Existing Home Sales Fall During Peak of Credit Crunch

- Existing Home Sales for September fell to 5.04M versus estimates of 5.25M and 5.48M in August.

BOTTOM LINE: Sales of previously owned US homes fell more than forecast in September, Bloomberg reported. The median existing home price fell 4.2% to $211,700, compared with September 2006. The number of homes for sale at the end of the month rose to 4.4 million or 10.5 months’ supply at the current sales pace, up from 9.6 months in August. I expect sales to improve a bit this month as the fears of the credit turmoil peaked in September. The odds of a 25 basis points rate cut at the upcoming Fed meeting are now 86% and a 50 basis point cut 14%, according to fed fund futures. Given the Fed’s recent silence, as expectations for a cut have soared, I now think another cut is likely at month’s end. I continue to believe the significant economic drag from housing, combined with booming global growth, will produce US economic growth of around 2-2.5% over the intermediate-term, which is perfect for many US growth stocks. Growth closer to 3% is likely for 3Q, which is released next week.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Japan’s crude oil imports in September fell 9.8% from a year earlier, as record oil prices accelerated a shift to alternatives from petroleum products in the world’s second-largest economy. Japan’s demand for petroleum products including gasoline and jet fuel declined 1.8% in August, marking the 10^th consecutive monthly fall. Motorists have switched to fuel-efficient mini-cars, while factories shifted to natural gas from fuel oil as the main fuel for their in-house power generators.
- The yen may extend its biggest decline in four weeks against the euro as a global rally in stocks spurs investors to buy higher-yielding assets financed by loans in Japan.
- Japan’s consumer prices probably fell for an eighth month in September, a sign that deflation lingers in the world’s second-largest economy.

Wall Street Journal:
- AT&T(T) has been circling the satellite-tv sector for several years, contemplating a bid for one of the two major players. Now, with consolidation in the telephone industry mostly done, AT&T appears to be getting ready to swoop in.

New York Times:
- The European Union introduced a “blue card” plan on Tuesday aimed at attracting highly skilled immigrants like doctors, nurses and engineers, even as policy makers across the bloc grappled with how to keep out unskilled migrants.

MarketWatch.com:
- Market expects big iPod gains from Apple(AAPL).

IBD:
- Apple(AAPL) Ready to Pounce with Leopard System Update.

TimesOnline:
- A British technology company and Suzuki Motor will today unveil the Crosscage – a hydrogen-powered motorcycle that its developers claim will bring closer the dream of totally green driving.

Yonhap News:
- North Korea will probably disable its nuclear program by the middle of next month, citing Baek Jong Chun, the South Korean president’s security adviser.

Commercial Times:
- Mediatek’s, Taiwan’s largest chip designer, fourth-quarter shipments of chipsets used in mobile phones will probably rise 16% from the previous three months because of demand from China.

Late Buy/Sell Recommendations
Citigroup:
- Added (UNH), removed (COH) from Recommended List.
- Reiterated Buy on (T), target $47.

CSFB:
- Reiterated Outperform on (AMZN).

Night Trading
Asian Indices are +.75% to +1.75% on average.
S&P 500 futures -.44%.
NASDAQ 100 futures -.69%.

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Earnings of Note
Company/EPS Estimate
- (ATI)/1.87
- (AN)/.38
- (CSL)/.86
- (CME)/4.12
- (GLW)/.37
- (ETH)/.56
- (FCX)/2.24
- (GD)/1.25
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- (MER)/-.45
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- (OXY)/1.32
- (DGX)/.76
- (R)/1.13
- (SWK)/1.10
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- (TRB)/.26
- (ABK)/1.88
- (WLP)/1.44
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- (PFCB)/.19
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- (ESRX)/.57
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- (FFIV)/.36
- (LRCX)/1.29
- (SEE)/.42
- (TASR)/.05
- (VMW)/.17
- (WWY)/.60

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

Economic Releases
10:00 am EST
- Existing Home Sales for September are estimated to fall to 5.25M versus 5.5M in August.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil inventory build of 963,000 barrels versus a 1,784,000 barrel increase the prior week. Gasoline supplies are expected to rise by 475,000 barrels versus a 2,768,000 barrel increase the prior week. Distillate supplies are estimated to rise by 250,000 barrels versus a 994,000 barrel build the prior week. Finally, Refinery Utilization is expected to remain unch. versus a .5% increase the prior week.

