Stocks Mixed into Final Hour as Healthy Profit-taking Offsets Less Economic Pessimism

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Computer longs, Software longs, Retail longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is mildly positive today as the advance/decline line is about even, most sectors are rising and volume is around average. Investor anxiety is slightly above average. Today’s overall market action is bullish, considering recent gains. Then yen is falling again today versus the US dollar and is down about 4% over the last 10 days, which is a positive. Moreover, the G-7 currency volatility index is falling again today to 9.43, down from a peak of 11.75 three weeks ago, which is also a positive. The total put/call hit a high 1.23 this morning. As well, the ISE Sentiment Index hit a depressed 75.0. Retail options traders remain very skeptical of any meaningful move higher in stocks. Moreover, the “smart money” OEX put/call is a low .89. The NYSE reported yesterday that short interest on the exchange, over the last two weeks of November, rose from 12.39 billion shares to 12.77 billion shares, which is just off the all-time high of 12.95 billion shares in July. Moreover, the 3.1% increase leaves NYSE short interest up an astounding 33.2% since mid-February, the largest percentage jump since at least 1991, when Bloomberg began tracking. This is just more evidence, in my opinion, that the many bears continue to party like it's 2000-2003, despite the S&P 500's 105% gain from that period's lows. Short interest was basically flat from mid-2002 through first quarter 2005, which is what I would expect considering the extraordinary number of new hedge funds created during the aftermath of the bursting of the internet bubble, combined with a large stock rally off the bottom in October 2002. The recent parabolic rise in short interest is stunning and is symptomatic of the current “U.S. negativity bubble”, in my opinion. Moreover, the only ETF that is ranked in the top 40 NYSE short positions is the iShares Russell 2000 Index (IWM). The rest are all equities. I think this is a direct result of the massive capital that has been allocated to low correlation U.S. stock strategies and the undying belief by the herd that the U.S. will continue to underperform all other global markets indefinitely. As well, many investors continue to see a 2000-type market meltdown lurking around every corner. I suspect, given their risk-adjusted underperformance over the last few years, that many low-correlation U.S. stock strategies will see significant redemptions at year-end and that a large percentage of this capital will move into more positively correlated U.S. stock strategies. As well, I think a chain reaction of events has already begun that will eventually lead to a dramatic positive change in perception by global portfolio managers regarding the prospects for U.S. stocks vs. most other global markets. The parabolic rise in short interest this year is unsustainable and only brings the "mother of all short-covering rallies" closer, in my opinion.

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

1) LNY +14.2%

2) ZLC +9.0%

3) AVX +8.0%

4) MYL +6.9%

5) KNX +6.6%

6) PZN +6.5%

7) PBY +6.0%

8) MWV +5.7%

9) BWY +5.6%

10) PII +5.3%

11) TPX +5.3%

12) JRT +5.0%

13) FRT +5.0%

14) FMD +4.7%

15) DW +4.7%

16) PPS +4.6%

17) ESS +4.6%

18) IN +4.3%

19) MIM +4.2%

20) LEN +4.2%

21) TWB +4.2%

22) MTX +4.1%

23) SUP +4.1%

24) TRN +3.9%

25) TER +3.8%

I expect US stocks to trade mixed-to-higher into the close from current levels on less economic pessimism, lower energy prices, bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- Hedge funds run by Goldman Sachs(GS) and AQR Capital Management LLC fell in November as swings in financial markets confounded the computer-driven trading models used by the quantitative managers.
- Crude oil is falling another $2.83/bbl. today and is down $12/bbl. from recent highs on recent US dollar strength and worries over global demand.
- Gold is falling $8.70/oz., the most in a week, after a fall in energy prices reduced the appeal of the precious metal as an inflation hedges.
- Goldman Sachs Group(GS) Chief Economist Jim O’Neill said it is ‘hard to be bearish’ on the US dollar. (video)
- Cheesecake Factory(CAKE) increased its buyback program by 5 million shares after repurchasing $250 million of stock this fiscal year.
- Treasuries are declining, heading for their first weekly fall since October, as a government report diminished chances of a recession by showing employers added more jobs last month than economists forecast.
- Imax Corp.(IMAX) had its biggest gain ever in Nasdaq Stock Market trading after announcing plans to install 100 digital projection systems in AMC Entertainment(AC) theaters.
- The US and its European allies will proceed with efforts to impose a third round of United Nations sanctions against Iran.
- Cintas Corp.(CTAS), the largest US supplier of uniforms, jumped the most in two years after a Robert W. Baird analyst raised his rating, saying the stock is poised to climb if a historical correlation with US hiring holds true.
- Iraq Bonds Rally on US Troop Surge, Oil Earnings. Holders of Iraqi bonds are giving President Bush a vote of confidence.
- CA Inc.(CA), the second-largest maker of software for mainframe computers, gained the most in 10 months after Goldman Sachs(GS) upgraded the stock to “buy” and said a measure of profitability will improve next year.
- Papa John’s(PZZA), the third-largest US pizza chain, rose the most in two months in US trading after forecasting 2008 profit that may exceed analysts’ estimates and announcing the repurchase of as much as $50 million of its stock.
- Macrovision Corp.(MVSN) agreed to buy Gemstar-TV Guide(GMST) for $2.8 billion in cash and stock, adding interactive program listings to software that protects TV shows and movies from piracy.
- Synopsys Inc.(SNPS), whose programs help engineers design semiconductors, surged the most in more than a year on the Nasdaq after demand for software licenses produced fourth-quarter sales and profit that beat estimates.
- The dollar rose for a third day versus the yen, the longest winning streak since October, after a report showed U.S. employers added more jobs than forecast last month, suggesting the economy will avoid a recession.

