Stocks Surging into Final Hour on Bargain-Hunting, Short-Covering, Less Pessimism

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Semi longs, Biotech longs, Computer longs and Energy shorts. I have not traded today, thus leaving the Portfolio 75% net long. The overall tone of the market is mildly positive today as the advance/decline line is slightly higher, most sectors are rising and volume is above average. My intraday gauge of investor angst is at an elevated level again. Other measures of anxiety are near or above the levels seen at the March market lows. We have been hearing for two years that the housing downturn would lead to an imminent economic decline as consumer spending collapses, sending unemployment soaring. I see no evidence of this. The latest consumer confidence report just hit new cycle highs, jobless claims are falling to low levels and retail sales are accelerating. And that is with oil at record highs and housing-related fear stories rampant in the media. I continue to believe the recent credit turmoil will remain a financial event and not an economic one. I see consumer spending actually accelerating to above-average rates this autumn as energy prices fall meaningfully, interest rates remain low, inflation decelerates to low rates, consumer sentiment rises further, stock gains continue, wages continue to substantially outpace inflation, housing fears subside and unemployment remains historically low. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, more economic optimism and short-covering.

Today's Headlines

Bloomberg:
- Prudential Financial(PRU) said it’s still buying securities backed by subprime mortgages and expects turmoil in the market to cost the company no more than $150 million over five years.
- MBIA Inc.(MBI), the world’s largest bond insurer, told investors today that the turmoil in the subprime mortgage market poses “no threat” to the $114 billion of collateralized debt obligations the company has insured.
- US brokers’ shares have fallen to historically low levels due to “panic” selling and should rebound when investors factor in the firms’ earning potential, Keefe, Bruyette & Woods said.
- Barnaby Martin, chief European credit strategist at Merrill Lynch(MER) sees demand for collateralized debt obligations or CDOs picking up by year-end.
- Natural gas futures in NY declined 4% as inventories rose toward a record as industrial demand waned further, easing concern of possible supply disruptions from storms and heat-driven demand.
- Beazer Homes(BZH) shares rallied after hedge fund Citadel Investment Group LLC almost doubled its stake in the homebuilder.

Wall Street Journal:
- A team led by Alliant Techsystems(ATK) may sign a $1.5 billion design-and-development contract for Ares I solid-fuel boosters in the next few days, citing aerospace industry officals.
- VMware’s Fusion program allows Apple’s(AAPL) Macintosh personal computers to run the Apple operating system and Microsoft’s(MSFT) Windows seamlessly, Walter Mossberg wrote.
- Google Inc.(GOOG) has suggested that wireless operators, including T-Mobile USA and Verizon Wireless(VZ), offer handsets designed for Google products such as searches, e-mail and a mobile Web browser.
- Wal-Mart(WMT) has boosted sales and frustrated rivals by promoting well-known consumer electronics brands at lower prices.

NY Post:
- The vacancy rate for lower Manhattan office space has dropped to 6.7%, almost the level it was in the months preceding the Sept. 11, 2001, terrorist attacks, citing a study.

Boston Globe:
- The collapse of Sowood Capital Management LP cost the Massachusetts state pension system $30 million.

Gulf News:
- High inflation in the Persian Gulf will slow real gross domestic product growth, citing a report from the National Bank of Dubai.

Job Market Still Very Healthy, Factory Orders Rise

- Initial Jobless Claims for last week fell to 307K versus estimates of 310K and 303K the prior week.

- Continuing Claims rose to 2525K versus estimates of 2548K and 2541K prior.

- Factory Orders for June rose .6% versus estimates of a 1.0% gain and a -.5% decline in May.

BOTTOM LINE: First-time claims for jobless benefits rose less than forecast last week, indicating the labor market is still expanding, Bloomberg said. The four-week moving average of claims fell to 305,500 from 309,000 the prior week. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, held steady at a historically low 1.9%. We have been hearing for two years that the housing downturn would lead to an imminent economic decline as consumer spending collapsed, sending unemployment soaring. I see no evidence of this. The latest consumer confidence report just hit new cycle highs, jobless claims are falling to historically low levels and retail sales are accelerating. And that is with oil at record highs and housing-related fear stories rampant in the media. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

