Stocks Higher into Final Hour on Fed Commentary

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Retail longs, Medical longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is positive today as the advance/decline line is higher, almost every sector is rising and volume is about average. Weekly same-store-sales rose 2.0% this week, the same as last week, but up from 1.4% in early July. Moreover, weather derivatives show nationwide temperatures moving down to slightly below average for this time of the year for the next seven days, which could help boost cold weather clothing sales. As well, the Rasmussen consumer index rose to 111.7 today, up from 105.6 a week ago and also up from the August average of 106.8 during the peak of the global market turmoil. The investment grade credit default swap index has declined another 8.4% over the last week, and the speculative grade credit default swap index has decreased 3.3% over the same period, both of which are positives. The JPMorgan Emerging Market Debt Index hit a new all-time high yesterday and is up 0.55% over the last week. The Bear Stearns High-Yield Index is 0.47% higher during that period. Overall, I view comments by the Fed’s Poole today as more dovish than I expected. However, fed fund futures now imply a 38% chance for a 25-basis-point cut at the upcoming meeting, down from 48% yesterday and 74% one week ago. The 10-year yield is moving back to unchanged, and stocks are moving higher on these comments and the release of the FOMC minutes. I expect US stocks to trade mixed into the close from current levels as investment manager performance anxiety and short-covering offsets falling odds for a fed rate cut at the October meeting and higher energy prices.

Today's Headlines

Bloomberg:
- Ian Wace, co-founder of the $17 billion hedge fund manager Marshall Wace LLP, expects an “absolute explosion” in share prices globally as company profits increase.
- Google Inc. shares rose to a record after Lehman Brothers(LEH) raised its price forecast to the highest on Wall Street and predicted the dominant Internet search engine operator will soon introduce its own mobile telephone.
- Crude oil is rising above $80/bbl. in NY as the dollar declined against the euro even as the IEA said the recent global credit turmoil will cut demand for the commodity.
- Fed policy makers left their Sept. 18 meeting without any specific plan for further interest-rate cuts because they were unsure how markets and economic growth would evolve, records of the gathering suggest.
- The Fed’s Poole said turmoil in financial markets is showing signs of easing, though continued weakness in housing and credit markets may hurt economic growth.

NY Times:
- In Some Schools, iPods Are Required Listening.

NY Post:
- TiVo and Rhapsody are joining forces to deliver digital music service directly to TiVo consumer’s televisions via the digital video recording company’s set-top box.

Financial Times:
- SABMiller Plc, the world’s third-largest brewer, and Molson Coors Brewing are in talks to create a joint company.

Ansa:
- The IMF cut its 2008 forecast for economic growth in the 13 countries sharing the euro to 2.1% from 2.5% previously.

Economic Releases

- None of note

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Tuesday Watch

Late-Night Headlines
Bloomberg:

- Google Inc.(GOOG), seeking new sources of advertising revenue, introduced software that lets Web sites run YouTube videos and related ads alongside articles.
- The IMF will cut its forecast for US economic growth next year to 1.9% from the 2.8% growth it predicted in April. The IMF may also cut its forecast for growth in the UK to 2.3% from 2.7% predicted in April.
- Patients who get treatment within a day of having a minor stroke cut their risk of a second stroke by 80%, researchers reported.
- European finance ministers said China should allow the yuan to appreciate against the euro after failing to find a common position on their currency’s rally to a record against the dollar.
- Wheat futures fell for a fourth straight day in Asian trading on speculation higher prices may slow demand for the grain.

Wall Street Journal:
- Two American scientists and a Briton won the 2007 Nobel Prize in Medicine Monday for groundbreaking discoveries that led to a powerful technique for manipulating mouse genes.

MarketWatch.com:
- Does hardware have a softer side? Home Depot(HD) thinks so. It is testing a warm-and-fuzzy approach to selling hammers, lighting and garage doors that is targeted at female shoppers.
- Expeditors Intl.(EXPD) to join S&P 500 as TXU exits.

CNNMoney.com:
- Richest person in China is 26-year-old woman.
- Firms like Nasdaq, NYSE are making a mad dash to acquire other exchanges worldwide. What’s at stake? Cash and customers.

AP:
- American Electric Power(AEP) reached a $4.6 billion settlement with the federal government, agreeing to reduce pollution in the US Northeast to end an ongoing government lawsuit.

IBD:
- Profit growth likely screeched to a virtual halt in the third quarter. But Wall Street already is betting corporate earnings will quickly rev back into high gear.

Financial Times:
- European nations are to draw up radical proposals to improve transparency in financial markets and to change the way credit rating agencies operate in an attempt to prevent any recurrence of the financial turmoil arising from the credit squeeze.

The Economic Times:
- Reliance Retail has clinched an exclusive marketing and distribution deal with the iconic maker of iPods and Mac computers, Apple(AAPL), for standalone iStores. This is Reliance Retail’s first exclusive alliance with an international brand. The first store, to be called iStore by Reliance Digital, will come up by October-end in Bangalore. This is the first time Apple is tying up with a big corporate house for distribution anywhere in the world. Reliance Industries is India’s largest company by market value.
- Accenture Ltd.(ACN) and India’s Wipro Ltd. are vying to buy Dell’s(DELL) captive back-office business outside the US.

Shanghai Securities News:
- China’s inflation may remain higher than 6% in September, citing a survey with domestic brokerages and economists. Inflation may reach as high as 7% in September or October, citing Li Huiyong, an analyst at Shenyin & Wangguo Securities.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are -.25% to +.50% on average.
S&P 500 futures -.03%.
NASDAQ 100 futures -.16%.

