Wednesday Watch

Late-Night Headlines
Bloomberg:
- Goldman Sachs(GS) is starting three new hedge funds to woo investors after two funds lost money this year, CEO Lloyd Blankfein said.
- Australian consumer confidence dropped to an 11-month low and wages growth slowed in the third quarter, suggesting the central bank doesn’t need to increase interest rates again next month.
- The prime ministers of North Korea and South Korea begin three days of talks in Seoul today on developing joint economic zones and stronger ties as a follow-up to last month’s summit between the countries.
- Tokyo Electron Ltd., the world’s second-largest maker of machines used to produce semiconductors, rose the most in four years in Tokyo trading after saying orders will climb and Deutsche Bank raised its rating on the stock.
- The yen fell for a second day against the euro as Asian stocks rose, giving traders confidence to buy high-yielding assets with loans in Japan.
- Wendy’s Intl.(WEN), the third-largest US hamburger chain, received a bid from Nelson Peltz’s Triarc Cos. that was less than the $3.2 billion he said he might pay in July.

Wall Street Journal:
- Gates Foundation, China to Fight AIDS.

NY Times:
- Democratic Governor Eliot Spitzer is abandoning his plan to issue driver’s licenses to illegal immigrants, saying that opposition is just too overwhelming to move forward with such a policy.

MarketWatch.com:
- Fed chief to announce changes in Fed communications strategy.
- Philanthropy at work. Companies make strategic donations of money, products, workers’ labor.
- Short-term market-timers’ pessimism cheers contrarians.
- Rupert Murdoch said Tuesday he expects to make the Wall Street Journal’s online edition a free Web site, moving away from the paid-subscription model it has successfully employed since its inception in 1996.

BusinessWeek:
- Meet the entrepreneurs, age 25 and under, behind this year’s five winning US businesses, as voted by BusinessWeek.com readers.

Morningstar:
- After months of skittishness around anything tied to risky subprime mortgages, a handful of sophisticated investors are looking to increase their exposure to such assets.

IBD:
- Bank Loans Surge As Businesses Find Wall St. Tight-Fisted.

CNBC.com:
- E*Trade Shares Rebound, CEO Cancels Presentation.

Reuters:
- Oil prices slumped more than 3.5% Tuesday after the IEA cut its forecast for world oil demand growth, saying that the recent surge in crude prices had already hurt consumption. Crude oil imports by China, the world’s second-largest oil consumer, fell to a 10-month low in October, according to preliminary government data.

Financial Times:
- Morgan Stanley(MS) has taken a minority stake in Traxis Partners, the hedge fund group founded by Barton Biggs, Morgan Stanley’s outspoken former chief strategist.
- Citigroup’s(C) first shortlist of CEO candidates doesn’t include John Thain, who was widely seen as a favorite. Thain could be added to the list later. The shortlist includes a number of internal and external candidates, the newspaper said, naming Bob Willumstad, chairman of American International Group, as one.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (AMAT), target $23.
- Reiterated Buy on (NTAP), target $31.
- Reiterated Buy on (WMT), target $53.

Night Trading
Asian Indices are +.75% to +2.75% on average.
S&P 500 futures +.05%.
NASDAQ 100 futures +.04%.

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Earnings of Note
Company/EPS Estimate
- (PCS)/.12
- (DAKT)/.22
- (KALU)/.98
- (ARM)/.00
- (WGOV)/.68
- (AMAT)/.29
- (NTAP)/.26
- (PETM)/.22
- (SINA)/.28
- (FDC)/.33
- (HLT)/.33
- (SNDA)/.42
- (LDG)/.44
- (M)/.07

Upcoming Splits
- (MPR) 4-for-3
- (TNP) 2-for-1
- (CRS) 2-for-1
- (APAGF) 4-for-1

Economic Releases
8:30 am EST
- The Producer Price Index for October is estimated to rise .3% versus a 1.1% gain in September.
- The PPI Ex Food & Energy for October is estimated to rise .2% versus a .1% gain in September.
- Advance Retail Sales for October are estimated to rise .1% versus a .6% gain in September.
- Retail Sales Ex Autos for October are estimated to rise .2% versus a .4% gain in September.

