Core PPI Decelerates, Retail Sales Rebound, Confidence Falls, Inventories Decline

- The Producer Price Index for September rose 1.1% versus estimates of a .5% increase and a 1.4% decline in August.

- The PPI Ex Food & Energy for September rose .1% versus estimates of a .2% gain and a .2% increase in August.

- Advance Retail Sales for September rose .6% versus estimates of a .2% gain and a .3% increase in August.

- Retail Sales Less Autos for September rose .4% versus estimates of a .3% gain and a .4% decline in August.

- Preliminary Univ. of Mich. Consumer Confidence for October fell to 82.0 versus estimates of 84.0 and 83.4 in September.

- Business Inventories for August rose .1% versus estimates of a .2% gain and a .5% increase in July.

BOTTOM LINE: Prices paid to US producers rose in September as oil costs climbed, while core inflation was less than forecast, Bloomberg said. Over the last 12 months core producer prices rose 2.0% down from 2.2% the prior month. The increase in wholesale prices last month was led by a 4.1% gain in energy costs, the most since November. I expect producer prices to show meaningful deceleration over the intermediate-term as commodity prices decline from elevated levels.

Retail sales in the US blew past economists’ forecasts last month, reducing concerns that a consumer slowdown might drag the economy into recession, Bloomberg reported. Purchases at automobile dealerships and parts stores rose 1.2%. Sales at electronics and appliance stores rose .9%. Excluding autos, gasoline and building materials, the retail group the US government uses to compute GDP for consumer spending, sales gained .3% versus unch. in August. There remains little evidence of the imminent recession that so many have predicted over the last year. I expect retail sales to exceed estimates again next month as weather turns more seasonal and sentiment improves.

Confidence among US consumers this month fell to the lowest since August 2006, Bloomberg reported. The expectations component fell to 71.6 from 74.1 in September. However, the current conditions component, which is a gauge of Americans’ perceptions of their financial situation and whether it is a good time to buy big-ticket items, rose to 98.2 from 97.9 in September. Consumers also said they expect inflation to rise 3.0% in a year versus expectations of a 3.1% increase last month. The S&P 500 touched its second record high this week and has gained 11% since mid-August. I expect consumer confidence to rebound significantly over the intermediate-term as housing fears subside, stocks continue to rise, interest rates remain low, inflation decelerates further, energy prices decline, incomes continue to substantially outpace inflation and unemployment remains historically low.

Inventories at US businesses rose less than forecast in August. Sales fell .4%. I continue to expect manufacturing to help boost overall US growth over the intermediate-term as companies gain confidence in the current expansion and rebuild depleted inventories.

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Friday Watch

Late-Night Headlines
Bloomberg:
- Electronic Arts(ERTS) agreed to buy Bioware Corp. and Pandemic Studios, makers of video games including “Baldur’s Gate,” for about $825 million to add action-adventure and role-playing titles.
- Samsung Electronics, Asia largest maker of semiconductors, flat screens and mobile phones, posted a surprise gain in profit after a shortage of liquid-crystal displays drove up prices.

Wall Street Journal:
- Economists’ Outlook Turns Rosy. Majority in Survey Say Fed’s Rate Cut on Target.

MarketWatch.com:
- General Electric(GE) infrastructure gets the limelight.

CNNMoney.com:
- Children’s Place Retail Stores(PLCE), the operator of the Disney Store clothing chain, is for sale.
- Berkshire may be done with PetroChina.

Business Week:
- Bear Stearns’(BSC) Bad Bet.

USA Today.com:
- Federal deficit hits lowest level in 5 years. The deficit is now 1.2% of GDP, less than the average of the last 40 years.

Financial Times:
- China is considering limiting the operations of steelmakers, petrochemical plants and other factories near Beijing for nearly two months next year in order to reduce air pollution during the Olympic Games, according to local media.
- Moody’s Investor Service may introduce new ratings to give guidance on the price performance of thinly traded securities at the end of the year, citing Ray McDaniel, the rating company’s chief executive.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (BBY), target $55.
- Reiterated Buy on (ERTS), target $75.
- Downgraded (NILE) to Sell, target $88.

Business Week:
- IncrediMail Ltd.(MAIL), a maker of software for personalizing e-mail, could see its stock gain 36% within a year, according to Matthew Weiss of Maxim Group.

Night Trading
Asian Indices are -1.25% to -.25% on average.
S&P 500 futures -.22%.
NASDAQ 100 futures -.29%.

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Economic Releases
8:30 am EST
- The Producer Price Index for September is estimated to rise .5% versus a 1.4% decline in August.
- The PPI Ex Food & Energy for September is estimated to rise .2% versus a .2% gain in August.
- Advance Retail Sales for September are estimated to rise .2% versus a .3% gain in August.
- Retail Sales Less Autos for September are estimated to rise .3% versus a .4% decline in August.

10:00 am EST
- Preliminary Univ. of Mich. Consumer Confidence for October is estimated to rise to 84.0 versus 83.4 in September.
- Business Inventories for August are estimated to rise .2% versus a .5% increase in July.

Other Potential Market Movers
- The Fed’s Bernanke speaking, Fed’s Fisher speaking, Fed’s Yellen speaking, Fed’s Kohn speaking and (HRL) analyst meeting could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by commodity and technology stocks in the region. I expect US equities to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 75% net long heading into the day.

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.