Stocks Sharply Lower into Final Hour on Overseas Losses and Profit-taking

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Computer longs, Internet longs and Medical longs. I have not traded today, 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 below average. Investor anxiety is above average again. Today’s overall market action is bearish. Long-biased hedge funds have, in general, had very good years. I suspect that many of those funds are now locking in gains. This is likely the main reason for the severe underperformance today in this year’s biggest winners. The TED spread, which has been the source of much angst of late, is falling 15 basis points today to 195 basis points. It has declined 26 basis points in five days, which is a big positive. As well, the 30-day asset backed commercial paper yield is falling 18 basis points today to 5.79%. This is down 37 basis points in five days, which is also a big positive. I still expect stocks to finish the week on a positive note. 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) may start its newest stock hedge fund with as much as $10 billion in what would be the biggest debut in the industry’s history.
- Oil is falling $1.42/bbl. to $89.85/bbl. in NY on worries over rising global supplies, decelerating global demand and a stronger US dollar.
- Copper is falling to a nine-month low on worries over rising global stockpiles and slowing demand.
- Former President Bill Clinton’s decision to reconsider a business relationship with California billionaire Ron Burkle reflects concern those financial dealings may embarrass his wife’s presidential candidacy.
- Insider Buying of Retailers, Led by Dillard’s, Climbs.
- Ambac Financial Group(ABK) rose as much as 26%, and MBIA Inc.(MBI) climbed after Moody’s Investors Service affirmed the Ass credit ratings on the companies’ bond insurance units.

Wall Street Journal:
- Ingersoll-Rand(IR) has agreed to acquire Trane in a cash-and-stock deal valued at approximately $10.1 billion that would create one of the world’s largest makers of air conditioners and other climate-control systems.
- Will a Twist on an Old Vow Deliver for Domino’s Pizza(DPZ)?
- The Senate appears poised to hand the White House another victory with a measure that would make permanent an expansion of government spy powers and shield phone companies from liability for assisting government eavesdropping.

NY Times:
- Faster Chips Are Leaving Programmers in Their Dust.
- Can an untested Silicon Valley startup with the slightly embarrassing name Ribbit take on corporate giants like Microsoft(MSFT) and Avaya(AV)?

Reuters:
- China Eastern Airlines Corp. aims to buy 40 Airbus SAS A320s and is in talks to buy about 40 Boeing Co.(BA) 737s to expand domestic routes, citing the company’s chairman, Li Fenghua.

China Securities Journal:
- China will “actively and prudently” use interest-rate policy to stabilize inflation next year, citing People’s Bank of China Vice Governor Liu Shiyu.

al-Hayat:
- Syria and Iraq discussed plans to build a new oil pipeline to carry crude from Baghdad through Syrian territories. The two countries also discussed resuming operations on the Kirkuk-Baniyas oil pipeline from northern Iraq to the Syrian Mediterranean coast.

Bear Radar

Style Underperformer:

Large-cap Growth (-1.29%)

Sector Underperformers:

Airlines (-4.04%), Gold (-3.59%) and Oil Service (-3.11%)

Stocks Falling on Unusual Volume:

IR, BSI, NOV, ACIW, HAYN, COMV, ASFI, LIFC, FSTR, RIGL, PCLN, MTRX, RIGL and BDC

Current Account Deficit Shrinks, NY Manufacturing Decelerates, Prices Paid Falls, International Demand for US Assets Surges

- The 3Q Current Account Deficit fell to -$178.5 billion versus estimates of -$183.0 billion and a downwardly revised -$188.9 billion in 2Q.

- Empire Manufacturing for December fell to 10.3 versus estimates of 20.0 and a reading of 27.4 in November.

- Net Long-term TIC Flows for October rose to $114.0 billion versus estimates of $50.0 billion and a downwardly revised $15.4 billion in September.

BOTTOM LINE: The US current-account deficit narrowed in the third quarter to the smallest in two years, as the trade deficit shrank and Americans earned more on overseas investments, Bloomberg reported. The gap amounted to 5.1% of the economy, the smallest since the first quarter of 2004. I expect the current-account deficit to narrow further this quarter.

Manufacturing in New York expanded this month at a slower pace as companies cut inventories, Bloomberg reported. The Outlook component of the index, which measures the manufacturing outlook for the next six months, rose to 32.4 from 30.5 the prior month. The New Orders component fell to 14.3 from 24.5 the prior month. The Inventories component fell to -10 from -1.2 the prior month. The Prices Paid component fell to 35.0 from 42.9 the prior month. I still 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.

International buying of US financial assets accelerated to the fastest pace in five months in October, when financial-market strains diminished as Federal Reserve policy makers lowered interest rates, Bloomberg said. The increase came as foreign investors bought more Treasuries than in any month in almost two years and bought the most US equities since May. International holdings of US equities rose a net $30.2 billion in October versus $2.6 billion in September. Foreign investors’ demand for US Treasuries rose by $49.8 billion versus $26.3 billion the prior month. International demand for US assets will likely increase further over the intermediate-term.

Bull Radar

Style Outperformer:

Small-cap Value (-.03%)

Sector Outperformers:

Retail (+.92%), I-Banks (+.80%) and Banks (+.65%)

Stocks Rising on Unusual Volume:

GRP, AHG, CG, ERF, BZC, MMA, MELI, SVNT, RMBS, BMTI, CSUN, JASO, MPEL, EFUT, ADTN, EEFT, PETD, RAVN, AAON, DPTR, DECK, ABK, RDN, SLM, BTI, CG, CZN, PLT, NTY and MEDX

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