10:00 am EST
- Business Inventories for September are estimated to rise .4% versus a .1% gain in August.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -750,000 barrels versus a -821,000 barrel decline the prior week. Gasoline supplies are expected to fall by -500,000 barrels versus an -819,000 barrel decline the prior week. Distillate inventories are estimated to fall by -500,000 barrels versus a 98K barrel increase the prior week. Finally, Refinery Utilization is estimated to rise by .50% versus a .07% gain the prior week.

Other Potential Market Movers
- The Fed’s Bernanke speaking, Fed’s Fisher speaking, weekly EIA energy inventory data report, weekly MBA Mortgage Applications report, (SE) analyst meeting, (SMOD) analyst meeting, (TLM) analyst meeting, (LEG) analyst meeting, (LXK) analyst day, (PCL) analyst day, (QCOM) analyst meeting, (UFI) investor meeting, (GWW) analyst meeting, (CSAR) analyst meeting, Piper Jaffray Global Internet Summit, Stephens Investment Conference, CSFB Healthcare Conference, CSFB Insurance & Asset Management Conference, Morgan Stanley Global Consumer & Retail Conference, UBS Global Tech & Services Conference, Bear Stearns SMid Cap Conference and Merrill Lynch Banking & Financial Services Conference could also impact trading today.

BOTTOM LINE: Asian indices are sharply higher, boosted by technology and automaker stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the day.

Stocks Finish Sharply Higher, at Session Highs, on Strength in Financial, Technology, Retail Sectors

Indices
S&P 500 1,481.05 +2.91%
DJIA 13,307.09 +2.46%
NASDAQ 2,673.65 +3.46%
Russell 2000 789.15 +2.88%
Wilshire 5000 14,890.37 +2.79%
Russell 1000 Growth 609.90 +2.82%
Russell 1000 Value 811.88 +2.84%
Morgan Stanley Consumer 740.67 +1.78%
Morgan Stanley Cyclical 998.45 +2.18%
Morgan Stanley Technology 625.89 +3.68%
Transports 4,705.78 +2.44%
Utilities 518.31 +.44%
MSCI Emerging Markets 153.22 +3.05%

Sentiment/Internals
Total Put/Call 1.21 +32.97%
NYSE Arms .31 -66.95%
Volatility(VIX) 24.10 -22.48%
ISE Sentiment 118.0 +.85%

Futures Spot Prices
Crude Oil $91.41 -3.39%
Reformulated Gasoline 232.15 -3.95%
Natural Gas 7.93 -.33%
Heating Oil 250.45 -3.01%
Gold 801.90 -.72%
Base Metals 237.96 +1.19%
Copper 311.40 +.16%

Economy
10-year US Treasury Yield 4.26% +5 basis points
US Dollar 75.85 -.07%
CRB Index 345.53 -1.14%

Leading Sectors
I-Banks +5.8%
Computer Hardware +5.58%
Airlines +5.2%

Lagging Sectors
Utilities +.45%
HMOs +.45%
Restaurants +.26%

Evening Review
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Afternoon Recommendations
CSFB:
- Rated (PEP) Outperform, target $87.
- Rated (KO) Outperform, target 68.

Afternoon/Evening Headlines
Bloomberg:
- US stocks rallied the most in two months after Wal-Mart Stores’ profit beat analysts’ estimates and Goldman Sachs(GS) said it doesn’t plan any significant writedowns on mortgage-related assets.
- The risk of US companies defaulting on their debt fell after Goldman Sachs(GS) said it doesn’t plan to take significant writedowns on mortgage-related assets and Bank of America said it may need to write down $3 billion of debt.
- Goldman Sachs(GS) and Lehman Brothers(LEH) led gains among brokerage stocks on optimism that Wall Street’s biggest firms have contained losses stemming from asset-backed securities.
- Crude oil fell more than $3 a barrel, the biggest decline in three months, after the IEA cut its forecast for global demand through 2008 and record prices curb fuel use.
- MBIA Inc.(MBI), the world’s biggest bond insurer, rose the most since October 1987 after the Wall Street Journal reported that Warren Buffett’s Berkshire Hathaway(BRK/A) may provide capital to the bond insurance industry.

