Today's Headlines

Bloomberg:
- US stocks rallied, sending the S&P 500 to a record, after job growth exceeded forecasts and signaled the economy has weathered the August financial turmoil.
- Merrill Lynch(MER) will report its first quarterly loss in six years and faces “continued challenges” in credit markets the rest of this year. The stock is rising 3% on the news.
- Former Duke University lacrosse players accused of rape and then cleared sued disbarred ex-District Attorney Mike Nifong, the city of Durham, North Carolina, and its police department for malicious presecution.
- M&A, Stock Sales Climb as Global Credit Markets Calm.
- Copart(CPRT) rose to a record high on the Nasdaq after it increased its buyback program by 20 million shares, or almost a quarter of its stock outstanding.
- Iranian President Mahmoud Ahmadinejad reiterated his condemnation of Israel as crowds gathered in Tehran to chant “Death to America” and “Death to Israel” at a rally in support of Palestinians.
- Yahoo!(YHOO) executives should consider breaking up or selling the company, which runs the most-visited US Web site, to increase the value of the shares, according to Sanford C. Bernstein analysts.

Wall Street Journal:
- The United Kingdom is home to 17% of Europe’s high net-worth individuals, defined as anyone with more than $1 million in financial assets, such as private-equity holdings, stocks and bonds, according to a survey by Merrill Lynch and Capgemini.
- US Venture Capitalists Target Bigger Buyout Deals.

USAToday.com:
- The US military says it has captured at least six al-Qaeda media centers in Iraq and arrested 20 suspected propaganda leaders since June. The seizures of the centers underscore the importance al-Qaeda has placed on media.

DailyPrincetonian.com:
- Apple Users Quadruple at Princeton.

Job Market Still Healthy, Americans' Wages Growing Twice Inflation Rate

- The Change in Non-Farm Payrolls for September was 110K versus estimates of 100K and an upwardly revised 89K in August.

- The Unemployment Rate for September rose to 4.7% versus estimates of 4.7% and 4.6% in August.

- Average Hourly Earnings for September rose .4% versus estimates of a .3% gain and a .3% increase in August.

BOTTOM LINE: US employment accelerated in September and revised figures for August showed an unexpected gain, easing recession concerns and making the Fed less likely to cut interest rates again, Bloomberg reported. Revisions added 118,000 jobs to payroll numbers previously reported for July and August. Service industries, which include insurance companies, banks, restaurants and retailers, added 143,000 jobs last month. Moreover, average hourly earnings are growing at a very strong 4.1% year over year vs. the 20-year average of 3.2%. The 10-month moving average of average hourly earnings is 4.01%, and 1998 was the only year during the entire 1990s expansion that exceeded current levels. Furthermore, average hourly earnings are growing more than twice the CPI's most recent rate of 2.0% year over year. Finally, the unemployment rate's 10-month moving average is 4.5%. There have been only two other periods since the mid-1950s during which it has been lower. Job creation of around 75,000-125,000 is perfect for the stock market, in my opinion. The 10-year yield is rising 15 basis points on today's news as the imminent recession thesis loses further credibility. Fed funds futures now imply a 53.2% chance of a 25-basis-point cut at the upcoming meeting, down from 72% yesterday and 84% one week ago. A very healthy job market, record stock prices and a relatively small price decline in nationwide home prices, after historic gains, are the primary reasons that Americans' net worth hit another record high during the second quarter. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor costs increases.

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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.