Stocks Lower into Final Hour on Economic Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Biotech longs, Semi longs and Retail longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is very negative today as the advance/decline line is substantially lower, every sector is declining and volume is above average. Money market funds reported net cash inflows totaling $20.1 billion, bringing the total net assets invested in the sector to a record $2.87 trillion. Potential bull firepower continues to amass on the sidelines even as the DJIA just hit a new record just one week ago. The dollar-based three-month Libor rate is falling again today and is down 58 basis points from September highs. This is the lowest it has been since May 2006, which is a big positive. The 10-year yield is falling another 10 basis points, to 4.39%. Moreover, the odds of another rate cut at the upcoming month-end meeting have risen to 76% from 70% yesterday and 32% one week ago. It is interesting to note, however, that the odds of a recession beginning next year have plunged on Intrade.com to 31% from 59% in September. There has been a lot of talk once again about recession, especially from some CEOs. I have to wonder though why insider selling is at levels more associated with a meaningful market bottom rather than a top if a recession is imminent. Insiders were selling in droves right before economic growth began plunging in 2000. The U.S. economy had been booming over the last few years and is in the process of slowing to modestly below-trend rates. In my opinion, many CEOs want the Fed to cut much more to get growth back to booming levels. Thus, the constant talk of recession. I think it is wise to look at what insiders are doing rather than what they are saying. I still believe a booming global economy combined with the drag from U.S. housing will produce modestly below-trend growth in the U.S. of around 2% to 2.5% over the intermediate term, which is the perfect backdrop for growth stocks. Oil's $.87 per barrel decline is also noteworthy heading into a weekend with the Turkey/Iraq situation still uncertain. The gasoline crack spread is plunging to a very low $1.56 per barrel, and I still think the refiners make good shorts at current levels. As well, Schlumberger (SLB), the favorite stock in the loved oil service sector, had a good report and is getting pounded. Cyclicals are underperforming today, falling 2.95%. As I said at the beginning of the year, I still believe the most economically sensitive companies will underperform over the intermediate term despite their perceived low valuations. It is interesting to note that the stocks that I consider the "growth" leaders are either higher or down much less than the averages today. They continue to lead during market advances and decline less during pullbacks. Talk of crashes and recessions is spiking once again today. That is a big positive as this usually coincides with market bottoms. In the current U.S. "negativity bubble," this type of talk seems to come sooner and sooner after every surge higher. This is likely the result of the explosion in low/negative correlation U.S. stock strategies since the bursting of the bubble in 2000. Many of these funds badly need a bear market to survive after the S&P 500's recent 110% move higher during what was supposed to be a secular bear. Maybe this is the start of a major bear market, but the odds are substantially against it. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, rising fed rate cut odds, falling energy prices and short-covering.

Economic Releases

- None of note

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Friday Watch

Late-Night Headlines
Bloomberg:
- The International Monetary Fund(IMF) needs to shore up its finances or risk undermining its credibility with the countries it’s meant to help, according to credit rating agency S&P.

Wall Street Journal:
- Executives of Citigroup(C) say the giant bank has secured funding through year end for the $80 billion in structured investment vehicles it manages after selling $20 billion in assets since the midsummer credit crunch.

MarketWatch.com:
- Google wields its murky mobile plans in plain sight.

CNNMoney.com:
- Private equity firms may have lost their line of cheap financing, but don’t count them out yet.

Reuters:
- Web search leader Google Inc.(GOOG) reported on Thursday a 46% rise in profits that topped analysts’ expectations, as revenues grew 57% and comfortably outpaced expense growth, reassuring investors.

USA Today.com:
- Wal-Mart whacks prices to get holiday shoppers going.

Financial Times:
- Microsoft’s Xbox 360 recorded its best month of the year in September, with 528,000 consoles sold in the US on the back of the success of its Halo 3 video game, NPD, the market research firm, reported on Thursday.

Globe and Mail:
- Global bull market has legs, BCA’s Barnes says.