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Earnings of Note
Company/EPS Estimate
- (MOS)/.62
- (OXM)/.46
- (AA)/.65
- (OSIP)/.39

Upcoming Splits
- (RUSHA) 3-for-2

Economic Releases
2:00 pm EST
- Minutes of Sept. 18 FOMC Meeting

Other Potential Market Movers
- The Fed’s Yellen speaking, IDB/TIPP Economic Optimism Index, weekly retail sales reports, (SFE) analyst day, (JCI) analyst presentation, (HRL) analyst meeting, (HME) analyst day and (MMM) investor day could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by technology 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 100% net long heading into the day.

Stocks Finished Mixed as Falling Energy Prices Offset Profit-Taking

Indices
S&P 500 1,552.58 -.32%
DJIA 14,043.73 -.16%
NASDAQ 2,787.37 +.25%
Russell 2000 840.14 -.56%
Wilshire 5000 15,621.75 -.31%
Russell 1000 Growth 629.99 -.07%
Russell 1000 Value 865.52 -.57%
Morgan Stanley Consumer 753.06 -.21%
Morgan Stanley Cyclical 1,079.52 -.53%
Morgan Stanley Technology 682.94 +.56%
Transports 4,934.97 -1.24%
Utilities 513.93 -.20%
MSCI Emerging Markets 155.01 -.23%

Sentiment/Internals
Total Put/Call .74 unch.
NYSE Arms 1.33 +143.0%
Volatility(VIX) 17.46 +3.25%
ISE Sentiment 187.0 +32.62%

Futures Spot Prices
Crude Oil $79.03/bbl. -2.70%
Reformulated Gasoline 199.93 -2.44%
Natural Gas 6.88 -2.73%
Heating Oil 215.90 -2.90%
Gold 739.0 -1.10%
Base Metals 245.71 -2.36%
Copper 362.0 -2.83%

Economy
10-year US Treasury Yield 4.64% unch.
US Dollar 78.78 +.60%
CRB Index 323.39 -1.77%

Leading Sectors
Computer Hardware +1.92%
Gaming +1.22%
Restaurants +.96%

Lagging Sectors
Gold -1.43%
Oil Tankers -1.70%
Oil Service -2.02%

Evening Review
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Afternoon Recommendations
Deutsche Bank:
- Rated (FISV), (SSS), (EXR) and (JKHY) Buy.

Bank of America:
- Rated (MF) Buy, target $37.

Citigroup:
- Rated (ERTS) Buy, target $75.
- Rated (ATVI) Buy, target $29.

Afternoon/Evening Headlines
Bloomberg:
- Greg Yurek, CEO of American Superconductor Corp.(AMSC) see wind-power growth.(video)
- Sprint Nextel(S) ousted CEO Gary Forsee after he failed to wrest customers from Verizon Wireless(VZ) and AT&T Inc.(T). The stock rose 3% in after-hours trading.
- Yum! Brands(YUM), the owner of the Pizza Hut, Taco Bell and KFC restaurant chains, said third-quarter profit rose 17%, exceeding analysts’ estimates. The stock rose 3.6% in extended trading.
- Crude oil dropped more than $2 a barrel for the first time in almost two months as the dollar rebounded against the euro, reducing the appeal of commodities as an investment and on speculation oil consumption will fall.

New Yorker:
- Victor Niederhoffer closed his main Matador hedge fund last month after losing more than 75% of assets, the second time he’s been forced to liquidate.

NY Post:
- Ellington Capital Management, a hedge fund with $5.2 billion in assets, suspected withdrawals from some accounts because of a decline of liquidity in markets back by mortgages.

CNNMoney.com:
- Ethanol Sales to Exceed Gasoline In Brazil By 2020, according to the CEO of Petrobras.

BOTTOM LINE: The Portfolio finished higher today on gains in my Computer longs, Semi longs, Internet 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 slightly negative today as the advance/decline line finished mildly lower, sector performance was mixed and volume was light. Measures of investor anxiety were slightly above average into the close. Today's overall market action was neutral. Many market-leading growth stocks once again posted huge relative gains. Tech was relatively strong, as well, with computer hardware jumping 1.9%. Commodities and housing-related equities were sources of weakness throughout the day. The Retail HOLDRs (RTH) fell 0.2% but finished well off session lows. I wouldn't be surprised to see retail stocks actually rise on upcoming September reports that will likely come in modestly below estimates. Investors may begin looking past near-term weakness and begin factoring in colder weather, lower energy prices, better consumer confidence and the positive effects of rising stocks at a time of record net worth and low unemployment. I suspect this holiday retail selling season will easily exceed dramatically lowered estimates as well. The NYSE Arms finished at a high 1.32 on low volume, which bodes well for the near term. I continue to see meaningful technical breakouts in all market-cap categories of growth stocks. The Financial Times has an interesting interview with Giles Conway-Gordon today, managing director of a hedge fund of funds and a 20-year industry veteran. He says that he expects hedge funds to see $500 billion in redemptions over the next 12 months. Quantitative black-box funds that use massive leverage are especially at risk and many won't survive, he said. His concerns echo comments I have made numerous times over the last year. Many of these "market-neutral" funds have very poor risk-adjusted returns in both up and down markets. As well, a large percentage of these funds were marketed as a way to generate 8% to 12% low-risk gains in what they said was a U.S. secular bear market. Their poor performance, combined with the dying belief in the U.S. secular bear case, will result in substantial outflows over the coming years, in my opinion. I still think a significant portion of this capital will flow into more positively-correlated U.S. stock strategies, which could provide the catalyst for the “mother of all short-covering rallies.”