Confidence Falls, Existing Home Sales Better-Than-Expected

- Consumer Confidence for September fell to 99.8 versus estimates of 104.3 and an upwardly revised 105.6 in August.

- Existing Home Sales for August fell to 5.5M versus estimates of 5.48M and 5.75M in July.

BOTTOM LINE: Consumer confidence fell more than forecast in September, Bloomberg reported. The Present Situation component of the index fell to 121.7 from 130.1, but remains relatively high. The Expectations component fell to 85.2 from 89.2 in August. The price of regular unleaded gasoline, which reached as high as $3.05 a gallon in July, slid to $2.81 as of yesterday. The main reason consumer confidence came in below estimates was due to the huge drop in the New England region from 105.4 to 79.7. Confidence actually soared in the Southeast Central region from 101.60 to 121.0 and rose in the Mid-Atlantic, Northwest Central and Southwest Central regions. I continue to believe both main gauges of consumer sentiment will move back near cycle highs over the intermediate-term as stocks hit new record highs, interest rates remain low, inflation decelerates further, energy prices fall meaningfully, housing fears subside, wages continue to substantially outpace inflation and unemployment remains historically low.

Sales of previously owned US homes fell in August, Bloomberg reported. However, the median home price rose .2% to $224,500. The Case-Shiller Home Price Index fell 3.9% year-over-year in July, however this index is still 98.4% higher from when the stock market bubble burst in 2000. Supplies of existing homes, at the current sales pace, came in at 10 months’ worth versus 9.5 months in July. I continue to believe home sales are in the process of stabilizing at lower, but still high by historic standards, levels. Home construction will remain muted over the intermediate-term as homebuilders work down inventories.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Intercontinental Exchange(ICE), Tesoro Corp.(TSO), Teradata Corp. and Expedia Inc.(EXPE) will join the S&P 500 Index., S&P said today.

Wall Street Journal:
- Although global economic fallout from the US subprime-mortgage crisis is likely to be protracted, governments shouldn’t “rush to regulate everything,” said the International Monetary Fun’s top financial-review official, Jaime Caruana.

MarketWatch.com:
- Chinese stock investors warming to US managers. With opening of outside markets to individuals, fund firms flock to mainland.
- Wall Street says buy EMC for VMware. Analysts bullish on both businesses; VMware’s valuation a concern.

IBD:
- Cable TV Firms’ Next Evolution: Business Phone Service Provider.

Financial Times:
- Arcelor Mittal(MIT) is to spend $35 billion adding to the capacity of its steelmaking plants around the world, lakshmi Mittal, the company’s CEO and main owner, said.

Berliner-Zeitung:
- Q-Cells AG CEO Anton Milner said he expects the solar-power industry to grow at least 40% a year, double the rate forecast by the German association that represents the industry.

Late Buy/Sell Recommendations
Morgan Stanley:
- Reiterated Overweight on (LOW), target $38.

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Economic Releases
10:00 am EST
- Consumer Confidence for September is estimated to fall to 104.3 versus 105.0 in August in August.
- Existing Home Sales for August are estimated to fall to 5.48M versus 5.75M in July.

Other Potential Market Movers
- The Fed’s Plosser speaking, weekly retail sales reports, CaseShiller Home Price Index, Richmond Fed Manufacturing Index, (LOW) analyst conference, (AMAT) solar power, Piper Jaffray Solar Power Conference, CSFB Chemical Conference, UBS Global Life Sciences Conference, Merrill Lynch Global Power/Gas Conference, Thomas Weisel Consumer Conference, RBC Financial Institutions Conference and Jeffries Shipping/Logistics/Offshore Services Conference could also impact trading today.

