Stocks Sharply Lower into Final Hour on Weakness in Financials and Retailers

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Retail longs and Biotech longs. I added to my (EEM) short and added (IWM)/(QQQQ) hedge this morning, thus leaving the Portfolio 75% net long. The overall tone of the market is very negative today as the advance/decline line is substantially lower, every sector is falling and volume is above average. Investor anxiety is high again. The Fed's Stern spoke in Singapore last night. Here is a summary of his comments via Bloomberg:

1. It is too early to say what future actions are needed.
2. The U.S. housing adjustment still has a way to go.
3. Mortgage foreclosures are likely to increase.
4. Home building will remain subdued.
5. The flowover effects from housing are modest at most.
6. Other areas of the U.S. economy are doing well.
7. Housing is only a small proportion of the U.S. economy.
8. The U.S. economy is very resilient and sound.
9. The Fed is dependent on incoming economic data.
10. Policy can be changed at the appropriate time.
11. Energy, food prices are going up.
12. U.S. inflation has been fairly modest.
13. U.S. consumers are in reasonably good shape.
14. Shouldn't exaggerate the U.S. housing impact.
15. U.S. exports are doing well.

Overall, I would classify these comments as mixed. Barring a significant deterioration in economic data over the next month, I still think the Fed will remain on hold at the Dec. 11 meeting. However, fed fund futures imply a 90% chance for another 25-basis-point cut at the upcoming meeting. S&P 500 large futures traders remain positioned near historically net short levels, public short sales are spiking again and the AAII bull ratio four-week average is registering extreme pessimism. The Rasmussen Investor Index fell today to the lowest level of the year and is now at the lowest since mid-March 2003. These readings come with the S&P 500 just 6.6% off an all-time high and insider activity exceptionally bullish. Hitwise is reporting today that Google (GOOG) had 64.5% of the U.S. search market in October vs. 63.6% in September. Yahoo! (YHOO) had 21.7% vs. 22.6% in September, and MSN had 7.4% vs. 7.8% in September. Google is trading down 1.8% to session lows as the broad market moves back to session lows. I expect Google to continue to take share over the long term. As well, video ads, which are just in their infancy, and new product additions should continue to propel growth to relatively high rates over the intermediate-term, notwithstanding any economic slowdown. The stock is becoming egregiously cheap again relative to the broad market and its Internet peers given its fundamentals. I plan to add to my long position on any significant further weakness from current levels. In my opinion, longer-term investors who are dumping the stock as indiscriminate selling takes hold will regret it. I expect US stocks to trade mixed into the close from current levels as bargain hunting and short-covering offsets global economic worries.

Economic Releases

- None of note

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Monday Watch

Weekend Headlines
Bloomberg:
- Genentech Inc.(DNA), the largest US maker of cancer drugs, said its Avastin medicine slowed the spread of brain tumors in a study, offering a potential option against a disease that has resisted therapy for 25 years.
- Crude oil prices aren’t high and the commodity is sold for a paltry sum, Iranian President Mahmoud Ahmadinejad said today in Riyadh.
- Iran won’t use oil exports as a weapon and will find other ways to respond to US pressure, President Mahmoud Ahmadinejad said.
- Former Fed Chairman Greenspan said the dollar’s decline hasn’t affected the global economy and is a “market phenomenon.”
- The death toll from tropical cyclone Sidr in Bangladesh rose to more than 2,000, with more than 1.5 million people living in temporary shelters after homes were flattened and low-lying areas flooded, disaster management officials said.
- Celgene Corp.(CELG), the maker of thalidomide-based cancer drugs, will acquire Pharmion Corp.(PHRM) for $2.9 billion in cash and stock to expand its product lineup of treatments for blood diseases and cancer.
- Copper futures were little changed near an eight-month low in Shanghai as global inventories rose to their highest since April, raising concerns demand may be slowing for the industrial metal.

Wall Street Journal:
- General Motors(GM), looking to speak year-end demand, has launched a new “Red Tag Event” incentive campaign that offers 0% financing for 60 months on several 2007 models and discounts on many newly launched 2008 models.
- Chrysler, looking to return to profitability by 2009, is considering branding changes that would further simplify its product portfolio while helping to cut as many as 1,000 dealers.
- China’s government has ordered commercial banks to freeze lending through the end of this year in an attempt to rein in surging investment and cool economic growth.

