Stocks Higher into Final Hour on Bargain-Hunting, Short-Covering

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Software longs, Internet longs and Medical longs. I covered my (IWM)/(QQQQ) hedges and added to a few of my lagging longs, including (BRCM) today, thus leaving the Portfolio 100% net long. The overall tone of the market is slightly positive today as the advance/decline line is neutral, most sectors are rising and volume is around average. The U.S.-based three-month Libor rate is falling another 2 basis points and has plunged 77 basis points from its September highs. It is also the lowest since March 2006. The Semiconductor Industry Association said global chip sales rose 5.9% in September as demand for PCs and cell phones increased. It also said NAND flash revenue rose 58.5% in September from year ago levels. Analyst downgrades are again today running around 2-1 over upgrades. Optimism in the Wall Street research community continues to fade as it has for the last seven years. According to Zacks, the median year-over-year growth rate for S&P 500 third-quarter reported earnings has climbed to 10.6% over the last few days. Like last week, I expect most earnings reports over the next couple of weeks to be more of a positive market catalyst. Fed fund futures now imply a 98% chance for a 25-basis-point fed funds rate cut on Wednesday. This is up from 86% last Friday and 92% one week ago. The odds for no change in rates are 2%, up from 0% last Friday and down from 14% one week ago. I expect the Fed to cut its benchmark interest rate by 25 basis points. S&P 500 futures traders are still positioned near historically net short levels, and there are still many indicators registering extraordinary bearishness given the S&P 500 is just 1.9% off its record high set less than three weeks ago. There remains massive bull firepower on the sidelines. The Philadelphia Stock Exchange Semiconductor Sector Index (SOX) is very oversold technically. I also see the recent decline as excessive given my view of improving fundamentals for the group over the intermediate term. A bounce in the semis could spur further gains in the broad tech sector and help left the entire market. Advance third-quarter GDP, which is released on Wednesday, is expected to come in at 3.1%. Considering how many pundits and analysts said we were plunging into recession in August, a number around 3% should give a psychological boost to investors. I still expect U.S. GDP growth to come in modestly below trend, around 2.0% to 2.5%, over the intermediate term as the significant drag from U.S. housing is mostly offset by booming global growth. I expect US stocks to trade mixed-to-higher into the close from current levels on bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- Lehman Brothers(LEH) set up a $3 billion fund to invest in leveraged loans that banks are selling at a discount.
- Democratic senators Hillary Rodham Clinton and Barack Obama are in a statistical tie in Iowa among the party’s likely caucus-goers, a University of Iowa poll found.
- Crude oil climbed above $93/bbl. in NY for the first time after Mexico shut a fifth of its production and the dollar declined against he euro.

Wall Street Journal:
- A divide is emerging on the presidential trail over battling terrorists: how exactly to label the fight.
- CEO Search File: Merrill.
- US public pension funds are starting to pay their managers better as they take on complicated investments such as hedge funds and leveraged-buyout funds.

NY Times:
- SAP Ex-Executive Plans Electric-Car Battery Stations.

Economic Releases

- None of note

Links of Interest

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Chart of Interest

Monday Watch

Weekend Headlines
Bloomberg:
- US stocks advanced for the sixth time in seven weeks after earnings from Microsoft Corp.(MSFT) and Apple Inc.(AAPL) bolstered speculation that the economy is growing enough to sustain profits.
- Billionaire investor Carl Icahn sued BEA Systems(BEAS), the software maker that spurned a $6.7 billion offer from Oracle Corp.(ORCL), demanding that the company hold an annual meeting and allow shareholders to vote on a sale.
- Apple Inc.(AAPL) said it will restrict iPhone sales to two phones a customer and require credit or debit card payment on those phones to discourage unauthorized resellers and maintain enough stock for the holidays.
- The real mavens in the US bond market may be your next-door neighbors, and they say now’s the time to buy Treasuries. Twenty percent of Americans who say it’s a bad time to buy a house cite high interest rates as a reason, according to a monthly survey of consumers by the Univ. of Mich. in Ann Arbor. That threshold has been exceeded five other times since 1988, each followed b y a rally in Treasuries.
- Bank shares are so cheap and their dividends so high that some of the world’s biggest investors now say the combination is unbeatable.
- Merrill CEO Stan O’Neal Decides to Leave, WSJ Reports.
- Nissan Motor, Japan’s third-largest automaker, rose the most in six years on the Tokyo Stock Exchange after it reported higher fiscal second-quarter operating profit and analysts raised their ratings.

Wall Street Journal:
- NYSE Files to End Trading ‘Collars.’

NY Times:
- Democrats in Congress Plan to Shorten Their Workweek.
- Some Bulls See Hope in Buybacks.
- In a major shift, NY Democratic Governor Eliot Spitzer is backing off his plan to allow illegal immigrants to obtain the same kind of driver’s licenses as other New Yorkers, after weeks of furor over the proposal. Instead, the governor said on Saturday, illegal immigrants in the state would be able to obtain a license that would permit them to drive but would not be accepted as identification to board plans or cross borders.
- Lehman Brothers(LEH) increased its hedges on mortgages and started to reduce its commitment to leveraged loans in the second quarter, citing an interview with CEO Richard Fuld.
- After Succeeding, Young Tycoons Try, Try Again.
- Workers at Chrysler Approve Contract.

