Trade Deficit Shrinks Again as Exports Soar to Another Record, Import Prices Boosted by Oil, Confidence Low

- The Trade Deficit for September shrank to -$56.5 billion versus estimates of -$58.5 billion and -$56.8 billion in August.

- The Import Price Index for October rose 1.8% versus estimates of a 1.2% gain and a downwardly revised .8% increase in September.

- The Preliminary Univ. of Mich. Consumer Confidence Index for November fell to 75.0 versus estimates of 80.0 and a reading of 80.9 in October.

BOTTOM LINE: The US trade deficit unexpectedly narrowed in September as exports soared to another record, Bloomberg reported. Exports boomed to new record highs for the seventh consecutive month. Exports rose to $140.1 billion as almost all major categories, including foods, raw materials, automobiles and consumer goods registered gains. The trade deficit will likely continue to improve over the intermediate-term.

Prices for goods imported into the US jumped more than forecast in October as oil prices neared a record, Bloomberg reported. Prices excluding petroleum, which still includes nat gas, food and metals, rose .5%. Excluding petroleum, prices rose 3.2% over the last 12 months. The cost of imported capital goods fell .1% versus unch. the prior month. Costs for consumer goods excluding autos rose .1%. I expect import price increases to subside over the coming months and move back to below-average levels over the intermediate-term.

Confidence among US consumers fell more than expected in November, Bloomberg reported. The Expectations component fell to 64.7 versus 70.1 the prior month. The Current Conditions component fell to 91 versus 97.6 the prior month. Consumers expect inflation to rise a below average 2.9% over the next five years. I still expect Consumer Confidence to head back near cycle highs over the intermediate-term as housing fears subside, stocks make new record highs, unemployment remains historically low, wages continue to substantially outpace inflation, gas prices fall, the dollar firms and inflation decelerates further.

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Friday's Watch

Late-Night Headlines
Bloomberg:
- BHP Billiton(BHP) may need to offer cash for Rio Tinto Group(RTP) after its smaller rival rejected the largest ever takeover bid.
- Merck(MRK) may pay about $5 billion to settle claims it hid the health risks of its withdrawn Vioxx painkiller, three lawyers with direct knowledge of the accord said.
- China called on Iran to “positively respond” to international concerns it may be using its nuclear program to develop an atomic weapon.
- Nikon Corp., the world’s second-biggest maker of cameras aimed at professionals, climbed the most in almost five years after the company raised its full-year profit forecast and dividend.
- North Korea thanked the US Navy for assisting one of its cargo ships hijacked by pirates off the coast of Somalia last month and said the incident was a symbol of cooperation between the government in Washington and Pyongyang.
- Julius Baer Holding, Switzerland’s third-largest private bank, plans to spin off its US fund unit early next year in an IPO.

Wall Street Journal:
- Chrysler LLC plans to offer rebates and incentives next month to reduce its inventory.

CNNMoney.com:
- If it feels like more and more Americans have extra money to spend, that's because they do. The percentage of U.S. households with discretionary income rose to 64 percent last year from 52 percent in 2002, a report by The Conference Board shows. Today about 73 million U.S. households have discretionary income, up from about 57 million in 2002.
- Wall Street braces for higher tax rates. If lawmakers let capital gains and dividend rates move higher, selling pressure could pick up and buyers could get stingy. The leading Democratic candidates for president have said they’d favor higher investment taxes on upper-income taxpayers – and Wall Streeters don’t like it.
- Marvel recalling plush ‘Curious George’ dolls. About 175,000 plush dolls are being recalled for excessive levels of lead after the company re-tested its entire product line.
- Prince Alwaleed: Why Chuck had to go.

IBD:
- Intel(INTC) Unveils Its ‘Penryn’ Chip Lineup.

CNBC.com:
- NY Democratic Attorney General Andrew Cuomo was wrong to file subpoenas against Fannie Mae(FNM) and Feddie Mac(FRE) without consulting their federal regulator and may have overreached his authority, the regulator wrote in a letter Thursday.

Reuters:
- Economy faces risks, not recession: Bernanke.

Telegraph:
- Citigroup Inc.(C) is being urged by some analysts and shareholders to beak off and sell its brokerage, investment banking and retail operations, citing analysts.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (CELG), target $78.
- Reiterated Buy on (URBN), target $30.

