Stocks Sharply Higher into Final Hour on Diminishing Credit Fears, Bargain-Hunting, Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Internet longs, Biotech longs, Semi longs and Medical 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, almost every sector is rising and volume is below average. My intraday gauge of investor angst is slightly above-average levels, despite today’s gains. The 3-month t-bill yield is up 74 basis points from last Thursday's lows in a sign that investor flight to safety is subsiding. The CEO of Deutsche Bank said today that there are signs the credit crisis is easing, and the Broker/Dealer Index is 3.1% higher and at session highs. I still believe this index just has to remain stable for the major averages to push higher. Growth stocks are once again outperforming value stocks and growth tech is especially strong. Kulicke & Soffa (KLIC) boosted 4Q guidance by 6.6%, citing additional orders for wire bonding products. Bank of America boosted its price target on Intel(INTC) to $31 after the SIA said chip sales rose 3.2% from June. As well, Piper upped their 12-month price target on Apple Inc. to $211, which I view as very reasonable. The analyst said iPhones and iMacs are exceeding his sales estimates. I still think Apple will exceed $180 before year-end and the stock remains my second-largest long position behind Google Inc.(GOOG). As I said a few months ago, I still believe tech will continue to outperform the major averages over the intermediate term. According to TrimTabs, hedge funds saw $32 billion in outflows during the month of July, the most since 2000, and August is likely to see even more. Moreover, funds of fund saw 5% of their total assets leave the door. I continue to believe that the record explosion in short interest over the last year had mainly been a result of the massive infusion of capital into low/negative correlation U.S. stock strategies, such as market-neutral funds, that had marketed themselves as a safe alternative to other strategies and the market. However, market-neutral funds, as a whole, have performed poorly (in both up and down markets) for several years. Considering what has transpired over the last couple of months, I expect a significant portion of the capital fleeing these types of funds to find its way back into more positively correlated U.S. stock strategies over the coming months. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, diminishing credit fears, strength in the tech sector and bargain hunting.

Today's Headlines

Bloomberg:
- US investors are returning from summer vacation to the cheapest stock market in almost 12 years, and some of the biggest fund managers say they’re ready to load up on shares of technology, energy and industrial companies.
- Emulex Corp.(ELX) CEO said technology spending is unaffected by the subprime mortgage rout.
- Deutsche Bank AG CEO Ackerman said financial markets are stabilizing after central banks pumped more than $200 billion into the world’s money markets.
- Steve Forbes, CEO of Forbes, says “now is the time” to put money in US stocks.
- The yen fell against the US dollar on speculation gains in US stocks may encourage investors to borrow the Japanese currency to buy riskier assets.
- Copper is falling the most in two weeks on concern over construction spending and rising stockpiles.
- Toyota Motor(TM) passed Ford Motor(F) to become second in US sales of cars and light trucks this year through August.
- Apple’s(AAPL) iPhone became the best-selling advanced US mobile phone in its first full month of sales, research firm iSuppli said.
- Intel(INTC) rose to a seven-week high after Banc of America(BAC) and CSFB boosted their earnings estimates for the world’s biggest semiconductor maker on growing demand for personal computers and laptops.
- MetroPCS Communications offered to buy Leap Wireless Intl. for about $5.5 billion to expand in the fastest-growing part of the cell-phone market.

Wall Street Journal:
- Slew of Online Tools Let Consumers Create and Mange Their Digital Medical Records.
- Trading spreads on many of the newest exchange-traded funds have widened during recent market fluctuations.

Business Week:
- If Credit Markets Thaw, Recession Is Unlikely.

CNET News.com:
- Apple might start making enterprise-class iPhones or incorporate more enterprise-friendly features into existing models, a Gartner analyst has predicted.

CNNMoney.com:
- Investors sold $32 billion of hedge funds assets in the month of July, the largest outflow since 2000; August may be higher.

Times Online:
- The emergence of a patent filing has stoked speculation that Google(GOOG) is working on a mobile phone-based payments service dubbed “Gpay” that could be rolled out by the internet search giant with a new phone handset.

Manufacturing Still Healthy, Prices Paid Falls, Construction Spending Declines

- ISM Manufacturing for August fell to 52.9 versus estimates of 53.0 and a reading of 53.8 the prior month.

- ISM Prices Paid for August fell to 63.0 versus estimates of 63.0 and a reading of 65.0 in July.

