Stocks Soar on Heavy Volume as Economic Pessimism Diminishes

Indices
S&P 500 1,497.49 +1.41%
DJIA 13,657.86 +1.14%
NASDAQ 2,612.98 +2.01%
Russell 2000 795.64 +2.78%
Wilshire 5000 15,006.42 +1.48%
Russell 1000 Growth 601.30 +1.44%
Russell 1000 Value 839.08 +1.33%
Morgan Stanley Consumer 727.48 +1.08%
Morgan Stanley Cyclical 1,043.75 +1.27%
Morgan Stanley Technology 638.34 +1.58%
Transports 5,079.39 +1.44%
Utilities 506.73 +.70%
MSCI Emerging Markets 134.69 +2.8%

Sentiment/Internals
Total Put/Call .98 -4.85%
NYSE Arms .79 +9.21%
Volatility(VIX) 21.45 -.51%
ISE Sentiment 121.0 +137.25%

Futures Spot Prices
Crude Oil 72.25 -.23%
Reformulated Gasoline 193.42 -.51%
Natural Gas 6.25 +.85%
Heating Oil 197.24 +.42%
Gold 685.40 +.45%
Base Metals 247.55 -1.17%
Copper 344.80 -1.67%

Economy
10-year US Treasury Yield 4.86% +10 basis points
US Dollar 80.34 -.18%
CRB Index 313.05 +.09%

Leading Sectors
Homebuilders +5.0%
REITs +4.06%
Internet +3.37%

Lagging Sectors
Defense -.31%
Tobacco -.60%
HMOs -3.13%

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In Play

Afternoon Recommendations
Bank of America:
- Rated (PCLN) Buy, target $96.
- Rated (EXPE) Buy, target $35.

Afternoon/Evening Headlines
Bloomberg:
- US stocks continued their recovery from a three-week rout after Cisco Systems(CSCO) raised its sales forecast and speculation increased that banks and homebuilders may have weathered the worst of a subprime mortgage shakeout.
- Volume on the Nasdaq exchange hit 3.67 billion shares today, the second highest volume day on record.
- President Bush and Treasury Secretary Paulson played down gyrations in financial markets and said the US economy is “strong”, requiring no change in government policy.
- William Dunkelberg, chief economist at the National Federation of Independent Business sees “no major threat” in credit markets.
- The risk of owning corporate bonds fell again as concerns eased that losses from subprime mortgages will slow the US economy.
- US Housing and Urban Development Secretary Alphonso Jackson said the government may raise the limit on purchases of home loans by Fannie Mae(FNM) and Freddie Mac(FRE) in order to increase liquidity in the mortgage market.
- Crude oil fell again in NY, reversing earlier gains, after a report showed declining US gasoline consumption as US oil inventories remain near decade highs.
- Honda Motor(HM) said its FCX fuel-cell car is the first hydrogen-powered auto to qualify for a US tax credit aimed at promoting vehicles that don’t use petroleum-based fuels.
- American International Group(AIG), the world’s largest insurer, said second-quarter profit rose 34%.
- France has increased security controls on trains in the east of the country after receiving a tip about a terrorist threat.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs, Semi longs, Retail longs, Biotech longs and Medical longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was very positive today as the advance/decline line finished substantially higher, most sectors rose and volume was very heavy. Measures of investor anxiety were high into the close despite gains. Today's overall market action was very bullish. The Nasdaq and small-caps were especially strong. Nasdaq volume hit the second-highest on record today at 3.67 billion shares. I continue to believe the Nasdaq will substantially outperform the other major averages through year-end. As I said a couple of months ago, cyclical tech has joined growth tech in leadership, which is making for a lethally bullish combination. The Morgan Stanley Tech Index is 12.8% higher year-to-date. Growth outperformed value again today, with small-cap growth leading the way as it soared 3.6%. While the Russell 2000 is lagging for the year, it is solely a function of the weakness in small-cap value shares, which are down 3.9% year-to-date. Small-cap growth is 7.7% higher so far this year, outperforming the S&P 500. In my opinion, the argument over whether growth or value investing is a better long-term strategy isn't really the question. The question is where we are in the cycle. I continue to believe a major shift is beginning to take place into growth and away from value and that this new trend will last for several years at least. Despite better energy inventory data and less global economic pessimism today, oil was unable to rally, which is another bearish sign for the commodity. I suspect it will head into the $60s/bbl. within two weeks, barring a hurricane fear spike. I continue to believe a natural gas long hedge for a short crude position will work well for a few weeks. Today's late afternoon swoon likely left more bulls underinvested and more bears even more short. There are so many signs of investor skepticism regarding the huge surge from Monday's lows that I doubt a retest of those lows will occur. Headlines are still scary, and anxiety is still high. Too many bulls are still underinvested, and too many bears are still too short. Moreover, and most importantly, many market-leading stocks are breaking out on very large volume. That doesn't mean we can't pull back or rest for a bit, but I think a retest of the lows is unlikely.

