Stocks Mostly Higher into Final Hour on Lower Energy Prices, Bargain-Hunting, Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Semi longs, Medical longs, Retail longs and Commodity shorts. I covered my (IWM)/(QQQQ) hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The overall tone of the market is positive today as the advance/decline line is slightly higher, most sectors are rising and volume is above average. Back in August and September, we were told by many pundits that the U.S. economy was plunging into recession. Economists now expect 3.1% third-quarter GDP growth. Many of the same pundits are still predicting imminent recession, as they have for several years, even though there is little evidence of this, in my opinion. The odds of the U.S. entering recession next year have also plunged to 31% from 57% in September, according to Intrade.com. I continue to believe that booming global growth, combined with the drag from U.S. housing, will leave U.S. growth around 2%-2.5% over the intermediate term. The Fed's Kroszner said this morning that the "Fed will act as needed to help markets function" and that the "Fed should consider markets impact on the economy." If the economy were to slow more than I anticipate, the Fed has more than enough ammunition to jumpstart economic growth if needed. The U.S. Dollar Index is jumping 0.84%. The dollar-based three-month LIBOR rate is falling another 6 basis points today, to 5.09%. This is now down 63 basis points from September highs and the lowest since April 2006. As well, the 30-day Asset Backed Commercial Paper Yield Index is falling another 13 basis points today, to 5.04%. This is down 125 basis points from September highs and the lowest since May 2006. Commodities are under pressure on the strength in the U.S. dollar and worries over demand. As well, Dow Jones is reporting that Iraq's President said that the Turkish Kurd rebel group will call a ceasefire on TV today. Oil is falling $1.04 per barrel on the news. I still see substantial downside for oil from current levels before year-end. Fed fund futures now imply an 86% chance for a 25-basis-point cut at the upcoming meeting, up from 70% on Friday and 32.0% one week ago. As well, the 10-year yield is down to 4.40%, which greatly increases rate cut odds, in my opinion. According to Reuters, the blended earnings growth rate for the S&P 500 for the third quarter, which combines reported numbers with estimates for companies yet to report, is -0.1%. Earnings expectations have come down so much that remaining reports may now provide a positive catalyst for stocks. Last week's sharp decline in equities seemed way overdone given the news. This was likely due to market's overbought state, options expiration and the "crash" anniversary. Furthermore, S&P 500 futures traders are still positioned near historically net short levels. 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.

Today's Headlines

Bloomberg:
- Commodities fell the most in two weeks, led by copper, oil, gold and corn, on concern that slowing economic growth will hurt demand for raw materials.
- Hasbro Inc.(HAS), the world’s second-largest toymaker, said profit jumped 62%, exceeding analysts’ estimates, on sales of Transformers and Spider-Man movie action figures and a tax benefit.
- Royal Caribbean Cruises(RCL), the world’s second-largest cruise-ship operator, said third-quarter profit rose more than analysts estimated and boosted its earnings forecast on higher prices for Caribbean and European voyages.
- SanDisk Corp.(SND) rose as much as 5.7% after JPMorgan added the world’s largest maker of memory chips for digital cameras to its focus list, saying that its shares are undervalued.

Wall Street Journal:
- Nissan Races to Make Smaller, Cheaper Cars.
- Whether or not “Clinton fatigue” plays any role in complicating Hillary Clinton’s bid for the presidency, one things seems clear: Americans are suffering from Clinton book fatigue.

NY Times:
- Buyers Pounce on Deals as Homes Go on the Block.

USAToday.com:
- WellPoint doctors to get Zagat ratings.

Jornal de Negocios:
- European Central Bank governing council member Vitor Constancio said past oil-price movements are temporarily boosting inflation and this effect will wane by April.

Expert:
- The Russian economy’s “number one problem” is low productivity, said former Economy Minister German Gref.

Economic Releases

- None of note

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Monday Watch

Weekend Headlines
Bloomberg:
- Just when many investors are acknowledging the sudden swoon of US stocks as a sign of a market top, some of Europe’s biggest money managers are anticipating a profit rebound for American companies and slowing earnings growth at home.
- Mobile-phone shipments worldwide this year will probably increase 20%, more than previously though estimated, because of higher Nokia Oyj sales and demand in China and India, JPMorgan Chase(JPM) said.
- Axel Weber, a member of the European Central Bank’s governing council, said the bank may have to raise interest rates further to quell inflation as the euro-region’s economy maintains its expansion.
- US Treasury Secretary Henry Paulson said the World Bank should focus on lending to poor countries and trim funds for China, India and other middle-income nations that are luring private capital.
- Federal Reserve Governor Frederic Mishkin said inflation measures that exclude food and energy costs are a “better guide” to underlying changes in prices.
- Johnson & Johnson(JNJ) and Boston Scientific(BSX) reported new safety data today for drug-coated stents that may help revive sales depressed by prior reports linking the devices to a higher risk of heart attacks.
- Russian Finance Minister Alexei Kudrin suggested the price of gold may decline because of a potential increase in production after the Natalka field was confirmed as the world’s third-largest deposit of the precious metal.
- Turkey’s military probably won’t attack Kurdish rebels in northern Iraq in the immediate future, US Defense Secretary Robert Gates said, after meeting his Turkish counterpart.

