Stocks Rising into Final Hour on Less Economic Pessimism, Buyout Speculation

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Medical longs, Semi longs, Biotech longs and Computer longs. I covered my (IWM)/(QQQQ) hedges and some of my (EEM) short and added to my (UA) long today, thus leaving the Portfolio 100% net long. The overall tone of the market is positive today as the advance/decline line is higher, most sectors are rising and volume is above average. A number of market-leading stocks are moving back to session highs even as the odds of a 25-basis-point Fed rate cut at the upcoming meeting continue to fall. They are down to 30% now, from 40% yesterday. As well, oil is back to record highs. The market continues to display impressive resiliency. The NYSE Arms has been running above average all day, which is also a positive. Tech stocks are higher after Samsung posted positive results and raised memory capex. I expect semis to begin to participate more in the current rally over the coming weeks. Moreover, Oracle (ORCL) is paying a significant premium for BEA Systems (BEAS), and Oracle isn’t declining on the news. This is a big positive for tech, and I think more significant acquisitions will occur before year-end as many companies remain cheap relative to their prospects. I expect US stocks to trade mixed-to-higher into the close from current levels on performance anxiety, less economic pessimism and short-covering.

Today's Headlines

Bloomberg:
- Carl Icahn told CNBC that Oracle Corp.(ORCL) made a “smart move” offering $6.7 billion for BEA Systems(BEAS) even though BEA is still “undervalued.”
- BEA Systems(BEAS) today confirmed that its Board had received an unsolicited proposal from Oracle(ORCL) to acquire BEA Systems for $17. The board concluded that the proposal significantly undervalues BEA.
- Copper is falling on speculation demand in China, the world’s biggest metal consumer, will decline should the country raise interest rates again to cool the economy.

Wall Street Journal:
- EBay Inc.(EBAY) is upgrading its search technology and simplifying its Web site to attract more buyers.

USAToday.com:
- The number of tourists visiting New Orleans is forecast to rise more than 60% this year, helped by conventions and corporate meetings.

LA Times:
- Survey finds homeless numbers drop countrywide.

Financial Times:
- Hewlett-Packard(HPQ) perennial bid speculation for Kodak(EK) resurfacing.

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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