Stocks Soaring into Final Hour on Less Economic Pessimism, Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Computer longs, Internet longs, Software longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is very positive today as the advance/decline line is substantially higher, almost every sector is rising and volume is heavy. Investor anxiety is slightly below average. Today’s overall market action is very bullish. The rise in the ten-year yield is mostly a function of waning recession fears after the strongest consumer spending report in more than two years. The TED spread is falling another 8 basis points today to 186 basis points, which is down 35 basis points in 8 days. It is also down 54 basis points from its August high. Also, the 30-day asset backed commercial paper yield is down another 10 basis points to 5.55%, which is down 61 basis points in 9 days and down 78 basis points from September highs. Moreover, the VIX is breaking below its 200-day moving average today and is trading below 20 for the first time in awhile. Economically sensitive small-caps are today’s best performers as the Russell 2000 is gaining over 2%. As well, the Morgan Stanley Cyclical Index is jumping 2.0%. It appears to me that all the economic fear mongering that continues unabated by the many permabears is starting to lose its effectiveness. I still see further upside in stocks from current levels into year-end. I expect US stocks to trade mixed-to-higher into the close from current levels on diminishing credit market angst, less economic pessimism, seasonal strength, bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- US stocks gained the most in two weeks, led by energy and technology shares, after the biggest increase in consumer spending in two years helped reduce concern the economy will slow.
- Merrill Lynch(MER) rose in NY trading after the Wall Street Journal reported that the world’s biggest brokerage firm may receive a cash infusion of as much as $5 billion from Singapore’s state-owned Temasek Holdings Pte.
- Dennis Gartman, economist and editor of the Gartman Letter says oil won’t likely reach $100/bbl. in 2008.
- Crude oil rose more than $2/bbl. in NY after a US government report showed consumer spending gained the most in more than two years, signaling economic growth and oil demand may be stronger than expected.
- First Marblehead Corp.(FMD), the third-largest US arranger of securities backed by student loans, rose the most ever on the NYSE after Goldman Sachs(GS) agreed to a $260.5 million investment, equivalent to about 20% of current shares.
- The Federal Reserve will conduct biweekly emergency auctions of loans as “long as necessary” as part of a global attempt by central bankers to restore faith in the money markets.
- ResMed Inc.(RMD), the No. 2 maker of equipment for treating breathing-related sleep disorders, rose the most in five years on the NYSE after analyst speculation that the company may be a takeover target.
- Itron Inc.(ITRI), the maker of utility meters for electric, gas and water usage, rose the most in a year after RBC Capital Markets recommended investors buy the shares.
- Walgreen Co.(WAG), the largest US drugstore chain, posted quarterly profit that beat analysts’ estimates on higher sales of prescription drugs and reduced expenses, sending the shares up the most in more than seven years.
- NetSuite Inc.(N), the software maker majority-owned by Oracle’s Larry Ellison, rose for a second day after its IPO, advancing as much as 30% as investors seek to tap demand for business programs.
- Apple Inc.(AAPL) CEO Steve Jobs’ annual Macworld surprise may be a slimmed-down laptop and a higher-capacity model of the iPhone.

TheDeal.com
- Hedge Connection looks to set up investors with fund managers.

CNBC:
- Bear Stearns(BSC) has been talking to Fortress Investment Group(FIG) about a “capital infusion.”
- Third Avenue Management LLC holds common stock in Radian Group(RDN) and MBIA Inc.(MBI), citing an interview with the money manager’s founder, Martin Whitman. “We hope to be part of the capital infusions that go into these troubled financial institutions,” Whitman said. He said Third Avenue holds 19% of Radian and a little more than 10% of MBIA. He also said the company’s bets involve MGIC Investment Corp.(MTG) and Ambac Financial Group(ABK) and were made over the past 30 to 45 days. (video)

USA Today:
- Senator Barack Obama has pulled even with Senator Hillary Clinton among Democrats in New Hampshire, according to a USA Today/Gallup poll. Clinton and Obama were supported by 32% of those polled, with 18% supporting former senator John Edwards. Last month most surveys in the state showed Clinton with a double-digit lead.

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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