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

Stocks Finish Lower on Profit-taking Ahead of Housing Data

Indices
S&P 500 1,517.73 -.53%
DJIA 13,759.06 -.44%
NASDAQ 2,667.95 -.12%
Russell 2000 805.80 -.90%
Wilshire 5000 15,219.84 -.53%
Russell 1000 Growth 612.39 -.29%
Russell 1000 Value 847.57 -.74%
Morgan Stanley Consumer 738.25 -.38%
Morgan Stanley Cyclical 1,049.28 -.61%
Morgan Stanley Technology 658.39 +.17%
Transports 4,767.75 -1.23%
Utilities 509.16 +.18%
MSCI Emerging Markets 146.67 +1.42%

Sentiment/Internals
Total Put/Call .91 +5.81%
NYSE Arms 1.19 +42.45%
Volatility(VIX) 19.37 +1.95%
ISE Sentiment 133.0 -17.90%

Futures Spot Prices
Crude Oil 80.56 -1.30%
Reformulated Gasoline 207.35 -1.94%
Natural Gas 6.38 +4.93%
Heating Oil 222.39 -1.43%
Gold 737.80 -.16%
Base Metals 248.54 +.42%
Copper 364.20 +1.38%

Economy
10-year US Treasury Yield 4.62% unch.
US Dollar 78.54 -.07%
CRB Index 333.75 +.18%

Leading Sectors
REITs +1.53%
Gaming +1.21%
Computer Hardware +.30%

Lagging Sectors
Homebuilders -2.49%
Networking -2.55%
Airlines -5.41%

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Afternoon Recommendations
Bank of America:
- Rated (EMC) Buy, target $24.

Afternoon/Evening Headlines
Bloomberg:
- In its ongoing effort to curb foreclosures, Countrywide Financial(CFC) is actively working with borrowers who are experiencing financial challenges.
- Lowe’s Cos.(LOW) said earnings this year may be below its prior estimate because a drought slowed sales of patio furniture and plants. The stock fell 5.8% in after-hours trading.
- Iranian President Mahmoud Ahmadinejad said the Palestinian people are paying for the Holocaust with the violence in the Middle East and asked why varying views of the genocide aren’t allowed to be expressed.
- Protesters at Columbia University demonstrated against a speech by Iranian President Mahmoud Ahmadinejad scheduled for this afternoon.
- ValueClick Inc.(VCLK), the second-biggest US Internet advertising broker, rose as much as 10% in Nasdaq Stock Market trading on speculation the company may be bought.

Wall Street Journal:
- Microsoft Corp.(MSFT), lagging behind Google Inc.(GOOG) in the online ad market, is in talks to purchase a stake of as much as 5% in social-networking site Facebook Inc.

Boston Globe:
- Boston asset manager MFS Investment Management today said it is entering the alternative investments business with a new subsidiary that will provide seed and expansion capital to emerging hedge fund managers.

Nikkei English News:
- Toyota Motor(TM) plans to offer an ultracompact car for the European market around 2009 as emissions rules boost demand for small, fuel-efficient vehicles.

BOTTOM LINE: The Portfolio finished higher today on gains in my Computer longs, Internet longs, Retail 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 negative today as the advance/decline line finished lower, most sectors fell and volume was below average. Measures of investor anxiety were above-average into the close. Today's overall market action was mildly bearish. Meaningful weakness was mainly confined to the homebuilders, airlines and financials. The homebuilding index looks poised to take out its recent lows. While I don't see significant downside risk in this sector from current levels, I would continue to avoid it over the intermediate-term. I suspect financials have see their lows, but I doubt they will be any better than market performers over the intermediate-term. On the positive side, the bears were unable to gain any downside traction today despite the market's huge run over the last two weeks. The Vix is back near 20. The NYSE Arms was above-average most of the afternoon, as well. This remains one of the best markets I can remember for true stock-pickers, which could be attributed to the explosion in popularity of ETFs and technical analysis. Many growth stocks rose today, not just the leaders. My monitor pages are filled with several hundred names putting in meaningful upside today. A number of sectors also rose: the gaming, REIT, HMO, wireless, computer hardware, software, steel, alternative energy and utility sectors all posted gains, notwithstanding losses in the major averages. The NYSE cumulative advance/decline line is now back above its 200-day moving average. I still believe way too many bulls are underinvested and many bears are too short, given the recent change in the macro backdrop and psychology. Thus, I continue to expect any near-term market weakness to remain muted and short-lived. Given ongoing earnings jitters, I wouldn't be surprised to see the S&P 500 make a new all-time high as earnings season commences in earnest.

