Monday Watch

Weekend Headlines
Bloomberg:
- US stocks gained for the first time in four weeks on speculation the government will take steps to avert a lending crisis, helping the market overcome increasing home-loan and hedge fund losses.
- The “solidity” of BNP Paribas SA, Frances’s biggest bank, isn’t affected by the subprime crisis rippling through financial markets, Alain Papiasse, head of the bank’s asset management and services division, said in an interview published today in Le Parisien.
- Gold is going nowhere. Dollar-prcied bullion, a traditional haven for investors in times of turmoil, is lagging behind US Treasuries.
- Countrywide Financial Corp.(CFC) CEO Mozilo said the US Federal Reserve’s decision to pump more than $38 billion into the banking system may bolster confidence and help restart stalled credit markets.
- Treasuries posted their first weekly decline since early July after the Federal Reserve added $62 billion to the banking system to help avert a crisis of confidence in global credit markets.
- Hedge fund manager DE Shaw increased to 5.3% its stake in mortgage insurer Radian Group(RDN), according to a regulatory filing Friday.
- The yen’s seven-week rally is about to end.
- Pakistani and Afghan tribal leaders took a “positive” first step in the fight against terrorism by agreeing at their peace council to boost cooperation along the border, Pakistan’s President Pervez Musharraf said.
- The speculative grade bond credit default swap index fell 20.5% last week, on renewed optimism, after central banks boosted global liquidity.

Wall Street Journal:
- Northwest Airlines Corp.(NWA) is considering becoming a passive investor with one of four parties that may bid for Midwest Airlines.
- Crude-oil futures are feeling the tremors emanating from the credit markets and are weakening on fears that they could be the next casualty of the risk exodus.
- S&P 500 Looks On Cheap Side Amid Turmoil.

NY Times:
- The sharp stock market decline that began in late July is more likely to be a minor downturn in a continuing bull market than the beginning of a major bear market. That, at least, is the conclusion of an extensive analysis of corporate insiders’ trading behavior.
- Fund managers, who make what they consider conservative investments based on computerized calculations, are being blindsided by “model misbehavior,” Gretchen Morgenson wrote.
- A 75% drop in the overseas-based communications collected by US spy agencies because of tighter court restrictions spurred the quick passage of a new law giving President Bush more surveillance power.
- Novell Inc.(NOVL) owns the copyrights covering the Unix operating system, not SCO Group Inc., which may jeopardize that company’s lawsuits against Novell and International Business Machines(IBM).
- Democratic presidential candidates are detailing positions that might keep US troops in Iraq for years, while appealing to primary voters by pledging a quick end to the war and bringing the troops home.
- Cases of the sexually transmitted disease syphilis have risen among women in NYC as bisexual relationships increase, citing the Department of Health and Mental Hygiene.
- Cage-free egg demand is rising faster than production as corporations including Google Inc.(GOOG) add them to their cafeteria menu and Whole Foods Market(WFMI) sell them exclusively.

Barron’s:
- Shares of Bear Stearns(BSC), the second-largest underwriter of mortgage bonds, may sell at double their current price should the company consider merging with or being acquired by a larger company.
- Scott Barbee, managing director of the Aegis Value Fund, won the No. 1 spot in the 12^th annual Barron’s/Value Line list of the top 100 US mutual-fund managers.

MarketWatch.com:
- Big liquidation triggers hedge-fund turmoil. Some compare upheaval to LTCM collapse; market neutral funds are hit hard.
- Google, Cisco don’t collateralize loans. Commentary: Ignore analysts, look to debt-free tech sector for safe haven.

AP:
- Gas prices drop nearly 11 cents in last 2 weeks.

Reuters:
- China on Sunday delivered a vote of confidence in the US dollar, saying dollar assets form an important part of its foreign exchange reserves and the US currency plays a prominent role in the global monetary system.

TheStreet.com:
- “If investors have cash on the sidelines, they should not wait too long to put it to use,” says Jeremy Siegel, Wharton business school professor at the University of Pennsylvania and well-known markets commentary.

