Stocks Finish Sharply Higher on Positive Earnings Reports, More Economic Optimism

Indices
S&P 500 1,463.76 +2.19%
DJIA 13,289.29 +1.90%
NASDAQ 2,563.16 +2.50%
Russell 2000 787.32 +2.54%
Wilshire 5000 14,693.51 +2.16%
Russell 1000 Growth 587.65 +2.29%
Russell 1000 Value 820.63 +2.05%
Morgan Stanley Consumer 713.12 +1.64%
Morgan Stanley Cyclical 1,017.31 +2.57%
Morgan Stanley Technology 626.77 +2.64%
Transports 4837.42 +2.21%
Utilities 487.87 +2.28%
MSCI Emerging Markets 130.18 +1.65%

Sentiment/Internals
Total Put/Call .93 -27.91%
NYSE Arms .28 -92.78%
Volatility(VIX) 23.81 -9.47%
ISE Sentiment 100.00 +8.70%

Futures Spot Prices
Crude Oil 73.57 +2.57%
Reformulated Gasoline 210.15 +4.27%
Natural Gas 5.43 -2.91%
Heating Oil 204.33 +2.35%
Gold 676.20 +.40%
Base Metals 234.85 -.72%
Copper 335.35 +1.24%

Economy
10-year US Treasury Yield 4.56% +5 basis points
US Dollar 80.67 -.10%
CRB Index 306.83 +.78%

Leading Sectors
Oil Service +3.75%
Computer Hardware +3.5%
Retail +3.5%

Lagging Sectors
Hospitals +1.16%
Restaurants +1.11%
HMOs +1.05%

Evening Review
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Afternoon Recommendations
Piper Jaffray:
- Reiterated Outperform on (GOOG), target $660.

Afternoon/Evening Headlines
Bloomberg:
- Technology shares rallied, helping the US stock market recover from the steepest decline in three weeks and sending the Nasdaq Composite Index to its biggest advance in a year.
- US property and casualty insurers such as Chubb Corp. and Travelers face “minimal” risk of investment losses and no prospect of ratings downgrades this year from the subprime mortgage crisis, Fitch Ratings said.
- Most insurers and reinsurers face ‘negligible’ risk from the US subprime crisis, S&P said.
- Federal Reserve Chairman Ben S. Bernanke said relaxing portfolio limits on Fannie Mae(FNM) and Freddie Mac(FRE) isn’t necessary for the two largest US mortgage finance companies to help stem a surge in foreclosures.
- Global Hyatt Corp. said a group of investors including Goldman Sachs Holdings will buy a minority stake in the hotel operator for $1 billion.
- Google Inc.(GOOG) may introduce software to run mobile phones within the next eight weeks to promote its e-mail and mapping services, an analyst said.
- Ford Motor(F) is “in good shape financially” and has enough liquidity for its restructuring plan, CEO Mulally said.

MacRumors.com:
- German magazine Capital is reporting that talks between Apple(AAPL) and Volkswagen are in an early stage for a so-called “iCar.”

BOTTOM LINE: The Portfolio finished higher today on gains in my Retail longs, Computer longs, Medical longs and Semi longs. I covered some more of my (EEM) short and my remaining (IWM)/(QQQQ) hedges in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished substantially higher, every sector rose and volume was below average. Measures of investor anxiety were slightly above average into the close. Today's overall market action was bullish. There were notable reversals higher in the financials and homebuilders today. Technology, energy and retail shares were especially strong. With so many shorts and underinvested bulls, it doesn't take much to send the market soaring. I don't think Bernanke's letter to Schumer that was released this afternoon said much that investors didn't already know, but it may have been the last straw for many that had hoped for a late-day swoon. I think the key to today's gains was mainly a result of data that showed consumer spending isn't collapsing. Positive comments from analysts on back-to-school PC sales were significant. As well, (WSM), (BIG) and (DLTR) had positive earnings reports. That doesn't mean consumer spending is at strong levels, but investors had been pricing in a dire back-to-school and holiday selling season. With PC sales healthy, that appears much more unlikely, in my opinion. Also important today, many market-leading stocks posted outsized gains, rising 3%-5%. I was too underexposed to the market when the day began. My style is geared around substantially outperforming the market on the upside and keeping downside risks in check. My hedges are not an attempt to make money on the downside, they are used to cut volatility. Those hedges serve their purpose over the long run. I am having one of my best years relative to the market, and I will continue to quickly cut market risk when my analysis and models dictate such a change is warranted to protect gains into year-end. My top three long positions, which I have frequently disclosed for two years, are Google (GOOG), Apple (AAPL) and Intuitive Surgical (ISRG). Those stocks are up +35.3%, +101.7% and +133.5%, respectively, over the last year. Today's gains here will likely lead to further gains in Asia tonight. The Nikkei futures are indicating an up 360 open in Japan tonight.

***Alert***

- I am having technical difficulties. I will try to post after the close.

Economic Releases

- None of note

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- The world price of raw sugar, among the worst performing commodities this year, may fall further as oversupply will probably persist until 2009, Peter Baron, executive director of the International Sugar Organization, said.
- Brazil’s state-owned oil and gas company Petrobras announced Tuesday that it expects to start large-scale production of ethanol from cellulose between 2015 and 2020.
- The share of US residents classified as poor fell .3% to 12.3%, the Census Bureau said today. Median household income adjusted for inflation rose to $48,200.

NY Times:
- Politicians, regulators and financial specialists outside the US are seeking a role in the oversight of American markets, banks and rating agencies after recent problems related to subprime mortgages.

CNNMoney.com:
- Google: A safe haven stock?