Stocks Lower into Final Hour on Profit-taking Ahead of Housing Data

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Computer longs, Medical longs and Retail longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is negative today as the advance/decline line is lower, most sectors are declining and volume is below-average. The Bear Stearns High Yield Index is 1.2% higher over the last week. The JPMorgan Emerging Market Bond Index is 1.0% higher over that period and hit an all-time high three days ago. As well, the speculative grade credit default swap index is down 24.4% in five days and the LCDX leveraged loan index is back to levels seen before the credit turmoil accelerated. Moreover, the dollar-based 3-month Libor rate has dropped 45 basis points in 5 days and the 10-year swap rate has declined 4 basis points over that period. Given recent more positive economic data, the surge in commodities, dollar weakness and stocks back near their highs, I still wouldn't be surprised to hear more hawkish comments from this week's Fed speakers. This could also boost the oversold dollar and put pressure on overbought crude prices. Despite the 9% gain in the S&P 500 in just five weeks and that the index is just 1.4% off its all-time high, equity index futures traders' positions remain extraordinarily bearish. In my opinion, one of the indications that stocks were just correcting recently and not beginning a new bear market was the very strong bullish sentiment displayed by corporate insiders. According to CNBC, insider buying over the past 12 months was the greatest last month during the peak of the credit turmoil. Despite the recent surge in stocks back near record highs, insider selling remains muted, which is a big positive and bodes well for further gains. Citi raised its target price on Apple (AAPL) to $185 from $160. AAPL is making a new all-time high on the news, and I still except AAPL to exceed $180 before year-end. The MS Tech Index is substantially outperforming the S&P 500 today, and the index is now 28% higher over the last year and up 17.5% year to date. As I said at the beginning of the year, I still expect tech to outperform over the intermediate-term. The Fed's Fisher said this morning that the US is experiencing a "mitigation" in inflation, which gives the Fed some "wiggle room." He also said "some might have lost sight of our economy's resiliency." I expect US stocks to trade mixed into the close from current levels as short-covering and investment manager performance anxiety offsets worries over tomorrow’s housing data and profit-taking.

Today's Headlines

Bloomberg:
- Crude oil is falling for a second day as companies increased output at platforms in the Gulf of Mexico after a storm threat passed.
- Banks reduced the backlog of unsold corporate debt to $370 billion after seizing on improved investor demand to issue $7 billion of leveraged loans and bonds in the past two weeks, Bank of America(BAC) analysts said.
- C-Cor Inc.(CCBL), the provider of broadband equipment and services to companies including Comcast Corp.(CMCSA), gained the most in eight years in early trading after Arris Group(ARRS) said it will buy the company for $730 million.
- Bristol-Myers Squibb(BMY) agreed to buy closely held Adnexus Therapeutics for as much as $505 million to gain an experimental cancer medicine.
- EMC Corp.(EMC) rose the most in six weeks after analysts at Bear Stearns(BSC) and Citi Investment Research recommended investors buy shares of the world’s largest maker of data-storage computers and software.
- Sims Group Ltd. agreed to buy Metal Management(MM) for about $1.49 billion in stock to create the world’s largest publicly traded scrap-metal recycler.

Wall Street Journal:
- Hard Case: Job Market Wanes for US Lawyers. Growth of Legal Sector Lags Broader Economy; Law Schools Proliferate.
- China has issued strict rules for television talent shows, banning “American Idol”-style, mass-audience voting by mobile text messaging.
- Wachovia Corp.(WB) and Bank of America(BAC) are among US companies adding jobs in wealth and asset management as more Americans enter retirement with more money than ever before.

NY Times:
- New York Grudgingly Opens Door to Ahmadinejad.

Business Week:
- US: mortgage default rate stabilizing.

NY Sun:
- State lawmakers threatened to withhold funding from Columbia University in New York over its invitation to Iranian President Mahmoud Ahmadinejad.

LA Times:
- California Governor Arnold Schwarzenegger will sign a bill requiring the state’s two public pension funds, the largest in the US, to sell investments in companies doing business in Iran.