NY Times:
- The Gloomsayers Should Look Up.
- As Apple(AAPL) Gains PC Market Share, Jobs Talks of a Decade of Upgrades.
- Lottomatica SpA’s Gtech Holdings(GTK) and Scientific Games Corp.(SGMS), the two dominant suppliers of equipment and products to US state lotteries, plan to expand into other countries.
- Fight Against Coal Plants Is Creating Diverse Partnerships.

MarketWatch.com:
- US venture deals fewer in number, bigger in size.
- The end of Microsoft as we know it? Commentary: A holding company in the mold of KKR, Berkshire Hathaway.

Washington Post:
- One year ago, a 32-year-old trader at a giant hedge fund named Amaranth held huge sway over the price the country paid for natural gas. Trading on unregulated commodity exchanges, he made risky best that led to the fund’s collapse – and, according to a congressional investigation, higher gas bills for homeowners.

CNNMoney.com:
- Apple’s(AAPL) Earnings Preview: Firing On All Cylinders.

MSNBC.com:
- Commercial real estate market outlook upbeat.

MIT Review:
- The Blow-Up. This summer, as a meltdown in subprime credit market spilled over into other markets, all eyes were on the mathematically trained financial engineers known as “quants.” Who are these guys?

LA Times:
- Some firms replace offshoring with onshoring. Small US towns can match India in cost, Northrop Grumman(NOC) plans up to 50 sites for tech support, Dell opens a center in Idaho.

USA Today:
- Sporting goods makers who once treated technology as a threat are boosting revenue with online social-networking tools, mapping programs and wireless gadgets.

Seattle Times:
- Clean technologies propel venture capital funding. Shrugging off credit-related economic woes, venture capitalists be heavily on new companies in the third quarter, driven by opportunities in clean technologies, software and biotechnology.

AP:
- Iran named Deputy Foreign Minister Saeed Jalili as it nuclear envoy following the resignation of Ali Larijani, a move that may support President Mahmoud Ahmadinejad’s hard line stance on talks with Western governments.
- US teachers were fired or disciplined for sexual abuse in more than 2,500 cases during a five-year period.
- Half of likely US voters said they would never vote for Senator Hillary Clinton for president, a new survey by Zogby International shows. The latest Zogby survey showed 50% of those polled said they would never vote for her, compared with 46% of likely voters who said the same thing in a Zogby survey in March. Among Democratic women, 17% said they would not vote for Clinton.

Sydney Morning Herald:
- Russia, the world’s second-biggest oil exporter after Saudi Arabia, has forecast crude oil may drop to $60/bbl. within 10 years. “Oil is significantly overpriced,” Russia’s Finance Minister, Alexei Kudrin, said in Washington on Friday. Crude oil prices have “overshot their fundamentals and are likely to come down sharply,” Eric Chaney and Richard Berner, analysts at Morgan Stanley, wrote in a report on Friday.

Gulfnews.com:
- Saudi Arabia is not considering or revaluing its currency or moving away from its dollar peg, Finance Minister Ebrahim Al Assaf said yesterday.

Al-Arabiya:
- Saudi Arabia, the world’s largest oil exporter, will pump more crude oil if there was an emergency disruption to supplies, citing a government official.

Weekend Recommendations
Barron's:
- Made positive comments on (MMC), (VAR), (SHLD) and (MNST).

Citigroup:
- Reiterated Buy on (ADBE), target raised to $56.

Night Trading
Asian indices are -3.25% to -1.75% on average.
S&P 500 futures -.83%.
NASDAQ 100 futures -.88%

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Earnings of Note
Company/Estimate
- (CHKP)/.37
- (HAL)/.65
- (HAS)/.71
- (MRK)/.70
- (SGP)/.30
- (AXP)/.85
- (AAPL)/.84
- (KMB)/1.06
- (RCL)/1.78
- (TXN)/.50

Upcoming Splits
- (ARD) 2-for-1
- (CSNT) 2-for-1

Economic Data
- None of note

Other Potential Market Movers
- The Fed’s Kroszner speaking, (WSO) analyst meeting and (NCI) investor day could also impact trading today.

