Stocks Finish Lower on Profit-taking

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Stocks Mixed into Final Hour on Healthy Consolidation of Recent Gains

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Retail longs and Biotech longs. I have not traded today, thus leaving the Portfolio 75% net long. The overall tone of the market is slightly positive today as the advance/decline line is neutral, most sectors are rising and volume is above average. Investor anxiety is slightly above-average. Many market leading stocks are strong again today, and many secondary stocks are posting outsized gains. The U.S. Dollar Index is back near unchanged for the day, recouping morning losses. This is something to keep an eye on as a further acceleration in gains would likely begin to pressure commodities. The fact that the bears are unable to gain any downside traction in stocks despite the jump in oil and yesterday's huge gains is a big positive. Overall, I would classify today's action as a healthy consolidation of yesterday's gains. The MBA Mortgage Applications Index surged 5.5%, boosted by a 6.4% jump in refis. The Broker/Dealer Index is 2.5% higher despite another $1.2 billion writedown at Bear Stearns (BSC) and Massachusetts regulators accusing the company of fraud related to its hedge funds. Goldman Sachs (GS) credit default swaps have plunged 23.4% over the last week, which is a big positive. E*Trade (ETFC) is up another 14% on further buyout speculation. Stability in the financials has been a large broad market positive over the last few days. Today, the Rasmussen Investor Confidence Index fell to the lowest since March 20, 2003, which was on the eve of the Iraq war. This is more evidence of the extreme pessimism that currently permeates the investment landscape. I expect US stocks to trade mixed into the close from current levels as profit-taking offsets short-covering.

Producer Prices Decelerate, Retail Sales Above Estimates, Business Sales Rise

- The Producer Price Index for October rose .1% versus estimates of a .3% gain and a 1.1% rise in September.

- The PPI Ex Food & Energy for October was unch. versus estimates of a .2% gain and a .1% rise in September.

- Advance Retail Sales for October rose .2% versus estimates of a .1% increase and an upwardly revised .7% gain in September.

- Retail Sales Less Autos for October rose .2% versus estimates of a .2% increase and a downwardly revised .3% gain in September.

- Business Inventories for September rose .4% versus estimates of a .4% gain and an upwardly revised .3% increase in August.

BOTTOM LINE: Prices paid to US producers rose in October at a slower pace than forecast, suggesting the economy is absorbing the effects of a jump in energy costs, Bloomberg said. Core producer prices are rising at a 2.5% rate over the last 12 months. Prices of light trucks fell 2.7%. Computer prices fell 1.3%. The cost of consumer goods rose .1%. Prices for capital goods fell .1%. While producer prices will likely jump next month on the rise in energy, I still believe inflation has peaked for this cycle and measures will continue to decelerate over the intermediate-term.

Retail Sales in the US increased at a better-than-expected .2% rate in October, Bloomberg reported. Unseasonably warm weather continues to weigh on clothing retailers. Overall retail sales have been modestly below average for awhile. I expect a bounceback to more average rates as cold weather comes and the holidays approach. I expect sales of consumer electronics to be very strong this holiday season.

Inventories at US businesses rose in September as sales surged .6%, Bloomberg reported. Businesses had enough goods on hand at the current sales pace to last only 1.27 months, the same as August. Inventories at retailers rose .1%. Inventory rebuilding and record exports should result in an upward revision to 3Q US GDP to above 4.5%. I continue to expect inventory rebuilding to help boost overall US growth over the intermediate-term as companies gain confidence in the sustainability of the current expansion.

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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
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- (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%

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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%