Stocks Surging into Final Hour on Bargain-Hunting, Short-Covering, Diminished Credit Fears

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Medical longs, Semi longs and Retail longs. I covered my (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 100% net long. The overall tone of the market is positive today as the advance/decline line is higher, most sectors are rising and volume is heavy. My intraday gauge of investor angst is at an above-average level. I continue to believe recent credit fears are way overdone. We have been hearing for a couple of years now that a recession was imminent as consumer spending plunged as a result of housing. Second-quarter GDP came in at a very healthy 3.4%. As well, the core PCE showed a substantial deceleration, even with $70 oil. Inflation readings are already below long-term average rates. If oil falls meaningfully from current levels, as I suspect, inflation readings will actually reach low rates. Even if stocks stabilize and begin moving higher over the coming weeks, as I expect, I do not believe the 10-year yield will move anywhere near the 5.32% seen six weeks ago as a result of the substantial deceleration in inflation I foresee. As well, GDP growth should average around 3% through year-end, which will provide a very positive backdrop for investing as earnings continue to exceed estimates. I also see the Nasdaq outperforming the other major averages as growth stocks, specifically technology growth stocks, lead the broad market substantially higher. Growth stock outperformance last week was incredible, which will likely result in more large investors increasing exposure to these types of stocks that can grow meaningfully, even if global growth slows from recent booming levels. Again today, many quality growth stocks I monitor are posting huge gains, substantially outperforming the major averages. As well, several indicators I monitor are exceeding the extreme levels seen at the March market lows. Odd-lot short-selling soared last week, easily eclipsing levels seen during the previous fear spike in March. As well, the CBOE total put/call surged near March levels, and NYSE Advancing-Declining Volume surpassed March levels last week. Finally, the Rydex Nova/Ursa Ratio and NYSE Ticks exceeded levels seen during the March lows. These are several of the indicators I follow that are around levels normally associated with meaningful market bottoms. While there could be more near-term turbulence, I still expect stocks to rise substantially from current levels as credit/housing fears subside, interest rates remain low, M&A activity surges into the fall, energy prices fall meaningfully, inflation decelerates further, consumer/investor sentiment rises, consumer spending accelerates, the U.S. dollar firms, earnings continue to exceed estimates, unemployment remains historically low, wages continue to substantially outpace inflation, and technology spending accelerates. I still expect the S&P 500 to return about 17% for the year. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, diminishing credit fears and short-covering.

Today's Headlines

Bloomberg:
- Citadel Investment Group LLC took over Sowood Capital Management’s credit holdings after the Boston-based hedge-fund manager suffered losses on corporate bonds and loans.
- Morgan Stanley’s(MS) credit rating was raised one level to AA- from A+ by S&P, which said improvements in the firm’s “competitive position” will enable it to ride out market declines.
- HSBC Holdings(HBC), the world’s fourth-largest bank and one of the first to warn of sub-prime problems, said first-half profit rose 25%, beating analysts’ estimates.
- Gasoline futures fell again before a weekly Energy Dept. supply report that may show a second consecutive inventory increase during the heart of driving season.
- Rupert Murdoch’s News Corp.(NWS/A) said it is “highly unlikely” to proceed with a $5 billion bid for Dow Jones(DJ) without more support from the publisher’s controlling Bancroft family. Dow Jones shares plunged as much as 9.1%.
- China’s government curbed bank lending for a sixth time this year to cool the economy after the fastest expansion since 1994.

Wall Street Journal:
- The US Pension Protection Act of 2006, which allows automatic enrollment of workers into 401(k) retirement plans, will greatly expand the pool of investors, Charles Schwab, CEO at Charles Schwab(SCHW) said.
- The Sierra Club notified Target Corp.(TGT), Dollar General(DG) and RC2 Corp.(RCRC) and seven other US companies they are required to file reports with the US Environmental Protection Agency over lead contamination in toys and other products from China.
- Global energy shares may not be a good place for investors seeking to weather a clampdown on credit because the industry’s profit may have peaked.
- LS9 Inc., a renewable petroleum company based in Silicon Valley, California, maintains it has developed a new way to extract energy from plant sugars.
- Goldman Sachs(GS) is boosting the size of a corporate debt fund it is starting to $20 billion take advantage of the turmoil in credit markets.
- Whirlpool Corp.(WHR) is using cardboard, Styrofoam and computers to eliminate dents, dings and scrapes that add millions to production costs annually.

