Stocks Mixed into Final Hour as Weakness in Commodities is Offset by Strength in Technology Shares

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Software longs, Internet longs, Computer longs, Retail longs and Commodity shorts. 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. A WSJ article suggested the Fed may remain on hold tomorrow. While no change in rates is possible, it is highly unlikely. Fed fund futures now imply a 94% chance for a 25 basis point cut and only a 6% chance of no change. I seriously doubt the Fed would blindside the market with no change in rates given the current macro backdrop and their recent comments. I still expect a 25 basis point cut tomorrow. The US dollar-based 3-month LIBOR rate is falling another 5 basis points today to 4.91%. This has now plunged 81 basis points from its September high and is at the lowest level since March 2006. As I suggested yesterday, Google (GOOG) appears to be embarking on another meaningful push higher. As well, another surge in Apple (AAPL) shares looks likely. A number of other market-leading stocks are posting gains today despite losses in the major averages. Under Armour (UA) beat estimates and boosted guidance despite very warm weather of late. I added shares during the most recent pullback and plan to continue doing so going forward. Goldman Sachs (GS) is recommending investors take profits in crude oil futures due to rising exports, a slowing U.S. economy and an adequate level of heating oil inventories. Goldman also said today that rising oil supplies will come from the Greater Plutonio oil field in Angola and the Genghis Khan field in the U.S. Gulf of Mexico, which will ramp up production over the next several weeks. Goldman said it was closing its long positions in oil, according to Bloomberg. I view this as significant. The much-loved commodity stocks are under pressure today on falling prices, but a number of other sectors are rising. Today's Consumer Confidence index fell more than expected, to 95.60, which is modestly below the 20-year average of 101.9. The Present Situation component of the index came in at 118.8 vs. the 20-year average of 113.2. This also corresponds with the most recent Rasmussen consumer survey, which indicates that 79% of Americans currently rate the economy as fair to excellent, while 29% rate it poor. Consumers still feel pretty good about their situation now, which doesn't indicate a meaningful decline in consumer spending is imminent. The Expectations component of today's confidence report fell, however, to a depressed 80.10 vs. the 20-year average of 94.4. The gap between consumer perceptions regarding their current situation and the future is near the largest in history. This isn't surprising given the current U.S. “negativity bubble.” The overwhelming majority of media outlets always paint a dire picture of the future, and it does affect consumer perceptions. In my opinion, many that want a U.S. bear market and recession, for both political and financial gain, are currently abusing George Soros' Theory of Reflexivity by attempting to scare businesses and consumers so much that they actually do retrench. Given that housing worries are the most extreme in the South Atlantic and Pacific regions of the country, it is very interesting that confidence remains high in the Pacific and healthy in the South Atlantic. In fact, confidence actually surged 11.6% in the Pacific region this month. Very depressed confidence in the Northeast Central and New England regions, where most media outlets and hedges funds are located, continues to negatively skew the entire confidence gauge.

Here is a breakdown of today's consumer confidence reading by region:

• Northeast Central 61.8
• New England 64.6
• Mid Atlantic 85.10
• Northwest Central 96.10
• South Atlantic 102.7
• Southeast Central 108.0
• Pacific 119.7
• Southwest Central 127.0
• Mountain 141.80

I expect US stocks to trade mixed-to-higher into the close from current levels on bargain-hunting, falling energy prices and short-covering ahead of tomorrow’s Fed announcement.

Today's Headlines

Bloomberg:
- Goldman Sachs(GS), the bank that said in July oil may reach $95 a barrel, told clients its was “time to take profits” after crude rose to a record $93.80 in NY yesterday. Oil is falling $3.34/bbl. to $90.19/bbl.
- Bank of America(BAC), the second-biggest US bank, says rising demand for high-risk, high-yield debt is helping US credit markets recover.
- The global sugar glut may take as long as two years to erode because of record crops in India and Brazil, the International Sugar Organization said.
- Researchers at IBM(IBM), the world’s biggest computer-services company, have devised a process to recycle discarded computer-chip wafers into solar panels.
- American Superconductor(AMSC), a leading energy technologies company, announced today that it has formed a new division known as “AMSC China” to serve the growing wind energy, power grid and industrial markets in China.
- The US House of Representatives approved a bill to bar states from levying taxes on Internet access through 2014, clearing the way for President Bush to sign the measure into law before an existing ban expires.
- Mergers and acquisitions overtook last year’s record in the first ten months as publicly listed companies picked up the slack left by private-equity firms unable to fund transactions because of rising borrowing costs.
- Greenspan Says China’s Stock-Market Bubble Is Likely to Burst.
- Under Armour(UA), the maker of moisture-releasing athletic wear, rose more than 5% for the third time in a week after lifting annual sales and earnings forecasts.

