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Stocks Building on Recent Gains into Final Hour on Less Economic Pessimism

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Software longs, Internet longs, Semi longs, Gaming longs and Biotech longs. I added to my (ILMN) and (NUAN) longs and took profits in a trading long today, thus leaving the Portfolio 100% net long. The overall tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is heavy. Investor anxiety is above average. Today’s overall market action is very bullish, considering the sharp gains of the last two days. Many of yesterday’s laggards are rising substantially today and yesterday’s large winners aren’t giving back much, which is a very positive sign. Homebuilders and banks are even building on recent sharp gains. The MS Tech Index is substantially outperforming, rising 2.1%. The VIX is falling 4% today, but remains high at 27.70. I still think there are many other potential positive catalysts that could materialize at any time. The US equity markets continue to trade as if a meaningful bottom is now in place. While we are becoming a bit extended on a short-term basis, I seriously doubt a full retest of recent lows will occur as so many expect. I will closely monitor MSFT’s likely positive earnings report and conservative guidance and the market’s reaction to it. Apple Inc.(AAPL) is weak again today and I view the current price as an excellent entry point for both long and short-term investors. I will add again to my long position on any further meaningful weakness from current levels. Nikkei futures indicate another 160 point gain on the open in Japan tonight. I expect US stocks to trade modestly higher into the close from current levels on short-covering, less economic pessimism, gains in overseas markets and bargain hunting.

Today's Headlines

Bloomberg:
- The Bush administration and House lawmakers announced agreement on an economic stimulus package that would distribute rebate checks to 117 million families and give businesses incentives to invest in equipment.
- Societe Generale SA said unauthorized bets on stock index futures by a rogue trader caused a $7.2 billion trading loss, the largest in banking history.
- NY’s insurance regulator said a plan to have US banks aid bond insurers will “take some time to finalize.”
- Dow Chemical(DOW) CEO Andrew Liveris said financial markets are overreacting to the prospect of the US entering a recession.
- Short-term debt backed by assets such as mortgages and auto loans expanded for a fourth straight week as the Fed cut its target rate the most in 23 years, pushing borrowing costs to the lowest since July 2005.
- The risk of companies defaulting fell after NY regulators urged Wall Street firms to bail out bond insurers including MBIA Inc.(MBI) and Ambac Financial Group(ABK) to avert worsening credit-market turmoil.

Wall Street Journal:
- Some of Mike Huckabee’s top advisers are working pay and some field directors have been let go entirely, the campaign said today, as money woes have taken hold.
- The Wall Street Journal’s Web site, WSJ.com, will keep a significant portion of its content behind its paid-subscription wall, News Corp. Chairman Rupert Murdoch said.

NY Times:
- Jeffries Cuts Hedge Fund Investment Amid Loss.

NY Post:
- Sharks Circle Yahoo!(YHOO). LBO, Media Bigs Attracted to Battered Stock.

Reuters:
- OPEC doesn’t need to raise its output because recent declines in prices show there is enough supply, citing Abdullah bin Hamad al-Attiyah, Qatar’s oil minister.
- Spanish Economy Minister Pedro Solbes said the European Central Bank is debating whether to cut interest rates amid market turmoil.

Financial Times:
- One of the most controversial figures in world shipping markets has denied playing a pivotal role in the past few weeks’ decline of dry bulk shipping rates, saying it results from fundamental market changes.
- French Prime Minister Francois Fillon said he expects the European Central Bank to act to cushion the economy against market turbulence and slowing growth.

globeandmail:
- Smiles disappearing in hedge fund land.

Cbichina.com:
- China’s copper output rose 17% to 302,200 metric tons in December, compared with a year earlier, citing figures form the National Bureau of Statistics.

