Bearish Sentiment Now Exceeds Levels Seen at Depths of 2000-2003 Bear Market

* Meanwhile, corporate insiders are buying hand over fist.

The AAII percentage of bulls dropped to 35.85% this week from 47.6% the prior week. This reading is approaching depressed levels. The AAII percentage of bears jumped to 47.2% this week from 35.7% the prior week. This reading is now approaching elevated levels. Moreover, the 10-week moving average of the percentage of bears is currently at 45.3%, an elevated level. It has only been higher two other times in its history, which were July-August 2006 and September 1990-December 1990. Moreover, the 10-week moving average of the percentage of bears peaked at 43.0% right near the major bear market low during 2002. It is astonishing that the 10-week moving average of the % bears is currently greater than at any time during the bubble bursting meltdown of 2000-2003, which was arguably the worst stock market decline since the Great Depression.

Furthermore, the 50-week moving average of the percentage of bears is currently 38.3%, an elevated level seen during only one other period since tracking began in the 80s. That period was October 1990-July 1991, right near another major stock market bottom. The extreme reading of the 50-week moving average of the percentage of bears during that period peaked at 41.6% on Jan. 31, 1991. The current reading of 38.3% is slightly above the peak during the 2000-2003 bear market, which was 38.1% on April 10, 2003. I find this even more astonishing, notwithstanding the recent pullback, given that the S&P 500 is currently 102% higher from the October 2002 major bear market lows and just 5.2% off a record high.

Individual investor pessimism towards US stocks is currently deep-seated and historical in nature. This is just more evidence of the current “US negativity bubble" and bodes very well for further out-sized gains over the intermediate-term. It is also noteworthy that as investor pessimism grows ever thicker, corporate insiders continue to display downright giddy behavior with their recent stock activity during this pullback. It is even more interesting that the retail sector is seeing substantial insider buying, notwithstanding the current extreme investor pessimism towards the prospects for consumer spending. Prior to the 2000 economic downturn, insiders were bailing in droves. I continue to believe US stocks are poised for very strong performance during the first quarter of next year as the undying belief in an imminent recession fades and the uncertainty currently surrounding the financial sector lifts substantially.

Personal Incomes Rise, Spending Strongest in Over 2 Years, Spread Between Consumer Present Situation/Expectations Largest Since After Hurricanes in 05

- Personal Income for November rose .4% versus estimates of a .5% increase and a .2% gain in October.

- Personal Spending for November rose 1.1% versus estimates of a .7% gain and an upwardly revised .4% increase in October.

- The PCE Core for November rose .2% versus estimates of a .2% gain and a .2% increase in October.

- Final Univ. of Mich. Consumer Confidence for December rose to 75.5 versus estimates of 74.5 and a reading of 74.5 in November.

BOTTOM LINE: Consumer spending in the US rose in November by the most in more than two years as incomes grew and shoppers took to the streets early, Bloomberg reported. The Core PCE, the Fed’s preferred inflation gauge, rose 2.2% year-over-year in November, the same as in March and below the 20-year average of 2.4%. Adjusted for inflation, personal spending rose .5%, the most this year. Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, rose .6%. Purchases of non-durable goods rose .6% and purchases of services rose .5%. I continue to believe consumer spending will remain resilient over the intermediate-term as Americans’ net worth is at record levels. As well, unemployment remains low by historic standards, wage growth is very strong, most interest rates remain very low and stocks remain near record highs.

Consumer confidence finished December slightly higher than initially estimated, Bloomberg reported. The Expectations component of the index came in at 65.6. However, the Current Conditions component, which reflects Americans’ perception of their current financial situation and whether it is a good time to buy big-ticket items like cars, came in at 91. The last time the spread between the two was this large was in September and October of 2005, right after historic hurricanes ravaged the Gulf coast. The S&P 500 rose 13.5% over the ensuing 7 months. Before that, the last time the spread between the two was as large as it is now was July 1993, right after US GDP growth had fallen from 4.6% to .5% during 1Q 1993. The S&P 500 rose 10.8% over the next 9 months on its way to huge gains in subsequent years.