Night Trading
Asian Indices are -.50% to +1.0% on average.
S&P 500 futures +.29%.
NASDAQ 100 futures +.40%.

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Earnings of Note
Company/EPS Estimate
- (KDE)/-.15
- (CLWR)/-.75
- (DRS)/.95
- (FNM)/.85
- (GG)/.15
- (JASO)/2.63

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Trade Deficit for September is estimated to widen to -$58.5 billion versus -$57.6 billion in August.
- The Import Price Index for October is estimated to rise 1.2% versus a 1.0% gain in September.

10:00 am EST
- Preliminary Univ. of Mich. Consumer Confidence for November is estimated to fall to 80.0 versus 80.9 in October.

Other Potential Market Movers
- The (HNT) Investor Conference, (CTIC) analyst day, (GAS) Analyst Presentation and (FNM) Conference Call could also impact trading today.

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

Stocks Finish Mostly Lower on Weakness in the Tech Sector

Indices
S&P 500 1,474.77 -.06%
DJIA 13,266.29 -.25%
NASDAQ 2,696.00 -1.92%
Russell 2000 780.90 +.64%
Wilshire 5000 14,855.40 +.01%
Russell 1000 Growth 613.28 -.73%
Russell 1000 Value 803.80 +.76%
Morgan Stanley Consumer 735.22 +.73%
Morgan Stanley Cyclical 1,017.98 +.26%
Morgan Stanley Technology 634.48 -3.57%
Transports 4,696.73 +.72%
Utilities 526.89 +1.99%
MSCI Emerging Markets 157.79 -.13%

Sentiment/Internals
Total Put/Call 1.24 +15.89%
NYSE Arms .86 -46.61%
Volatility(VIX) 26.16 -1.25%
ISE Sentiment 119.0 +10.19%

Futures Spot Prices
Crude Oil $95.60 -.80%
Reformulated Gasoline 243.65 -.17%
Natural Gas 7.73 +1.43%
Heating Oil 260.15 -.61%
Gold 833.90 +.05%
Base Metals 241.32 -1.77%
Copper 321.75 -1.27%

Economy
10-year US Treasury Yield 4.28% -4 basis points
US Dollar 75.43 +.03%
CRB Index 353.85 -.16%

Leading Sectors
Alternative Energy +2.5%
Utilities +1.99%
HMOs +1.65%

Lagging Sectors
Networking -3.19%
Computer Hardware -3.59%
Internet -4.66%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Most US stocks rose after a final-hour rally in banks from their lowest level in two years overcame a sell-off in technology shares led by Cisco Systems(CSCO).
- Qualcomm Inc. said profit rose 84% after selling more chips. The shares fell 7.4% after a forecast missed analysts’ estimates.
- pricelin.com’s(PCLN) gross travel bookings for the 3^rd quarter rose 54% to $1.39 billion. The shares jumped 9% in after-hours trading.

BOTTOM LINE: The Portfolio finished lower today on losses in my Computer longs, Internet longs, Semi longs and Software longs. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was slightly negative today as the advance/decline line finished mildly lower, most sectors gained and volume was heavy. Measures of investor anxiety were above about average into the close. Today's overall market action was mildly bearish. Meaningful weakness was almost exclusively concentrated in market leading tech stocks today. Most sectors gained. While today's afternoon rebound, led by financials, was a positive, I would have liked to have seen more evidence of angst at the lows. Copper has broken down through its uptrend that has been in place since January. Oil is near session lows, falling 0.88, but continues to levitate near $100 per barrel on extreme speculation by investment funds. I want to see how Asia reacts to our stock rebound before further shifting market exposure. Nikkei futures are indicating a flat open in Japan right now. The AAII percentage of bulls dropped to 36.19% this week from 44.7% the prior week. This reading is back to below-average levels. The AAII percentage of bears soared to 51.4% this week from 36.5% the prior week. This reading is now at elevated levels. The percentage of bears has only been higher six other times over the last decade. Moreover, the 10-week moving average of the percentage of bears is currently at 36.6%, a high level. The 10-week moving average of the percentage of bears peaked at 43.0% at the major bear market low during 2002. The 50-week moving average of the percentage of bears is currently 37.3%, an elevated level seen during only two other periods since tracking began in the 1980s. Those periods were October 1990 to July 1991 and March 2003 to May 2003, both of which were near major stock market bottoms. The extreme readings in the 50-week moving average of the percentage of bears during those periods peaked at 41.6% on Jan. 31, 1991, and 38.1% on April 10, 2003. We are currently still close to eclipsing the peak in long-term bearish sentiment during the 2000 to 2003 market meltdown. I find this astonishing, notwithstanding the recent pullback, given that the S&P 500 is 107% higher from the October 2002 major bear market lows and just made a new record high three weeks ago.

