Stocks Lower into Final Hour on Economic Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour as losses in my Retail longs and Semis longs more than offset gains in my Medical longs, Software longs and Commodity shorts. I have not traded 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 above average again. Today’s overall market action is bearish. True “growth” stocks are once again substantially outperforming “value” stocks today. The Russell 2000 Small-cap Value Index is this year’s worst performing style, falling 10.2% for the year. The Russell 1000 Large-cap Growth Index is this year’s best-performing style, rising 12.6% year-to-date. I continue to believe the trend of substantial growth stock outperformance is just beginning and will last for several more years. The US dollar-based 3-month LIBOR rate is falling another 2 basis points to 4.97% today and is down 76 basis points from September highs. The investment grade credit default swap index and speculative grade credit default swap index are falling 1.16% and .37%, respectively, over the last week. February home price futures remain stable at $207,800, the same as the prior week. These are all positives. Despite the better-than-expected economic data and higher headline inflation readings, fed fund futures still imply a 78% chance for another 25 basis point rate cut at the January 31 meeting. The US dollar continues to trade very well, which should pressure most commodity prices further over the intermediate-term. There are a number of market moving events next week. Given how bearishly positioned many funds are, I wouldn’t be surprised to see the lifting of uncertainty surrounding these events provide an upside catalyst for stocks next week ahead of the holidays. I expect US stocks to trade modestly higher into the close from current levels on falling energy prices, bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- Goldman Sachs(GS) raised its outlook on the debt of Citigroup(C), saying the company is partially insulated from losses on seven investment funds it’s rescuing.
- The US dollar advanced the most against the euro since May 2005 as investors pared expectations for interest-rate reductions.
- The US Senate passed legislation that would make Federal Housing Administration loans available to subprime borrowers facing foreclosure, clearing the way for President Bush’s expected signature.
- The US economy probably won’t contract because the Federal Reserve will keep cutting interest rates, said Robert Doll, who helps oversee about $1.3 trillion as chief investment officer of global equities at BlackRock Inc.(BLK).
- Doll of BlackRock Says US Stocks ‘Reasonably Cheap.’ (video)
- President Bush said Congress should pass a year-end budget package without raising taxes or including “gimmicks.”
- Fannie Mae(FNM), the largest source of money for US home loans, is “very comfortable” with the quality of its mortgage portfolio and will prosper when housing market conditions improve, CEO Daniel Mudd said today.
- Ethanol producers surged after the US Senate approved energy legislation that will more than quadruple the use of biofuels over the next 15 years. President Bush will sign the bill into law if it reaches his desk.
- Tudor Investment’s Raptor hedge fund faces more than $1 billion in client redemptions after losing 8.5% this year, according to clients of the firm.
- Sugar prices are unlikely to rise next year as Brazilian production holds at a record and Indian output climbs to the highest ever, said Cosan SA Industria e Comercio’s finance chief.
- Dennis Garman, economist and editor of the Gartman Letter, is bullish on the US dollar.
- Gold is falling another $6/oz. as a rally in the US dollar eroded the appeal of the precious metal as an alternative investment.
- Crude oil is falling another $.38/bbl. on worries over slowing global demand, rising supplies and a firmer US dollar.
- Fed Chairman Bernanke said the central bank’s draft mortgage regulations next week will protect consumers without cutting off credit.

Wall Street Journal:
- Biotech giant Amgen Inc.(AMGN), reeling from safety and regulatory problems that have sunk sales of its flagship anemia drugs, is hoping to find salvation in the $7 billion global market for osteoporosis medications.
- Will Leap Wireless(LEAP) Do a Deal After All?

Federal Reserve Bank of San Francisco:
- Sovereign Wealth Funds May Grow to $17 trillion.

Digitimes:
- TomTom NV should be able to ship more than 10 million portable navigation devices this year, beating its own forecast, citing component makers. The sales increase will be driven by “strong” demand in the fourth quarter. Garmin Ltd.(GRMN) will ship 12 million units. On October 24 TomTom forecast shipments would rise to between 9 million and 10 million units this year.

Financial Times:
- Drake Management, one of the best-performing hedge funds last year, is in crisis talks with investors in its flagship fund following heavy losses from bets against US Treasuries, according to several investors.

Bear Radar

Style Underperformer:

Small-cap Value (-1.01%)

Sector Underperformers:

Retail (-1.89%), Steel (-1.36%) and Oil Service (-1.22%)

Stocks Falling on Unusual Volume:

BDK, DSW, HAYN, GSIC, PFWD, PICO and CVGI

CPI, Industrial Production Rise More Than Estimates

- The Consumer Price Index for November rose .8% versus estimates of a .6% gain and a .3% increase in October.

- The CPI Ex Food & Energy for November rose .3% versus estimates of a .2% increase and a .2% gain in October.

- Industrial Production for November rose .3% versus estimates of a .2% gain and a downwardly revised .7% decline in October.

- Capacity Utilization for November rose to 81.5% versus estimates of 81.7% and 81.4% in October.

BOTTOM LINE: US consumer prices rose more than expected on higher energy costs, Bloomberg reported. Core consumer prices are now rising at a 2.3% rate over the last 12 months versus the long-term average of 3.0%. Energy prices surged 5.7% versus a 1.4% gain the prior month. Food prices rose .3% versus a .3% gain the prior month. The 10-year TIPS spread, a gauge of inflation expectations, is rising to 2 basis points to 2.36% on the report, but is still down from 2.48% less than three weeks ago. The CPI should begin decelerating again next month on the recent decline in energy prices. I continue to believe inflation fears have peaked for this cycle and the long-term trend of disinflation remains firmly in tact.

Industrial Production in the US rose more than expected last month as factories made more cars and consumer electronics, Bloomberg reported. The report shows manufacturing, boosted by record demand for US products abroad, is holding up well. US exports in October soared to a record $141.7 billion. Utility production dropped 1.3% for a second straight month on unseasonably warm temperatures across the nation. Production of consumer durable goods, including autos, furniture and electronics, rose .9% and motor vehicle production surged 1.7%. I continue to believe manufacturing will help boost overall US growth over the intermediate-term as companies gain confidence in the sustainability of the current expansion and rebuild depleted inventories as a result of booming exports.

Bull Radar

Style Outperformer:

Large-cap Growth (+.02%)

Sector Outperformers:

Alternative Energy (+2.44%), Airlines (+1.69%) and I-Banks (+1.18%)

Stocks Rising on Unusual Volume:

TRU, CMO, ATE, RIGL, MELI, BMRN, BMTI, ESLR, CSUN, SVNT, ASYS, IPSU, ARTC, SMTS, JASO, AFFX, LEAP, FTEK, UNTD, ENER, WOOF, CLWR, TTWO, ICE, JRJC, MANT, BEAV, USMO, HES and C

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