Bull Radar

Style Outperformer:

Small-cap Value (+1.53%)

Sector Outperformers:

Wireless (+3.2%) Steel (+2.84%) and Oil Service (+2.64%)

Stocks Rising on Unusual Volume:

RMD, ROL, UBA, TR, FMD, TAL, SYM, OHI, RESP, MATW, MGEE, NAVG, GRNB, OTTR, STBA, ASFI, BRKR, IWOV, WSBC, SHEN, NGPC, FFIC, MTRX, FFBC, AWBC, AGII, ITRI, DGIT, RIMM, BRP, CCOI, GMO, HES, PSEC, PBR, CGX, BNE, CTB, MOV and FOSL

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Friday Watch

Late-Night Headlines
Bloomberg:
- MBIA Inc.(MBI) has announced that in response to media and other inquiries received as a result of information the Company posted on December 19, 2007 on its Web site relating to its collateralized debt obligation exposure, the Company is issuing the following statement: The inflation posted on December 19,2007 discloses no additional Multi-Sector CDO exposure. MBIA discussed its exposure to CDO transactions with inner CDOs during a conference call for investors on August 2, 2007. The stock surged 11% in after-hours trading.
- Toshihiko Fukui’s final act as governor of the Bank of Japan may be to cut borrowing costs for the first time in more than six years.
- Sharp Corp., Japan’s largest maker of liquid-crystal displays, rose the most in two weeks in Tokyo trading after a report said Toshiba Corp. may buy its LCD panels.

NY Times:
- Genentech(DNA) appears to have resolved a dispute with ophthalmologists that will allow its drug Avastin to continue to be used to treat eye diseases, both sides said.

MarketWatch.com:
- Research In Motion(RIMM) on Thursday saw earnings more than double for its fiscal quarter amid continued strong demand for the company’s BlackBerry line of smart-phone devices.
- NetSuite CEO: Ellison played critical role. Buy Nelson says software on-demand marks changing of the guard in industry.

BusinessWeek.com:
- If you’re a contrarian, you’ll probably like Eastman Kodak(EK), which is currently a pariah on the Street.
- The FCC’s auction of wireless spectrum is swarming with participants, some of which you might not expect – including Chevron(CVX) and Vulcan’s Paul Allen.
- Record Online Sales in Britain. Christmas came early to online retailers as Internet sales have skyrocketed more than 65% higher than during last year’s holiday period.

CNNMoney.com:
- Toy makers close in on safety plan. Group representing companies hopes to get regulators’ OK on tougher testing measures.

SmartMoney.com:
- CEO Interview: John Riccitiello, Electronic Arts(ERTS).

USA Today.com:
- Starbucks-Dunkin’ faceoff may stir market share in hot industry.

Reuters:
- Washington Mutual(WM) said on Thursday it is cooperating with a SEC inquiry into the handling and reporting of mortgage loans that may have been based on inflated home appraisals.

China Securities Journal:
- China’s economy may expand 10.9% next year and inflation may rise 4.5%, the central bank’s research bureau forecast in a report today.

Late Buy/Sell Recommendations
Citigroup:
- In general, we garnered little new from Micron’s(MU) earnings report. We maintain our generally positive view, therefore, predicated on capital spending declines, 200mm decommissioning and NT price stabilization. We note that Micron did point to above seasonal demand conditions for CY1Q08, echoing commentary from other parts of the supply chain. This bodes well for Intel(INTC), our top idea, where strong demand will support upside to consensus margin for 1Q08 and 2Q08(as inventories prove difficult to build).

Morgan Stanley:
- Reiterated Overweight on (CELG), target $79.

CSFB:
- Reiterated Outperform on (CELG), target lowered to $65.

Night Trading
Asian Indices are +.75% to +1.25% on average.
S&P 500 futures +.14%.
NASDAQ 100 futures +.29%.

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Earnings of Note
Company/EPS Estimate
- (CC)/-.31
- (WAG)/.44

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Personal Income for November is estimated to rise .5% versus a .2% decline in October.
- Personal Spending for November is estimated to rise .7% versus a .2% gain in October.
- The PCE Core for November is estimated to rise .2% versus a .2% gain in October.