- Construction spending for July fell .4% versus estimates of unch. and an upwardly revised .1% gain in June.

BOTTOM LINE: Manufacturing in the US cooled slightly in August, but continued to register expansion in the sector, Bloomberg reported. The export component of the index rose to 57 versus 56.5 in July. “Our members aren’t mentioning, in terms of comments, a lot of concerns about the overall financial-market picture,” said Norbert Ore, chairman of ISM’s factory survey. The report suggests “the economy is in great shape. We are not seeing signs yet that the economy is deteriorating significantly,” Ore said. The prices paid component fell to the lowest level since February. The inventory component fell to 45.4 from 48.5 in July. The employment component rose to 51.3 from 50.2 the prior month. I continue to believe manufacturing will help boost overall US economic growth over the intermediate-term as companies gain confidence in the sustainability of the current expansion and rebuild depleted inventories.

Spending on US construction projects unexpectedly fell in July, while June’s number was revised higher, according to Bloomberg. According to a recent report, 2Q commercial construction rose by the most since 1981. Public construction rose .7% and private non-residential construction rose .4% in July. I continue to believe construction spending growth has peaked for this cycle as homebuilders pare down inventories and commercial construction slows to more average rates.

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Tuesday Watch

Weekend Headlines
Bloomberg:
- North Korea agreed to a year-end deadline to identify and dismantle its nuclear facilities, US Assistant Secretary of State Christopher Hill said.
- North Korea said the US agreed to remove the communist country from its list of state sponsors of terrorism and lift all economic sanctions, a claim the US declined to confirm.
- President Bush arrived in Iraq on an unannounced trip to an air base in the country’s Anbar province ahead of a progress report on the war that Congress is set to get next week.
- Mergers and acquisitions may set a worldwide record of more than $3.57 trillion before this year ends without a mega-deal from the kings of leveraged buyouts.
- Hurricane Felix plowed across the Caribbean on a course that’s forecast to push its 135 mph winds close to Honduras tomorrow, before the storm slams into Belize the following day.
- European stocks climbed for a fourth day, paced by banking shares, as investors worldwide gained confidence that markets will weather the fallout from losses in the US subprime mortgage market.
- Crude oil stalled near a four-week high in NY on signs Hurricane Felix may weaken and break up without threatening output in the Gulf of Mexico.
- Stephen Brown, professor of finance at NYU’s Stern School of Business says the “worst has passed” in the subprime crisis.
- Hugo Chavez’s economy is starting to unravel in the currency market. While Venezuela earns record proceeds from oil exports, consumers face shortages of meat, flour and cooking oil. Annual inflation has risen to 16%, the highest in Latin America, as President Chavez tripled government spending in four years.
- China doesn’t hold any US subprime debt among the country’s $1.33 trillion in foreign exchange reserves, said Wei Benhua, deputy director of the State Administration of Foreign Exchange.
- Australia’s biofuel production capacity is expected to double this year to more than 600 million liters, a consultant said.
- The US government may offer a “significant” food aid package to victims of a flood in North Korea last month, the State Department said.
- Switzerland is planning measures to lower energy consumption and fight global warming while easing the country’s reliance of foreign sources of energy, Transport and Environment Minister Moritz Leuenberger said.
- Aluminum fell the most in two weeks after inventories of the metal used in beverage cans and aircraft rose to a three-year high.
- European gasoline fell more than 5%, the largest one-day drop in three weeks, on the expectation demand for motor fuels will start to fall in the US and Europe as the summer vacation season ends.
- The US Commodity Futures Trading Commission has collected almost 3,000 pages of documents in connection with complaints regarding hedge fund manipulation of the metals market, according to Metals Bulletin.
- OPEC will keep production targets unchanged next quarter because the crude market is well-supplied, the oil ministers of members Algeria and Qatar said.
- China, the world’s second-biggest energy consumer, has “very serious” pollution problems and must strengthen the enforcement of environmental regulations, Vice Premier Zeng Peiyan told government officials.
- Merck’s(MRK) experimental niacin drug Cordaptive improved cholesterol levels with reduced facial flushing, a side effect that has limited use of the market leader, Abbott Labs’(ABT) Niaspan, researchers said.
- A Swedish study found no increased risk of death among patients getting drug-coated stents made by Boston Scientific(BSX) and Johnson & Johnson(JNJ), reversing an earlier finding.
- Eli Lilly’s(LLY) experimental schizophrenia drug, which may replace its top-selling Zyprexa was just as effective without causing patients to gain weight, according to a study.
- Global bond sales increased 31% in the second quarter to a record $1.09 trillion, driven by private-equity firms financing leveraged buyouts, according to the Bank of International Settlements.
- China Oilfield Services Ltd., the world’s best-performing oil and gas drilling stock this year, fell the most in more than two weeks in Hong Kong after Credit Suisse Group cut its rating, predicting slower earnings growth.
- The market fallout from the subprime mortgage slump is less severe than in 1998 after Russia’s default and the collapse of Long-Term Capital Management, the Bank for International Settlements said.
- Google Inc.(GOOG), trailing Baidu.com(BIDU) in China’s online search industry, plans to increase investments in content providers to win share in the world’s second-largest Internet market.