Wall Street Journal:
- Shhh, NYSE Aims to Bring Back Blocks.
- Murtha Inc. How Lawmaker Rebuilt Hometown on Earmarks. Johnstown Gets Billions With Power Broker’s Aid; FBI Questions a Contract.

USAToday.com:
- States battle rise in copper thefts. ‘Epidemic’ affects electricity, irrigation.

Washington Post:
- Preteens Trading Fairy Wands for Fishnets. Halloween Trend Toward Racy Get-Ups Vexes Parents.

China Daily:
- China is set to triple its natural gas output by 2020 as its top producers step up exploration, citing an analyst.
- China’s rate of birth defects has surged 40% since 2001, which means a deformed baby is born every 30 seconds.

Consumer Confidence Declines

- Consumer Confidence for October fell to 95.6 versus estimates of 99.0 and a reading of 99.5 in September.

BOTTOM LINE: Consumer confidence fell more than expected in October, Bloomberg reported. However, the present conditions component of the index, which measures Americans’ perception of their current financial situation, remained high at 118.8 versus the 20-year average of 113.2. I still expect consumer confidence to move back towards cycle highs over the intermediate-term as housing fears subside, interest rates remain low, inflation decelerates further, gas prices decline, unemployment remains historically low, wages continue to significantly outpace inflation and stocks rise further.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- The euro snapped five days of gains versus the dollar on speculation credit market losses at European financial companies will weaken the case for the central bank to raise interest rates.
- Japan’s unemployment rate unexpectedly rose for a second month and the Labor Ministry downgraded its assessment of the jobs market as hiring slowed.

Wall Street Journal:
- In a risky change of strategy, Democrats are pursuing a plan that would dare President Bush to veto a massive bill that combines spending for veterans care, education and the Pentagon.
- Google Inc.(GOOG) is about to unveil a plan to change the way the mobile-phone industry works.

New York Times:
- GM(GM) to Build Hybrid Research Center in China.

BusinessWeek.com:
- Time to Buy Financial Stocks?
- Electronic Arts(ERTS) 2.0. The games giant has spent $860 million on recent deals, heralding a shit in strategy and potentially building a new innovation engine for itself.
- Apple, Google vs. Big Wireless. The tech giants’ mobile software efforts could give developers the long-awaited upper hand over cellular carriers – and even Symbian and Microsoft.

USA Today.com:
- Tribune, Gannett team to expand city-focused websites.

TimesOnline:
- Google’s(GOOG) advertising revenue overtook that of ITV Plc’s ITV1, the UK’s top commercial television channel, for the first time, citing its analysis of Google’s third-quarter results.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (NKE), target $67.

CSFB:
- Reiterated Outperform on (VZ), target raised to $52.

Night Trading
Asian Indices are -.50% to +.25% on average.
S&P 500 futures -.21%.
NASDAQ 100 futures -.12%.

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Earnings of Note
Company/EPS Estimate
- (ADP)/.43
- (BEAV)/.41
- (BEC)/.75
- (CRDN)/1.36
- (CPO)/.67
- (FPL)/1.22
- (IT)/.11
- (IVC)/.32
- (JAH)/.69
- (LIZ)/.70
- (ONNN)/.22
- (PMI)/-1.05
- (STE)/1.26
- (TKLC)/.12
- (TEN)/.39
- (X)/2.66
- (VSH)/.26
- (RRD)/.74
- (BJS)/.61
- (CL)/.85
- (MAS)/.45
- (PG)/.90
- (Q)/.16
- (SIRI)/-.08
- (TRW)/.25
- (UA)/.34
- (WEC)/.67
- (AVP)/.36
- (COCO)/.04
- (SAF)/1.53
- (GT)/.51
- (AXL)/.23
- (MGM)/.49
- (CMG)/.52
- (ANDW)/.18
- (DWA)/.43
- (EQR)/.04
- (FIC)/.41
- (LNC)/1.37
- (MCK)/.72
- (OMTR)/.05
- (SIRF)/.22
- (WYNN)/.60
- (AG)/.30
- (BWLD)/.26
- (CMC)/.92
- (ENR)/1.05
- (TIE)/.38
- (VNO)/.66

Upcoming Splits
- (MNRK) 6-for-5

Economic Releases
10:00 am EST
- Consumer Confidence for October is estimated to fall to 99.0 versus a reading of 99.8 in September.

