Stocks Finish Sharply Higher on Less Economic Pessimism, Fed Rate Cut

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Stocks Surging into Final Hour on Less Economic Pessimism, Fed Rate Cut

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Computer longs, Software longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is positive today as the advance/decline line is higher, almost every sector is rising and volume is heavy. Mastercard (MA) reported excellent results and boosted its stock buyback program. I have heard many bears say that the company's positive results of late are just a function of how strapped the U.S. consumer is. However, Mastercard attributed these strong results to strong international and emerging market demand. The stock, with short interest near record levels, is soaring 22% on the report. As I have said a number of times, I don't usually highlight the Investors Intelligence survey because I don't think it is a good contrary indicator. I choose to highlight the AAII survey, which recently showed exceptional bearishness, given how close the S&P 500 is to a record. Many others have been pointing to the Investors Intelligence survey, however, as recent evidence that investors were too complacent. That survey came out today and shows a seven-week low in investor optimism. I haven't heard anyone even mention this. The Fed cut the fed funds rate and discount rate 25 basis points, as expected. The Fed also explicitly stated that the balance of risks are now equal with respect to inflation and growth. I think, overall, the policy statement was slightly more hawkish than many investors expected. I view those statements as a positive, however. The odds of another 25-basis-point cut at the December meeting are now 51.8%, down from 60.7% before the meeting. I still think the market is in a win-win situation as the Fed has massive firepower available if needed. If growth remains extraordinarily resilient, many companies will continue to post stellar earnings results -- even with the drag from housing on a few sectors. Google (GOOG) is already back near session highs and I agree with those who think that the company should split its stock. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, less economic pessimism, investment manager performance anxiety and short-covering.

US Growth Surges, GDP Price Index Plunges, Consumer Spending Jumps, Chicago PMI Falls, Construction Rises

- Advance 3Q GDP rose 3.9% versus estimates of a 3.1% gain and a 3.8% increase in 2Q.

- Advance 3Q Personal Consumption rose 3.0% versus estimates of a 3.2% gain and a 1.4% increase in 2Q.

- Advance 3Q GDP Price Index rose .8% versus estimates of a 2.0% gain and a 2.6% increase in 2Q.

- Advance 3Q Core PCE rose 1.8% versus estimates of a 1.5% gain and a 1.4% increase in 2Q.

- 3Q Employment Cost Index rose .8% versus estimates of a .9% gain and a .9% increase in 2Q.

- Chicago Purchasing Manager for October fell to 49.7 versus estimates of 53.0 and a reading of 54.2 in September.

- Construction Spending for September rose .3% versus estimates of a .5% decline and a downwardly revised .2% decline in August.

BOTTOM LINE: Economic growth in the US unexpectedly accelerated in the third quarter, despite the housing and credit market turmoil, as increases in exports, consumer spending and business investment more than made up for a drop in home construction, Bloomberg reported. GDP grew at an annual rate of 3.9%, the most since the first quarter of 2006 and well above the long-term average of 3.1%. The catalysts for this strong showing were a sharp bounceback in consumer spending and decelerating inflation. Employment costs, which make up two-thirds of inflation, rose at a slower pace than during 2Q. The Core PCE, the Fed’s favorite inflation gauge, rose 1.8% which is within the Fed’s stated comfort zone of 1-2%. Moreover, the rate of growth in the GDP Price Index is plunging. The GDP Price Index rose .8% during 3Q versus 4.2% during 1Q, despite some significant rises in commodity prices. This is the lowest rate of growth in prices since the second quarter of 1998. I continue to believe the secular trend of disinflation remains firmly in tact and that Asia will experience another bout of deflation during the next substantial global growth slowdown. According to Intrade.com, the odds that U.S. growth turns negative this quarter are only 12.5%. Moreover, economists are estimating growth of 1.8% this quarter. I expect growth to come in between 2% to 2.5%, boosted by inventory rebuilding and strong exports. I also still think U.S. growth of around 2% to 2.5% is likely over the intermediate term as a booming global economy continues to more than offset the substantial drag from housing.

