Friday Watch

Late-Night Headlines
Bloomberg:
- Gold Is a Bad Hedge, Questionable Investment: Michael R. Sesit.
- Research In Motion(RIMM), maker of the BlackBerry e-mail phone, said second-quarter profit more than doubled and gave a forecast that beat analysts’ estimates as new products fended off a challenge from Apple’s(AAPL) iPhone.

Wall Street Journal:
- Federal Prosecutors Launch Probe of Bear Stearns(BSC) Funds.
- The biggest banking deal ever is likely to conclude today, resulting in the dismemberment of one of Europe’s largest banks.

MarketWatch.com:
- Nasdaq launches ETF market.

NY Times:
- Microsoft(MSFT) Rolls Out Personal Health Records.

USA Today.com:
- Rates on 30-year mortgages fall.

Financial Times:
- Alcatel-Lucent(ALA) looks set to lose business with AT&T(T) to its arch-rival in a fresh blow to the troubled Franco-American telecoms equipment maker.

Reuters:
- Google Inc.(GOOG), the world’s most popular Internet search engine, said it’s catching up with Baidu.com(BIDU) in China thanks to partnerships with local Internet companies.
- More than half a million toys ranging from key chains to Winnie the Pooh bookmarks and Baby Einstein color blocks are being recalled because of excessive lead, the US Consumer Product Safety Commission said.
- Short interest on the NYSE resumed its rise at the end of September, increasing by .3%, the exchange said.

Late Buy/Sell Recommendations
Business Week:
- Sotheby’s(BID) shares could rise 16% in a year. Rommel Dionisio of Wedbush Morgan Securities said investing in the auction company is a way to profit from the trend of rising wealth.
- Polycom Inc.(PLCM), a maker of video-conferencing systems, is trading below its value and could rise by more than 50% within six months to a year.

Night Trading
Asian Indices are -.50% to +.75% on average.
S&P 500 futures -.10%.
NASDAQ 100 futures +.02%.

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Earnings of Note
Company/EPS Estimate
- None of note

Upcoming Splits
- (PCAR) 3-for-2
- (RUSHA) 3-for-2

Economic Releases
8:30 am EST
- The Change in Non-farm Payrolls for September is estimated at 100K versus -4K in August.
- The Unemployment Rate for September is estimated to rise to 4.7% versus 4.6% in August.
- Average Hourly Earnings for September are estimated to rise .3% versus a .3% gain in August.

3:00 pm EST:
- Consumer Credit for August is estimated to rise to $9.5 billion versus $7.5billion in July.

Other Potential Market Movers
- The Fed’s Kohn speaking, Fed’s Warsh speaking and the Infectious Diseases Society of America Conference could also impact trading today.

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

Stocks Finish Slightly Higher on Rising Anxiety Ahead of Tomorrow's Employment Report

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Stocks Mixed into Final Hour Ahead of Tomorrow's Employment Report