Reuters:
- Problems in the US subprime mortgage market are unlikely to push the US economy into a recession over the next 12 months, the top economist for a leading US business group said on Tuesday.

Nikkei:
- Toshiba Corp. plans to speed up production of sensors used in mobile-phone cameras by a year to meet demand as handsets use higher resolution optics.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (MRVL), target $22.

Morgan Stanley:
- Reiterated Overweight on (STX), target $33.

Night Trading
Asian Indices are -2.25% to -1.25% on average.
S&P 500 futures -.19%.
NASDAQ 100 futures +.03%.

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Earnings of Note
Company/EPS Estimate
- (BIG)/.12
- (BWS)/.29
- (CHS)/.26
- (CTRN)/.05
- (CWTR)/.12
- (PSS)/.44
- (DLTR)/.33
- (ENER)/-.12
- (FRED)/.09
- (JAS)/-.66
- (JOYG)/.70
- (NOVL)/.02
- (SIGM)/.35
- (TIVO)/-.05
- (WSM)/.16

Upcoming Splits
- (FTI) 2-for-1

Economic Releases
10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -600,000 barrels versus a 1,890,000 barrel increase the prior week. Gasoline supplies are expected to fall by -2,500,000 barrels versus a -5,709,000 barrel decline the prior week. Distillate inventories are estimated to rise by 800,000 barrels versus a 1,356,000 barrel increase the prior week. Finally, refinery utilization is estimated to remain unch. versus a -.2% decline the prior week.

Other Potential Market Movers
- The weekly MBA Mortgage Applications report could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by financial and automaker stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.

Stocks Finish at Session Lows on Low Volume as Credit Fears Resurface

Indices
S&P 500 1,432.36 -2.35%
DJIA 13,041.85 -2.10%
NASDAQ 2,500.64 -2.37%
Russell 2000 767.83 -2.74%
Wilshire 5000 14,382.27 -2.34%
Russell 1000 Growth 574.52 -2.16%
Russell 1000 Value 804.13 -2.52%
Morgan Stanley Consumer 701.60 -1.82%
Morgan Stanley Cyclical 991.80 -3.17%
Morgan Stanley Technology 610.63 -2.41%
Transports 4732.98 -2.75%
Utilities 477.01 -1.20%
MSCI Emerging Markets 128.04 -2.13%

Sentiment/Internals
Total Put/Call 1.29 +35.79%
NYSE Arms 3.87 +184.17%
Volatility(VIX) 26.30 +15.8%
ISE Sentiment 92.0 -30.83%

Futures Spot Prices
Crude Oil 71.60 -.51%
Reformulated Gasoline 201.90 -1.04%
Natural Gas 5.67 +5.45%
Heating Oil 199.23 -.87%
Gold 671.80 -.65%
Base Metals 236.56 +1.12%
Copper 329.0 -1.97%

Economy
10-year US Treasury Yield 4.51% -5 basis points
US Dollar 80.84 +.13%
CRB Index 304.44 -.38%

Leading Sectors
HMOs -.39%
Gaming -1.08%
Disk Drives -1.27%

Lagging Sectors
Engineering & Construction -3.6%
Steel -4.45%
Homebuilders -4.79%

Evening Review
Market Performance Summary
WSJ Data Center
Sector Performance
ETF Performance
Style Performance
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Market Wrap CNBC Video(bottom right)
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In Play

Afternoon Recommendations
ThinkEquity:
- Upgraded (RNOW) to Buy.

Afternoon/Evening Headlines
Bloomberg:
- Corn fell the most in more than two weeks and soybeans declined as farmers in the South began their harvest, boosting US supplies that the government estimates will be 14% larger than last year.
- Google Inc.(GOOG) said CFO George Reyes will leave and the biggest Internet search engine company will replace him by year-end.
- NY Senator Hillary Rodham Clinton and Connecticut Senator Chris Dodd won their first endorsements from national labor unions, gaining coveted support in their bids for the Democratic presidential nomination.
- IndyMac Bancorp Inc.(IMB), the biggest US independent home lender, is hiring as many as 850 former employees of bankrupt American Home Mortgage Investment Corp. in a push to issue more loans to people with good credit.
- Seagate Technology(STX), the world’s largest make of hard-disk drives, boosted its sales and profit forecasts for the current quarter. The stock rose 5.5% in after-hours trading.
- Semtech(SMTC), a leading producer of high performance analog and mixed-signal semiconductors, reported net sales for the second quarter rose 3.3% yoy. The stock surged 8.5% in after-hours trading.
- PDL Biopharma(PDLI) will divest all its marketed products, stop developing its lead drug candidate and slash a “substantial” number of jobs in a strategic overhaul. The shares tumbled 15% in extended trading.

AP:
- New Jersey was surpassed by Maryland as the nation’s richest state, according to the latest US Census Bureau statistics.

BOTTOM LINE: The Portfolio finished lower today on losses in my Retail longs, Computer longs and Semi longs. I added to my (SII) short, (BHP) short and to my (IWM)/(QQQQ) hedges in the final hour, thus leaving the Portfolio 50% net long. The tone of the market was negative today as the advance/decline line finished substantially lower, every sector fell and volume was below average. Measures of investor anxiety were elevated into the close. Today's overall market action was bearish. In my opinion, the news today wasn't that bad, which makes today's losses more meaningful. As well, the 10-year yield is at session lows at 4.51%, and the yen is at session highs vs. the U.S. dollar. Cyclicals were especially weak today, falling 3.1%. Growth outperformed value, which could be pressuring quant funds again. Nikkei futures are indicating a down 387 open in Japan tonight. I expect stocks to make their lows for the week tomorrow.