Orders placed with American factories rose in June as international buyers, buoyed by the strongest global expansion since the 1970s, bought more aircraft. Orders for durable goods, which make up over half of total factory demand, surged 1.3% in June versus a 2.4% decline the prior month. Today’s report showed business spending plans were unchanged in June, a revision from a previously reported drop. Bookings for capital goods ex aircraft and military equipment, a gauge of future business investment, were unch. after declining 1.5% in May and up from a previous estimate of a .7% decline. I continue to believe manufacturing will add to economic growth through year-end as companies gain more confidence in the sustainability of the current expansion as consumer spending accelerates and rebuild inventories from depleted levels.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- A bridge in Minneapolis collapsed today, causing vehicles to fall into the Mississippi River. At least three people were killed.
- China is failing to ease restrictions of human rights activists and is intensifying its crackdown on the media a year before the Beijing Olympics, Human Rights Watch said.
- Mattel’s(MAT) Fisher-Price division is recalling 967,000 Sesame Street, Dora the Explorer and other children’s toys manufactured in China that may contain paint with “excessive levels” of lead.
- Toyota Motor and Honda Motor led Asian carmakers to a record share of US auto sales in July sending their US rivals below the 50% threshold for the first time.
- BMW AG, the world’s largest luxury-car maker, gained US sales in July on young buyers’ demand for the 3-Series sport sedan while other European brands suffered declines.
- Turmoil in global financial markets, while posing a risk to economic growth, isn’t “unsettling,” said John Lipsky, first deputy managing director of the International Monetary Fund.
- Families who lost relatives at the World Trade Center applied for a permit to gather at the site for the anniversary of the Sept. 11 terrorist attack, opposing city and state officials who have moved the ceremony to a nearby lower Manhattan park.
- Shares of Macquarie Bank Ltd. and Babcock & Brown Ltd., Australia’s biggest investment banks, rebounded from yesterday’s slump after the companies said earnings were unaffected by the rout in global credit markets.

Wall Street Journal:
- News Corp.(NWS/A) Chairman Rupert Murdoch, having finalized a deal to buy The Wall Street Journal’s publisher, Dow Jones(DJ), is expected to turn his attention to figuring out his strategy for each of its businesses.

MarketWatch.com:
- Concern about American International Group’s exposure to subprime mortgages is overdone, analysts said on Wednesday.
- Highland Capital Management LP has generated strong performance this year betting against subprime mortgages and is well positioned to benefit from recent turmoil in credit markets, according to a letter the $40 billion investment firm sent to clients on Wednesday.

CNN.com:
- Why stocks can shake off mortgage meltdown. Turmoil in the credit markets is sparking a global sell off, but are investors overreacting?

Financial Times:
- Walt Disney made its first acquisition in social networking on Wednesday, buying Club Penguin, which operates an online virtual world for children, for a fee that could eventually rise to $700m.
- Rupert Murdoch is likely to take control of Dow Jones(DJ) within three months, staff learnt on Wednesday, as the News Corp.(NWS/A) chairman moved to lock in the support of other shareholders after winning the backing of enough members of the Bancroft family.

London-based Times:
- UK manufacturing activity increased in July despite a strong pound, soaring oil prices and higher interest rates, citing the CIPS/NTC purchasing managers’ index.

Nikkei:
- Japan’s Cabinet Office will revise the government’s projections for both real and nominal gross domestic product growth for fiscal 2007 to 2.1%. That would represent a .1 percentage point increase in real growth.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (SPW), target $105.
- Reiterated Sell on (Q), target $7.
- Reiterated Buy on (CBI), target $50.

Night Trading
Asian Indices are unch. to +1.50% on average.
S&P 500 futures +.07%.
NASDAQ 100 futures +.01%.

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Earnings of Note
Company/EPS Estimate
- (ATVI)/.06
- (ATK)/1.36
- (AMT)/.05
- (B)/.48
- (BCO)/.58
- (CKP)/.26
- (CHK)/.65
- (CQB)/.49
- (CLX)/1.10
- (CVS)/.46
- (EK)/.09
- (EXPE)/.33
- (FAF)/.93
- (GMCR)/.14
- (IN)/.06
- (IP)/.54
- (KBR)/.29
- (LEA)/.91
- (MGM)/.58
- (NEM)/.22
- (NYX)/.63
- (PWR)/.17
- (RDC)/1.04
- (HOT)/.63
- (TBL)/-.31
- (VSE)/.14
- (VIA/B)/.49
- (WMB)/.36

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Initial Jobless Claims for last week are estimated to rise to 310K versus 301K the prior week.
- Continuing Claims are estimated to rise to 2548K versus 2545K prior.

10:00 am EST
- Factory Orders for June are estimated to rise 1.0% versus a -.5% decline in May.

Other Potential Market Movers
- The ECB Policy Meeting, weekly EIA natural gas inventory report, CIBC Communications Tech Conference and ThinkEquity ThinkBIG Conference could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by mining and financial stocks in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the day.

