Stocks Falling into Final Hour on 25 Basis Point Fed Rate Cuts

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet longs, Computer longs, Biotech longs and Retail longs. I added to my (EEM) short and added (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 75% net long. The overall tone of the market is negative today as the advance/decline line is substantially lower, most sectors are falling and volume is about average. Investor anxiety is slightly above average. Today’s overall market action is bearish. The Fed did not cut the discount rate 50 basis points as I had expected. As well, the tone of their language in the ensuing policy statement was a bit more hawkish than expected. The Fed said energy, commodity prices may push inflation up. I continue to believe high energy prices are having a much more negative impact on the broad US stock market than is commonly perceived. Fed fund futures now imply a 21.3% chance for a 50 basis point fed funds rate cut and a 65.4% chance for another 25 basis point fed funds rate cut at the January 30 meeting. The US dollar is strengthening on the news, which is pressuring most commodity prices. The 10-year yield is dropping 19 basis points to 3.97%. The Fed’s actions will likely result in even greater outperformance by true “growth” stocks over “value” stocks over the coming months. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering and bargain-hunting.

Today's Headlines

Bloomberg:
- US financial and real estate companies are at “attractive valuations” after their shares fell on the subprime mortgage crisis, said David Jackson, chief executive officer of Dubai-owned investment firm Istithmar PJSC.
- The tumor in the financial markets known as structured investment vehicles is shrinking, reducing the urgency for a bailout sponsored by the US Treasury.
- Sales of collateralized loan obligations, the source of funding that helped drive leveraged buyouts to a record earlier this year, rose 17% last month, according to Morgan Stanley analysts.
- General Electric(GE) received a contract valued at about $650 million to provide 333 wind turbines to Noble Environmental Power for new and expansion projects in NY and Texas.
- China, the world’s biggest pork consumer, will lift a ban on shipments from six US pork processing facilities as part of measures aimed at reducing the country’s record trade surplus.
- Crude oil rose more than $1/bbl. on speculation the US Fed will lower interest rates, bolstering demand in the world’s largest energy consumer.
- Wheat fell the most in two weeks on speculation that high prices will curb demand for US supplies.
- Commodity index returns may decline next year as a slowing US economy crimps demand for energy and metals, according to Commerzbank AG.
- Two suicide bombings blamed on an al-Qaeda group rocked the Algerian capital, killing as many as 62 people in the worst attack since Islamist massacres in the 1990s.
- A majority of New Jersey voters oppose a proposal to eliminate the state’s death penalty, which narrowly passed the Senate yesterday and will be considered by the Assembly later this week. A repeal measure is opposed by a 53% to 39% margin, according to a Quinnipiac University poll.
- It seems like old times at AT&T(T). The largest US phone company announced a $15.2 billion stock buyback today and raised its dividend 13%, the largest increase in AT&T history. The shares climbed the most in almost five years.
- Synchronoss Technologies(SNCR), whose software activates Apple’s(AAPL) iPhone, surged as much as 12% in Nasdaq Stock Market trading after announcing a contract with Sprint Nextel(S).
- ArvinMeritor Inc.(ARM), a US maker of shock absorbers and brakes for commercial trucks, jumped as much as 12% after the company affirmed its 2008 profit forecast.
- Sony Corp.(SNE) CEO Stringer plans to connect the company’s flagship PlayStation 3 console with its other electronics as part of its growth strategy next year and beyond.
- DuPont Co.(DD) CEO Holliday said the US economy will avoid a recession in 2008, buoyed by services and commercial construction as well as falling oil prices.
- Libya has set aside $100 billion to buy foreign assets, joining a group of oil-rich Arab states led by the United Arab Emirates that is searching for investment opportunities around the world.
- Merck(MRK) plans to seek regulatory approval next year for a new obesity treatment and begin selling a medicine for raising levels of good cholesterol.

Wall Street Journal:
- Democrats are rethinking their year-end budget strategy amid anger over White House veto threats and recriminations within the party over the suggestion that Congress is trading on the Iraq war to gain leverage for domestic spending.

NY Post:
- Facing a severe ratings decline and disgruntled advertisers, NBC is taking the unusual step of offering cash back – rather than additional ad time – to compensate for the shortfall.

Handelsblatt:
- UBS AG CEO Marcel Rohner said it’s “hard to imagine” a further loss after the Swiss bank wrote down US

subprime mortgage investments by $10 billion.

Bear Radar

Style Underperformer:

Mid-cap Value (-.57%)

Sector Underperformers:

Oil Tankers (-1.83%), Airlines (-1.68%) and Banks (-1.48%)

Stocks Falling on Unusual Volume:

NCS, WM, KR, FADV, ARTC, MEDX, IPSU, ASYS, HINT, PTNR, OSTK and VIP

Bull Radar

Style Outperformer:

Large-cap Growth (+.13%)

Sector Outperformers:

Telecom (+3.0%), Internet (+1.29%) and Restaurants (+.68%)

Stocks Rising on Unusual Volume:

HTZ, RGA, CNK, TUC, GRR, FCEL, HOKU, FSIN, KALU, SNCR, CELG, PRGO, CHNR, RATE, BARE, CBEY, JNPR, CSCO, SVVS, MHGC, CHKE, ARII, STEC, OYOG, LNCR, T, MPWR and KTC

Wholesale Inventories Hit Record Low as Sales Rise

- Wholesale Inventories for October were unch. versus a downwardly revised .6% gain in September.

BOTTOM LINE: Inventories at US wholesalers were little changed in October, Bloomberg reported. However, sales rose .7%. The rise in sales brought the supply of stockpiles down to an all-time low of 1.09 months worth at the current sales pace. I continue to believe inventory rebuilding will help boost overall US growth over the intermediate-term as companies gain confidence in the sustainability of the current expansion.

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