CBS News.com:
- Credit Crisis? Not Really. National Review Online: Sub-Prime Mortgage Market Woes Are Greatly Exaggerated.

Washington Post:
- From an early age, people are trained to act quickly when they hear sounds of emergency: fire alarms, police sirens, even car horns. So while it might be difficult for investors who hear alarm bells on Wall Street, often the wisest reaction is to stand still.

LA Times:
- Conditions at California’s lowest-performing schools have improved in the past three years, following the settlement of a class-action lawsuit, citing a study.

Hollywood Reporter:
- NBC Universal may buy Oxygen Media, the closely held owner of the Oxygen cable television network, for as much as $3 billion.

Forbes.com:
- Consumer Spending Will Not Collapse in Face of Housing Correction.

Oil & Gas Journal:
- US oil drilling activity hit a 21-year high last week, according to Baker Hughes.

Financial Times:
- The much-heralded financial rocket scientists responsible for the explosion in complex mathematical trading strategies are bracing themselves for fresh pain after what one team of analysts called “the perfect storm” last week.
- Wall street is braced this week for the most anticipated technology IPO in years as VMware, a fast-growing software company, prepares to float 10% of its shares on the stock market.
- General Motors(GM) may allow buyers of its Chevy Volt electric car to rent the vehicle’s battery as a way of pricing the vehicle at a comparable level to a traditional, petrol-driven family saloon.
- Central banks are expected to continue intervening in the money markets on Monday in an effort to unblock the financial system after last week’s turmoil.

Daily Telegraph:
- Hedge fund panic was behind global stock markets collapse.

AFP:
- Iraq and Iran signed an agreement to build two oil pipelines from the southern Iraqi port of Basra to the southwest Iranian port of Abadan, citing the state-run Iran news agency.

Sunday Times:
- Nasdaq Stock Market(NDAQ) may sell part of its stake in London Stock Exchange Group Plc to fund a higher offer for Swedish exchange operator OMX AB.
- Bank of England policy maker Andrew Sentence suggested that interest rates may need to remain high for a while as global economic growth underpins inflation, citing an interview.

Weekend Recommendations
Barron's:
- Made positive comments on (BSC), (GLW) and (ZRAN).
- Made negative comments on (CMG).

Citigroup:
- We are upgrading (AVT) and (ARW) to Buy from Hold. We see EMS inventory turning to catalyst from a headwind, recent acquisitions progressing well, and each company in no need of credit markets for additional acquisitions as they have sufficient cash and cash flow. With more favorable EMS inventory levels, we have increased conviction EPS for distributors could be set for upside.
- Reiterated Buy on (INTU), target $35.
- While we cannot hope to predict the outcomes of the current credit market volatility, we emphasize that semiconductor fundamentals are strong. Consistent with the view from out strategist and economist, we expect technology to be a leader from this current market weakness, and we expect semiconductors to play a vital role in this. We continue to favor (INTC), (MU), (TXN), (SPSN) and (IDTI).

Night Trading
Asian indices are -.25% to +.75% on average.
S&P 500 futures +.75%.
NASDAQ 100 futures +.67%.

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Earnings of Note
Company/Estimate
- (BX)/.34
- (BOBE)/.36
- (CNK)/.09
- (DV)/.25
- (DTE)/.47
- (NTES)/.29
- (SYY)/.46

Upcoming Splits
- (SHEN) 3-for-1

Economic Releases
8:30 am EST
- Advance Retail Sales for July are estimated to rise .2% versus a -.9% decline in June.
- Retail Sales Less Autos for July are estimated to rise .4% versus a -.4% decline in June.

10:00 am EST
- Business Inventories for June are estimated to rise .4% versus a .5% increase in May.

Other Potential Market Movers
- The Keefe Bruyette & Woods Bank Conference could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by financial 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 Market Outlook by CNBC.