Stocks Soar into Close on Short-covering, More Economic Optimism, Bargain-hunting

Indices
S&P 500 1,465.81 +.72%
DJIA 13,362.37 +1.14%
NASDAQ 2,553.87 +.30%
Russell 2000 777.91 +.23%
Wilshire 5000 14,713.02 +.54%
Russell 1000 Growth 589.16 +.60%
Russell 1000 Value 822.70 +.61%
Morgan Stanley Consumer 708.80 +1.14%
Morgan Stanley Cyclical 1,041.67 -.19%
Morgan Stanley Technology 630.27 +.78%
Transports 5,045.97 +.32%
Utilities 489.46 +2.11%
MSCI Emerging Markets 132.42 -2.11%

Sentiment/Internals
Total Put/Call 1.36 +14.29%
NYSE Arms .66 -73.26%
Volatility(VIX) 23.67 +.64%
ISE Sentiment 101.0 -3.81%

Futures Spot Prices
Crude Oil 76.65 -1.99%
Reformulated Gasoline 203.30 -3.46%
Natural Gas 6.40 +3.38%
Heating Oil 207.10 -2.46%
Gold 677.50 -.26%
Base Metals 254.80 -2.05%
Copper 358.40 -1.77%

Economy
10-year US Treasury Yield 4.78% +4 basis points
US Dollar 80.83 +.08%
CRB Index 319.87 -1.31%

Leading Sectors
Disk Drives +2.37%
Utilities +2.11%
Telecom +1.77%

Lagging Sectors
Oil Service -1.35%
I-Banks -1.59%
Gold -1.96%

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Afternoon Recommendations
Bank of America:
- Rated (DELL) Buy, target $35.
- Rated (SUNW) Buy, target $6.25.
- Rated (HPQ) Buy, target $56.

Afternoon/Evening Headlines
Bloomberg:
- Starbucks Corp.(SBUX), the world’s largest coffee shops, said third-quarter profit rose 8.8% on sales from new stores and demand for chilled drinks. The stock surged 4.1% in after-hours trading.
- Dolby Labs(DLB) reported total revenue of $119.6 million, compared to $93.7 million for the third quarter of fiscal 2006, an increase of 28%. The stock is rising 9% in extended trading.
- Invitrogen(IVGN) reported revenues for the second quarter were $322 million, an increase of 13% over the $285 million for 2006. The stock rose 7.6% in after-hours trading.
- The Gordon and Betty Moore Foundation, established by the co-founder of Intel Corp.(INTC) and his wife, pledged $100 million to the Univ. of Cal., Davis for a professional nursing school.
- The International Monetary Fund said the US economy is likely to have a “soft landing” as growth continues in the face of the subprime mortgage concerns.
- Gasoline futures in NY fell 3.3%, the lowest in almost four months, after an energy dept. report today showed a second week of inventory gains as oil inventories remain near decade highs.
- Ethanol prices fell 5.1% in Chicago after a government report showed production increased 38% over the year before and gasoline futures fell.

BOTTOM LINE: The Portfolio finished higher today on gains in my Retail longs, Computer longs, Networking longs and Commodity shorts. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was mildly negative today as the advance/decline line finished modestly lower, sector performance was mixed and volume was heavy. Measures of investor anxiety were elevated into the close. Today's overall market action was bullish. The explosive move higher on the close likely left many traders heavily leaning the wrong way. As well, with Asian stocks taking 3%+ hits overnight, I suspect those traders will be quite shocked to come in to their offices and see the DJIA up 150, given the news today. I think the main tell for the close today -- and possibly an indication that we may have seen a meaningful bottom -- came when Beazer Homes (BZH) dropped 42%, yet the broad market held relatively firm. I suspect Asian stocks will see a nice bounce tonight, which should lead to further upside in US and European shares tomorrow morning. Growth stocks are still the cheapest in at least 30 years relative to value stocks on a price-to-cash flow basis. Leading growth stocks have crushed the performance of the major averages this year, have held up better during this pullback and should continue outperforming substantially going forward. Six of the stocks on which I have disclosed that I am long for the last two years -- Google (GOOG, +11.2%), Apple (AAPL, +57%), Intuitive Surgical (ISRG, +120%), Under Armour (UA, +27%), Quanta Services (PWR, +40%) and Gilead Sciences (GILD, +14%) -- are prime examples of this massive outperformance year-to-date, and these are just a few examples. There are many others. Moreover, the Russell 1000 Growth Index is still 7.1% higher year-to-date vs. a 1.9% gain for the Russell 1000 Value Index. Midcap growth is 8.6% higher for the year vs. a 3.1% gain for midcap value. Finally, the Russell 2000 Growth Index is 4.0% higher year-to-date vs. a 4.8% loss for the Russell 2000 Value Index. A significant change is under way toward multiyear growth stock outperformance, in my opinion, and this continues to be ignored by most investors.