Other Potential Market Movers
- The weekly retail sales reports, S&P/CaseShiller Home Price Index, (AKAM) analyst meeting, (ENZN) investor day, (VAR) investor meeting, (ECPG) investor day, (YUM) investor day and Johnson Rice Consumer Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by pharmaceutical and commodity 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 Higher on Short-Covering, Bargain-Hunting Ahead of Fed

Indices
S&P 500 1,540.98 +.37%
DJIA 13,870.26 +.46%
NASDAQ 2,817.44 +.47%
Russell 2000 821.72 +.04%
Wilshire 5000 15,503.68 +.37%
Russell 1000 Growth 633.57 +.57%
Russell 1000 Value 848.05 +.34%
Morgan Stanley Consumer 746.66 +.48%
Morgan Stanley Cyclical 1,061.30 +.66%
Morgan Stanley Technology 673.22 +.56%
Transports 4,844.51 -.46%
Utilities 526.41 +.73%
MSCI Emerging Markets 165.36 +2.19%

Sentiment/Internals
Total Put/Call .85 +4.94%
NYSE Arms .76 +31.80%
Volatility(VIX) 19.87 +1.58%
ISE Sentiment 191.0 +20.13%

Futures Spot Prices
Crude Oil $93.58 +1.86%
Reformulated Gasoline 232.75 +2.35%
Natural Gas 7.27 +.71%
Heating Oil 246.65 +1.40%
Gold 793.50 +.76%
Base Metals 249.99 +.44%
Copper 352.50 -.35%

Economy
10-year US Treasury Yield 4.38% -2 basis points
US Dollar 76.83 -.25%
CRB Index 349.43 +1.03%

Leading Sectors
Networking +2.14%
Construction +1.56%
Semis +1.39%

Lagging Sectors
Banks -.48%
REITs -.96%
HMOs -1.38%

Evening Review
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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- NY-based Somerset Partners LLC paid $509 million for 450 Park Ave., the most ever paid for a US office tower on a per-square-foot basis.
- The yen weakened the most in three weeks against the dollar as global stocks rose, encouraging investors to take on riskier bets financed with loans in Japan.
- Bill Gross, manager of the world’s biggest bond fund, expects the Fed to lower benchmark interest rates to 3.5%.

Financial News:
- Allianz SE’s Pacific Investment Management, known as Pimco, has bought more than $5 billion in mortgage-backed securities for its clients, citing Pimco fund manager Bill Gross in an interview. Gross “would buy up to an additional $2 billion” in mortgage-backed securities in the coming weeks.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Internet longs, Medical longs and Software longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was mildly positive today as the advance/decline line finished about even, most sectors rose and volume was around average. Measures of investor anxiety were around average into the close. Today's overall market action was bullish given the rise in oil and last week’s gains. Cyclicals and growth stocks outperformed throughout the day. Even as many pundits seem bent on talking us into recession, the odds of fourth-quarter U.S. growth turning negative are only 13%, according to Intrade.com. As well, as I posted earlier, third-quarter U.S. growth is estimated at 3.1%. This would be around trend and should boost overall economic sentiment a bit. The consumer confidence index, released tomorrow, will likely come in below estimates and could help pressure stocks modestly in the morning. However, near-term losses will likely remain mild ahead of Wednesday's Fed announcement. Strength could surface later in the day. Google (GOOG) quietly made another record high earlier in the day. I suspect the stock is beginning another meaningful push higher after a brief pause. I still don't think it is too late to buy the stock at current levels, and it remains my largest long position. Despite mild gains in the major averages and neutral breadth, there were many stocks on my monitor pages with 2% to 5% gains. This remains an excellent market for stockpicking. Overall, insider activity remains near levels normally associated with meaningful market bottoms, even as imminent recession predictions continue unabated. Here are some of the noteworthy insider buys over the last week.

• Thornbug Mortgage (TMA): 1,000,000 shares at $9.50
• First Horizon (FHN): 147,500 shares at $24.26
• General Electric (GE): 83,000 shares at $40.08
• DuPont Fabros Technology (DFT): 152,300 shares at $21.00
• SanDisk (SNDK): 50,000 shares at $40.76
• Smithfield Foods (SFD): 53,930 shares at $28.49
• MGIC Investment (MTG): 73,000 shares at $19.23
• Western Alliance Bancorp (WAL): 51,000 shares at $21.08
• Whirlpool (WHR): 10,000 shares at $84.33