Thursday, October 11, 2007

Stocks Finish Lower on Profiting Taking After Recent Sharp Gains

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Stocks Lower into Final Hour on Profit-taking, Weakness in Tech, ECB Comments

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet longs, Medical longs, Semi longs and Computer longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short and (BHP) short 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 above average. As I cautioned earlier in the week, September retail sales were disappointing, rising 1.7% vs. estimates of a 2.5% gain. The ICSC said that weather subtracted 0.5% from sales. There remains little evidence of an impending recession. Intrade.com is still showing the chances of a recession next year at 43%. However, this is down from 59% last month. The AAII percentage of bulls rose to 54.6% this week from 51.8% the prior week. This reading is above average levels. The AAII percentage of bears rose to 25.8% this week from 25.3% the prior week. This reading is still modestly below average levels. However, the 10-week moving average of the percentage of bears is currently at 36.9%, 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 36.6%, 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 long-term bearish sentiment during the 2000-2003 market meltdown, which I find astonishing given that the S&P 500 is 115% higher from the October 2002 major bear market lows and is making new record highs daily. While bullishness has rebounded recently, I would have to see a string of readings in the high 50s-low 60s before becoming concerned. We are just now getting back to more normal bull market levels in most gauges of investor sentiment. I still 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; domestic ETFs have just recently seen improved inflows, and there has been an explosion in low correlation/negative correlation U.S. stock strategies; the quantity of research that caters to these funds has soared; permabears pundits are more popular than ever; there have been huge spikes in gauges of investor anxiety over the last couple of years on relatively mild market pullbacks; 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 is more popular than ever; short interest on the major exchanges has exploded higher this year; S&P futures traders remain positioned near historically short levels; the mainstream press obsesses with what is wrong and what could go wrong; investors seem to always price in the worst case scenario immediately rather than the most likely scenario; 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 market at record highs, which bodes very well for further outsized gains. I expect US stocks to trade mixed-to-lower into the close from current levels on profit-taking and more shorting.

Trade/Budget Deficits Shrink, Import Prices Rise on Oil, Job Market Healthy

- The Trade Deficit for August shrank to -$57.6 Billion versus estimates of -$59.0 Billion and -$59.0 Billion in July.

- The Import Price Index for September rose 1.0% versus estimates of 1.0% and a .3% decline in August.

- Initial Jobless Claims for last week fell to 308K versus estimates of 315K and 320K the prior week.

- Continuing Claims fell to 2521K versus estimates of 2550K and 2536K prior.

- The September budget surplus rose to $111.6 billion versus estimates of $100.7 billion and $56.2 billion in August.

BOTTOM LINE: The US trade deficit narrowed more than forecast in August as exports climbed to a record for the sixth consecutive month, Bloomberg reported. According to most economists, record exports will prevent the economy from slipping into recession even as the housing slump persists. A cheaper dollar is also boosting gains in tourism to the US. The nation’s surplus in services grew to a record $9 billion, as a result of travel. The trade deficit with China narrowed 5.4% as American companies exported a record $5.9 billion worth of goods. I expect the trade deficit to only improve modestly over the intermediate-term as energy price declines more than offset better US growth relative to other developed nations.

Prices of goods imported into the US rose in September as costs for oil jumped to a record, Bloomberg reported. Prices excluding oil fell .2%, the largest drop since October 2006. “This drives home the point that weakness in the dollar is not a huge inflation risk,” said Doug Porter, an economist at BMO Capital. The costs of imported capital goods were unchanged. Prices of Chinese goods rose .2%. I expect import price increase to decelerate meaningfully over the intermediate-term as energy prices fall as other product price increases remain muted.

The number of US workers filing first-time claims for unemployment benefits fell more than forecast last week, showing the labor market remained resilient heading into the fourth quarter, Bloomberg said. The four-week moving-average of jobless claims fell to 310,250 from 313,250 the prior week. The unemployment rate among those eligible to collect benefits, which tracks the US unemployment rate, remained 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.