Reuters:
- The Federal Reserve will reduce its target rate “at least another 100 basis points” over the next six to 12 months, said Paul McCulley, a fund manager at PIMCO.

Financial Times:
- Weyerhaeuser Co.(WY) signed confidentiality agreements with as many as seven companies interested in its containerboard and building-materials divisions.

Nikkei English News:
- Sun Microsystems(SUNW) and 10 other information technology firms will build Japan’s first underground data center, which will use half the power of other facilities.

BOTTOM LINE: The Portfolio finished higher today on gains in my Computer longs, Internet longs, Medical longs, Retail 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 very positive today as the advance/decline line finished substantially higher, every sector gained and volume was heavy. Measures of investor anxiety were above about average into the close, despite today’s sharp gains. Today's overall market action was very bullish. Market-leading growth stocks were especially strong, with many soaring 5% to 10%. Computer hardware, wireless, bank, investment bank, homebuilder, retail and airline stocks all posted 4%+ gains. Despite the recent pullback, the MS Tech Index is still 11% higher year-to-date. I still expect tech to outperform through year-end, especially growth tech. I still think market-leading growth stocks have likely seen their lows for the year. If we do get another bout of meaningful weakness over the coming weeks, it will likely be the result of global economic slowdown fears. Secular growth stories should display relative strength under such a scenario. Recent declines in many of these stocks have left them cheap again relative to the broad market given their fundamentals. Nasdaq short interest rose another 1.6% the last two weeks of October, to 8.02 billion shares, the Nasdaq reported yesterday.

Here are the 25 stocks with the largest percent increase in short interest relative to their float over the last two weeks of October:

1. CALM +17.2%
2. MNKD +16.4%
3. TGIC +14.9%
4. CTCT +12.8%
5. CLWT +9.8%
6. CCRT +9.5%
7. BKUNA +8.3%
8. BHIP +7.4%
9. FOLD +7.3%
10. WBMD +7.0%
11. MBRK +7.0%
12. USNA +6.8%
13. TMTA +6.6%
14. HCSG +6.5%
15. HAIN +6.2%
16. CORS +6.0%
17. OVTI +5.9%
18. NTII +5.4%
19. TASR +5.3%
20. SNCR +5.2%
21. PALM +5.2%
22. BONT +5.1%
23. SEED +5.0%
24. ACLI +4.9%
25. FBTX +4.6%

The S&P 500 also reported short interest data yesterday. Despite its very oversold state, the financial sector saw a 10.5% jump in short interest over the last two weeks of October, which was by far the largest increase of any S&P 500 sector. Broken down by industry, banks saw short interest spike 16.7%, diversified financial short interest rose 9.6%, and real estate short interest surged 9.5%. This also corresponds with the fact that the Financial Select Sector SPDR (XLF) is the second most heavily shorted security on the Amex. The XLF is now 4.1% higher on the day to session highs.

Here are the 25 S&P 500 companies with the largest increase in short interest relative to their float over the last two weeks of October:

1. JNY+8.9%
2. HAR +8.5%
3. ABI +7.7%
4. ABK +5.2%
5. MTG +5.0%
6. CFC +4.7%
7. AIV +3.4%
8. LXK +2.9%
9. LEN +2.9%
10. DDS +2.8%
11. VRSN +2.7%
12. TIE +2.6%
13. LSI +2.4%
14. EK +1.9%
15. NYX +1.9%
16. FHN +1.6%
17. IFF +1.4%
18. BC +1.4%
19. BDK +1.3%
20. CIT +1.0%
21. ETFC +1.0%
22. CVG +1.0%
23. HAL +1.0%
24. NCC +1.0%
25. CBG +1.0%

Stocks Soaring into Final Hour on Falling Oil, Strength in the Retail and Financial Sectors