Wall Street Journal:
- General Motors(GM) is struggling to halt declining US sales, but it has a bright spot in the three large crossover vehicles it launched in the past year.
- Now, with millions of children – some as young as kindergartners – getting cellphones, the options are expanding for parents who want to set limits on their kids’ wireless activities as well.

NY Times:
- More R-rated movies are showing up on US airline flights, which aren’t governed by federal broadcast laws, prompting some parents, flight attendants and children’s advocacy groups to protest.
- Microsoft(MSFT) will this week begin offering free software to link the Windows operating system with free Internet-based services.
- Citigroup(C) Buys Parts of a Troubled Mortgage Lender.
- Bloomberg TV is largely an afterthought in a lucrative genre dominated by CNBC. That could be changing as the marketplace for television business news heats up.

Barron’s:
- Barron’s introduced a stock index that encompasses stocks of all sizes in every industry sand ranks them based on value and company fundamentals. The index, The Barron’s 400, was based on components on the DJ Wilshire 5000, then analyzed by MarketGrader, a Miami-based company that ranks stocks by a company’s growth profile, its profitability and stock valuation.

MarketWatch.com:
- Corporate insiders’ buying bodes well for the stock market.

CNNMoney.com:
- 8 ways to tame your brain.
- Unlocked iPhones Go On Sale Tomorrow.

Chicago Tribune:
- Presidential candidate Barack Obama has received the most campaign contributions from CEOs at the Chicago area’s 50 largest publicly traded companies.

Orange Country Register:
- California’s population of illegal immigrants is increasing at a slower pace than the nation as a whole.

Reuters:
- Federal Reserve Chairman Ben Bernanke soothed financial markets this week with a pledge at an annual mountain retreat to limit damage to the economy from financial turmoil and parried critics of his understated style by showing a keen grasp of current hazards.
- Wall Street upbeat on new breed of fuel cells.

AP:
- The US Army’s $20,000 signing bonus attracted more than 6,200 recruits since July and pushed the military branch closer to its recruitment goal of 80,000 for fiscal 2007.
- North Korea agreed to declare and disable all its nuclear facilities by the end of 2007, citing the US chief negotiator on the subject.
- The US “leads the world in labor productivity,” with the average employee producing $63,885 a year in wealth, citing a UN agency report.

Financial Times:
- Federal Reserve governor Frederic Mishkin set the stage for an aggressive monetary policy response by the US central bank to any fall in house prices in his presentation to the Jackson Hole symposium this weekend.
- August looks to be the worst month for hedge funds in seven years and is close to being the worst since 1998 as almost all hedge fund strategies have failed to perform.
- The private sector will find ways to structure debt arrangements that will ensure that most US homeowners facing big increases in their mortgage payments will stay in their homes, Ed Lazar, chairman of the White House council of economic advisers said.
- Financial stocks are trading at their cheapest levels on a book value basis in a decade.
- The Chinese military hacked into a Pentagon computer network in June in the most successful cyber attack on the US defense department, say American officials.
- One of Europe’s most senior investment bankers has forecast that the credit squeeze will ease over the next few months but warned that borrowers will not be able to enjoy the easy credit conditions of the past three years.

Financial Times Deutschland:
- The European Central Bank will leave its forecasts for economic growth and inflation in the 13-nation euro region “largely unchanged.”

