Stocks Finish Mostly Higher on Late Rebound

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Stocks Lower into Final Hour on Rise in Oil, Financial Sector Worries

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Semi longs and Software longs. I covered some of my (EEM) short and my (QQQQ/(IWM) hedges this morning, then added back to my (EEM) short and added (IWM)/(QQQQ) hedges this afternoon, 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, most sectors are falling and volume is above average. Investor anxiety is high again. Weekly retail sales rose 2.3% vs. 2.4% last week and up from 1.4% in early July. There remains much evidence that consumer spending is modestly below-average but little evidence of the imminent plunge in spending that has been predicted for years and is being priced into many stocks at current levels. Building permits were the lowest in 14 years, which is a positive as homebuilders work down inventory. UBS upgraded Under Armour (UA) to Buy, saying its channel checks indicate sales have accelerated significantly over the last few weeks as weather turned more seasonal. The firm said that UA sales growth at some retailers was in the triple-digit range. I think the stock remains very attractive at current levels. Research In Motion (RIMM) said today at the Scotia Capital Telecom & Tech Conference that the company wasn't worried about a macroeconomic slowdown, especially in the financial services sector. Worries over a possible slowdown at RIMM have been weighing on the tech sector. Thomas Weisel initiated the company with an Overweight rating today. Nordstrom (JWN) is soaring 11.5% after yesterday's beat and raise. The company also expanded its buyback by $2.5 billion. I said yesterday that longer-term investors would regret selling Google (GOOG) into recent broad market weakness. Today, CSFB upped its target on the stock to $900, and it is jumping 2.2%, despite broad market weakness. The stock remains my large equity long position, and I still see substantial upside from current levels. Last night in Asia, the Nikkei and Hang Seng saw large reversals, with both opening down over 3% and both finishing at session highs, rising over 1% for the day. Oil is rising $3.76 per barrel on a 0.72% decline in the dollar index and still looks poised to test $100 per barrel, which could finally provide the negative catalyst to demand for a substantial decline in the commodity into year-end. The release of the FOMC minutes today showed the Fed believes US economic growth will come in around 1.8%-2.5% in 2008, which is near my prediction of 2-2.5% over the intermediate-term. I continue to believe true growth stocks will outperform the broad market substantially given the current macro backdrop. I expect US stocks to trade mixed-to-lower into the close from current levels on another rise in oil and global economic worries.

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Tuesday Watch

Late-Night Headlines
Bloomberg:

- The global burden of HIV has been overstated, with new surveillance data showing the number of people carrying the AIDS-causing virus is about 6.3 million lower than estimated last year. More accurate ways of tracking the disease indicate for the first time that the world turned the corner on the three-decade epidemic in the late 1990s.
- London Metal Exchange director Philip Crowson stated on Monday that China’s robust demand for raw materials may slow down after the 2008 Beijing Olympics, due to a series of policies on curbing investment and rising inflation pressure. Philip stressed at a mining conference in PerthChina’s vigorous investment boom might be exaggerating the country’s underlying needs, particularly as its economy becomes more market-oriented, the state-owned companies improve their efficiency, and more efforts are made on environmental protection. that
- Leaders of the Association of Southeast Asian Nations will today agree to “abide by and implement” changes to their markets allowing the region to be a European Union-modeled economic community by 2015.
- Japan starts taking fingerprints and photographs of foreigners entering the country from today to catch terrorists that Justice Minister Kunio Hatoyama says are beating immigration controls using false passports and disguises.

BusinessWeek:
- Brazil, the New Oil Superpower. State-run Petrobras’ “monstrous” new oil find has wide-ranging implications for the South American country, the oil majors, oil services providers, and beyond.

IBD:
- Hard Drive Makers Resist Price War.

USA Today.com:
- Why give thanks when you can shop?

AP:
- General Motors’(GM) Cadillac CTS was named 2008 car of the year in the US by Motor Trend magazine.

Financial Times:
- The US Federal Reserve will on Tuesday publish its first set of enhanced economic forecasts alongside the minutes of the last meeting of the Federal Open Market Committee, and the result may surprise some investors. The new economic projections are likely to show that Fed policymakers expect the US economy will pull through an expected near-term rough patch and regain strength over the course of 2008, even though they see downside risks to that ­forecast.
- Arab investors, flush with liquidity, are considering investments in distressed US financial assets as they try to turn the turmoil in credit markets into a regional opportunity.

Daily Telegraph:
- Rio Tinto(RTP), defending a takeover proposal from BHP Billiton(BHP), may offer its larger rival partnerships in some projects instead of a merger.

Economic Daily News:
- AU Optronics(AUO) will supply panels that will be sued in Dell’s(DELL) new touch-screen laptops.

Jiji Press:
- Tomy Co. and other Japanese toymakers are shifting production to Vietnam on rising costs and safety concerns in China, where almost 90% of Japanese-brand toys are produced.

