Stocks Lower into Final Hour on Profit-taking, Earnings Jitters, Lingering Subprime Concerns

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Semi longs, Computer longs, Medical longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative today as the advance/decline line is substantially lower, most sectors are declining and volume is heavy. My intraday gauge of investor angst is elevated, which is a positive. Cyclicals and small-caps are especially weak today. However, several sectors are hanging tough, including computer hardware, disk drives, oil service, defense and medical stocks. As well, an unusual number of stocks on my monitor pages are higher given headline losses. The 10-year yield is plunging another 6 basis points to, 4.95%. As I said when the 10-year yield was soaring in June, I still think the yield will fall to at least 4.75% later this quarter as inflation expectations diminish further. This will eventually be perceived as a large positive, especially for growth stocks. Google (GOOG) reported a slight disappointment after the close yesterday. I still think that the company is doing all the right things to become a monopoly in its fast-growing market and laying the groundwork to dominate many other Internet markets. I added a bit to my long yesterday in after-hours at around $511 and still expect it to easily surpass $600 before year-end. Intuitive Surgical (ISRG), on the other hand, is soaring 32% on a stellar report. I also think this is another example of a short squeeze. Short interest in the shares and the put/call open interest ratio are near records. As I said when ISRG was correcting last year down around $90, I still think the company has the potential to be one of the best growth stocks over the next decade. I remain long the shares. The NYSE reported yesterday after the close that short interest on the exchange surged another 3.9%, building on its recent parabolic rise and making another record high. I continue to believe this is unsustainable, and I will post more details on it next week. I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower long-term rates, falling energy prices and bargain-hunting.

Today's Headlines

Bloomberg:
- The Fed’s Poole said that the sub-prime mortgage problem should remain isolated and that inflation expectations seem well contained.
- Corn futures in Chicago headed for the biggest weekly drop in 10 years and soybeans fell on speculation rains and cooler weather will promote development of the two biggest US crops.
- Sugar is falling in NY on speculation that India, the second-largest producer, may offer to sell unrefined supplies of the sweetener, adding to a global surplus.
- Natural gas futures in NY fell again, dropping 4%, on signs that US supplies are poised to break record levels this year.

Wall Street Journal:
- T.Boone Pickens, chairman of Dallas-based BP Capital LLC, wants to set up retail natural-gas transportation fueling stations in China to help cut pollution.
- Google Inc.(GOOG) started offering Internet tools, including free online advertisements, to politicians as a way to help them get elected.
- John Edwards, the third-ranking Democratic candidate for president, continues to hold sway over much of the party’s debate on Iraq, health care and other issues.
- The SEC may amend the rule which allows fund companies to charge marketing fees, known as 12b-1 fees, citing SEC Chairman Christopher Cox.

NY Times:
- US congressional Democrats are delaying an overhaul of the country’s voting system after receiving pressure from state and local officials and advocates for the disabled.

USA Today:
- US cities need to spend $1.6 trillion during the next five years to replace or rebuild aging roads, water systems, dams and airport runways, citing an engineering trade group.

AP:
- A plan to commemorate the sixth anniversary of the World Trade Center attacks in a small park is opposed by victims’ families. In a letter this week, family groups called the Trade Center “sacred ground” and questioned whether the crowds of mourners would be accommodated at Zuccotti Park, southeast of the site and about three-quarters of an acre in size.
- A military device found on a NJ women’s lawn today was inoperable and didn’t pose a hazard, citing police.
- Major General Richard Lynch, commander of US forces south of Baghdad, said it will take until late this year to defeat militants and until next summer to secure gains made by US soldiers. Reversing the US troop buildup in Iraq would risk giving up the progress American soldiers have made, he said. Yesterday, Lieutenant General Ray Odierno, the day-to-day commander of US forces in Iraq, said that al-Qaeda been placed on the defensive by a monthlong US offensive.

Economic Releases

- None of note

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Friday Watch

Late-Night Headlines
Bloomberg:
- The yen traded near a record low against the euro and a 16-year low versus Australia’s dollar as gains in global stocks encouraged investors to borrow in Japan’s currency to buy assets elsewhere.
- China is likely to raise interest rates this quarter to cool inflation and investment. Some economists expect an increase today.
- Chinese bonds, Asia’s worst performers this year, will drop further should the central bank raise interest rates and cut taxes on deposit income, according to China Galaxy Securities.
- China’s government said unregistered fish farms were responsible for producing the seafood that was found by the FDA to contain banned chemical substances.
- Korea Gas Corp., the world’s largest buyer of liquefied natural gas, plans to increase storage capacity 72% by 2012 to meet higher demand for the fuel during winter months.
- China, the world’s biggest producer of steel, said it boosted crude-steel output by 19% to 240 million tons in the first half of this year from a year earlier.
- Light-emitting diodes started as the little red indicators on clock radios and are backlights in most cell phones. Now the LEDs are helping Apple Inc.(AAPL) and Sony Corp.(SNE) slim down computers and televisions and cut power usage.
- Dow Jones(DJ) director Dieter von Holtzbrinck resigned, saying he couldn’t support the board’s recommendation that the Wall Street Journal publisher be sold to Rupert Murdoch’s News Corp.(NWS/A).

Business Week:
- Viacom Inc.(VIA/B), owner of the Paramount film studio, might lose director Steven Spielberg and the DreamWorks name after buying the company last year for $1.53 billion.
- Brink’s Co.(BCO) is under pressure to split its armored-truck and security-services businesses into two publicly traded companies.

Dow Jones:
- The United Auto Workers union and Lazard Ltd. have been discussing ways to restructure retirees’ health-care benefits to help limit the cash drain on US automakers.

China Securities Journal:
- China’s economic policy makers should reconsider whether the country’s 3% inflation target is suitable and weight the possibility of raising it, citing unidentified Chinese experts. The consumer price index is likely to surpass 4% or “remain at a high level” in the next reporting period. Inflation, tracked by the price index, may even exceed 5% for a single month.

Late Buy/Sell Recommendations
Business Week:
- Pipex Pharmaceuticals(PP) stock may double in a year as the company’s drug pipeline draws investors, citing Steven Winters, president of Gemini Strategies.
- Research Frontiers(REFR) will probably have a large stock bounce when the company’s major licensees sign up for its light-control technology.

Night Trading
Asian Indices are +.50% to +1.50% on average.
S&P 500 futures -.10%.
NASDAQ 100 futures -.16%.

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Earnings of Note
Company/EPS Estimate
- (BSX)/.09
- (CAT)/1.49
- (C)/1.14
- (GAP)/-.30
- (SLB)/.96
- (WB)/1.22
- (WHR)/1.87

Upcoming Splits
- None of note

Economic Releases
- None of note

Other Potential Market Movers
- The Fed’s Poole speaking, SEMICON West and the (SCHW) Business Update could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by commodity and technology stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

DJIA Closes Above 14,000 for First Time on Positive Earnings, Short-Covering, Surging Tech Sector

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