Wednesday, October 10, 2007

Stocks Mixed into Final Hour as "Growth" Stock Surge Offsets Weakness in Financials

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet 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 slightly negative today as the advance/decline line is mildly lower, sector performance is mixed and volume is about average. Google (GOOG) is rising another $9 today as Merrill upped its target to $740. As well, antitrust experts say the DoubleClick deal will go through. Moreover, ComScore is saying today that Google had 37.1 billion searches worldwide in August vs. 8.5 billion for Yahoo! (YHOO) and 3.2 billion for Baidu (BIDU). Google remains my largest equity long position, and I still see substantial upside from current levels. It is interesting to note that investment research downgrades have been running ahead of upgrades by about a 4-to-1 margin over the last week, yet stocks are higher. As well, despite yesterday's dovish Fed commentary, fed fund futures now imply a 34% chance for a 25-basis-point cut at the upcoming meeting, down from 70% one week ago and stocks are still mostly rising. The underlying tone of the market remains very positive. I still think too many bulls are underinvested and many bears are too short. While I do pay attention to the Investors Intelligence survey, I do not view it as a good contrary indicator. According to Investors Intelligence, optimism on U.S. stocks rose to the highest this week since December 2005. Many are insinuating that this reading points to an imminent drop in stocks. Over the ensuing five months, however, from January 2006-May 2006, the S&P 500 rose 7%. Just look at the Investors Intelligence chart carefully, and you can see that bullish sentiment has been around current levels many other times since the bear market lows of 2002. The S&P 500 is up 115% since then. On the other hand, according to Greenwich Alternative Investments, hedge fund managers that are bullish on U.S. stocks are at a historical low this month. Only 8% are bullish, while 92% are either neutral or bearish. This also corresponds with the gigantic rise in short interest this year and S&P 500 futures traders that remain positioned near historically net short levels. As well, an overwhelming majority of those surveyed believe the dollar will continue to decline and that the 10-year will fall in price. Here is a summary of Greenwich's October survey:





U.S. Equities (S&P 500)

Expectation

August

September

October

Bullish

36%

25%

8%

Neutral

28%

17%

50%

Bearish

36%

58%

42%

U.S. Dollar

Bullish

43%

33%

25%

Neutral

14%

25%

17%

Bearish

43%

42%

58%

U.S. Treasury 10-year Note (price)

Bullish

21%

33%

25%

Neutral

29%

17%

25%

Bearish

50%

50%

50%





Source: Greenwich Alternative Investments


I expect all three of these consensus beliefs to be proven wrong over the intermediate-term. These findings provide more evidence of the current U.S. "negativity bubble," in my opinion. I expect US stocks to trade modestly higher into the close from current levels on investment manager performance anxiety, strong “growth” stock outperformance and short-covering.

Today's Headlines


Bloomberg:

- The risk of owning the debt of European financial companies fell to the lowest level since July as credit-default swap traders bet that the worst losses from subprime mortgages are known.
- Mortgage applications in the US rose 2.4% last week, as purchases gained for the first time in three weeks and refinancing rebounded.
- The US economy will skirt recession even as the housing slump takes a bigger bite from growth, according to a survey of economists.
- A group called DraftGore.com placed an open letter in the NY Times urging former vice president and 2000 Democratic presidential nominee Al Gore to run again for the White House.
- Chrysler’s US factory workers went on strike today after the UAW union failed to reach a new contract agreement with the third-largest US-based automaker.
- Akamai Technologies(AKAM) and Limelight Networks(LLNW), makers of software that increases data-delivery speed on the Internet, rose in Nasdaq trading after an analyst rated the stocks “buy” in new coverage.
- Costco Wholesale Corp.(COST), the largest US warehouse club, reported fourth-quarter profit that exceeded analysts’ estimates as customers bought more fresh food and consumer electronics. The stock had its biggest gain in five years, rising 9%.
- Hovnanian Enterprises(HOV) climbed as much as 6.6% on speculation it may be bought by Toll Brothers(TOL), the largest US luxury homebuiler.

Wall Street Journal:
- The US economy will continue to expand at a moderate pace because export growth will counteract the housing slump and households won’t stop spending, said Mickey D. Levy, the chief economist at Bank of America(BAC).
- MGM Mirage(MGM) will build a new casino resort in Atlantic City.

