Stocks Finish Higher on Bernanke Comments, Lower Energy Prices, Buyout Speculation

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Stocks Soaring into Final Hour on Bernanke Comments, Buyout Speculation, Lower Energy Prices, Less Economic Pessimism

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Software longs and Retail longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is positive today as the advance/decline line is higher, sector performance is mostly positive and volume is heavy. Investor anxiety is high again, despite today’s gains. Today’s overall market action is bullish. The total put/call hit a high 1.23 again and the ISE Sentiment Index hit a depressed 82.0 this morning. The TED spread is dropping another 7 basis points today to 115 basis points, the lowest level since November 1. Moreover, the 30-day asset backed commercial paper yield is plunging another 18 basis points today to 4.34%, the lowest since December 2005. Given today’s news, I am surprised the major averages aren’t rising more than they are. Bear complacency is extraordinarily high. While I am not predicting it, I believe Bernanke set the stage for a rate cut before the January 29 meeting with the wording of his statements today. I suspect the Fed will no longer be perceived as being “behind the curve” over the coming weeks. As well, the acquisition of Countrywide(CFC) by Bank of America(BAC) would be a huge positive for the broad market. An eventual acquisition by another suitor of Washington Mutual(WM) is also likely, in my opinion. Today’s news and market action continues to be indicative of another meaningful stock market bottom. Illumina Inc.(ILMN) is jumping 16% today to another record high. I remain long the stock and still see further substantial upside from current levels. I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower energy prices, diminishing credit angst, less economic pessimism and bargain hunting.

Today's Headlines

Today’s Headlines
Bloomberg:
- US stocks are surging for a second day after Fed Chairman Bernanke said the Fed is ready to take “substantive additional action” in a “timely and decisive manner.”
- Bank of America(BAC) is in advanced talks to buy Countrywide Financial(CFC), the biggest US mortgage lender. Shares of Countrywide soared as much as 72% on the report.
- The US asset-backed commercial paper market expanded for a second straight week, bolstering optimism that the worst rout in short-term credit markets in more than seven years may be ending.
- Micron Technology(MU) said on its conference call today that nothing has changed since December call and demand looks pretty good.
- FTI Consulting Inc.(FCN), a provider of forensic accounting, and Comtech Telecom(CMTL) were recommended by Jason Votruba, portfolio manager at UMB Scout Small Cap Fund.
- Blackstone Group(BX), the world’s largest buyout firm, agreed to buy hedge fund manager GSO Capital Partners LP for $930 million in cash and stock, a sign it expects debt markets to rebound from subprime-loan losses.
- Despite Bernanke’s comments today, a weaker dollar and rising gold, crude oil is falling $2/bbl. on worries over slowing global demand and rising production. Global oil production reached 87.3 million barrels per day during the latest month, a new record high.
- Citigroup Inc.(C) rose in Germany and Japan after the Wall Street Journal reported that the biggest US bank is seeking as much as $10 billion from foreign investors.

Wall Street Journal:
- Iraq Surge Worked, McCain, Lieberman Write.
- Start-Up Can Cool Specific Parts of Chips That Get Too Hot.
- Verizon Communications’(VZ) software on the new Voyager mobile phone isn’t as capable as that on Apple’s iPhone, nor is it as well-designed, Walter Mossberg wrote.

NY Times:
- Murdoch Said to Offer $4.8 Billion for Monster(MNST).

NY Post:
- Time Warner(TWX) is joining media heavyweights like Disney, Viacom and Sony in making financial best on online virtual worlds.

MSNBC.com:
- Senator John Kerry of Massachusetts, the 2004 Democratic presidential nominee, endorsed Senator Barack Obama for the White House Thursday in a timely slap at Senator Hillary Rodham Clinton as well as his own vice presidential running mate.

USA Today:
- The number of slot machines is soaring as states seek more revenue and gamblers increasingly move from table games to the flashy electronic devices.

Jobless Claims Fall, Unemployment Falls, Wholesale Sales Surge Most Since 05, Inventories Hit New Record Low

- Initial Jobless Claims for this week fell to 322K versus estimates of 340K and 337K the prior week.

- Continuing Claims fell to 2702K versus estimates of 2730K and 2754K prior.

- Wholesale Inventories for November rose .6% versus estimates of a .4% gain and unch. in October.

BOTTOM LINE: The number of Americans filing first-time claims for jobless benefits unexpectedly fell 15,000 this week to a two-month low, Bloomberg reported. The four-week moving average of new claims fell to 341,000 from 344,000 the prior week. The unemployment rate among those eligible to collect benefits, which tracks the US unemployment rate, fell to a historically low 2.0% from 2.1% the prior week. This is a very positive data point. As well, the National Retail Federation said that total sales for November and December combined rose 4% this past holiday season, which is better-than-expected and not the disaster that is being portrayed in the financial press today. A huge crack in the imminent recession thesis will develop should jobless claims stay around these levels over the next couple of weeks, as I suspect. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

Inventories at US wholesalers rose more than forecast in November and sales jumped, Bloomberg reported. Sales rose 2.2%, the most since September 2005. The increase in sales brought the supply of goods on hand down to 1.07 months, the lowest in US history. The rise in stockpiles was led by a 2.6% jump in petroleum products and a 2.3% increase in autos. I continue to believe manufacturing will help boost US economic 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.

Bear Radar

Style Underperformer:

Small-cap Growth (-.02%)

Sector Underperformers:

Oil Tankers (-3.0%), Oil Service (-1.54%) and Energy (-.97%)

Stocks Falling on Unusual Volume:

MW, HRS, ANN, BKS, BRP, USMO, ININ, ANW, PZE, CGV and SNP

AAII % Bears 58.9, Highest Since October 18, 1990 After Iraq’s Invasion of Kuwait and During Peak of Recession

* Notwithstanding historical individual investor pessimism, corporate insiders continue to buy their own stocks.

The AAII percentage of bulls dropped to 19.6% this week from 25.7% the prior week. This reading is now at a very depressed level. The AAII percentage of bears rose to 58.9% this week from 55.2% the prior week. This reading is now at an extraordinarily elevated level. The last time the AAII % Bears was this high was October 18, 1990 after Iraq’s invasion of Kuwait and before Operation Desert Storm began on January 17, 1991. Moreover, the peak of the 1990-1991 recession also occurred during 4Q 1990 as US GDP contracted 3.0%. The S&P 500 rose 65% over the next three years after this peak in bearish sentiment.

As well, the 10-week moving average of the percentage of bears is currently at 49.7%, also an extraordinarily elevated level. It has only been higher one other period in its history, which was 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 6.7 percentage points 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 39.7%, also an extraordinarily 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 39.7% is 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 94.1% higher from the October 2002 major bear market lows and 9.2% off its recent record high.

Individual investor pessimism towards US stocks is currently deep-seated and historical in nature, which bodes very well for further outsized gains over the intermediate-term. This is just more evidence of the current “US negativity bubble.” 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. During the 2000 economic downturn, insiders were bailing in droves. I still expect US stocks to turn in a positive return for this quarter, notwithstanding the poor start, as the undying belief in an imminent recession begins to fade and the uncertainty currently surrounding the financial sector lifts substantially.