Forbes.com:
- Gasoline prices could decline by 2010 amid a “potential oversupply” of oil products, even though US refining capacity will be expanded less than previously thought, according to a new report by Edinburgh, Scotland-based consultancy Wood Mackenzie LTD.

NY Post:
- NY Democratic Governor Eliot Spitzer’s administration prevented investigators from questioning two top aides in a probe of the governor’s use of state police to collect records on a political rival.

Financial News:
- World issuance of investment-grade bonds is at nearly a three-year low, citing Thomson Financial.

Economic Releases

- None of note

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Moday Watch

Weekend Headlines
Bloomberg:
- Investors are preparing to snap up shares of telephone, health-care and computer companies after last week’s $2.1 trillion global stock market rout left US equities the cheapest in 16 years.
- Schroder, ABN, Wells Load Up on Stocks in Worst Rout Since 2002.
- Barclays Plc shares may rise this week after reports that ABN Amro Holding NV’s board will withdraw its support for a bid from the UK’s third-largest bank.
- Doosan Infracore Co., South Korea's largest construction-equipment maker, said it signed an agreement to buy a unit of Ingersoll-Rand Co. for $4.9 billion to expand its overseas business.
- New York state voters say Democratic Governor Eliot Spitzer should testify under oath about how much he knew of his staff’s actions to use state police in an effort to spy on a political opponent, according to a WNBC/Marist poll.
- Iraq won its first Asian Cup soccer title by beating three-time champion Saudi Arabia 1-0 in today’s final in Indonesia.
- US Treasury Secretary Henry Paulson, rejecting claims from Congress that he’s too soft on China, said negotiations rather than sanctions have led to a faster appreciation of the yuan.
- Automakers are embracing legislation in the US House that would raise fuel-economy standards, abandoning years of resistance because of concerns they might otherwise be forced to accept even tougher measures.
- Japan’s industrial production increased in June, ending the worst manufacturing slump in almost two years and easing concern that growth in the world’s second-largest economy may falter. Higher overseas demand is driving profits at Toshiba Corp. and Toyota Motor and encouraging them to make more chips and cars.

Wall Street Journal:
- Investors wondering what to do after the past week’s stock-market turbulence shouldn’t be throwing in the towel. Fast-growing big companies could be poised to move higher in coming months.
- A rice research institute in the Philippines, which helped boost Indian crop yields beginning in the 1960s, is once again trying to develop new varieties adaptable to drought.
- The turmoil in the credit markets is beginning to wound some high-profile hedge-fund managers – but it’s prompting others to swoop in an snap up some beaten-down assets.
- Some Hard-Hit Cities See Signs of a Housing Market Turnaround.

NY Times:
- A senior member of the Bancroft family, which controls Dow Jones(DJ), has changed his mind and now supports selling the company to News Corp.(NWS/A).
- Hedge-fund firm Sowood Capital, founded by a former Harvard Management manager, is down about 10% this year after bond losses stemming from subprime mortgage turmoil.
- When it comes to making asset allocation decisions in your portfolio, it is best not to be dogmatic. That is the conclusion of a new study, which found that investors are likely to do better over the long term by resisting the advice of those who take extreme positions about how much of their portfolios should be allocated among the various assets classes.
- After years of being accused by Western nations of making only token gestures to fight fake goods and months of complaints about the safety of its exports, China is taking extraordinary steps to change its image.
- Microsoft is beset with competition from all sides, unlike any it has seen in decades, and Bill Gates, who co-founded the company 32 years ago, still intends to step away next year as planned.
- Facebook, the online social network, has stolen some of MySpace’s momentum with users and the news media. Now, it is being subjected to the same accusations that it does not do enough to keep sexual predators off its site.

