Stocks Surging into Final Hour on Strength in Commodities and Tech, Bounce in Financials

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Medical longs, Software longs and Computer 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 gaining and volume is heavy. The U.S. Dollar Index is dropping another 0.5%, which is contributing to the $2.85-per-barrel jump in oil. I think oil needs to display some signs of topping before the broad market can mount a significant rally into year-end. This will likely occur over the coming weeks as investors begin to price out another rate cut at the December meeting, which should lead to some firming in the dollar. As well, the upcoming hype surrounding oil's likely push to $100 per barrel could provide the last burst of excessive long speculation necessary to provide the catalyst for a major reversal. Fed fund futures now imply a 58% chance for another 25-basis-point cut at the December meeting, down from 62% yesterday and 64% one week ago. Briefing.com is reporting that rumors are floating around that Apple (AAPL) is working on a partnership with a Chinese company for iPhone distribution. Apple is less than a point away from its record high. If this rumor is confirmed, I suspect the shares will hit $200 before week's end. I still see substantial upside to the stock over the intermediate term. It remains my second largest long position, just behind Google (GOOG) and just ahead of Intuitive Surgical (ISRG). 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:
- Crude oil rose above $97/bbl. in NY to a record as a storm forecast to produce 36-foot waves in the North Sea forced BP Plc(BP) and ConocoPhillips(COP) to evacuate workers and cut production.
- MasterCard Inc.(MA), the second-biggest credit card company, rose more than 6% after Deutsche Bank AG raised its recommendation to “buy” from “hold” because of a better-than-expected third-quarter profit.
- Ambac Financial(ABK) disputed conclusions by Morgan Stanley(MS) that the industry’s losses will worsen.
- Xcel Energy(XEL), the owner of utilities in Denver and Minneapolis, may invest billions of dollars to boost wind-power capacity to take advantage of rising demand for cleaner energy.
- Gasoline demand in the US fell to the lowest in six months as retail pump prices rose, according to a report today from MasterCard Inc.(MA) based on credit card charges at filling stations.

Wall Street Journal:
- Legg Mason’s Miller Looks to the Battered. Star Manager Is Trimming Funds To Add Brokerage, Housing, Consumer Stocks.

CNBC.com:
- Wachovia Corp.(WB) is among banks seeking to hire away Merrill Lynch(MER) brokers by offering upfront bonuses of as much as $2 million.
- Caterpillar Inc.(CAT) CEO Jim Owens said the US housing market may recover from a recession in the second half of 2008, and the overall economy will have a “soft landing.”

Financial Times:
- Biofuels can match oil production.

Economic Releases

- None of note

Links of Interest

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- North Korea started disabling its nuclear program under the supervision of US inspectors, a State Department spokesman said.
- The falling dollar isn’t cause for alarm and is part of a “global rebalancing process,” according to David Rosenberg, chief North American economist at Merrill Lynch(MER). “The dollar is no lower today than it was in 1997 – we don’t remember that being a particular Armageddon-type time period,” Rosenberg said.
- Former Fed Chairman Greenspan said the US currency isn’t likely to weaken further against the euro, though over the long term it will fall against Asian currencies.
- Alibaba.com Ltd. more than doubled on its first day of trading in Hong Kong, pushing its market value past South Korea’s NHN Corp. to become Asia’s second-biggest Internet company after Yahoo Japan Corp.
- Hedge-fund managers should toughen internal rules for valuing securities and preventing insider trading while giving clients more information about investment risks, according to the industry’s main US lobbying group. The Managed Funds Assoc., whose members include SAC Capital and DE Shaw, called in a new report today for “significantly heightened standards” for preventing trading abuses and preparing for financial crises.
- China is likely to increase gold output by 8% this year, overtaking the US as the world’s second-biggest producer and challenging South Africa’s century-long dominance.
- China may become a net exporter of stainless steel next year as output rises faster than demand growth, said Baoshan Iron & Steel, the nation’s second-largest producer of the alloy. Rising output from China, which overtook Japan as the world’s biggest stainless steelmaker last year, may prolong a domestic glut until at least 2010, the China Special Steel Enterprise Association said yesterday.

Wall Street Journal:
- In a sign of the gradual recovery of the corporate loan market, Wall Street investment banks plan to launch on Wednesday an offering of up to $10 billion in loans for Chrysler LLC’s automotive business.

New York Times:
- The Bush administration on Tuesday will propose a significant expansion of the authority of the federal drug and consumer product safety agencies to inspect and certify imports, White House and other administration officials said Monday.

IBD:
- Growth Led Value Stock Funds For Solid Gains In Volatile Month.