NY Times:
- President Bush’s administration is developing new rules to allow more foreign guest workers into the country for farm labor.
- Marking a new form of collaboration between the entertainment industry and corporations seeking to highlight a social or political agenda, Electronic Arts(ERTS), the No. 1 video game publisher, plans to announce today that it has collaborated with BP Plc(BP), the energy company, in developing the latest installment of the hit SimCity computer game series.

- Intel Pushes Partners to Spend More on Online Ads.

Seeking Alpha:
- Goldman(GS) Boosts Cisco(CSCO) Target: Significant Upside Will Follow.

AP:
- EBay Inc.(EBAY) plans to start a social-networking service and will introduce other “customer-friendly” features to revive sales.

Wholesale Inventories Rise Less Than Estimates, Sales Rise

- Wholesale Inventories for August rose .1% versus estimates of a .3% increase and a .2% gain in July.

BOTTOM LINE: Sales at US wholesalers outpaced inventories in August, a sign manufacturers may be spurred to expand production, Bloomberg reported. Sales at wholesalers climbed .4% versus a .2% gain the prior month. The inventory-to-sales ratio remains at a low 1.11. Factory inventories fell .1%, the first decline since February 2006. Sales of petroleum products also fell .1%. I continue to believe inventory rebuilding will help boost overall US growth as companies gain confidence in the sustainability of the current expansion.

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Tuesday, October 09, 2007

Wednesday Watch

Late-Night Headlines
Bloomberg:
- Chevron Corp.(CVX), the second-largest US oil company, said third-quarter net income was “significantly below” the record $5.4 billion the company earned in the April-June period.
- Saudi Aramco plans to increase oil exports to China by at least 9% this year, said two company officials.

MarketWatch.com:
- Retailers may see slowest gain in five months as eighth-warmest September in 113 years chills demand for cold-weather apparel.
- Is Google(GOOG) a better buy than Yahoo!? At $600, Web search giant still has lower valuation than rival.

CNNMoney.com:
- Carly Fiorina to join Fox Business Channel. The media company says Former HP chief, ‘one of the foremost business leaders of our time,’ will join Fox Business Channel when it launches.
- 35 Best Places to Retire.

IBD:
- Inflation Worries? Not For Fed, Which Focuses On Growth.

c/net News.com:
- Under mounting pressure from their Republican colleagues, the Democrats on a US House of Representatives panel have finally scheduled a vote on a bill that would extend by four years a soon-to-expire federal ban on Internet access taxes.

USA Today.com:
- Personal chefs aren’t just for the rich anymore.

Reuters:
- Goldman Sachs(GS) shares hit all-time high.

Late Buy/Sell Recommendations
Citigroup:

- Reiterated Buy on (GILD), target $51.

Night Trading
Asian Indices are +.50% to +1.25% on average.
S&P 500 futures -.11%.
NASDAQ 100 futures -.11%.

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Earnings of Note
Company/EPS Estimate
- (COST)/.83
- (HST)/.13
- (PGR)/.37
- (MON)/-.16
- (RT)/.21
- (LRCX)/1.26
- (SCHN)/1.34

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- Wholesale Inventories for August are estimated to rise .3% versus a .2% gain in July.

10:30 am EST
- Bloomberg consensus estimates call for a 1,250,000 barrel crude oil build versus a 1,138,000 barrel increase the prior week. Gasoline supplies are expected to fall by 350,000 barrels versus a 41,000 barrel decline the prior week. Distillate Inventories are estimated to fall by 750,000 barrels versus a 1,173,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to remain unch. versus a .59% increase the prior week.

Other Potential Market Movers
- The Fed’s Rosengren speaking, (HRL) analyst meeting, (PETM) analyst meeting, (MSCC) analyst day, (MMM) investor day, (BFF) investor meeting, Biotechnology Industry Organization Investor Forum could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by commodity and automaker stocks in the region. I expect US equities to open mixed and to finish mixed. The Portfolio is 100% net long heading into the day.

DJIA and S&P 500 Close at New All-Time Highs on Fed Commentary

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