Stocks Lower into Final Hour, Weighed Down by Tech

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Software longs, Internet longs and Computer longs. I added to my (IWM)/(QQQQ) hedges on the slightly higher open this morning and then covered some of them and some of my (EEM) short this afternoon, thus leaving the Portfolio 75% net long. The overall tone of the market is negative today as the advance/decline line is lower, most sectors are falling and volume is heavy. Investor anxiety is above-average. I am seeing some positive developments. Banks are now 1% higher, and the Broker/Dealer Index is about even. Market leaders are cutting losses. The NYSE reported recently that short interest on the exchange rose another 2.4% the last two weeks of October. Here are the 25 stocks with the largest percentage increases in their short interest relative to their float over that time period:

1. XJT +13.3%
2. RDN +9.2%
3. PFB +9.0%
4. VMW +9.05
5. CMG +8.7%
6. HAR +7.8%
7. SPF +7.7%
8. SCA +6.8%
9. HCR +5.7%
10. IMB +5.4%
11. ABK +5.2%
12. WCI +5.0%
13. MTG +4.9%
14. NDN +4.8%
15. CFC +4.7%
16. HOS +4.6%
17. DSL +4.5%
18. UA +4.5%
19. ETH +3.9%
20. MIR +3.9%
21. MGI +3.8%
22. USG +3.7%
23. EMS +3.7%
24. FED +3.5%
25. CEC +3.5%

It is also noteworthy that short interest on the Amex rose 4.2% over the last two weeks of October, led by a 20,582,364 share increase in short interest in the Financial Sector Select SPDR (XLF). The XLF is now has the second largest short position on the exchange behind the SPDRs (SPY). I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- Kenneth Brusda, president of North Star Asset Management, said he expects “headline news” on writedowns from losses related to subprime mortgages will be “over in the next couple of quarters.”
- Copper is falling to an 11-week low as rising supplies and the prospect of slower economic growth raised speculation that demand will slump.
- The US dollar will keep its status as the “world currency” for 15 to 20 years, said Stephen Roach, chairman of Morgan Stanley Asia Ltd.
- Petroleo Brasileiro SA(PBR), Brazil’s state-controlled oil company, said its Tupi field may contain as much as 8 billion barrels of oil and natural gas, an amount that could boost the country’s reserves by 62%.
- US Treasury notes rose to the highest since 2005 as Federal Reserve Chairman Ben S. Bernanke told Congress he expects the US economy to “slow noticeably.”

NY Times:
- India’s Solution for Oil Prices: Ban Speculation by Banning Trading. There are “no supply constraints right now, and demand has not escalated out of control,” Mr. Srinivasan said. Rather, trading on Nymex, is contributing “enormously” to high prices, he said. If crude were eliminated from the commodities traded on Nymex, Mr. Srinivasan predicted, the world would “see a drastic reduction in the price.” Mr. Srinivasan’s idea is based on the widely held belief that investors are artificially driving up oil prices. Hedge funds, banks and pension funds have poured capital into oil trading in recent years, betting that demand will increases. Analysts say these bets have become self-fulfilling prophecies, helping to push prices higher.
- US troops have driven al-Qaeda in Iraq out of every Baghdad neighborhood, according to Major General Joseph Fil, the US commander in the city.
- The Democratic chairman of the House Ways and Means Committee has proposed legislation that would effectively halt some current tax break audits of people who get a tax break for living and operating a business in the United States Virgin Islands.

NY Post:
- AQR Capital Management LLC, a hedge-fund company with about $38 billion in assets, pulled a planned IPO after several investors withdrew their funds.

Financial Times:
- BP Plc(BP) CEO Tony Hayward may increase capital expenditures, because BP’s recent polity of being conservative in spending on alternative and other higher-cost fuel sources makes less sense if oil prices stay high.