TheStreet.com:
- Seven Reasons to Be Bullish Now.

MarketWatch.com:
- Despite Thursday, top market timing newsletters remain bullish.

- Duo of Google and Sprint could put AT&T in a headlock.

AP:
- Google Inc. may install by September a system to prevent copyright-infringing videos from being posted on its YouTube Web site, citing company lawyer Phillip Beck.
- EBay Inc.(EBAY) may use its “buy it now” feature even though the US Supreme Court ruled its infringed upon MercExchange’s patent, citing US District Judge Jerome Friedman.

LA Times:
- Walt Disney(DIS) dropped its plan to sell wine named after the Disney-Pixar movie “Ratatouille” at Costco Wholesale Corp.(COST) stores because of complaints from California winemakers and concerns over underage drinking, citing company spokesman Gary Foster.

CNNMoney.com:
- Is sourcing in China worth it? Businesses weigh the costs and benefits, in the wake of product recalls and bans.

Boston Globe:
- ‘Aesthetic medicine’ firms hope vanity has its price.
- Boston’s Brigham and Women’s Hospital plans to let a group of surgeons provide partial face transplants to patients with disfigured features.

NY Post:
- Tom Cruise’s United Artists movie studio and Merrill Lynch(MER) may complete a $500 million film-financing agreement by mid-August.

San Jose Mercury News:
- More than half of all babies born in California were delivered by Latina mothers in 2004 and the state could have an Hispanic majority by 2050, citing demographers and its own research.

Seattle Times:
- Microsoft Corp.(MSFT) co-founder Paul Allen is funding more documentary films, including one on climate change, adding to 20 movies financed by his production company.

Reuters:
- The technology company Google Inc.(GOOG) is the biggest gainer in Interbrand’s annual ranking of the top 100 Global Brands.(video)
- US average retail gasoline prices fell 17 cents per gallon over the past two weeks as Midwest refiners recovered from recent “difficulties” and produced more gas, an industry analyst said.

Financial Times:
- China’s steelmakers received more than $52 billion of government subsidies over the past decade, enabling them to sell products cheaper than international rivals, citing a report commissioned by the American Iron and Steel Institute.
- Carlos Ghosn, Nissan Motor’s CEO, said he will continue to seek an alliance with one of the three US domestic automakers.

Daily Telegraph:
- China and the other emerging giants have started to use their colossal reserves to buy Western companies.

The Times:
- Goldman Sachs(GS) is planning to launch a $10 billion hedge fund, which for the first time will be run by its own proprietary traders.

Spiegel:
- Deutsche Bank AG, Germany’s largest bank, will stop its business in Iran.

IMF Survey Magazine:
- Global Growth Seen at 5.2% in 2007.

Weekend Recommendations
Barron's:
- Made positive comments on (CME), (DD), (INAP), (HD), (GRMN) and (IBKR).
- Made negative comments on (REDF) and (AMZN).

Citigroup:
- Reiterated Buy on (MSFT), target $36.
- Upgraded (VECO) to Buy, target $25.

Night Trading
Asian indices are -1.0% to -.25% on average.
S&P 500 futures +.08%.
NASDAQ 100 futures unch.

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Earnings of Note
Company/Estimate
- (ACV)/.24
- (APC)/.77
- (ANDW)/.17
- (ADM)/.58
- (CBG)/.42
- (CNA)/1.09
- (FPL)/.80
- (HUM)/1.28
- (JAH)/.57
- (LTR)/.98
- (MNST)/.34
- (OSIP)/.27
- (PBI)/.70
- (PPS)/.04
- (RSH)/.25
- (SUNW)/.05
- (TSN)/.24
- (VZ)/.59
- (VMC)/1.46

Upcoming Splits
- (SJR) 2-for-1

Economic Releases
- None of note

Today’s Other Potential Market Movers
- None of note

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

Weekly Outlook

Click here for Economic Preview by MarketWatch.com.