10:00 am EST
- Final Univ. of Mich. Consumer Confidence for December is estimated at 74.5 versus 74.5 in November.

Other Potential Market Movers
- None of note

BOTTOM LINE: Asian indices are higher, boosted by technology shares and financial stocks in the region. I expect US equities to open modestly higher and to maintain gains into the afternoon. The Portfolio is 100% net long heading into the day.

Stocks Finish at Session Highs, Boosted by Gains in the Technology Sector

Indices
S&P 500 1,460.12 +.49%
DJIA 13,245.64 +.29%
NASDAQ 2,640.86 +1.53%
Russell 2000 767.54 +1.51%
Wilshire 5000 14,673.05 +.62%
Russell 1000 Growth 609.65 +.79%
Russell 1000 Value 790.14 +.29%
Morgan Stanley Consumer 738.66 +.05%
Morgan Stanley Cyclical 984.85 +1.18%
Morgan Stanley Technology 626.02 +1.70%
Transports 4,583.86 -.01%
Utilities 536.72 -.02%
MSCI Emerging Markets 148.72 +.23%

Sentiment/Internals
Total Put/Call .63 -44.7%
NYSE Arms 1.05 +7.63%
Volatility(VIX) 20.58 -5.07%
ISE Sentiment 110.0 -1.79%

Futures Spot Prices
Crude Oil $91.20 -.04%
Reformulated Gasoline 233.73 +.23%
Natural Gas 7.11 -.89%
Heating Oil 259.43 -.14%
Gold 799.80 -.70%
Base Metals 212.28 +1.92%
Copper 297.0 +.41%

Economy
10-year US Treasury Yield 4.04% +1 basis point
US Dollar 77.78 +.26%
CRB Index 349.63 -.16%

Leading Sectors
Software +2.22%
Wireless +2.11%
Computer Hardware +2.08%

Lagging Sectors
Insurance -.55%
Oil Tankers -1.04%
Airlines -1.17%

Evening Review
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Afternoon Recommendations
Needham:
- Rated (SINA) Buy.

Afternoon/Evening Headlines
Bloomberg:
- The US housing market will bottom out in the second quarter of 2008 and become a positive force on the national economy by the end of the year, said David Seiders, chief economist for the National Association of Home Builders.
- Research In Motion Ltd.(RIMM) said third-quarter profit doubled and gave a forecast that topped analysts’ estimates on consumer demand for the BlackBerry e-mail phone, spurring an 11% surge in the stock in after-hours trading.
- GE Commercials Finance and Allied Capital Corp. raised $3.6 billion to fund smaller private-equity transactions after lenders tightened financing requirements. Unitranche Fund LLC will provide loans of as much as $500 million.
- Red Hat Inc.(RHT) named former Delta Air Lines(DAL) COO James Whitehurst as CEO and said third-quarter profit rose 39%. Red Hat jumped 7.4% in extended trading.
- Campbell Soup(CPB) agreed to sell its Godiva chocolate unit to Yildiz Holding AS for $850 million.
- NetSuite Inc.(N), the software maker majority-owned by Oracle’s(ORCL) Larry Ellison, surged 37% in its first day of trading, underscoring investors’ confidence in business software spending.

NY Times:
- GM’s Fuel-Cell Test: 100 Cars, No Charge.

BOTTOM LINE: The Portfolio finished higher today on gains in my Software longs, Medical longs, Semi longs and Internet longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, most sectors rose and volume was about average. Measures of investor anxiety were slightly above average into the close. Today's overall market action was bullish. After the close, Research In Motion(RIMM) beat earnings estimates and boosted its guidance, saying it sees “strong” enterprise demand. This report is a huge positive, given RIMM’s exposure to the financial services sector. There still remains little evidence of the imminent recession that so many have been expecting since housing began deteriorating over two years ago. A further lifting of the uncertainty in the financial services sector, lower energy prices, more fed rate cuts and non-recessionary data in 1Q should provide the catalysts for a very good 1Q for US stocks. I expect the broad market to participate in another tech sector-driven rally tomorrow. Nikkei futures are indicating a +120 open in Japan.