NY Times:
- A Clinton Friend’s Role Sets Off Intense Criticism of CNN and a Re-examination. CNN, which sponsored the Democratic presidential debate Nov. 15, should have more fully disclosed commentator James Carville’s relationship to candidate Hillary Rodham Clinton, citing network President Jonathan Klein.
- The US was unable to convince the United Nations to adopt a resolution condemning the use of rape in achieving political or military goals. The US delegation wanted specific mention made of government soldiers and militia who use rape in warfare or as a means of intimidation. Those references were removed from the resolution’s text. Government-supported militias in Sudan’s Darfur region have been accused of using rape as a way to intimidate the population.

MarketWatch.com:
- The travel purse is still plentiful for Thanksgiving. Despite fuel costs and more airport headaches, Americans are on the move.
- Garmin(GRMN) quits Tele Atlas battle, but might win GPS war.
- Top-performing newsletter turns bearish on Chinese stocks.

IBD:
- Microsoft(MSFT) Starting to Deliver Servers for the Home.
- IBM(IBM) Beefs Up Storage Offerings.

Newsweek:
- Interpol, the world police organization, has issued so-called red notices for the arrest of three Iranian officials, including Deputy Defense Minister Ahmad Vahidi, alerting customs and border authorities worldwide that they are wanted on terrorism charges. The three men have been charged in Argentina with conspiring along with Hezbollah terrorist Imad Mughniyeh to blow up a Jewish community center in Buenos Aires in July 1994, an attack that killed 85 people.

Business Week:
- The Greatest Givers. BusinessWeek’s Special Report on individual and corporate philanthropy.
- Google’s(GOOG) Solo Wireless Bid. The king of search will bid alone at January’s auction of wireless airwaves, but it’s likely to need a partner to develop a network.
- S&P’s latest stock screen finds 8 top-ranked names whose shares are being snapped up by company insiders.

USA Today:
- Ethanol makers consider coast-to-coast pipeline.

CNNMoney.com:
- Who’s at the top of your holiday list? A foodie? A sports nut? A child? We’ve got you covered. A complete holiday gift guide.
- 7 year-end tax-saving moves.
- Safest cars: 11 new models.
- McDonald’s(MCD) Eyes Ballooning Coffee Market.

Reuters:
- Financial market turmoil may last some time, but US Treasury Secretary Henry Paulson told G20 members on Sunday he was confident that the US economy will keep growing.
- Japan’s prime minister said on Sunday that he believes the US economy is not in a poor state and that problems caused by the subprime mortgage crisis would be resolved soon.
- AT&T(T) may bid for EchoStar(DISH) by year’s end.

ABCNews.com:
- Could the Solar Bug Bring the Sun to the Car Market? Some Entrepreneurs are Trying to Create an Affordable Renewable-Energy Vehicle.

Financial Times:
- Merrill Lynch(MER) and Citigroup(C) may consider selling minority stakes in their brokerage arms to help boost their stock prices and balance sheets.
- OPEC unites behind higher prices.
- Yahoo!(YHOO) staff have been given until the first quarter of 2008 to revamp the poorly performing parts of its European business – or they will be closed down or sold.
- Support for SIV superfund grows.

Telegraph:
- They thrive on market volatility and they gamble on failure. Short-sellers, mostly hedge funds, who bet that a share price will fall, have emerged as the biggest winners of the credit crisis. One senior City official says the ubiquitous presence of hedge funds is one of the factors driving companies to abandon public markets.

Independent:
- BHP Billiton Ltd.(BHP) must add $15 billion to its offer for Rio Tinto Group(RTP) for the takeover to succeed, citing Jane Coffey at Royal London Asset Management.

Berlingske Tidende:
- Lego A/S is predicting that sales of the company’s toys may rise as much as 10% in the Christmas season compared with last year, citing Mads Nipper, head of Lego Markets and Products. The increase would make 2007 one of the best years in Lego’s history.

Le Monde:
- Iranian President Mahmoud Ahmadinejad said French President Nicolas Sarkozy was “young and inexperienced” and criticized his decision to push for sanctions against Iran outside the United Nations, citing a letter Ahmadinejad sent to Sarkozy. He said Sarkozy’s efforts to promote sanctions with the European Union probably will fail as Germany and Italy won’t support them.