Click here for Stocks in Focus for Monday by MarketWatch.com.

There are several economic reports of note and a number of significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. – None of note

Tues. – Personal Income, Personal Spending, PCE Deflator, 2Q Employment Cost Index, S&P/CS Composite Home Price Index, Chicago Purchasing Manager, Consumer Confidence, Construction Spending, weekly retail sales

Wed. – Weekly MBA Mortgage Applications report, weekly EIA energy inventory report, Challenger Job Cuts, ADP Employment Change, Pending Home Sales, ISM Manufacturing, ISM Prices Paid, Total Vehicle Sales

Thur. – Initial Jobless Claims, Factory Orders

Fri. – Change in Non-farm Payrolls, Unemployment Rate, Average Hourly Earnings, ISM Non-Manufacturing

Some of the more noteworthy companies that release quarterly earnings this week are:

Mon. – Anadarko Petroleum(APC), Andrew Corp.(ANDW), Archer-Daniels-Midland(ADM), CB Richard Ellis(CBG), CNA Financial(CNA), Humana(HUM), Loews Corp.(LTR), Monster Worldwide(MNST), Pitney Bowes(PBI), Post Properties(PPS), RadioShack(RSH), Tyson Foods(TSN), Verizon Communications(VZ), Vulcan Materials(VMC)

Tues. – Automatic Data Processing(ADP), Avon Products(AVP), Buffalo Wild Wings(BWLD), Cephalon(CEPH), Chipotle Mexican Grill(CMG), Coach Inc.(COH), Diebold(DBD), DreamWorks(DWA), General Motors(GM), Hilton Hotels(HLT), IAC/InterActiveCorp.(IACI), ImClone Systems(IMCL), Liz Claiborne(LIZ), Marathon Oil(MRO), Masco Corp.(MAS), MetLife Inc.(MET), Nymex Holdings(NMX), Ruth’s Chris(RUTH), Safeco(SAF), Shaw Group(SGR), St. Joe(JOE), Under Armour(UA), Valero Energy(VLO), WebMD Health(WBMD), Whole Foods(WFMI)

Wed. – Administaff(ASF), Alltel Corp.(AT), Applebees(APPB), Boyd Gaming(BYD), CA Inc.(CA), Cigna(CI), Computer Sciences(CSC), Devon Energy(DVN), Dolby Labs(DLB), Dominion Resources(D), Electronic Arts(ERTS), Garmin(GRMN), Given Imaging(GIVN), GlobalSanataFe(GSF), Kraft(KFT), Martha Stewart(MSO), Mastercard(MA), OfficeMax(OMX), Prudential Financial(PRU), Starbucks(SBUX), Time Warner(TWX), Transocean(RIG), Walt Disney(DIS), Wynn Resorts(WYNN)

Thur. – Barnes Group(B), Clorox(CLX), Eastman Kodak(EK), Expedia(EXPE), Intl. Rectifier(IRF), International Paper(IP), Lear(LEA), MGM Mirage(MGM), Newmont Mining(NEM), NYSE Euronext(NYX), Rowan Cos(RDC), Starwood Hotels(HOT), Timberland(TBL)

Fri. – Armor Holdings(AH), Procter & Gamble(PG), Weyerhaeuser(WY)

Other events that have market-moving potential this week include:

Mon. – None of note

Tue. – Keefe, Bruyette & Woods Community Bank Investor Conference, (LSI) Analyst Day

Wed. – Keefe, Bruyette & Woods Community Bank Investor Conference, BOE Policy Meeting

Thur. – CIBC Communication Tech Conference, ThinkEquity Partners ThinkBIG Conference, BOE Policy Meeting, ECB Policy Meeting

Fri. – None of note

BOTTOM LINE: I expect US stocks to finish the week modestly higher on better-than-expected earnings reports, mostly positive economic data, bargain-hunting, lower energy prices and short-covering. My trading indicators are giving neutral signals and the Portfolio is 75% net long heading into the week.