TheStreet.com:
- Tech Funds Still Unloved.

Zacks.com:
- So far, 37% of the S&P 500 firms have reported (185 companies). The results have been better than most have feared, and over the past few days the results have been getting better. The median year-over-year growth rate has climbed sharply. We are now back in double digits, which if maintained would make this the 21st straight quarter of double-digit growth.

MarketWatch.com:
- Tech drives third-quarter earnings season. Sector sees average earnings growth of 15% while overall market slips.
- Market’s volatility making timers skittish; that’s bullish.
- On a need-to-know-everything basis. Work gets personal when you enter the online world of social networking.
- Parsons to end reign at Time Warner(TWX).
- Old favorites holding ground in TV season.
- Plastics that are green in more ways than one. Bioengineers develop grasses that yield environmentally friendly polymers.
- Bullish bargain hunting from the inside. Insiders picked up buying in wake of past week’s market drop.

IBD:
- Dismal Financial Profits Mash Real Strength in Techs, Medicals.
- The Q3 Glass is Half Full for US Drug Firms.

Washington Post:
- General David Petraeus, the top US military commander in Iraq, said the Sunni Muslim terrorist group al-Qaeda in Iraq no longer operates in large numbers in any parts of Baghdad and is diminished in strength.

Bespoke Investment Group:
- One thing that has changed about the sell-side though, is that just like the media, analysts as a whole are not a very optimistic group. Over the last seven years they have been steadily becoming more bearish in their calls.

Silicon Alley Insider:
- Apple’s AT&T Bounty: $432 Per iPhone? Apple’s iPhones could be far more profitable than we thought. Based on an analysis of iPhone revenue that Apple reported last week, Piper Jaffray analyst Gene Munster estimates that carrier partner AT&T pays Apple $18 per month for each of its iPhone subscribers. Over the course of a two-year contract, that’s $432 – more than three times as much as the $120-per-sub payment we previously estimated.

Dept. of Justice:
- Fact Sheet: Commodities Fraud and Manipulation.

Business Week:
- US House Democratic lawmakers on Thursday called for giving the Commodity Futures Trading Commission more oversight of energy-trading markets, and promised to hold hearings to scrutinize the agency’s operations. The Democrats, including Rep. Bart Stupak of Michigan, made their case on the same day that oil company BP PLC(BP) agreed to pay $373 million to settle charges that it manipulated the price of propane.
- Stealth Rally for Computer Hardware Stocks.

San Francisco Chronicle:
- Nintendo Co. raised the worldwide sales forecast for its Wii game player twice as “overwhelming” demand means the product lasts “roughly a day on the shelf,” said Reginald Fils-Aime, president of Nintendo of America.

USA Today:
- Mortgage rates fall to lowest level in six weeks.

CNNMoney.com:
- Hackers Install Leopard on Intel PCs.

Forbes.com:
- Best Ways to Avoid Cancer.

Reuters:
- IPOs year to date; a risky bet pays off.
- Yahoo!(YHOO) stock surges ahead of Alibaba IPO pricing.
- Oracle(ORCL) withdraws bid for BEA(BEAS) as deadline expires.

I, Cringely:
- Google's(GOOG) goal here is to help us, of course, but along the way the company will have marginalized most higher-end computing vendors, especially Microsoft(MSFT). They will have also made us totally dependent on Google services in such a way that we'll never, ever, be able to extricate ourselves. We'll be slaves, but happy slaves, and Google will come to dominate all computing for the next generation.

Financial Times:
- Mergers may yet be on the cards.

Economist.com:
- Replacing worn-out eye lenses has never been simpler or better.

TimesOnline:
- Up, up and away – the hydrogen car is here. The hydrogen fuel cell is the holy grail of greener motoring and Honda has got there first.

Le Figaro:
- NYSE Euronext(NYX), operator of the world’s largest securities exchange, is interested in a stake in the Tokyo stock exchange operator, CEO Thain said.

Weekend Recommendations
Barron's:
- Made positive comments on (FMC), (MRK), (GOOG) and (WY).

Citigroup:
- Reiterated Buy on (URBN), raised estimates, target $30.
- Reiterated Buy on (CVH), target $69.
- Reiterated Buy on (OI), raised target to $52.

Night Trading
Asian indices are +.75% to +1.25% on average.
S&P 500 futures +.26%.
NASDAQ 100 futures +.43%

Morning Preview
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Earnings of Note
Company/Estimate
- (NNDS)/.63
- (ACV)/.35
- (CNA)/.68
- (HTZ)/.57
- (LTR)/.95
- (LPX)/-.15
- (NWA)/.78
- (RSH)/.26
- (SCHN)/1.35
- (VZ)/.62
- (HUM)/1.49
- (K)/.73
- (ATHR)/.26
- (CBG)/.57
- (EOG)/.80
- (OSG)/.69
- (PPS)/.05
- (SOHU)/.23
- (VMC)/1.59
- (BOL)/.63
- (PBI)/.73

Upcoming Splits
- (MNRK) 6-for-5

Economic Data
- None of note

Other Potential Market Movers
- The Johnson Rice Consumer Conference and (ETH) Investor Conference could also impact trading today.

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