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Internet longs, Software longs, Retail longs and Computer longs. I covered some of my (IWM)/(QQQQ) hedges and some of my (EEM) short this morning today, thus leaving the Portfolio 75% net long. The overall tone of the market is very positive today as the advance/decline line is sharply higher, almost every sector is rising and volume is heavy. Investor anxiety is above-average despite today’s gains. The CBOE total put/call is soaring 38% today, to a high 1.26. If it were to close here, it would be the highest level seen during this pullback and the highest closing level since Aug. 29. The ISE Sentiment Index is also a below-average 130. The VIX is falling 20% today, but is still relatively high at 25. These readings are very surprising given the magnitude of today's gains. While I wouldn't be surprised to see a mild pullback tomorrow morning, these readings bode well for further gains in the near term. As well, near record S&P 500 index future shorts, near-record NYSE short interest, a record public short-interest ratio, record money market fund inflows, the sixth highest AAII bearish percentage the last decade, a record low hedge fund sentiment reading and the recent surge in mutual fund outflows all bode well for a continuation of recent gains over the coming weeks. Today's best performers are the beaten up market-leading growth stocks. While there could be some sort of retest in these shares over the coming days, I believe they have likely seen their lows for the year already. Apple (AAPL) is especially strong today, rising 11%, on news that it is talking to China Mobile (CHL) about selling the iPhone. I think the recent pullback in the shares was excessive and there remains substantial upside in the shares from current levels. Weekly retail same-store-sales rose 2.4% vs. a 2.1% gain the prior week and up from 1.4% in early July. Retail sales remain only modestly below average levels, and I still see no evidence of the sharp decline in consumer spending that has been predicted for several years. Seemingly, every year, the IEA raises its global oil demand growth forecast during summer driving season, and every year, it lowers it during the fourth quarter. This is one of the reasons oil is falling today. Global oil demand growth has not been strong for several years, despite a booming global economy. I expect US stocks to trade mixed-to-higher into the close from current levels on bargain-hunting, lower energy prices and short-covering.

Today's Headlines

Bloomberg:
- Crude oil fell more than $4/bbl. in NY, the biggest decline in more than three months, after the International Energy Agency cut its forecast for global demand through 2008 as record prices curb fuel use.
- Gold is falling for a third straight session after a drop in energy costs reduced the appeal of the precious metal as a hedge against inflation.
- The yen is falling against the 16 most-actively traded currencies as Bank of Japan Governor Toshihiko Fukui gave no indication of when the central bank would increase interest rates following today’s policy meeting.
- Third Avenue Management LLC, the money manager founded by activist investor Martin Whitman, became the largest investor in Radian Group(RDN), the worst-performing stock in the S&P 400 Midcap this year. The stock rose as much as 17% on the news.
- Wal-Mart Stores(WMT) said quarterly profit rose more than analysts estimated and boosted its full-year earnings forecast after luring customers with holiday discounts. The shares rose the most in five years.
- More New Yorkers view Democratic Governor Eliot Spitzer unfavorably than favorably for the first time, following his plan to allow illegal immigrants to get driver’s licenses, according to a poll released today by Siena Research Institute.
- Goldman Sachs(GS) doesn’t plan to take any significant writedowns on mortgage-related assets, CEO Blankfein said.
- The S&P 500 is 10% undervalued as of yesterday’s close and will end the year at 1,600, according to David Bianco, chief equity strategist at UBS Securities.
- E*Trade Financial(ETFC) is “highly unlikely “ to declare bankruptcy, BMO Capital Markets said.
- Apple Inc.(AAPL) rose the most in more than a year in Nasdaq trading after China Mobile, the world’s biggest wireless operator, said it’s in talks to sell the iPhone.

Wall Street Journal:
- Galleon Group hedge fund manager Rick Sherlund turned to prospecting for gold in Alaska in the summer time as a break from his office.

USAToday.com:
- Straw poll: CEOs lean toward Giuliani.
- Roadside bombs in Iraq fall sharply.

AP:
- The US military is beginning to reduce the number of brigades deployed in Iraq and will send thousands of troops home by July.

AppleInsider:
- Unlike last year, the annual Macworld Expo and Conference that rolls around in January will actually serve as a launch pad for some new Macs, including a chic and ultra-compact notebook design long under development by Apple Inc.

Economic Releases

- None of note

Links of Interest

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