Other Potential Market Movers
- The weekly MBA Mortgage Applications report, (ARTC) analyst meeting, (GOOG) analyst day and (WMT) fall analyst meeting could also impact trading today.

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

Stocks Finish Near Session Highs on Positive Earnings Reports, Decline in Oil

Indices
S&P 500 1,519.59 +.88%
DJIA 13,676.23 +.81%
NASDAQ 2,799.26 +1.65%
Russell 2000 818.53 +1.04%
Wilshire 5000 15,310.50 +.89%
Russell 1000 Growth 624.99 +1.22%
Russell 1000 Value 836.93 +.53%
Morgan Stanley Consumer 733.53 +.55%
Morgan Stanley Cyclical 1,045.62 +.83%
Morgan Stanley Technology 684.35 +1.85%
Transports 4,942.48 +2.01%
Utilities 501.98 +.02%
MSCI Emerging Markets 156.37 +2.71%

Sentiment/Internals
Total Put/Call .97 -3.96%
NYSE Arms .96 +21.41%
Volatility(VIX) 20.41 -5.68%
ISE Sentiment 137.0 +26.85%

Futures Spot Prices
Crude Oil $85.22 -.93%
Reformulated Gasoline 210.78 -1.20%
Natural Gas 6.76 -1.92%
Heating Oil 229.60 -.64%
Gold 763.90 +.49%
Base Metals 250.53 +2.16%
Copper 350.80 +.62%

Economy
10-year US Treasury Yield 4.4% -1 basis point
US Dollar 77.54 -.67%
CRB Index 335.34 -.30%

Leading Sectors
Oil Service +3.28%
Road & Rail +3.06%
Wireless +2.67%

Lagging Sectors
Semis -.37%
Oil Tankers -1.06%
Retail -1.10%

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Afternoon Recommendations
CIBC:
- Rated (RIGL) Sector Outperformer.

Afternoon/Evening Headlines
Bloomberg:
- US stocks rose the most in two weeks after better-than-expected earnings from Apple Inc.(AAPL) and American Express(AXP) eased concern the housing slump has depressed consumer spending.
- Democratic House Ways and Means Committee Chairman Charles Rangel said he plans to propose a tax increase on executives at buyout firms and hedge funds to help pay for a temporary fix to the alternative minimum tax that lawmakers agree must pass this year.
- Intel Corp.(INTC) CEO Ostellini said sales of its Viiv chips for home-entertainment systems have beaten his goals, as consumers move computers into the living room to serve as DVD and music players. Ostellini also said “people are buying notebooks like they’re hotcakes.”
- Amazon.com(AMZN), the world’s biggest internet retailer, said quarterly profit quadrupled and raised its forecasts for the year as customers bought the final Harry Potter novel and purchased more electronics and jewelry. The stock fell 9% in after-hours trading.

