Stocks Mostly Lower into Final Hour on More Economic Pessimism, Profit-taking

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Semi 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 mildly negative today as the advance/decline line is slightly lower, sector performance is mixed and volume is light. Investor anxiety is above average again. Today’s overall market action is neutral. The NYSE Arms hit a high 1.42 and the VIX is rising another 2.5% today, back to 21. The 10-year yield is falling another 10 basis points on another spike in economic pessimism as investors ignore today’s healthy December Chicago PMI report and chose to focus on the weaker November New Homes Sales report. Gauges of credit market angst are falling again today. The TED spread is falling 13 basis points to 158 basis points today. The 10-year swap spread is down 2.1 basis points to 64.9 basis points over Treasuries. LIBOR is dropping again and the 30-day US asset backed commercial paper yield is falling 10 basis points today. With such light volume, elevated levels of investor pessimism and high NYSE Arms readings over the last couple of days, it shouldn’t take too much buying to boost the averages by Monday’s close, which I expect. Recent long addition (SIGM) is surging 8% on above-average volume today. I still see substantial upside in the shares even after this year’s strong gains. I expect US stocks to trade mixed-to-higher into the close from current levels on diminishing credit market angst, seasonal strength, bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- A Taliban commander linked to al-Qaeda is suspected of plotting the suicide attack that killed former Prime Minister Benazir Bhutto, Pakistan’s government said.
- Macy’s Inc.(M), Best Buy(BBY) and Abercrombie & Fitch(ANF) may get a boost in store traffic and revenue in the next few weeks from the redemption of gift cards, which are growing faster than total retail sales.
- The cost of borrowing in dollars, euros and pounds fell, capping a second week of declines, as coordinated central bank action to revive money markets showed signs of success.
- Checkpoint Systems(CKP), the maker of anti-theft tags for retailers, rose the most in nine months after it named a new CEO and forecast 2008 earnings exceeding analysts’ estimates.
- Farmers in India, the world’s second-biggest wheat grower, may harvest more of the crop following early planting and “good weather” in the main growing areas, lowering overseas purchases. The country may harvest more than 75 million tons of wheat during the March-April harvest, the most since 2000, the nation’s agriculture commissioner said.
- Crude oil is rising to a one-month high on year-end investment fund mark-ups and a weaker dollar.
- Treasuries rose the most in more than two weeks and headed for the best annual returns since 2002 after a government report showed sales of new homes in the US fell more than expected.
- Democratic presidential candidate John Edwards said neither of his two major opponents would bring substantial change to the way Washington works – Hillary Clinton doesn’t want to and Barack Obama doesn’t know how.

Wall Street Journal:
- Warren Buffett, seizing a chance to profit from turmoil in the nation’s credit markets, is starting up a bond insurer that aims to make it cheaper for local governments to borrow and promises to be a tough competitor for the industry’s embattled incumbents.

NY Times:
- US companies are working with the Chinese government to design and install high-tech public surveillance systems as the country prepares for the Beijing Olympics.

NY Post:
- NY’s population stays almost unchanged.

AP:
- Google’s(GOOG) online search engine increased its lead in the US Internet search market in November over October, according to a report released Thursday by Nielsen Online.

MSNBC:
- Wind farms are popping up across the US to generate renewable electric energy, and that’s driving a large backlog of wind-tower business at Dallas-based industrial manufacturer Trinity Industries Inc.(TRN).

Information Times:
- China’s number of mobile-phone users may climb to 620 million next year, bringing the total telephone subscribers in the country to 976 million. Sales from the country’s communications industry may rise 25% to $342 billion in 2008 from a year earlier, citing comments by Wang Xudong, who heads the Ministry of Information Industry.

Bear Radar

Style Underperformer:

Small-cap Value (-.50%)

Sector Underperformers:

Airlines (-2.13%), REITs (-1.28%) and Hospitals (-.80%)

Stocks Falling on Unusual Volume:

CBK, THRX, OPTT, CWCO, NPSI and PPS

Bull Radar

Style Outperformer:

Small-cap Growth(+.69%)

Sector Outperformers:

Foods (+1.51%), Oil Service (+1.21%) and Telecom (+1.09%)

Stocks Rising on Unusual Volume:

TKF, GCO, CKP, LUB, RUK, SMA, CALM, CTDC, MELI, RICK, CRAI, DRYS, SOLF, HDNG, SIGM, SURW, SDTH, WPPGY, AMWD, FLIR, COMV, RES, OLN and UPL

Gauge of US Business Activity Jumps to 7-month High, Order Backlogs Soar to 10-year High, New Home Sales Fall

- The Chicago PMI for December rose to 56.6 versus estimates of 51.7 and a reading of 52.9 in November.

- New Home Sales for November fell to 647K versus estimates of 717K and 711K in October.

BOTTOM LINE: The Chicago PMI, a measure of US business activity, unexpectedly rose this month to the highest level since June as new orders increased and businesses reduced stockpiles of unsold goods, Bloomberg reported. Booming exports may help sustain growth in manufacturing, economists said. The New Orders component of the index rose to 58.4, the highest since August, versus 53.9 the prior month. Moreover, the Order Backlogs component soared to 60.7, the highest since January 1998, versus 45.9 in November. The Prices Paid component fell to 63.8 from 76.2 the prior month and the Employment component fell to 49 versus 54.4 in November. This report is a big positive. 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 record exports.

Sales of new homes in the US fell in November, Bloomberg reported. The median price of a new home fell .4% from year ago levels to $239,100. The number of homes for sale fell 1.8% to 505,000, the fewest in two years. The inventory to sales ratio rose to 9.3 months worth from 8.8 months worth in October. New Home Sales fell 28% in the Midwest, 19% in the Northeast and 6.4% in the South. They rose 4% in the West. I continue to believe new home construction will remain muted over the intermediate-term as builders work down inventories. I expect new home sales to bounce back next month, which should bring down inventories meaningfully with homes for sale at a 2-year low.

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