Economic Daily News:
- Advanced Semiconductor Engineering Inc., the world’s biggest chip packager and tester, expects sale to rise at least 20% next year, outperforming the global semiconductor industry’s 10% growth, citing Chairman Chang.

Nikkei:
- Japan’s government will lower its evaluation of consumer spending for the first time in 11 months in its October economic report.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (FCS), target $26.
- Reiterated Buy on (DST), target raised to $106.
- Reiterated Buy on (HSY), target $51.

Night Trading
Asian Indices are -.75% to +.25% on average.
S&P 500 futures -.32%.
NASDAQ 100 futures -.39%.

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Earnings of Note
Company/EPS Estimate
- (MMM)/1.28
- (AT)/.75
- (ACI)/.28
- (BSX)/.09
- (HOG)/1.05
- (HON)/.82
- (MCD)/.83
- (OSTK)/-.37
- (SLB)/1.06
- (FITB)/.69
- (WB)/1.04
- (XRX)/.26
- (CAT)/1.42

Upcoming Splits
- (DCR) 3-for-1
- (UCR) 3-for-1

Economic Releases
- None of note

Other Potential Market Movers
- The Fed’s Bernanke speaking and the Fed’s Poole speaking 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 modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Mixed as Rising Rate Cut Odds Offset Higher Energy Prices

Indices
S&P 500 1,540.08 -.08%
DJIA 13,888.96 -.03%
NASDAQ 2,799.31 +.24%
Russell 2000 825.03 +.02%
Wilshire 5000 15,501.21 -.05%
Russell 1000 Growth 631.12 +.23%
Russell 1000 Value 850.51 -.36%
Morgan Stanley Consumer 741.99 -.02%
Morgan Stanley Cyclical 1,072.46 +.30%
Morgan Stanley Technology 682.27 -.18%
Transports 4,908.58 +.59%
Utilities 510.40 -.30%
MSCI Emerging Markets 157.47 +.48%

Sentiment/Internals
Total Put/Call .80 -14.89%
NYSE Arms 1.09 +.59%
Volatility(VIX) 18.50 -.22%
ISE Sentiment 124.0 -10.79%

Futures Spot Prices
Crude Oil $89.53 +2.43%
Reformulated Gasoline 218.26 +1.68%
Natural Gas 7.35 -1.38%
Heating Oil 235.45 +1.54%
Gold 773.3 +1.44%
Base Metals 251.43 +.78%
Copper 353.60 -1.67%

Economy
10-year US Treasury Yield 4.50% -6 basis points
US Dollar 77.60 -.66%
CRB Index 342.18%

Leading Sectors
Steel +3.02%
Road & Rail +2.22%
Computer Hardware +1.10%

Lagging Sectors
Biotech -1.31%
Retail -1.31%
Airlines -1.80%

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Afternoon Recommendations
Deutsche Bank:
- Rated (RDNT) Buy.

Afternoon/Evening Headlines
Bloomberg:
- Google Inc.(GOOG) said third quarter profit jumped 46%, beating analysts’ estimates, after the company extended its lead over Yahoo! Inc.(YHOO) and grew outside the US. The stock is rising another 5 points in after-hours trading.
- Intuitive Surgical, Inc. (ISRG), the industry leader in surgical robotics, today reported third quarter 2007 revenue of $156.9 million, increasing 64% from $95.8 million for the third quarter of 2006. Third quarter 2007 revenue growth was driven by continued robotic procedure adoption and higher da Vinci(r) Surgical System sales. The stock is rising another 5% in extended trading.
- Advanced Micro Devices(AMD), the second-largest market of pc processors, reported a smaller-than-expected loss after sales beat estimates, sending the shares highs.
- Republicans criticized California Democrat Pete Stark for saying on the House floor that US troops in Iraq “get their heads blown off for the president’s amusement.”
- Billionaire Warren Buffett said his Berkshire Hathaway(BRK/A) sold its entire stake in PetroChina(PTR), a company that’s majority owned by the Chinese government and the focus of a divestment campaign by human rights groups.