Stocks Higher into Final Hour, Led by High Volume Surge in Tech Shares

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Biotech longs, Semi longs and Internet longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is very positive today as the advance/decline line is substantially higher, most sectors are higher and volume is very heavy. My intraday gauge of investor angst is still high. The financials surging higher in the face of ongoing negative news and a strong breadth breakout today leads me to conclude that the bottom for this pullback was seen on Monday, as I speculated that morning. It is also positive that today's rally is still being met with skepticism. The ISE Sentiment Index, after hitting a record low yesterday, is still a low 100.0. The CBOE total put/call hit a high 1.17 this morning, and its 10-day moving average remains near record levels. The VIX is jumping 6% today and remains near levels last seen in 2003. S&P is saying that it expects i-bank ratings to remain stable despite the fact that third-quarter results will be negatively impacted by recent issues, according to Reuters. The i-banking index remains 1.7% higher on the day. On Monday, the S&P 500 surged +2.4%. However, the average market-neutral fund fell -.67% that day, according to Dow Jones. It is also interesting to note that the long/short strategy, which has the ability to be more opportunistic, was flat on Monday. I think the extreme popularity of the market-neutral strategy since the bubble burst in 2000 has helped to pump air into the current "U.S. negativity bubble" and has played a significant role in the recent parabolic rise in short interest. I think it's very poor risk-adjusted return of 2.8% annualized over the last three years may indicate that these funds are being run in a more net short manner than market-neutral. I continue to believe this strategy will begin to see substantial redemptions very soon and that some of this money will find its way into more positively correlated U.S. stock strategies, which could lead to the "mother of all short-covering rallies." I expect US stocks to trade modestly higher into the close from current levels on short-covering, less economic pessimism and bargain hunting.

Today's Headlines

Bloomberg:
- US stocks rallied for a third day on diminishing concern that mortgage losses will hurt earnings at homebuilders and banks and after Cisco Systems(CSCO) increased its sales forecast.
- Citigroup(C), the largest US bank, and food maker Kraft Foods(KFT) led at least 13 companies taking advantage of a renewed appetite for debt in the busiest day in a month.
- Lehman Brothers(LEH) led the biggest increase in the Amex Securities Broker/Dealer Index since June 2006, as investors bought beaten down shares.
- President Bush said the US economy is “thriving” and he criticized congressional Democrats for crafting tax-and-spend programs that he said may derail growth or disrupt the path to a balanced federal budget.
- Blackstone Group LP(BX) raised $21.7 billion for the world’s biggest private-equity fund, just as a global credit crunch slows leveraged buyouts.
- Nokia Oyj(NOK) will retreat from most development of chips in handsets and put four semiconductor makers including Texas Instruments(TXN) in charge of the designs to help cut costs.
- Mortgage applications in the US rose last week by the most since January, as cheaper borrowing costs encouraged more Americans to seek loans for home purchases and refinancing.
- Copper is falling in NY to the lowest in six weeks as global inventories of the metal jumped the most since 2005, easing supply concerns.
- Sugar is falling to a three-week low in NY on speculation that supplies from Brazil and India, the world’s biggest producers, will expand a glut of the sweetener.
- Uranium prices, which have plunged by 20% in the past 10 weeks, may fall as low as $95 a pound in the “next few months,” said Troika Dialog, Russia’s oldest investment bank.

Wall Street Journal:
- Walt Disney’s(DIS) ESPN may say today that it will revamp its ESPN360.com all-video Internet site, aiming to draw new viewers with more live programming.

NY Times:
- Roadside bombs supplied by Iran caused 23 of 69 combat deaths suffered by US-led forces in Iraq last month, citing Lieutenant General Raymond Odierno, the No. 2 US commander in Iraq.

NY Post:
- Democratic Governor Eliot Spitzer wants illegal immigrants to have access to protective services without facing the risk of deportation.

Washington Post:
- The US and Mexico are close to reaching an agreement for an aid package aimed at combating drug cartels in Mexico, citing US lawmakers, congressional aides and Mexican officials.

CNBC:
- Bear Stearns(BSC) CEO Cayne is planning to go to China in the next few weeks to look for a joint-venture partner or a partnership that would lead to a strategic investment in the company, Charles Gasparino reported.

Chronicle of Higher Education:
- An English-language university in North Korea is nearing completion and its backers hope it will open next spring.

Daily Telegraph:
- China suggested it will sell holdings of Treasuries should the US congress impose trade sanctions to force a yuan revaluation, citing two Chinese officials.

Wholesale Inventories at Record Lows, Sales Rise Again

- Wholesale Inventories for June rose .5% versus estimates of a .4% gain and a .5% increase in May.