USA Today.com:
- Airlines improve on-time performance in September.

Commercial Times:
- Google Inc.(GOOG) has orders 1 million mobile phones from High Tech Computer Corp. Mobile phones using its operating system will be available by the second half of next year.

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

Night Trading
Asian Indices are unch. to +1.25% on average.
S&P 500 futures +.29%.
NASDAQ 100 futures +.25%.

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Earnings of Note
Company/EPS Estimate
- (CTSH)/.31
- (ADM)/.61
- (EXPD)/.34
- (JOE)/.10
- (THC)/-.06
- (ISE)/.52
- (JEC)/.65
- (VLO)/1.36
- (EMR)/.75
- (EP)/.22
- (BTU)/.32
- (LEA)/.17
- (TAP)/.93
- (RUTH)/.08
- (BMC)/.42
- (CHK)/.61
- (MTZ)/.19
- (CAR)/.66
- (ONXX)/-.21
- (GBX)/.69
- (PDLI)/.14
- (PSUN)/.13
- (MM)/1.06
- (GLBC)/-1.57
- (NILE)/.18
- (AES)/.28
- (ZOLT)/.23
- (PFGC)/.38
- (GBE)/.08
- (FMCN)/.43

Upcoming Splits
- (ATU) 2-for-1

Economic Releases
- None of note

Other Potential Market Movers
- The Fed’s Bernanke speaking, weekly retail sales reports, (FLEX) analyst meeting, (LLL) investor conference, (SPWR) analyst meeting, (DECK) analyst meeting, (CCJ) analyst meeting and (STR) analyst meeting could also impact trading today.

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

Stocks Finish Mildly Lower on Credit Worries

Indices
S&P 500 1,502.17 -.50%
DJIA 13,543.40 -.38%
NASDAQ 2,795.18 -.54%
Russell 2000 790.44 -.92%
Wilshire 5000 15,104.48 -.59%
Russell 1000 Growth 625.87 -.52%
Russell 1000 Value 814.86 -.63%
Morgan Stanley Consumer 737.49 +.02%
Morgan Stanley Cyclical 1,038.44 -.60%
Morgan Stanley Technology 669.20 -.63%
Transports 4,778.09 -.51%
Utilities 529.58 +.71%
MSCI Emerging Markets 157.51 -2.07%

Sentiment/Internals
Total Put/Call 1.02 -11.30%
NYSE Arms 1.0 -9.59%
Volatility(VIX) 24.31 +5.65%
ISE Sentiment 150.0 +10.29%

Futures Spot Prices
Crude Oil $94.68 -1.31%
Reformulated Gasoline 239.65 -1.76%
Natural Gas 7.96 -5.43%
Heating Oil 255.42 -.76%
Gold 808.90 +.05%
Base Metals 243.68 -.88%
Copper 330.30 -.66%

Economy
10-year US Treasury Yield 4.33% +2 basis points
US Dollar 76.44 +.13%
CRB Index 349.76 -1.08%

Leading Sectors
Utilities +.71%
Internet +.48%
HMOs +.12%

Lagging Sectors
Papers -2.0%
Retail -2.13%
I-Banks -2.73%

Evening Review
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In Play

Afternoon Recommendations
Goldman Sachs:
- Added (AAP) to Americas Conviction Buy List.

Citigroup:
- Reiterated Buy on (IACI), target $37.

Afternoon/Evening Headlines
Bloomberg:
- Robert Friedman, the former chief investment officer of Michael Pirce’s mutual-fund company, is shutting down his global stock hedge fund after two years, according to a letter sent to investors.
- Ford Motor(F) will pay $15.4 billion to create a union retiree health-care fund with the UAW under an agreement approved by UAW officials today.
- More than 1,200 of NYC’s public schools received report cards today in the city’s first attempt to compare and rate each school’s efforts to educate and improve performance of students and teachers.

BOTTOM LINE: The Portfolio finished about even today as losses in my Computer longs and Retail longs offset gains in my Internet longs, Medical 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 negative today as the advance/decline line finished lower, most sectors fell and volume was above average. Measures of investor anxiety were above average into the close. Today's overall market action was mildly bearish. Today's trading was very jerky on both the up and downsides. I saw many stocks both significantly outperforming and underperforming the averages, but few around the averages. HMO, Internet, defense and utility shares were relatively strong throughout the day. Anything related to the housing downturn was once again a source of meaningful weakness. Most of my longs fared pretty well today, led by Google (GOOG), which closed at another record high. Under Armour (UA), however, remains under pressure. I may add to that long again on any further meaningful weakness.