Chicago-area business activity in October fell below estimates, as manufacturers restrained production, Bloomberg reported. It was the seventh time since the economic expansion began in November 2001 that the index fell below 50. The New Orders component of the index fell to 53.9 from 56.2 the prior month. The Prices Paid component rose to 74.7 versus 59 the prior month. The Employment component fell to 49.5 versus 52 the prior month. I expect this gauge to bounce back next month as companies rebuild depleted inventories and companies gain confidence in the sustainability of the current expansion.

Spending on US construction projects unexpectedly rose last month as gains in the building of factories, hotels and schools offset a drop in home construction, Bloomberg reported. Non-residential construction rose 17% year-over-year during the month. I continue to believe construction activity will remain muted over the intermediate-term as homebuilders pare down inventories.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Crude oil fell for a second day, extending its decline from Monday’s record, after Goldman Sachs(GS), the bank that said in July oil may reach $95 a barrel, told clients it’s “time to take profits.”
- Mapfre SA, Spain’s biggest insurer, said it will acquire Commerce Group(CGI) for $2.2 billion in cash, adding the largest automobile insurer in Massachusetts.
- United Parcel Service(UPS) Adds $2 Billion More for Share Buybacks.

Wall Street Journal:
- Google(GOOG), Verizon Wireless(VZ) Discussing Phone Service.
- News Corp.’s(NWS/A) Fox television network has almost sold out the inventory of advertising space for the upcoming Super Bowl. The increased demand from the media buyers is outpacing past Super Bowls as advertisers seek ways to diminish the effect of digital video recorders.
- Democratic Rivals Target Clinton in Debate.

New York Times:
- GoogleGOOG) and Friends to Gang Up on Facebook.

MarketWatch.com:
- New California regulations may push hedge funds out of state.
- Apple Inc.(AAPL) saw booming sales of the latest version of its operating system over the weekend, which may help boost momentum for the company’s line of Mac computers during the holiday season.

CNNMoney.com:
- Oil: No longer a heavyweight. Higher efficiency, a more diverse energy mix and a more prosperous nation have softened rising oil’s economic punch.

IBD:
- Poll: PC Sales Merry This Christmas.

USA Today.com:
- 3^rd-quarter earnings may not be as bad as they seem.
- Fee fi fo fum: Google(GOOG) smells the blood of Microsoft.

Reuters:
- Dell(DELL) to resume buybacks, files restated results.
- Japan manufacturers PMI falls, pricing power weak.

TimesOnline:
- BP Plc(BP) is in talks with the Abu Dhabi government to find a “green energy” process to generate electricity.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (PBI), target $51.

CSFB:
- Reiterated Outperform on (MCK), target $69.

Night Trading
Asian Indices are -.75% to unch. on average.
S&P 500 futures +.01%.
NASDAQ 100 futures -.01%.

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Earnings of Note
Company/EPS Estimate
- (CRS)/2.11
- (CLX)/.68
- (CGX)/.92
- (CEG)/1.54
- (FCL)/.05
- (GRMN)/.81
- (HES)/1.37
- (IACI)/.35
- (IDA)/.65
- (IFF)/.70
- (IMA)/.24
- (IRM)/.18
- (JNY)/.34
- (LAZ)/.67
- (MA)/1.42
- (NCR)/.26
- (NEM)/.25
- (NBL)/1.23
- (OCR)/.55
- (PMTC)/.26
- (PPL)/.62
- (SPW)/1.19
- (RIG)/1.99
- (WY)/.49
- (WYN)/.73
- (BYD)/.41
- (KFT)/.41
- (COL)/.88
- (CAI)/.58
- (AAP)/.58
- (AOC)/.59
- (AVB)/.60
- (CNO)/.28
- (FMC)/.64
- (GSF)/1.90
- (JDSU)/.06
- (MET)/1.39
- (PRU)/1.74
- (TK)/.32
- (DOX)/.54
- (BCO)/.64
- (CROX)/.62
- (FBN)/.00
- (GRB)/.11
- (HLT)/.33
- (LNY)/.31
- (MSTR)/1.18
- (TUES)/.03

Upcoming Splits
- (MNRK) 6-for-5

Economic Releases
8:30 am EST
- Advance 3Q GDP is estimated to rise 3.1% versus a 3.8% gain in 2Q.
- Advance 3Q Personal Consumption is estimated to rise 3.2% versus a 1.4% gain in 2Q.
- Advance 3Q GDP Price Index is estimated to rise 2.0% versus a 2.6% gain in 2Q.
- Advance 3Q Core PCE is estimated to rise 1.5% versus a 1.4% increase in 2Q
- The 3Q Employment Cost Index is estimated to rise .9% versus a .9% gain in 2Q.