Bear Radar

Style Underperformer:

Small-cap Value (-1.17%)

Sector Underperformers:

Airlines (-2.92%), Retail (-2.28%) and Utilities (-1.61%)

Stocks Falling on Unusual Volume:

DLX, CNH, CY, OREX, THQI, DGII, MTSC, SPWR, EBAY, NFLX, VARI, CVCO, SOLF, IRBT, PSSI, AVID, PETM and VRTX

Jobless Claims Still Low, Continuing Claims Fall Substantially, Existing Home Sales Fall, Home Inventories Decline

- Initial Jobless Claims for this week fell to 301K versus estimates of 320K and 302K the prior week.

- Continuing Claims fell to 2672K versus estimates of 2720K and 2747K prior.

- Existing Home Sales for December fell to 4.89M versus estimates of 4.95M and 5.0M prior.

BOTTOM LINE: The number of Americans filing first-time claims for unemployment benefits unexpectedly dropped for a fourth straight week, indicating companies may be in better shape than believed, Bloomberg reported. The four-week moving average fell to a three-month low of 314,750 versus 328,750 the prior week. The unemployment rate among those eligible to collect benefits, which tracks the US unemployment rate, fell to 2% from 2.1% the prior week and remains at historically low levels. The recent decline in jobless claims is a major positive and they are no where near the 360,000+ usually associated with recessions, notwithstanding the overwhelming majority of pundits that claim we are already in one. CNBC just asked why so many talk as if we are already in a recession when the data clearly do not indicate such. It is due to the record number of stock market participants that perceive it is in their own political and financial interest to see a bear market and recession. We are in an election year with historically bitter political rhetoric. As well, there has been an explosion in the number of low correlation/negative correlation investment funds and all the businesses that cater to them since the bursting of the internet bubble and bear market of 2000-2003. These vocal individuals perceive a strong secular bull market as their enemy and they are the main reason for the current “US negativity bubble” and the parabolic rise in short interest, in my opinion. They believe the more they talk as if a recession and a bear market are inevitable the more likely they become as scared consumers, businesses and investors retrench. Many are quick to dismiss any positive analysis from long only managers, saying they are just talking their book. However, one could make the same argument regarding the analysis of investment managers that benefit from a poor market and economy. I continue to believe the job market will remain healthy over the intermediate-term, notwithstanding slower economic growth, as companies remain very slow to let go of workers before the historic exodus of baby boomers from the labor force over the coming years.

Sales of existing homes in the US fell slightly more than forecast in December and inventories fell, Bloomberg reported. For all of last year, prices of existing homes fell 1.8%. Over the prior six years, the Case-Shiller home price index rose 103.3%. The number of homes for sale at the end of December fell 7.4% to 3.91 million. At the current sales pace, that equates to 9.6 months’ supply, down from 10.1 months in November. Builders broke ground in December on the fewest new homes since 1991. I continue to believe the recent plunge in mortgage rates and pent-up demand will lead to a modest unexpected bounce in home sales over the coming months, which should bring down inventories meaningfully as builders continue to break ground on fewer homes. Fed fund futures now imply a 64.0% chance for a 50 basis point rate cut and 36% chance for a 25 basis point rate cut at the January 30th FOMC meeting. According to data released today, the average 30-year fixed mortgage rate is 5.48%, down 21 basis points over the last week and down 126 basis points from June 07 highs.

Bull Radar

Style Outperformer:

Mid-cap Growth (+1.24%)

Sector Outperformers:

Steel (+5.2%), Wireless (+3.20%) and Networking (+3.05%)

Stocks Rising on Unusual Volume:

EMM, WNS, BCA, EMG, ITB, FDG, SCX, GBX, DSG, HTZ, ESI, BRNC, MHGC, FFIV, EXPO, SASR, EURX, PLXS, PLCM, ALDN, TRMB, COIN, SMTS, MOLX, DROOY, SYMC, PRXL, RRGB, ASML, ACGY, SNCR, FDRY, COF, DLLR, BPFH, PCU, FCX, PBR, REP, BBV, TKC, PHI and DLR