BOTTOM LINE: The Portfolio finished higher today on gains in my Computer longs, Retail longs, Software 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 positive today as the advance/decline line finished higher, most sectors rose and volume was above average. Measures of investor anxiety were above average into the close. Today's overall market action was bullish. Tech shares outperformed substantially again today. The MS Tech Index is now 21% higher for the year. There is a serious bull market going on in growth stocks, which continues to be mostly ignored. It isn't just a few like so many want you to believe. It is going on across all market caps of growth. Outperformance by growth over value and the broad market is substantial and bodes well for significant inflows into growth-oriented funds next year for the first time in many years. This, combined with modestly below-trend economic growth over the intermediate term, should help further propel substantial growth stock outperformance. Semis cut losses substantially into the close, however, the index still fell 0.37% on the day. I expect semis to join the tech party over the coming weeks. Now is likely a good time to accumulate shares in the sector. Weakness in the shares is continuing after-hours. Weekly retail sales rose 2.3% this week vs. a 2.6% gain the prior week. They remain modestly below average levels, but up from 1.4% in July. Oil service, steel, Internet, computer hardware, wireless, HMO, construction, airline and road/rail shares all posted 2% plus gains today. My intraday gauge of investor angst finished at an above-average level, despite gains in the major averages, which is a positive. Tomorrow's existing home sales report and some profit-taking after today could pressure the major averages a bit in the morning.

Stocks Surging into Final Hour, Led by Tech Shares and Falling Energy Prices

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Internet longs, Medical longs, Retail longs and Software longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is slightly positive today as the advance/decline line is mildly higher, most sectors are rising and volume is above average. If things were as bad as the many bears claim, we should be seeing numerous forward guidance cuts. We are not seeing that. Earnings growth will remain muted over the intermediate term, however, and investors will increasingly pay a premium for those companies that can generate substantial growth given the current macro environment. I want to reiterate for emphasis that there are many companies with significant growth prospects, and it is beginning to be reflected in their stocks. It definitely is not just "the anointed ones." Midcap growth remains the best-performing style, and there are many under-the-radar stocks that I rarely hear mentioned in the press soaring right now. The NYSE reported recently that short interest on the exchange for the first two weeks of October fell to 11.66 billion shares from 11.88 billion shares. The 1.89% decline still leaves NYSE short interest up a whopping 22% since mid-February, the largest eight-month percentage jump since at least 1991, when Bloomberg began tracking. I continue to believe the recent parabolic rise in short interest was mainly the result of the avalanche of capital that had flowed into global market neutral funds, which help to pump air into the current U.S. "negativity bubble." Past poor performance and recent events have likely ensured that a significant portion of the capital allocated to these funds will flow back into more positively correlated U.S. stock strategies going forward. That process may already be beginning and could account for some of the recent decline in short interest. It is also noteworthy that public short sales continue to explode, S&P 500 futures traders remain positioned near historically net shortmoney market fund inflows continue to soar to records. levels, and

Here are the 25 NYSE stocks with the largest percentage increase in their short interest relative to their float for the first two weeks of October:

1. VMW +15.5%
2. BZH +14.4%
3. DHX +8.6%
4. DM +8.1%
5. UIC +7.0%
6. AVR +5.8%
7. HGG +5.4%
8 CXO +5.2%
9. NZ +4.9%
10. OWW +4.7%
11. BIG +4.3%
12. VR +3.9%
13. WCI +3.6%
14. VSE +3.5%
15. VG +3.4%
16. SAM +3.4%
17. BBY +3.4%
18. MDG +3.3%
19. PNW +3.1%
20. MFW +3.0%
21. BOL +2.8%
22. CLR +2.8%
23. EXM +2.9%
24. PFB +2.7%
25. VVC +2.7%

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, investment manager performance anxiety and short-covering.

Today's Headlines

Bloomberg:
- Hedge-fund managers attracted $45.2 billion in the third quarter, a decline from record fundraising earlier in the year as subprime-mortgage losses hurt investment returns.
- Countrywide Financial(CFC) will make it easier for customers to keep their homes by changing the terms on $16 billion of adjustable-rate mortgages.
- Crude oil fell for a third day on forecasts that a government report tomorrow will show US oil and gas inventories rose.
- Research In Motion(RIMM), the maker of the BlackBerry e-mail phone, said it’s teaming with France’s Alcatel-Lucent to distribute the handset in China, pushing its stock up as much as 12%.

USAToday.com:
- Honda upping number of fuel-cell cars on US roads.

indiatimes:
- Samsung claims most powerful memory chip.