9:45 am EST
- The Chicago Purchasing Manager report for October is estimated at 53.0 versus 54.2 in September.

10:00 am EST
- Construction Spending for September is estimated to fall .5% versus a .2% gain in August.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil build of 400,000 barrels versus a -5,288,000 barrel drawdown the prior week. Gasoline supplies are expected to fall by -200,000 barrels versus a -1,931,000 barrel decline the prior week. Distillate inventories are estimated to fall by -1,000,000 barrels versus a -1,847,000 barrel decline the prior week. Refinery Utilization is expected to rise by .50% versus a -.21% decline the prior week.

2:15 pm EST
- The Fed is expected to lower the benchmark fed funds rate by 25 basis points to 4.5%.

Other Potential Market Movers
- The ADP Employment Change report, weekly MBA Mortgage Applications report, NAPM-Milwaukee and (GR) analyst meeting could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity 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 Lower on Rising Apprehension Ahead of Tomorrow's Fed Announcement

Indices
S&P 500 1,531.02 -.65%
DJIA 13,792.47 -.56%
NASDAQ 2,816.71 -.03%
Russell 2000 816.15 -.68%
Wilshire 5000 15,403.50 -.65%
Russell 1000 Growth 630.91 -.42%
Russell 1000 Value 840.44 -.90%
Morgan Stanley Consumer 745.25 -.19%
Morgan Stanley Cyclical 1,052.74 -.81%
Morgan Stanley Technology 673.32 +.01%
Transports 4,842.16 -.05%
Utilities 526.46 +.01%
MSCI Emerging Markets 163.92 -.82%

Sentiment/Internals
Total Put/Call 1.05 +23.53%
NYSE Arms 1.30 +72.4%
Volatility(VIX) 21.07 +6.04%
ISE Sentiment 153.0 -19.90%

Futures Spot Prices
Crude Oil $89.80 -3.98%
Reformulated Gasoline 224.65 -3.48%
Natural Gas 8.01 +.44%
Heating Oil 242.09 -1.77%
Gold 785.30 -.92%
Base Metals 243.96 -2.41%
Copper 347.50 -1.31%

Economy
10-year US Treasury Yield 4.38% unch.
US Dollar 76.74 -.12%
CRB Index 344.19 -1.50%

Leading Sectors
Airlines +2.72%
Software +1.38%
REITs +.93%

Lagging Sectors
Steel -2.92%
Energy -3.05%
Oil Service -3.90%

Evening Review
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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- The benchmark gauge of stock market volatility rose for a second day and traders increased bets that tomorrow’s interest rate decision by the Fed will spur greater stock-price swings in the next three weeks.
- Crude oil fell more than $3 from a record in NY after Goldman Sachs(GS) told clients it’s “time to take profits.”
- DreamWorks Animation(DWA), the studio run by Jeffrey Katzenberg, said third-quarter profit rose 400% on sales of “Shrek the Third,” this year’s second-highest grossing US film.
- President Bush said he would reject any attempt by Congress to force him to accept legislation with increased domestic spending by combining it will funding for military operations and veterans health care.

Washington Post:
- Attacks by Iraqi Insurgents Dropped Sharply in September.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs, Medical longs, Software longs, Retail longs, Computer longs and Commodity shorts. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was mildly negative today as the advance/decline line finished lower, sector performance was mixed and volume was above average. Measures of investor anxiety were above average into the close. Today's overall market action was just mildly bearish. Most of today's meaningful losses were found in commodity-related stocks as oil fell $3.78 per barrel despite dollar weakness and expectations for another Fed cut tomorrow. Utility, Internet, software, computer hardware, semi, drug, hospital, HMO, homebuilder, REIT, restaurant and airline shares all gained for the day. Once again, today I have many stocks on my monitor pages posting significant gains despite losses in the averages. I continue to find many excellent “growth” stocks of all market caps at reasonable valuations that are doing very well this year.