Stocks Finish Mostly Higher on Strength in Technology Shares

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Stocks Mixed into Final Hour as Positive Earnings Offset Economic Worries

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Restaurant longs and Computer longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is mildly negative today as the advance/decline line is slightly lower, sector performance is mixed and volume is above average. Energy shares are lower, even when oil was rising earlier in the day, which could be routine profit-taking or investors anticipating a significant top in the commodity, similar to the ones seen during prior Mid-east conflict fear-spikes. The Fed's Beige Book report was more dovish than I had expected. Fed fund futures now imply a 58% chance for a cut at the upcoming meeting, up from 38% yesterday. The 10-year yield is at session lows, falling 10 basis points to 4.55%. Stocks are rebounding a bit. Market leaders are gaining some upside traction. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, rising fed rate cut odds and short-covering.

Today's Headlines

Bloomberg:
- JPMorgan(JPM), Lehman Brothers(LEH) and BNP Paribas SA say oil, wheat and metals traders are Wall Street’s hottest commodities.
- Metal and food prices will probably fall next year as supplies of the commodities increase, the IMF said.
- Apple Inc.(AAPL) will provide a development kit to let programmers create iPhone applications in February, in a bid to spur sales with new software such as games and a chat feature that the company doesn’t offer.
- The Fed said economic growth slowed since August in five of twelve regions, as consumer spending, manufacturing and service industries moderated.
- Democratic House Speaker Nancy Pelosi backed off her pledge to call a floor vote on a measure declaring the World War I-era killings of Armenians by Ottoman Turks an act of genocide after support for the resolution eroded.
- Crude oil rose to a record $89/bbl. in NY after Turkish lawmakers voted to allow the use of military force against Kurdish rebels in northern Iraq.

NY Observer:
- Murdoch’s Wall Street Journal Sets Sights on New York Times(NYT).

Reuters:
- President Bush’s job-approval rating sank to 24% this month, while Congress’s fell to 11%, according to a Reuters/Zogby poll release today.

Consumer Inflation Below Average, Housing Starts Fall

- The Consumer Price Index for September rose .3% versus estimates of a .2% gain and a -.1% decline in August.

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

- Housing Starts for September fell to 1191K versus estimates of 1280K and 1327K in August.

- Building Permits for September fell to 1226K versus estimates of 1285K and 1322K in August.

BOTTOM LINE: Prices paid by US consumers rose more than forecast in September, while the core measure showed inflation remains contained, Bloomberg reported. With inflation under control, the Fed has the leeway to cut the fed funds rate if necessary at the upcoming meeting later this month. The CPI is now rising at a 2.8% rate year-over-year versus the long-term average of 3.1%. As well, the core CPI is rising at a 2.1% rate, well below the long-term average of 3.0%. I continue to believe inflation has peaked for this cycle and that the secular trend of disinflation will eventually re-assert itself.

Housing starts in the US dropped more than forecast to a 14-year low in September, Bloomberg reported. Starts fell 28% in the Midwest, 12% in the South and 10% in the West. Starts jumped 45% in the Northeast. I continue view the decline in home construction as a positive as builders work down excessive inventories. Residential construction will likely remain weak through next year.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Tiger Woods and PepsiCo’s(PEP) Gatorade unit will develop a line of drinks to be introduced in March, led by a signature brand for the world’s top-ranked golfer. The first product will be called Gatorade Tiger.
- Stahlman of Gartner Says Technology Stocks to ‘Take Off’: Video.
- This year’s accelerating gains in food prices will slow to normal rates of growth in 2008 as farmers increase production of crops such as corn and wheat, Acting US Agriculture Secretary Chuck Conner said.
- Japan’s economic growth may falter because changes to building rules requiring stricter inspections will cause housing starts to slump, analysts said.