Wall Street Journal:
- An audio recording of an internal conference call at LDK Solar Co., which has been accused by a former employee of improper accounting, reveals that other officials of the US-listed Chinese “clean technology” company were confused about the quality of its inventory.

Financial Times:
- Biogen Idec(BIIB) in process of signing confidentiality agreement with prospective suitors, source says.

BOTTOM LINE: The Portfolio finished higher today on gains in my Software longs, Biotech 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 neutral today as the advance/decline line finished neutral, 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 mildly bearish, given today’s news. Again today, many stocks posted huge outperformance vs. the averages. I keep hearing that only a handful of stocks are moving higher. I strongly disagree. My monitor pages are filled with hundreds of stocks today posting 1.5%+ gains. Many stocks that I never even hear mentioned in the press are soaring right now. This year's best-performing style remains mid-cap growth, rising 16% year-to-date, and this area is where I am finding the best new ideas. This remains one of the best markets I have ever seen for true stockpickers. I continue to believe that is the result of the explosion in popularity of technical analysis, ETFs and quantitative funds. Google's (GOOG) report looked stunningly positive to me, and the initial reaction was a sell-off in the shares after-hours, as I expected. I still think the shares will be higher by day's end tomorrow and still see huge upside potential over the long term. Other positive earnings reports after the close could also help boost the major averages tomorrow.

Stocks Mixed into Final Hour as Rising Rate Cut Odds Offset Higher Energy Prices

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Software 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 mildly negative today as the advance/decline line is slightly lower, sector performance is mixed and volume is around average. The 10-year yield is falling 5 basis points, to 4.5%, on today's news. The odds of another imminent rate cut rise significantly on a further decline in this yield, in my opinion. Fed fund futures now imply a 70% chance for a 25-basis-point cut at the upcoming meeting, up from 54% yesterday and 40% one week ago. I have heard many pundits wonder how in the world Google (GOOG) can post earnings that justify its recent gains. That isn't the proper question, in my opinion. The real questions are, Why were the shares egregiously undervalued, and what took investors so long to begin to recognize Google's true value? I don't even think the shares are fairly valued yet, much less overvalued. Recent across-the-board "growth" stock multiple expansion makes it even more attractive at current levels. Moreover, how many investors took profits recently or plan to initiate a new long in the shares given the much-anticipated "sell the news" earnings reaction? I think quite a few given its short interest ratio just hit an all-time high and its put/call open interest ratio just skyrocketed to a record 1.20. As well, the company said today that video ads are taking off faster than anticipated, which is going to be huge for the future growth of the company. I still expect an initial kneejerk sell-off in the shares after-hours, however, I anticipate a higher stock price by the close of trading tomorrow. Google, which I have been long since the IPO, remains my largest equity long position, just ahead of Apple (AAPL). The AAII percentage of bulls plunged to 41.9% this week from 54.6% the prior week. This reading is now below average levels. The AAII percentage of bears jumped to 35.7% this week from 25.8% the prior week. This reading is now above average levels. Moreover, the 10-week moving average of the percentage of bears is currently at 36.5%, 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 still 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 114% higher from the October 2002 major bear market lows and recently made new record highs. I still see few 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; there has been an explosion in low correlation/negative correlation U.S. stock fund strategies; the quantity of research that caters to these funds has soared; the U.S. dollar is seen to have no bottom; U.S. equities are arguably the most hated securities by global portfolio managers; permabear 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 continues to explode higher; short interest on the major exchanges has rocketed higher this year; S&P 500 index 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; money-market funds are at record levels; and long-term investors are denigrated, while day-trading is championed as a crash is always seen as just around the corner. I contend there has never been a time in U.S. history when more market participants actually wanted a stock crash or recession for both political and financial gain, which has helped to produce the current U.S. "negativity bubble." Thus, I still believe that overall investor sentiment regarding U.S. stocks has never been worse in history with the market near record highs, which bodes very well for further outsized gains. 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.