Stocks Higher into Final Hour, Reversing Sharply From Mid-day Declines

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Software longs, Biotech longs and Medical longs. I covered all of my (IWM)/(QQQQ) hedges, added slightly to my (GOOG)/(AAPL)/(ISRG) longs and covered some of my (EEM) short today, thus leaving the Portfolio 100% net long. The overall tone of the market is positive today as the advance/decline line is higher, most sectors are rising and volume is about average. Investor anxiety is above average again. Today’s overall market action is bullish. The TED spread is falling another 7 basis points today to 189 basis points. It has declined 32 basis points in six days, which is a big positive. As well, the 10-year swap rate is falling to 63.7 basis points over Treasuries, which is down from 87.5 basis points over Treasuries one month ago. Gauges of credit market angst are beginning to fall meaningfully, which seems to be mostly ignored by investors so far. Investor reactions to the Goldman Sachs(GS) and Best Buy(BBY) earnings reports are other examples of good news failing to be rewarded as the undying belief by the herd that the future for the US economy is bleak remains firmly in tact. I continue to believe that as we move into the first quarter of next year without seeing a further meaningful deterioration in economic data that stocks will rise substantially from current levels as the recession trades get taken off. Below trend economic growth, low interest rates and decelerating inflation should prompt another explosive move higher in true “growth” stocks. I expect US stocks to trade modestly higher into the close from current levels on falling energy prices, diminishing credit market angst, bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- Demand for new commercial-mortgage securities outstripped supply last week “for the first time in quite a while,” according to RBS Greenwich Capital.
- The perceived risk of financial companies defaulting on their debt fell after Goldman Sachs Group(GS), the world’s largest securities firm, said quarterly profit rose more than analysts estimated.
- DreamWorks Animation(DWA) had its biggest rise in more than three years on the NYSE after saying it will buy back as much as $150 million of its shares.
- Bank of America(BAC), Citigroup(C) and JPMorgan(JPM), designed to bail out short-term debt markets, will start making purchases from structured investment vehicles “within weeks.”
- The US House of Representatives approved energy legislation that will phase out incandescent light bulbs and boost the fuel efficiency of new cars and the gas they use. President Bush plans to sign the measure.
- The cost to borrow in euros plunged after the European Central Bank added an unprecedented $500 billion to the banking system as part of a global effort to ease credit-market gridlock through year-end.
- Oil is falling another $.80/bbl. on speculation that demand is waning, supplies are rising and the US dollar will firm.
- Best Buy(BBY), the largest US consumer-electronics retailer, said third-quarter profit rose more than analysts estimated on sales of flat-panel televisions, laptop computers and video-game consoles.
- Goldman Sachs(GS), the world’s largest securities firm, reported record earnings in the worst quarter for Wall Street in six years.
- Thornburg Mortgage(TMA) rose 6.4% in NY after resuming its dividend. Founder Garrett Thornburg resigned as CEO.
- Industrial metals including copper and aluminum have peaked and probably will decline as supplies gain in the next 12 to 18 months, Fitch Ratings said.

Wall Street Journal:
- The US Federal Reserve should avoid revealing if inflation or economic growth is its focus when it explains interest-rate decisions, citing Fed Bank of Philadelphia President Charles Plosser.
- Founders Fund Management, a San Francisco venture-capital firm known for hot investments such as Facebook Inc., has raised $220 million for a new fund to go after more early-stage deals.
- Luxury-Car Sellers Put on the Ritz.
- Market commentators who attacked the US Federal Reserve for cutting interest rates by only a quarter-point last week don’t see far enough ahead, according to Kenneth Rogoff, formerly the chief economist at the IMF and now a professor at Harvard.
- Apple Inc.(AAPL) CEO Steve Jobs met NTT DoCoMo Inc. President Masao Nakamura to discuss selling the iPhone handset in Japan.

Boston Globe:
- Five of New England’s largest banks will commit at least $100 million to refinance subprime mortgages, citing executives.

AP:
- Americans probably spent more this year on mobile telephone services than on land lines for the first time, citing government officials and analysts.

AFP:
- Turkish troops who crossed the boarder into northern Iraq started to withdraw, citing the office of Massoud Barzani, president of Iraq’s Kurdish Regional Government.

Bear Radar

Style Underperformer:

Mid-cap Value (-.24%)

Sector Underperformers:

I-Banks (-1.59%), Gaming (-.92%) and Tobacco (-.75%)

Stocks Falling on Unusual Volume:

DCP, ASFI, STAR, COHR, ACMR, SYNA, ZGEN, STKL, RIGL, ACIW, PSYS, EHTH and PENX

Housing Starts Fall as Builders Work Down Inventories

- Housing Starts for November fell to 1187K versus estimates of 1176K and 1232K in October.

- Building Permits for November fell to 1152K versus estimates of 1150K and 1170K in October.

BOTTOM LINE: Housing starts in the US dropped in November and permits for future construction fell to a 14-year low, Bloomberg reported. Starts fell 16% in the Northeast, 6.9% in the West and 1.5% in the Midwest. Starts rose .3% in the South. New home construction will continue to be a drag on overall growth over the intermediate-term as homebuilders work down inventories.

Bull Radar

Style Outperformer:

Small-cap Growth (+.59%)

Sector Outperformers:

Computer Services (+1.49%), Utilities (+1.44%) and Telecom (+.91%)

Stocks Rising on Unusual Volume:

KND, KWK, TNL, RRC, BHS, TPL, EICU, EMKR, WWIN, PSEC, BMTI, ADBE, IMKTA, CONN, SLXP, COMV, OTEX, PWRD, DDUP, MICC, SYNT, CNSL, AHII, CRNT, CLWR, GMO, HES, KEP, SMG and SHFL

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