The US government posted the smallest budget deficit in five years as tax revenue reached a record and spending rose at a slower pace, Bloomberg reported. Total government spending rose 2.8% for the year, compared with an average annual increase of 6.8% since 2001. Revenue from tax receipts rose 6.7% in 2007, helping cut the budget deficit by 33% from the prior year. Corporate tax receipts rose 4.6% during the year. US military and social security spending rose 6.1% for the year, while spending on Medicare and Medicaid rose 9.4%. I expect the budget deficit to continue to fall meaningfully over the intermediate-term.

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Wednesday, October 10, 2007

Thursday Watch

Late-Night Headlines
Bloomberg:
- Legg Mason(LM) fund manager Bill Miller acquired a 13% stake in convertible preferred stock issued by Thornburg Mortgage to finance its issuance of jumbo mortgages.
- TXU Corp.(TXU) completed its $32 billion sale to a group led by KKR and TPG Inc. in a record buyout, setting up a possible breakup of Texas’s largest electricity supplier.

- The House Judiciary Committee approved a four-year extension on a ban on taxing Internet services, rejecting efforts by cable and telephone companies to make the prohibition permanent.
- Billionaire Warren Buffett’s Berkshire Hathaway(BRK/A) cut its stake in PetroChina to 3.1% of the publicly held shares as of Sept. 30, from 5.44% five days earlier.
- Australia’s unemployment rate fell to a 33-year low as companies hired extra workers for a 11th consecutive month in September, adding to signs the economy’s 16-year expansion may be gathering pace.
- Chrysler LLC agreed to spend $11 billion to finance a union-run health fund and will pay beginning employees lower wages under a new contract with the United Auto Workers.

Wall Street Journal:
- Nine Wall Street firms have agreed to pay $280 million for a minority stake in bond-trading firm TradeWeb LLC, a move that could help unify disjointed markets.

MarketWatch.com:
- VMware, Microsoft headed for virtualization war.
- ‘Cubes’ ETF may get a littler sibling.

IBD:
- Medical Equipment And Systems Firms Enjoy Healthy Runs.

CNBC.com:
- Google’s(GOOG) share price should hit $750, Cramer said Wednesday on Mad Money, maybe even higher.

Late Buy/Sell Recommendations
Citigroup:

- Reiterated Buy on (MON), target $95.
- Reiterated Buy on (KO), raised target to $67.

Night Trading
Asian Indices are +.25% to +1.0% on average.
S&P 500 futures +.09%.
NASDAQ 100 futures +.03%.

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Earnings of Note
Company/EPS Estimate
- (MTB)/1.94
- (PEP)/.96
- (SWY)/.44
- (SLM)/.73
- (FAST)/.42
- (IDT)/-.37
- (PLL)/.56
- (WINN)/-.14
- (WGO)/.40

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Trade Deficit for August is estimated to shrink to -$59.0 Billion versus -$59.2 Billion in July.
- The Import Price Index for September is estimated to rise 1.0% versus a -.3% decline in August.
- Initial Jobless Claims for last week are estimated to fall to 315K versus 317K the prior week.
- Continuing Claims are estimated to rise to 2550K versus 2541K prior.

12:00 pm EST
- The 2007 US Budget Deficit is estimated to shrink to -$162.5 Billion versus -$247.7 Billion in 2006.
- The Monthly Budget surplus for September is estimated to rise to $100.0 billion versus $56.2 billion in August.