BBC:
- Former US President Bill Clinton raised about $250,000 for his wife Hillary’s presidential campaign fund by appearing at a function in Dublin, Ireland.

WirtschaftsWoche:
- Software AG, Germany’s second-largest software maker, expects to have 2008 sales of at least $1 billion, citing CEO Karl-Heinz Streibich. Sales growth will be boosted by the company’s acquisition of WebMethods in the US, citing Streibich.

Nikkei English News:
- Nippon Oil Corp., Toyota Motor and 14 other Japanese companies will jointly develop technology to produce bioethanol from plants and used construction materials.

China Times:
- AU Optronics Group(AUO) will boost sales at least 30% next year, citing Chairman K.Y. Lee.

Weekend Recommendations
Barron's:
- Made negative comments on (MGM), (WYNN), (LVS), (LLY) and (ADM).

Citigroup:
- Upgraded (NMX) to Buy, target raised to $150.

Night Trading
Asian indices are unch. to +.5% on avg.
S&P 500 futures +.17%.
NASDAQ 100 futures +.34%

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Earnings of Note
Company/Estimate
- (LOW)/.42
- (CPB)/.72
- (MDT)/.57
- (PERY)/.55
- (FMCN)/.43
- (JWN)/.52
- (DY)/.34
- (HPQ)/.82
- (LEAP)/-.07
- (TWB)/.46

Upcoming Splits
- None of note

Economic Data
1:00 pm EST
- The NAHB Housing Market Index for November is estimated to fall to 17 versus 18 in October.

Other Potential Market Movers
- The (LMAT) analyst meeting, (RAI) analyst meeting and Bank of America Defense Day could also impact trading today.

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

Weekly Outlook

Click here for the Wall St. Week Ahead by Reuters.

Click here for Stocks in Focus for Monday by MarketWatch.com.

There are a few economic reports of note and some significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. – NAHB Housing Market Index

Tues. – Weekly retail sales reports, Housing Starts, Building Permits, Oct. FOMC Minutes

Wed. – Weekly EIA energy inventory report, weekly MBA Mortgage Applications report, Initial Jobless Claims, Univ. of Michigan Consumer Confidence, Leading Indicators

Thur. – US markets closed

Fri. – US stock market 1pm EST close

Some of the more noteworthy companies that release quarterly earnings this week are:

Mon. – Lowe’s(LOW), Campbell Soup(CPB), Medtronic(MDT), Hewlett-Packard(HPQ), Nordstrom(JWN), Focus Media(FMCN), Perry Ellis(PERY), Leap Wireless(LEAP)

Tues. – Dick’s Sporting Goods(DKS), GameStop(GME), Freddie Mac(FRE), Barnes & Noble(BKS), Stage Stores(SSI), BJ’s Wholesale(BJ), Hormel Foods(HRL), Aruba Networks(ARUN), Ltd Brands(LTD), Borders Group(BGP), Aspen Tech(AZPN), Hibbett Sports(HIBB), Whole Foods Market(WFMI), Hott Topic(HOTT), Target Corp.(TGT), Mothers Work(MWRK), DR Horton(DHI), Ross Stores(ROST), Gymboree(GYMB), J Crew(JCG), Office Depot(ODP), Zoltek(ZOLT), Foot Locker(FL), Pall Corp(PLL), Zale Corp.(ZLC), Eaton Vance(EV), Saks Inc.(SKS)

Wed. – Charming Shoppes(CHRS), Patterson Cos(PDCO), Children’s Place(PLCE), Gap Inc.(GPS), Deere & Co.(DE), Buckle Inc.(BKE), Abercrombie & Fitch(ANF)

Thur. – US markets closed

Fri. – Central Garden(CENT), Dillard’s(DDS)

Other events that have market-moving potential this week include:

Mon. – (LMAT) analyst meeting, (RAI) analyst meeting, Bank of America Defense Day

Tue. – (IART) analyst meeting, Bank of America Defense Day, Scotia Capital Telecom & Tech Conference

Wed. – None of note

Thur. – US markets closed

Fri. – None of note

BOTTOM LINE: I expect US stocks to finish the week modestly higher on bargain-hunting, a firmer dollar, seasonal strength and short-covering. My trading indicators are giving mixed signals and the Portfolio is 100% net long heading into the week.

Market Week in Review

S&P 500 1,458.74 +.34%*

Click here for the Weekly Wrap by Briefing.com.