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

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

Economic reports for the week include:

Mon. – Advance Retail Sales, Business Inventories

Tues. – Trade Balance, Producer Price Index, IBD/TIPP Economic Optimism, weekly retail sales

Wed. – Weekly MBA mortgage applications report, Consumer Price Index, Empire Manufacturing, weekly EIA energy inventory report, NET Long-term TIC Flows, Industrial Production, Capacity Utilization, NAHB Housing Market Index

Thur. – Housing Starts, Building Permits, Initial Jobless Claims, Philly Fed

Fri. – Univ. of Mich. Consumer Confidence

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

Mon. – Blackstone Group(BX), Bob Evans(BOBE), DeVry Inc.(DV), Netease.com(NTES), SYSCO Corp.(SYY)

Tues. – Agilent(A), Applied Materials(AMAT), Dillard’s(DDS), Fortress Investment Group(FIG), Fossil Inc.(FOSL), Harman Intl.(HAR), Home Depot(HD), TJX Cos(TJX), Wal-Mart Stores(WMT)

Wed. – Affiliated Computer Services(ACS), Daktronics(DAKT), Deere(DE), Dick’s Sporting Goods(DKS), Longs Drug(LDG), Macy’s(M), Network Applicance(NTAP), PetSmart Inc.(PETM), Salesforce.com(CRM), Sara Lee(SLE)

Thur. – Autodesk(ADSK), Estee Lauder(EL), Grube & Ellis(GBE), Guess ?(GES), Hewlett-Packard(HPQ), JC Penney(JCP), Kohl’s Corp.(KSS), Nordstrom(JWN), Red Robin(RRGB), Zumiez(ZUMZ)

Fri. – Focus Media(FMCN), JM Smucker(SJM)

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

Mon. – Keefe Bruyette & Woods Bank Conference

Tue. – CSFB Communications Conference, UBS Engineering & Construction Conference, Jeffries Industrials Conference, Keefe Bruyette & Woods Bank Conference

Wed. – CSFB Communications Conference, (YUM) Investor Day

Thur. – CSFB Communications Conference, (IVGN) Annual Investor Day

Fri. – None of note

BOTTOM LINE: I expect US stocks to finish the week modestly higher on better-than-expected earnings reports, diminishing forced selling, less hedge fund performance uncertainty, decelerating inflation, bargain-hunting, and short-covering. My trading indicators are giving neutral signals and the Portfolio is 75% net long heading into the week.

Market Week in Review

S&P 500 1,433.06 +1.43%*

Click here for the weekly market review by Bloomberg.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,453.64 +1.43%
DJIA 13,239.54 +.44%
NASDAQ 2,544.89 +1.34%
Russell 2000 788.78 +4.42%
Wilshire 5000 14,600.58 +1.47%
Russell 1000 Growth 585.07 +.97%
Russell 1000 Value 813.45 +1.59%
Morgan Stanley Consumer 713.59 +1.80%
Morgan Stanley Cyclical 1,010.17 -.61%
Morgan Stanley Technology 621.14 +.54%
Transports 4,961.73 +1.80%
Utilities 491.32 +3.10%
MSCI Emerging Markets 128.83 -1.65%

Sentiment/Internals
NYSE Cumulative A/D Line 65,166 -.96%
Bloomberg New Highs-Lows Index -801 -8.98%
Bloomberg Crude Oil % Bulls 28.0 +75.0%
CFTC Oil Large Speculative Longs 230,904 -12.7%
Total Put/Call 1.09 -23.78%
NYSE Arms .73 -79.26%
Volatility(VIX) 28.30 +12.48%
ISE Sentiment 106.0 +2.91%
AAII % Bulls 45.76 -.26%
AAII % Bears 38.98 -2.55%

Futures Spot Prices
Crude Oil 71.47 -5.25%
Reformulated Gasoline 195.48 -3.49%
Natural Gas 6.82 +11.80%
Heating Oil 197.12 -3.30%
Gold 681.60 -.45%
Base Metals 236.08 -7.60%
Copper 335.95 -3.56%