BOTTOM LINE: The Portfolio is mixed into the final hour as losses in my Internet longs and Computer longs are offset by gains in my Medical longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is slightly positive today as the advance/decline line is mildly higher, most sectors are gaining and volume is below average. I suspect that tomorrow's jobs report will come in modestly below estimates of 100,000. As long as we don't see another negative number, investors will likely be OK with a mild disappointment. A negative number would likely produce a negative market reaction initially, but would ensure another Fed rate cut, in my opinion, which could boost stocks later in the day. A number above 175,000 may result in initial market strength, but would significantly lower the odds of a fed funds rate cut at the upcoming meeting. Fed fund futures now imply a 70% chance for a 25-basis-point cut at the upcoming meeting, down from 86% a week ago. I still think the Fed hasn't made up its mind yet and the odds are closer to 50/50. The AAII percentage of bulls rose to 51.8% last week from 49.4% the prior week. This reading is still modestly above average levels. The AAII percentage of bears fell to 25.3% last week from 34.2% the prior week. This reading is now modestly below average levels. However, the 10-week moving average of the percentage of bears is currently at 38.3%, a high level. The 10-week moving average of the percentage of bears peaked at 43.0% at the major bear market low during 2002. The 50-week moving average of the percentage of bears is currently 36.7%, an elevated level seen during only two other periods since tracking began in the 1980s. Those periods were October 1990-July 1991 and March 2003-May 2003, both of which were near major stock market bottoms. The extreme readings in the 50-week moving average of the percentage of bears during those periods peaked at 41.6% on Jan. 31, 1991, and 38.1% on April 10, 2003. We are currently very close to eclipsing the peak in bearish sentiment during the 2000-2003 market meltdown, which I still find astonishing. The S&P 500 is 110% higher from October 2002 lows and is only 0.4% lower from its recent record set in July. While bullishness has rebounded recently, I would have to see several readings in the high 50s/low 60s before becoming concerned. We are just now getting back to normal bull market levels in most gauges of investor sentiment. I see no signs of excessive optimism in our market, outside of the Chinese ADRs. Moreover, U.S. stock mutual funds have seen outflows for most of the past five years; there has been an explosion in low correlation/negative correlation U.S. stock strategies; there have been huge spikes in gauges of investor anxiety over the last couple of years on relatively mild market pullbacks; permabear pundits are more popular than ever; a fairly large chunk of the public generally hates U.S. stocks and says it won't ever invest in them again; public short-selling continues to set new records; index futures traders are positioned near historically net short levels; short interest on the major exchanges has exploded higher this year; the mainstream press obsesses with what is wrong and what could go wrong, and long-term investors are denigrated, while day-trading is championed as a crash is always seen as just around the corner. I continue to believe that overall investor sentiment regarding U.S. stocks has never been worse in history with the S&P 500 right near a record high, which bodes very well for further outsized gains. I expect US stocks to trade mixed-to-higher into the close from current levels on less economic pessimism and short-covering.

Today's Headlines

Bloomberg:
- The risk of owning corporate debt fell for a fourth day as signs that the credit rout has passes lured investors back to the market, according to credit-default swap traders who bet on creditworthiness.
- Bear Stearns(BSC), the securities firm hit hardest by the collapse of the subprime mortgage market, said it will “weather the storm” and isn’t looking for a cash infusion from an outside investors.
- European Central Bank President Trichet signaled the bank is in no rush to raised interest rates as higher credit costs threaten to slow economic growth.
- Fed district bank presidents are expressing skepticism about the need for further rate cuts, and some investors agree.
- The market where companies routinely borrow for periods of three months or less expanded for the first time in eight weeks as investors regained their appetite for some asset-backed debt.

NY Times:
- Thousands of software developers are creating features for Facebook, the rapidly growing social network, many hoping to strike it rich alongside Facebook’s own employees.

USAToday.com:
- Boom in high-rise developments reflects cultural change reshaping downtown areas across the USA.

Detroit News:
- Ford Motor(F) will push the UAW union for a less-expensive labor agreement than one reached with General Motors(GM).

Financial Times:
- Facebook Inc., the social-networking Web site, may not be worth $10 billion, as has been touted, except to a company such as Microsoft Corp.(MSFT), which doesn’t want to miss out on the next big thing.

Job Market Still Healthy, Factory Orders Decline After Large Jump

- Initial Jobless Claims rose to 317K versus estimates of 310K and 301K the prior week.

- Continuing Claims fell to 2541K versus estimates of 2550K and 2551K prior.

- Factory Orders for August fell 3.3% versus estimates of a 2.8% decline and a 3.4% increase in July.

BOTTOM LINE: The number of US workers filing first-time claims for unemployment benefits last week remained near the average for the year, showing companies are holding on to their employees, Bloomberg reported. The four-week moving-average of claims increased to 312,750 from 312,250. The unemployment rate among those eligible for jobless benefits, which tracks the US unemployment rate, held steady at a historically low 1.9%. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

Orders placed with US factories fell in August after a large jump in July, Bloomberg reported. Excluding transports, factory orders fell 1.7%. Bookings in August for capital goods excluding aircraft and military equipment, a gauge of future business investment, fell .5% versus a .9% increase the prior month. Shipments of non-defense capital goods excluding aircraft, which the government uses to compute GDP, rose 1% versus unch. in July. Orders for petroleum and coal products fell 7.4% in August. Factory inventories fell .1%, the first decline since February 2006. I continue to believe manufacturing will help boost overall US growth as companies gain confidence in the sustainability of the current expansion and rebuild depleted inventories.

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