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Thursday Watch

Late-Night Headlines
Bloomberg:
- China unexpectedly increased fuel prices by as much as 10% in an “’urgent step” to help the nation’s oil refiners cover surging costs. To “guarantee domestic refined oil supply and promote energy conservation,” gasoline, diesel and jet fuel prices will rise $67 a metric ton starting today, the National Development and Reform Commission said.
- The dollar snapped seven days of losses against the euro on speculation the currency’s 1.6% decline over the past month was too fast as the Federal Reserve signaled it may be done with cutting interest rates.
- The US has destroyed as much as 80% of the al-Qaeda in Iraq group’s propaganda network since the deployment of additional American troops in the country, a spokesman for coalition forces said.
- Australia’s retail sales increased more than expected in September as higher wages and job gains boosted spending on furniture, electronics and food.
- A team of US nuclear inspectors travels to North Korea today to witness the communist nation start dismantling its nuclear program, Assistant Secretary of State Christopher Hill said.

Wall Street Journal:
- A report on the competitiveness of economies around the world released yesterday puts the US out front and highlights the growing potential of energy-producing countries awash in oil and natural gas revenue.

TheStreet.com:
- Barton Biggs, of hedge fund Traxis Partners, said last night on CNBC’s “Fast Money” that the Fed did what it should have done and the market is being set up for a big surge higher. He also mentioned that he is hearing from the prime brokers that hedge funds are at their lowest levels of being net long in 4 years. He expects a stampede into year end in big cap multinationals, tech, Asia and emerging markets.

BusinessWeek.com:
- Why Delta Should Buy Northwest. With a new CEO and a clean balance sheet, Delta is pondering expansion. Here’s why Northwest is the logical choice.

Financial Times:
- Google(GOOG) plans network to rival Facebook.
- Goldman(GS) shares at new highs.

Late Buy/Sell Recommendations
Citigroup:
- Upgraded (IACI) to Buy, target $37.
- We believe conservative expectations are appropriately factored into current retail stock prices & retailers could deliver upside to our +1% comp est. driving the stocks higher given 1) pent-up demand from weak Fall sales, 2) cooler weather, 3) easier comparisons, 4) negative investor sentiment, and 5) the end of tax loss selling(Oct.31). Our top picks for Holiday sales are 1) GPS and 2) TJX, as we believe both retailers are best positioned to deliver upside to current 4Q sales and EPS expectations given conservative inventory management and cost reductions.

CSFB:
- Reiterated Outperform on (MA), raised estimates and boosted target to $160.

Night Trading
Asian Indices are -.25% to +.75% on average.
S&P 500 futures -.18%.
NASDAQ 100 futures -.02%.

Morning Preview
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Earnings of Note
Company/EPS Estimate
- (BBI)/-.18
- (CLI)/.26
- (PTEN)/.55
- (RDN)/.38
- (D)/1.68
- (ATK)/.39
- (CVS)/.44
- (RDC)/1.14
- (NMX)/.64
- (BDX)/.97
- (PDE)/.80
- (MHS)/.69
- (ED)/1.06
- (ABC)/.64
- (TBL)/.49
- (AMSC)/.13
- (ASF)/.43
- (KBR)/.31
- (S)/.22
- (EK)/.28
- (VCLK)/.16
- (GGC)/.15
- (OII)/.85
- (EDS)/.41
- (FLS)/.92
- (CLF)/1.51
- (PSYS)/.38
- (ERTS)/.20
- (LVS)/.29
- (CA)/.26
- (VRSN)/.27
- (XOM)/1.74
- (IGT)/.38
- (OMX)/.63
- (TSO)/.84
- (SINA)/.27

Upcoming Splits
- (ATU) 2-for-1

Economic Releases
8:30 am EST
- Personal Income for September is estimated to rise .4% versus a .3% gain in August.
- Personal Spending for September is estimated to rise .4% versus a .6% gain in August.
- The PCE Core for September is estimated to rise .2% versus a .1% gain in August.
- Initial Jobless Claims for this week are estimated to fall to 330K versus 331K the prior week.
- Continuing Claims are estimated to rise to 2534K versus 2530K prior.

10:00 am EST
- ISM Manufacturing for October is estimated to fall to 51.5 versus 52.0 in September.
- ISM Prices Paid for October is estimated to rise to 63.0 versus a reading of 59.0 in September.

Afternoon:
- Total Vehicle Sales for October is estimated to fall to 16.0M versus 16.2M in September.

Other Potential Market Movers
- The Challenger Job Cuts report, weekly EIA natural gas inventory report and Oppenheimer Restaurant Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by technology 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 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.

Links of Interest

Market Snapshot Commentary
Market Performance Summary
Style Performance
Sector Performance
WSJ Data Center
Top 20 Biz Stories
IBD Breaking News
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In Play
NYSE Unusual Volume
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Chart Toppers
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Dow Jones Hedge Fund Indexes