (HSY)/.35
- (HON)/.76
- (ITW)/.88
- (IMCL)/.31
- (IRF)/.58
- (IGT)/.39
- (ISRG)/.66
- (MAN)/1.20
- (MEL)/.62
- (MSFT)/.39
- (MHK)/1.57
- (MOT)/.01
- (NUE)/1.15
- (OO)/.31
- (PPG)/1.53
- (SNDK)/.15
- (STX)/.36
- (SHW)/1.44
- (SYK)/.61
- (STI)/1.44
- (AMTD)/1.25
- (UNP)/1.62
- (UNH)/.81

Upcoming Splits
- (IOSP) 2-for-1

Economic Releases
8:30 am EST
- Initial Jobless Claims for last week are estimated to rise to 311K versus 308K the prior week.
- Continuing Claims are estimated to fall to 2550K versus 2554K prior.

10:00 am EST
- Leading Indicators for June are estimated to fall -.1% versus a .3% increase in May.

12:00 pm EST
- Philly Fed for July is estimated to fall to 13.5 versus a reading of 18.0 in June.

2:00 pm EST
- June 28 FOMC Meeting Minutes.

Other Potential Market Movers
- Fed Chairman Bernanke’s testimony to congress, the Fed’s Moskow speaking, SEMICON West and (SNCR) Analyst Event could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by mining and technology stocks 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.

Stocks Finish Lower, Despite Late Surge, on Healthy Profit-taking and Lingering Sub-prime Concerns

Indices
S&P 500 1,546.17 -.21%
DJIA 13,918.22 -.38%
NASDAQ 2,699.49 -.47%
Russell 2000 845.91 -.47%
Wilshire 5000 15,575.12 -.22%
Russell 1000 Growth 616.86 -.17%
Russell 1000 Value 877.03 -.24%
Morgan Stanley Consumer 737.20 -.27%
Morgan Stanley Cyclical 1,124.38 -.19%
Morgan Stanley Technology 649.08 -.66%
Transports 5,429.83 +.59%
Utilities 511.44 +.87%
MSCI Emerging Markets 140.09 -.84%

Sentiment/Internals
Total Put/Call 1.12 +20.43%
NYSE Arms .94 -9.21%
Volatility(VIX) 16.0 +2.37%
ISE Sentiment 156.0 -5.45%

Futures Spot Prices
Crude Oil 75.18 +1.57%
Reformulated Gasoline 219.50 +4.49%
Natural Gas 6.52 +3.46%
Heating Oil 209.90 +3.24%
Gold 673.80 +1.19%
Base Metals 256.98 +.62%
Copper 356.30 +.30%

Economy
10-year US Treasury Yield 5.02% -2 basis points
US Dollar 80.43 -.14%
CRB Index 323.60 +1.57%

Leading Sectors
Gold +3.74%
Road & Rail +2.06%
Energy +2.0%

Lagging Sectors
Banks -1.32%
I-Banks -1.68%
Semis -1.78%

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Afternoon Recommendations
Bank of America:
- Rated (BHI), (HAL), (SLB), (SII) and (WFT) Buy.

Afternoon/Evening Headlines
Bloomberg:
- Federal Reserve Chairman Ben Bernanke said hedge funds and private-equity firms offer “important benefits” for the US economy, including a way to share risk and increase liquidity in the markets.
- Washington Mutual(WM), the biggest US savings and loan, said second-quarter profit rose 8.2%, beating analysts’ estimates as the retail banking and credit card units grew and losses on mortgage lending narrowed. The stock rose 4% in extended trading.
- International Business Machines(IBM), the world’s biggest computer-services company, reported a 12% gain in second-quarter profit after bolstering sales through software acquisitions. The stock is surging $3/share in after-hours trading to $114.10.
- EBay Inc.(EBAY) said earnings rose for the fourth straight quarter after higher fees increased auction revenue and its PayPal unit added more corporate customers. The stock was mostly unch. in extended trading.
- Juniper Networks(JNPR) reported second-quarter net income of $86.2 million as new products boosted sales. The stock rose $.50/share to $27.25 in after-hours trading.
- Labor Ready(LRW) reported revenue for the second quarter of $351.1 million, an increase of 3.3% from $339.8 million for the second quarter of 2006. The stock is soaring 11.1% in extended trading.

AP:
- Iran confirmed that a second round of talks with the US about Iraq will be held in the “near future,” citing Iranian officials.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Semi longs and I-Banking longs. 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, sector performance was mixed and volume was above average. Measures of investor anxiety were above average into the close. Today's overall market action was mildly bearish as the major averages and breadth finished lower, but trimmed losses substantially into the close. Many stocks I monitor finished with gains. I suspect today's morning losses had more to do with option expiration than "real" selling. I also suspect many large investors that have been expecting a pullback or correction built short exposure further into morning weakness and are now left trapped again as stocks surged meaningfully into the close, leaving little time to exit morning positions. The brokers rebounded, but not as sharply as I would have expected. However, I suspect stocks will build on today's closing surge tomorrow.

Stocks Lower into the Final Hour on Healthy Profit-taking, Lingering Sub-prime Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Semi longs and I-Banking longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is very negative today as the advance/decline line is substantially lower, most sectors are declining and volume is above average. Yesterday afternoon, a fellow RealMoney Silver contributor said that he was considering building his long airline position in a meaningful way. I have to say that I am considering an airline long as well. This group is always despised, and, while not historically good long-term investments, they make excellent trading vehicles at times. I sense one of those times is fast approaching. Oil has moved up to $75 per barrel, stories of horrific waits on runways fill the airwaves, and analysts have recently turned more negative on the group. However, the Airline Index has been trending higher since mid-June, ignoring this news. According to my data, large speculative oil traders have never been this net long crude in history. This was the case last year when I wrote my post "17 Reasons for Energy Prices Peak" on Street Insight, with oil above $70 per barrel and right before it plunged $28 per barrel in less than six months, which sent the broad market and airlines flying. In my opinion, the fundamentals for oil are even worse this year, and its recent spike higher is solely a function of the mania for the commodity by funds trying to make up for recent relatively poor performance. The average commodity fund fell around 7% last year and is just marginally higher year-to-date. While a downside catalyst for oil could occur, I suspect crude will begin another meaningful decline anyway as the peak in hurricane season approaches over the next six weeks. My favorite airlines to consider for a long trade are Delta Air Lines (DAL), AMR Corporation (AMR) and Continental Airlines (CAL). I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower long-term rates and bargain-hunting.