Wall Street Journal:
- One in seven hedge-fund managers expect to raise capital in the next two years either through a flotation or the sale of a stake in their firm, before falling fee scales and rising costs squeeze some of them out of business, according to an Ernst & Young survey.
- Disney’s(DIS) $1 Billion Adventure. Planned Five-Year Revamp of Its California-Themed Park Aims to Boost Attendance by Mirroring Neighbor Disneyland.
- As much as 20% of the audience for television’s most popular shows are skipping the commercials.

AP:
- A House vote to label the century-old deaths of Armenians as genocide was in jeopardy Tuesday after several Democrats withdrew support and sounded alarms it could cripple US relations with Turkey. The loss of support is a major setback to Democratic House Speaker Nancy Pelosi and other Democratic leaders on Capitol Hill, who have fiercely defended the resolution to Republicans and the Bush administration as a moral imperative in condemning the World War I-era killings of up to 1.5 million Armenians by Ottoman Turks.

MarketWatch.com:
- Delta(DAL) could take role in airline mergers, CEO says.

IBD:
- Congress’ foolish move to declare the massacre of Armenians by the Ottoman Empire a genocide will have an impact far beyond politics. It affects you – both in your pocketbook and in your security.

Reuters:
- Apple’s(AAPL) new operating system to hit stores October 26.

Financial Times:
- Chinese companies are set to be Asia’s most acquisitive in the US or Europe next year, according to a survey of the region’s dealmakers.
- Tata Consultancy Services plans to open two computer services centres in the US in one of the biggest expansions by an Indian information technology outsourcing company in a developed market.
- Toyota received another black eye in North America when Consumer Reports, an influential consumer-advice publication, said its vehicles’ reliability had slipped to the point where its new models can no longer be recommended without owners’ feedback.

TimesOnline:
- The most extraordinary spectacle of the past week has been the apparent desire of the US Congress to pronounce as genocide the 1915 massacre of Armenians by Turks, even though there is nothing more provocative to Turkey, and no worse time at which to do it.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (DPZ), target $20.

Night Trading
Asian Indices are -1.0% to unch. on average.
S&P 500 futures +.32%.
NASDAQ 100 futures +.57%.

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Earnings of Note
Company/EPS Estimate
- (AMR)/.75
- (ABT)/.66
- (BLK)/1.90
- (CIT)/1.23
- (CMA)/1.22
- (KO)/.68
- (GCI)/1.00
- (MAN)/1.39
- (MTG)/.61
- (MI)/.83
- (PJC)/.50
- (UTX)/1.16
- (MO)/1.14
- (JPM)/.90
- (ITW)/.87
- (SYK)/.55
- (TER)/.18
- (ALL)/1.70
- (CTXS)/.38
- (ETFC)/.11
- (EBAY)/.33
- (RX)/.40
- (KNX)/.19
- (NE)/1.17
- (WM)/.23
- (BOT)/1.18
- (GRB)/.10
- (KMP)/.42

Upcoming Splits
- (DKS) 2-for-1

Economic Releases
8:30 am EST
- The Consumer Price Index for September is estimated to rise .2% versus a -.1% decline in August.
- The CPI Ex Food & Energy for September is estimated to rise .2% versus a .2% increase in August.
- Housing Starts for September are estimated to fall to 1280K versus 1331K in August.
- Building Permits for September are estimated to fall to 1285K versus 1322K in August.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil build of 1,050,000 barrels versus a -1,674,000 barrel drawdown the prior week. Gasoline supplies are expected to rise by 400,000 barrels versus a 1,675,000 barrel build the prior week. Distillate inventories are estimated to fall by -750,000 barrels versus a -563,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to fall -.25% versus a .33% increase the prior week.

2:00 pm EST
- Fed’s Beige Book

Other Potential Market Movers
- The Fed’s Beige Book report, Fed’s Hoenig speaking, weekly EIA energy inventory report, weekly MBA Mortgage Application report, Bear Stearns Retail Outing and Wachovia Consumer Growth Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by financial stocks in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.