Sunday Times:
- Qatar “could be willing” to buy Nasdaq Stock Market’s(NDAQ) one-third stake in London Stock Exchange for almost $2 billion.

Spiegel:
- Mohamed Elbaradei, the director-general of the IEA, said Iran has “last chance” to hold to a new pledge to roll back its nuclear plans.

Interfax:
- OAO Rosneft plans to raise oil output 36% to 2.8 million barrels a day within five years.
- Russia’s government may raise its forecast for economic growth in 2007 by the end of September, citing Economy Minister German Gref.

Commercial Times:
- Taiwan Semiconductor Manufacturing and United Microelectronics are expected to raise their fourth quarter shipments by 10% from the July-to-September period. The projected growth is higher than the 5% to 7% expansion estimated by institutional investors.

Weekend Recommendations
Barron's:
- Made positive comments on (GR).

Morgan Stanley:
- Reiterated Overweight on (FDX), target $124.

Night Trading
Asian indices are +.25% to +.50% on average.
S&P 500 futures -.13%.
NASDAQ 100 futures -.18%.

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Economic Releases
10:00 am EST
- ISM Manufacturing for August is estimated to fall to 53.0 from 53.8 in July.
- ISM Prices Paid for August is estimated to fall to 63.0 from 65.0 in July.
- Construction Spending for July is estimated unch. versus a -.3% decline in June.

Afternoon:
- Total Vehicle Sales for August are estimated to rise to 15.7M versus 15.5M in July.

Other Potential Market Movers
- The Keefe Bruyette Insurance Conference, Lehman Brothers Energy Conference, Citigroup Tech Conference and (DHR) analyst meeting could also impact trading today.

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

Weekly Outlook

Click here for The Coming Week by TheStreet.com.

Click here for the Tuesday Equity Preview by Bloomberg.

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. – US Markets Closed

Tues. – ISM Manufacturing, ISM Prices Paid, Construction Spending, Total Vehicle Sales

Wed. – Challenger Job Cuts, ADP Employment Change, Pending Home Sales, Fed’s Beige Book

Thur. – Final 2Q Non-farm Productivity, Final 2Q Unit Labor Costs, Initial Jobless Claims, ISM Non-Manufacturing, ICSC Chain Store Sales

Fri. – Change in Non-farm Payrolls, Unemployment Rate, Average Hourly Earnings, Wholesale Inventories

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

Mon. – US Markets Closed

Tues. – Diebold Inc.(DBD), Donaldson Co(DCI), Guess(GES)

Wed. – ABM Industries(ABM), ADC Telecom(ADCT), DSW Inc.(DSW), J Crew(JCG), Martek Biosciences(MATK)

Thur. – Campbell Soup(CPB), Cooper Cos(COO), Hovnanian Enterprises(HOV), Korn/Ferry(KFY), National Semi(NSM), Quiksilver(ZQK), UTI Worldwide(UTIW), VeriFone(PAY)

Fri. – JOS A Bank(JOSB)

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

Mon. – US Markets Closed

Tue. – Keefe Bruyette Insurance Conference, Lehman Brothers Energy Conference, Citigroup Tech Conference, (DHR) analyst meeting

Wed. – Keefe Bruyette Insurance Conference, Thomas Weisel Healthcare Conference, CSFB Biotech Conference, Kaufman Brothers Investor Conference, Citigroup Tech Conference, Lehman Brothers Energy Conference, Goldman Sachs Global Retailing Conference, Lehman Brothers Back-to-School Consumer Conference, BOE Policy Meeting, (DHR) analyst meeting, (JAVA) analyst meeting

Thur. – Cowen Clean Energy Conference, Thomas Weisel Healthcare Conference, Lehman Back-to-School Consumer Conference, Lehman Energy Conference, CSFB Global Automotive Conference, Citigroup Tech Conference, Goldman Sachs Global Retailing Conference, Morgan Keegan Equity Conference, CSFB Global Automotive Conference, Kaufman Brothers Investor Conference, BOE Policy Meeting, ECB Policy Meeting, (JNPR) investor gathering

Fri. – Morgan Keegan Equity Conference, Thomas Weisel Healthcare Conference

BOTTOM LINE: I expect US stocks to finish the week mixed as bargain-hunting, diminishing credit market fears, lower energy prices and short-covering offsets weaker economic data. My trading indicators are giving neutral signals and the Portfolio is 100% net long heading into the week.