Forbes.com:
- Sinking mortgage values have made big write-downs from banks and brokerages almost commonplace but that hasn’t deterred Joseph Lewis. The billionaire has upped his already sizable stake in Bear Stearns(BSC).

Boston Globe:
- Tens of thousands to see Winfrey, Obama.

Fortune.com:
- Apple’s(AAPL) $15 billion cash hoard. Which tech company has the most cash? Apple’s stash is indeed the biggest of the group, putting the iPod maker in the elite ranks of well-heeled Fortune 500 tech companies. Apple has added $5 billion to its coffers in the past year alone.

eWeek.com:
- NetSuite Plans Google-Style Auction IPO.

Energy Business Review:
- Nova Biosource Fuels has announced that start-up operations are progressing on schedule at the 20 million gallon per year biodiesel refinery being constructed for Scott Petroleum along the Mississippi river in Greenville, Mississippi.

Financial Times:
- ‘Quants’ continue to lose credibility. Given uncertainty in the current climate, the unemotional investment strategy used by quantitative funds based on core fundamentals in the market looks attractive. Yet “quant” funds, and quant-based funds, have come in for criticism in recent months after been widely blamed for the severity of the downturn in the summer.

Bear Radar

Style Underperformer:

Large-cap Value (+.02%)

Sector Underperformers:

Gold (-1.33%), Coal (-1.0%) and Computer Hardware (-.79%)

Stocks Falling on Unusual Volume:

CAE, GIL, FMD, ESL, STO, MVSN, PENX, FORM, SVVS and AEC

Job Market Still Historically Healthy, Confidence Spread Between Present Situation/Future Expectations at Hurricane Katrina Levels

- The Change in Non-farm Payrolls for November was 94K versus estimates of 80K and 170K in October.

- The Unemployment Rate for November remained at 4.7% versus estimates of 4.8% and 4.7% in October.

- Average Hourly Earnings for November rose .5% versus estimates of a .3% gain and a .1% increase in October.

- Preliminary Univ. of Mich. Consumer Confidence for December fell to 74.5 versus estimates of 75.0 and a reading of 76.1 in November.

BOTTOM LINE: Employers in the US hired more workers than forecast in November, suggesting job growth will help prop up spending, Bloomberg reported. Service industries, which account for the majority of US growth, added 127,000 jobs last month. Average Hourly Earnings rose a strong 3.8% year-over-year. The Monster Employment Index is just 6 points off its all-time record set in May. The 50-week moving average of jobless claims has been lower during only two other periods since the 70s. The unemployment rate is a historically low 4.7%, down from 5.1% in September 2005, notwithstanding significantly fewer real-estate related and auto production jobs during that period. The unemployment rate’s current 12-month average is 4.6%. It has only been lower during two other periods since the mid-50s.

Furthermore, most measures of Americans’ income growth are still very healthy. The 3.8% year-over-year gain in Average Hourly Earnings is substantially above the 3.2% 20-year average. The 12-month moving-average of the rate of growth of Americans’ Average Hourly Earnings is currently 3.94%. 1998 was the only year during the 90s expansion that it exceeded current levels.

Besides a healthy job market, the Case-Shiller Home Price Index is up 114% over the last decade and the S&P 500 has risen 105% since the October 2002 major bear market lows. As a result, Americans’ net worth just hit another all-time record, a fact that continues to be ignored by the record number of stock market participants that believe it is in their financial and/or political interest to paint a bleak picture of America. This is the main reason that consumer spending hasn’t fallen off the cliff that the many bears have predicted incorrectly for years.

The preliminary University of Michigan Consumer Confidence reading came in slightly below estimates, Bloomberg reported. The Expectations component of the index fell to 63.2 from 66.2 the prior month. However, the Current Conditions component, which gauges consumer attitudes about their current financial situation and whether or not it’s a good time to buy a big-ticket item, actually rose to 92.1 from 91.5. The last time the spread between the Expectations and Current Conditions components was this high was September/October 2005, right after hurricane Katrina ravaged the Gulf coast and wreaked havoc on the psyche of the nation. From the lows in October 2005, the S&P 500 gained 14% in under seven months.

Bull Radar

Style Outperformer:

Mid-cap Value (+.15%)

Sector Outperformers:

Airlines (+3.1%), Road&Rail (+1.5%) and Retail (+.70%)

Stocks Rising on Unusual Volume:

LLL, RC, EW, NRP, BSI, GFA, LQDT, SIRO, BECN, FAST, SNPS, SOLF, ICOC, HOKU, CTCM, CSIQ, OCNF, PZZA, POOL, ACTL, STAR, TESS, ALGN, LIFC, DDUP, BUCY, CAL, PCU, CTCM, UAUA, GTV, BTH, FCX, ARII, AVP and CA

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