Other Potential Market Movers
- The Fed’s Kroszner speaking, ICSC Chain Store Sales report, weekly EIA natural gas inventory report, (HRL) analyst meeting, (IHS) investor day, (MSCS) analyst meeting and Biotechnology Industry Organization Investor Forum could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by commodity and shipping 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 Mixed on Healthy Consolidation of Recent Gains

Indices
S&P 500 1,562.47 -.17%
DJIA 14,078.69 -.61%
NASDAQ 2,811.61 +.27%
Russell 2000 845.19 -.06%
Wilshire 5000 15,730.40 -.10%
Russell 1000 Growth 636.09 +.16%
Russell 1000 Value 869.0 -.43%
Morgan Stanley Consumer 753.21 -.40%
Morgan Stanley Cyclical 1,085.75 -.30%
Morgan Stanley Technology 689.40 +.34%
Transports 4,933.53 -1.07%
Utilities 516.09 -.92%
MSCI Emerging Markets 157.44 +.63%

Sentiment/Internals
Total Put/Call .88 +.88%
NYSE Arms 1.15 +58.35%
Volatility(VIX) 16.67 +3.47%
ISE Sentiment 123.0 -29.71%

Futures Spot Prices
Crude Oil $81.27 +1.27%
Reformulated Gasoline 203.0 +.49%
Natural Gas 7.01 +2.14%
Heating Oil 221.77 +1.48%
Gold 746.50 +.46%
Base Metals 252.82 +1.89%
Copper 370.10 +2.31%

Economy
10-year US Treasury Yield 4.65% unch.
US Dollar 78.32 -.27%
CRB Index 329.33 +1.06%

Leading Sectors
Oil Service +2.89%
Biotech +1.10%
Retail +1.05%

Lagging Sectors
Insurance -1.0%
Banks -1.12%
Oil Tankers -2.01%

Evening Review
Market Performance Summary
WSJ Data Center
Sector Performance
ETF Performance
Style Performance
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Market Wrap CNBC Video(bottom right)
S&P 500 Gallery View
Timely Economic Charts
GuruFocus.com
PM Market Call
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After-hours Movers

After-hours Stock Quote
In Play


Afternoon Recommendations
Piper Jaffray:

- Rated (QGEN) Outperform.

Afternoon/Evening Headlines
Bloomberg:
- New Jersey’s loss of residents to other US states more than tripled between 2002 and 2006, draining $10 billion in personal income from the economy and reducing tax revenue by $680 million, according to a Rutgers University report.
- Medtronic’s(MDT) experimental stent, Endeavor, appears to safely and effectively prop open clogged heart arteries, advisers to US regulators said today while deliberating whether to recommend approval of the device.
The stock is rising 3.2% in after-hours trading.
- Morgan Stanley(MS) said its quantitative strategy traders lost $390 million during a single day in August as their computer models failed to account for “widespread” investor selling.
- The United Auto Workers union said it reached a tentative agreement with Chrysler LLC, ending a strike that began at 11 am NY time this morning.
- Lexmark Intl.(LXK) surged 6.7%, the most since January 2006, on speculation the second-biggest US printer maker will be bought.
- Zumiez(ZUMZ) said September sales rose 13.9%. The stock is rising 5% in extended trading.
- US power producers will install more than 4,000 megawatts of wind generation this year as turbine-makers ramp up output, easing a shortage that’s hampered growth for more than a year.
- Crude oil rose for a second day on speculation that Turkish forces may attack rebel camps in northern Iraq, curtailing oil shipments.

Financial Times:
- Paulson in drive to ease subprime ‘pain.’

BOTTOM LINE: The Portfolio finished higher today on gains in my Software longs, Semi longs, Internet longs, Biotech 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 slightly negative today as the advance/decline line finished mildly lower, sector performance was mixed and volume was about average. 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. Every market-cap size of growth stocks rose today, as outperformance was again significant. As well, a number of sectors posted meaningful gains. Retail, construction, biotech, computer hardware, Internet and energy shares all posted nice gains. The Nasdaq is now 17.1% higher year-to-date. Investors are in love with emerging stocks, but I am finding many U.S. stocks across all market caps that have just as much or more growth than emerging market stocks with much less risk and greater transparency. As I said at the beginning of the week, I think retail sales for September will come in modestly below estimates, however, this is mostly factored into the stocks at current levels, in my opinion. I wouldn't be surprised to see stocks open modestly lower in the morning before gaining later in the afternoon.