South China Morning Post:
- BYD Co. plans to export its own-brand electric cars to the US and western Europe by the middle of next year, citing an official at the Hong Kong-listed battery maker.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (TGT), target $66. TGT’s November sales are tracking in-line with the company’s original guidance. We believe the arrival of more favorable weather in November has helped to drive sales of seasonal and cold weather items during the month.
- Reiterated Buy on (HOLX), target $74.
- Reiterated Buy on (MSFT), target $41.
- Reiterated Buy on (JWN), target $52.

Night Trading
Asian Indices are -3.0% to -.75% on average.
S&P 500 futures +.37%.
NASDAQ 100 futures +.65%.

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Earnings of Note
Company/EPS Estimate
- (UNFI)/.32
- (BKS)/-.09
- (DHI)/-.85
- (DKS)/.05
- (TGT)/.62
- (GME)/.23
- (FRE)/.00
- (EV)/.49
- (ROST)/.35
- (SKS)/.16
- (ZLC)/-.60
- (SSI)/.05
- (BJ)/.33
- (DDS)/-.19
- (HRL)/.65
- (BGP)/-.62
- (LTD)/.00
- (ARUN)/.03
- (HIBB)/.24
- (WFMI)/.30
- (PSUN)/.14
- (GYMB)/.90
- (ODP)/.40
- (HOTT)/.15
- (MWRK)/-.59
- (PLL)/.57
- (JCG)/.36
- (FL)/.24
- (BCSI)/.24

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Housing Starts for October are estimated to fall to 1170K versus 1191K in September.
- Building Permits for October are estimated to fall to 1200K versus 1261K in September.

2:00 pm EST
- Oct. 31 FOMC Meeting Minutes

Other Potential Market Movers
- The weekly retail sales reports, (IART) analyst meeting, Bank of America Defense Day and Scotia Capital Telecom & Tech Conference could also impact trading today.

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

Stocks Finish Sharply Lower on Economic Worries

Indices
S&P 500 1,433.27 -1.75%
DJIA 12,958.44 -1.66%
NASDAQ 2,593.38 -1.66%
Russell 2000 750.35 -2.49%
Wilshire 5000 14,405.22 -1.79%
Russell 1000 Growth 595.66 -1.50%
Russell 1000 Value 778.59 -2.04%
Morgan Stanley Consumer 734.03 -1.26%
Morgan Stanley Cyclical 945.74 -3.05%
Morgan Stanley Technology 609.08 -1.68%
Transports 4,457.97 -2.32%
Utilities 520.45 +.08%
MSCI Emerging Markets 149.62 -2.38%

Sentiment/Internals
Total Put/Call 1.12 -12.50%
NYSE Arms 1.74 +147.8%
Volatility(VIX) 26.01 +2.04%
ISE Sentiment 128.0 +88.2%

Futures Spot Prices
Crude Oil $94.76 +.98%
Reformulated Gasoline 238.45 +.38%
Natural Gas 7.76 -2.96%
Heating Oil 260.75 +.79%
Gold 781.80 -.66%
Base Metals 229.07 -.80%
Copper 303.85 -5.02%

Economy
10-year US Treasury Yield 4.07% -9 basis points
US Dollar 75.80 -.04%
CRB Index 346.90 -.72%

Leading Sectors
Utilities +.08%
Medical Equipment -.22%
Restaurants -.32%

Lagging Sectors
Gold -4.5%
Homebuilders -4.7%
Airlines -5.2%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Nordstrom Inc.(JWN), the owner of 101 department stores in the US, said third-quarter profit rose more than analysts estimated on the sale of its Faconnable brand. The stock jumped 12% in after-hours trading.
- Hewlett-Packard(HPQ), the biggest personal-computer maker, reported a profit that beat analysts’ estimates after extending its lead over Dell Inc.(DELL). The company plans to buy back as much as $8 billion in shares.
- The average US pump price for regular gasoline fell 1.2 cents to $3.10/gallon in the week ended today.
- Zinc fell to a 20-month low as shipments from China, the world’s largest producer of the metal, accelerated on speculation the government will end a tax rebate on exports.

Business Week:
- Finance Stocks to Buy Now.

BOTTOM LINE: The Portfolio finished lower today on losses in my Retail longs and Biotech longs. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was very negative today as the advance/decline line finished substantially lower, almost every sector fell and volume was slightly above average. Measures of investor anxiety were high into the close. Today's overall market action was very bearish. Nikkei futures are indicating a down-230 open in Japan. Hewlett-Packard (HPQ) and Nordstrom (JWN) just beat and raised. HPQ isn't moving much on the news, however JWN is rising 12% in after hours. Cyclicals were hit especially hard again today, falling 3%. I still think an imminent recession in the U.S. is virtually impossible if not accompanied by a significant slowdown overseas. It appears as though investors are pricing in this possibility right now. I want to see how the market reacts to this evening's positive earnings reports, and if overseas stocks stabilize tomorrow morning, before further shifting market exposure.

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.