BOTTOM LINE: Sales at US wholesalers rose faster than inventories in June, making it likely companies will continue to rebuild stocks, Bloomberg reported. Sales rose .6% versus a 1.3% gain in May. Distributors had 1.1 months worth of goods on hand at the current sales pace, matching the all-time low. Computer and hardware distributors showed the biggest gains in sales versus inventories. Sales of computer equipment jumped 5.4% in June. Sales of petroleum products fell 1.0%. I still believe inventory rebuilding will continue to help boost overall US economic growth over the intermediate-term as companies gain confidence in the sustainability of the current expansion.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- The risk of owning corporate bonds fell again as the Federal Reserve said economic expansion will continue, according to credit-default swap traders.
- Cisco Systems(CSCO), the world’s largest maker of computer-networking equipment, said profit rose 25% as customers spent more on high-speed Internet gear. The company forecast sales that beat estimates, sending the shares 6% higher in after-hours trading.
- Priceline.com(PCLN), the online travel agency, reported second-quarter earnings that exceeded analysts’ estimates. The stock soared 10% in extended trading.
- Posco, Asia’s third-biggest steelmaker, cut prices of its stainless steel products for a third time this year after the cost of nickel, a key raw material, declined. Nickel prices have plunged 44% since May 4.
- Australia’s central bank raised its benchmark interest rate a quarter point to the highest in almost 11 years.
- The yen declined on speculation a gain in Asian stocks will give investors confidence to resume borrowing in Japan to buy higher-yielding assets.
- Japanese companies plan to order more machinery in the third quarter to increase production as the global economy expands.

Wall Street Journal:
- Apple’s(AAPL) New iMacs Aim for Windows Users.

MarketWatch.com:
- Pakistan, Venezuela and Nigeria are among the most unstable emerging markets and rank the lowest on Eurasia Group's Global Political Risk Index, a political stability ranking for 24 emerging markets.
- Apple Inc. unveiled new additions to its line of iMacs Tuesday, showing the company's continued presence in the PC space despite the recent hoopla over consumer electronics products such as the iPod and iPhone.

NY Times:
- More Generics Slow the Surge in Drug Prices.
- Cooking Up More Uses for the Leftovers of Biofuel Production.
- The Seattle office market has made a spectacular recovery in the last few years. As a result many real estate investors want to park their money there.

Financial Times:
- Vodafone Group Plc is about to announce that it won’t exercise its right to sell part of its Verizon Communications(VZ) stake, valued at as much as $10 billion.
- Hedge funds hit critical list worldwide.
- A price war took hold of the US gaming market on Tuesday when Microsoft(MSFT) followed Sony’s(SNE) move last month to reduce the price of its core console.

International Finance News:
- China had a $120.9 billion increase in foreign reserves in the first half, most of it due to so-called “hot money,” citing figures from the customs department and the commerce ministry.

Xinhua News Agency:
- China seized more than 6,000 pieces of counterfeit jewelry inscribed with the Tiffany & Co.(TIF) name, citing local customs officials.

Late Buy/Sell Recommendations
Citigroup:
- Cisco Systems’ strong 4Q07 results add confidence to the outlook for communications IC suppliers exposed to the enterprise networking vertical. These are (IDTI), (XLNX) and (ALTR) in our universe.
- Reiterated Buy on (AKAM), target $58.
- Reiterated Sell on (TYC), target lowered to $45.

Morgan Stanley:
- Reiterated Overweight on (EMR), target raised to $54.

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S&P 500 futures +.17%.
NASDAQ 100 futures +.46%

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Earnings of Note
Company/EPS Estimate
- (AAP)/.66
- (AIG)/1.61
- (ACF)/.62
- (AQNT)/.20
- (BRL)/.71
- (CELL)/.15
- (CVC)/-.02
- (CECO)/.26
- (FLS)/.86
- (FTO)/1.64
- (GGC)/.26
- (HANS)/.37
- (INSP)/-.11
- (JBX)/.89
- (LAMR)/.21
- (NWS/A)/.27
- (RL)/.85
- (BID)/1.47
- (S)/.22
- (STN)/.56
- (TOL)/.17

Upcoming Splits
- (HCSG) 3-for-2

Economic Releases
10:00 am EST
- Wholesale Inventories for June are estimated to rise .4% versus a .5% gain in May.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -2,750,000 barrels versus a -6,497,000 barrel decline the prior week. Gasoline supplies are expected to rise by 775,000 barrels versus a 586,000 barrel build the prior week. Distillate supplies are estimated to rise by 1,775,000 barrels versus a 2,889,000 barrel build the prior week. Finally, Refinery Utilization is expected to remain unch. versus a 1.96% gain the prior week.

Other Potential Market Movers
- The Fed’s Stern speaking, weekly EIA energy inventory report, weekly MBA Mortgage Applications report, CSFB Electric Equipment & Multi-Industry Conference, RBC Technology Conference and Canaccord Adams Global Growth Conference could also impact trading today.

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