BOTTOM LINE: Asian indices are sharply lower, weighed down by commodity and financial shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the week.

Weekly Outlook

Click here for the Wall St. Week Ahead by Reuters.

Click here for Stocks in Focus for Monday by MarketWatch.com.

There are a few economic reports of note and some significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. – None of note

Tues. – Weekly retail sales reports, Richmond Fed Manufacturing Index

Wed. – Weekly MBA Mortgage Applications report, weekly EIA energy inventory data, Existing Home Sales

Thur. – Durable Goods Orders, Initial Jobless Claims, New Home Sales

Fri. – Univ. of Mich. Consumer Confidence report

Some of the more noteworthy companies that release quarterly earnings this week are:

Mon. – Halliburton(HAL), Hasbro(HAS), Merck(MRK), Schering-Plough(SGP), American Express(AXP), Apple Inc.(AAPL), Kimberly-Clark(KMB), Royal Carribean(RCL), Texas Instruments(TXN)

Tues. – Biogen Idec(BIIB), Brinker Intl.(EAT), Burlington Northern(BNI), Coach Inc.(COH), Smith International(SII), Whirlpool(WHR), United Parcel Service(UPS), AT&T(T), Altera Corp.(ALTR), Aflac(AFL), Broadcom(BRCM), Centex Corp.(CTX), Chubb Corp.(CB), Illumina Inc.(ILMN), Juniper Networks(JNPR), Microchip Tech(MCHP), Nabors Industries(NBR), Panera Bread(PNRA), Riverbed Tech(RVBD), Amazon.com(AMZN), CDW Corp.(CDWC), Cheesecake Factory(CAKE), Lexmark Intl(LXK), Lockheed Martin(LMT), Novellus Systems(NVLS), TD Ameritrade(AMTD)

Wed. – Autonation(AN), Carlisle Cos(CSL), CME Group(CME), Corning Inc.(GLW), Freeport-McMoRan(FCX), Moody’s Corp.(MCO), Northrop Grumman(NOC), Stanley Works(SWK), Tribune(TRB), Legg Mason(LM), PF Chang’s(PFCB), Boeing(BA), Norfolk Southern(NSC), Express Scipts(ESRX), Business Objects(BOB), Alcon(ACL), Amgen Inc.(AMGN), Monster Worldwide(MNST), Pulte Homes(PHM), Ryland Group(RYL), Akamai Technologies(AKAM), Anheuser-Busch(BUD), Conoco Philips(COP), F5 Networks(FFIV), General Dynamics(GD), Genzyme Corp.(GENZ), Lam Research(LRCX), Linens ‘n Things(LIN), Merrill Lynch(MER), Ryder System(R), Symantec Corp.(SYMC), Taser Intl.(TASR), VMware(VMW)

Thur. – Apache Corp.(APA), Black & Decker(BDK), Comcast Corp.(CMCSA), Goodrich Corp.(GR), Intercontinental Exchange(ICE), L-3 Communications(LLL), Starwood Hotels(HOT), XM Satellite Radio(XMSR), Zimmer Holdings(ZMH), Aetna Inc.(AET), Motorola Inc.(MOT), Raytheon(RTN), Southern Co.(SO), Kla-Tencor(KLAC), Baidu.com(BIDU), Ingram Micro(IM), Kenneth Cole(KCP), McAfee Inc.(MFE), Microsoft Corp.(MSFT), CB Richard Ellis(CBG), Celegene(CELG), Cummins Inc.(CMI), Deckers Outdoor(DECK), Diamond Offshore(DO), Dow Chemical(DOW), EMC Corp.(EMC), Estee Lauder(EL), General Motors(GM), Harrah’s Entertainment(HET), ImClone Sytems(IMCL), MBIA Inc.(MBI), Sybase Inc.(SY), Wendy’s International(WEN)

Fri. – Baker Hughes(BHI), Countrywide Financial(CFC), Tidewater Inc.(TDW), BearingPoint(BE), Fortune Brands(FO), Ingersoll-Rand(IR), ITT Corp.(ITT), Southern Copper(PCU)

Other events that have market-moving potential this week include:

Mon. – Fed’s Kroszner speaking, (WSO) analyst meeting, (NCI) Investor Day

Tue. – (BSX) analyst meeting, (WMT) analyst meeting

Wed. – (ARTC) analyst meeting, (EW) analyst lunch, (GOOG) analyst day

Thur. – None of note

Fri. – None of note

BOTTOM LINE: I expect US stocks to finish the week modestly higher on better-than-expected earnings reports, bargain-hunting, rising Fed rate cut odds and short-covering. My trading indicators are giving mostly bullish signals and the Portfolio is 75% net long heading into the week.