Economy
10-year US Treasury Yield 4.81% +12 basis points
4-Wk MA of Jobless Claims 307,800 +.6%
Average 30-year Mortgage Rate 6.59% -9 basis points
Weekly Mortgage Applications 656.50 +8.1%
Weekly Retail Sales +2.9%
Nationwide Gas $2.80/gallon -.06/gallon
US Cooling Demand Next 7 Days 17.0% above normal
ECRI Weekly Leading Economic Index 142.0 -.28%
US Dollar Index 80.67 +.63%
CRB Index 310.91 -2.28%

Best Performing Style
Small-cap Value +4.5%

Worst Performing Style
Mid-cap Growth +.76%

Leading Sectors
Alternative Energy +8.4%
Homebuilders +6.61%
Banks +4.0%
Biotech +3.93%
REITs +3.22%

Lagging Sectors
Tobacco -1.69%
HMOs -1.95%
Telecom -2.40%
Oil Tankers -3.06%
Steel -3.22%

One-Week High-Volume Gainers
One-Week High-Volume Losers

*5-Day Change

Stocks Lower into Final Hour on Continuing Weakness in Financials and Homebuilders

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Computer longs, Biotech longs and Medical longs. I have not traded today, thus leaving the Portfolio 75% net long. The overall tone of the market is mildly negative today as the advance/decline line is lower, sector performance is mixed and volume is very heavy. My intraday gauge of investor angst is elevated again. Investor angst is at levels normally associated with meaningful market bottoms. The NYSE Arms hit a very elevated 2.97 this morning. The VIX is at the highest level since early 2003. The ISE Sentiment Index 10-day moving average is at the second lowest reading on record. The CBOE total put/call 10-day moving average is also at the second highest reading on record. Money market funds, this week, saw $36 billion in inflows, the most since 2005. As well, the average 30-year mortgage rate fell nine basis points this week to 6.59%. This is down from 6.73% three weeks ago. November housing price futures are maintaining recent gains at $215,800. Trading has a panicky feel again today even as global central banks inject further liquidity into the system. The futures markets are now pricing in an imminent rate cut by the U.S. Fed. If this were to occur, the heavily shorted financials and housing-related equities would likely see extraordinary moves higher. At this point, I disagree that it would scare investors and result in further downside. As well, many of the hedge funds that are currently under duress are the very types of funds that I have been saying for some time will see substantial outflows. I still think a good portion of these outflows will move back into more positively correlated U.S. stocks strategies. Insider buying in general has soared recently, but especially so in financial equities even as investors stampede out the door, according to InsiderScore.com. In fact, this round of insider buying is led by the troubled financial industry, particularly among real estate investment trusts and other companies exposed to the subprime mortgage fallout, according to the report. This is very significant, in my opinion. RBC released its monthly consumer confidence index this morning. It came in at the best level in five months, jumping from 76.1 to 89.3. It appears that falling gasoline prices and a healthy job market were large contributors. It is also interesting to note that the gauge that measures consumers' feelings about the economy and their own financial fortunes over the next six months soared to 43.9 from 23.1 in July. As well, the employment component of the survey rose to 124.5 from 116.8 the prior month. Finally, the gauge that measures consumers' comfort level in making major purchases surged to 97.9 from 83.6 in July. This survey is contradictory to fears of imminent major job losses and a plunge in consumer spending. I still think consumer sentiment will improve further over the intermediate-term as housing fears subside, interest rates remain low, inflation decelerates further, energy prices continue to fall meaningfully, unemployment remains historically low, wages continue to substantially outpace inflation and stocks resume their major uptrend. Countrywide Financial(CFC), the source of much angst today, is trading near session highs, rebounding almost 3 points from today’s low. I expect US stocks to trade higher into the close from current levels on short-covering, rising expectations for a Fed rate cut and bargain hunting.

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