Stocks Mostly Lower into Final Hour on Jump in Energy Prices

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Computer longs, Medical longs, Software longs and Retail longs. I have not traded today, thus leaving the Portfolio 75% net long. The overall tone of the market is mildly negative as the advance/decline line is slightly lower, sector performance is mixed and volume is above average. Investor anxiety is high again. Today’s overall market action is neutral. The VIX is rising 2.7% today to a high 28.40. The ISE Sentiment Index is a low 88.0 and the total put/call hit a high 1.27 this morning. Growth stocks are substantially outperforming value stocks today, with many positing meaningful gains. I suspect another significant rotation is underway. As well, many market leading stocks are firm to higher. This is much healthier, in my opinion, than seeing the most heavily-shorted and beaten up stocks lead the broad market. OPEC’s talk of production cuts, with oil near record highs, and abandoning the US dollar is mind-bogglingly short-sighted, in my opinion, and just raises the odds for an oil price crash in the future. This is likely one of the main reasons energy-related stocks aren’t displaying more upside with oil back above $90/bbl. Moreover, oil at current prices makes it harder for the Fed to maintain its aggressive stance, thus increasing the odds of a more meaningful global slowdown. The 10-year yield is falling 11 basis points today. I expect better economic data over the coming weeks and diminishing bond insurer uncertainty to provide upside catalysts from current levels. (GOOG) is rising for the third day out of the last four. I still think the shares anywhere near current prices are providing investors with an excellent entry point as growth remains very healthy and the p/e multiple begins expanding again. Nikkei futures indicate a -42 open in Japan and DAX futures indicate a +7 open in Germany on Monday. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- Bear Stearns(BSC), the US firm that posted its first-ever loss last quarter on mortgage writedowns, is betting more than $1 billion that subprime home loans and bonds will continue to decline.
- Copper is rising another 2.4%, heading for its biggest weekly gain since May 2006, as inventories fell to the lowest level in more than three months.
- Oil is rising $3.41/bbl. to $91.44/bbl. after OPEC said it may cut oil production despite the fact that record prices for the commodity are greatly contributing to the global economic slowdown and that it may abandon the US dollar for the euro in pricing oil.
- Amazon.com(AMZN) posted its biggest two-day gain since November after saying it plans to buy back as much as $1 billion of stock in the next two years.
- Google Inc.(GOOG) hasn’t received formal objections from EU regulators about its proposed $3.1 billion purchase of DoubleClick(DCLK), indicating the EU is close to approving the deal.
- McDonald’s(MCD), the world’s largest restaurant company said comparable-store sales at US outlets rose 1.9%, more than the 1.5% increase it had previously forecast.
- OPEC may cut crude production when it meets next month to keep the price near record levels.

Wall Street Journal:
- Internet Logjams Spur Cable Boom. Seven years after a telecom boom and bust created a glut of fiber optical cable and destroyed $2 trillion in stock-market wealth, another building binge is on.
- Retailers in the US are turning to the Internet to sell to shoppers abroad in hopes of easing the pain of an economic slowdown at home.
- Toyota Motor(TM) is offering 7-year loans on new cars to help dealers boost sales.
- Now that the excitement of Super Tuesday has passed, we should remember the kinds of policies and principles at stake, Exhibit A: three pieces of legislation pending in Congress that would dramatically increase the liability of private companies for alleged acts of employment discrimination.

NY Times:
- Seattle Becomes New Destination for Venture Capital.

CNBC:
- An agreement for a bailout of bond insurers Ambac Financial(ABK) and FGIC Corp. might be reached as early as next week.

Social Science Research Network:
- Do Hedge Funds Profit from Mutual-Fund Distress?

CNNMoney.com:
- Unusual Perks: Goldman Sachs’(GS) Health Insurance Covers Sex Changes.

Reuters:
- The US dollar fell against the euro after a magazine report said OPEC may adopt the euro and abandon the US dollar when pricing oil.

Financial Times:
- PGGM, Europe’s second largest pension fund, has shaken up its commodities investment portfolio, halving its exposure to the agricultural sector and scrapping its gold and silver allocations in spite of recent record prices in both areas. At the same time, the Dutch pension fund has increased its exposure to industrial metals and livestock, according to officials and bankers familiar with the fund.

Dagens Naeringsliv:
- StatoilHydro ASA, Norway’s largest oil producer, will send a team to investigate the Bay Hassan oil field in northern Iraq, citing Iraqi Oil Minister Hussain al-Shahristani. Iraq plans to expand oil production to 6 million barrels a day in five years, from 2.4 million barrels a day now, al-Shahristani said.

Xinhua:
- Chinese mobile phone users are expected to send a record 17 billion text messages during the Lunar New Year holiday, citing government forecasts.

Bear Radar

Style Underperformer:

Large-cap Value (-1.61%)

Sector Underperformers:

Banks (-3.42%), Airlines (-2.85%) and HMOs (-2.78%)

Stocks Falling on Unusual Volume:

CNC, RHD, AGN, TDG, BW, AWH, SCOR, UTIW, CEPH, LPNT, PRFT, IPSU, SHPGY, CELL, JCOM, AU, TMX and ACL

Wholesale Inventories Rise

- Wholesale Inventories for December rose 1.1% versus estimates of a .3% gain and an upwardly revised .8% increase in November.

BOTTOM LINE: Inventories at US wholesalers surged in December as sales declined, Bloomberg reported. Sales fell .7%, the most since January. The decline in sales brought the supply of goods on hand to 1.09 months from 1.07 months worth the prior month. The increase in wholesale inventories was led by a 9.2% rise in oil product stockpiles. The overall gain in inventories could help lead to an upward revision in 4Q GDP. The odds of a 50 basis point rate cut at the FOMC meeting next month are 68.0%, while the odds of a 75 basis point cut have risen to 32.0%. According to Intrade.com, the odds the US enters recession this year have fallen to 66.5% from 77.5% a few weeks ago. The ECRI Weekly Leading Economic Index jumped 1.83% this week back to 133.50. Despite the recent bounce higher in commodities, fueled by OPEC’s talk of oil production cuts, the 10-year TIPS spread, a good gauge of inflation expectations, is 2.29% today, down from 2.48% in November and 2.38% one week ago. I continue to believe inventory rebuilding will help boost overall US growth over the intermediate-term as exports rise to new records and companies gain confidence in future economic conditions.

Bull Radar

Style Outperformer:

Mid-cap Growth (+.78%)

Sector Outperformers:

Construction (+3.35%), Restaurants (+1.77%) and Software (+1.56%)

Stocks Rising on Unusual Volume:

MTD, WNS, DRS, MFE, HEP, LZ, GDI, COG, VNUS, CTSH, CSTR, LMNX, OMTR, GMXR, HAYN, OYOG, SPTN, TTMI, ALNY, URBN, IOSP, FRME, KNSY, ACAP, EPIC, TBSI, GOLD, GCOM, NFS, EQ and AIZ

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