Monday Watch

Weekend Headlines
Bloomberg:
- US stocks rose this week to complete the steepest September advance since 1998 as the Fed’s interest-rate cut helped energy and raw-material companies lead the market’s recovery from a summer rout.
- China Investment Corp., the nation’s $200 billion sovereign wealth fund, starts operations today as the government seeks to boost returns on the world’s biggest foreign-exchange reserves.
- US high-yield bonds posted the best returns in four years this month after the Fed’s interest rate cut enticed investors back to the riskiest debt.
- US Treasuries capped their biggest quarterly rally in five years as the inflation gauge preferred by Fed policy makers showed consumer prices rose at the slowest pace in more than three years during August.
- The euro’s record-setting rally may not extend through the end of October, according to analysts who rely on market patterns for their predictions.
- Garry Kasparov, the ex-world chess champion turned politician, will run in Russia’s March 2008 presidential election as the candidate for The Other Russia, a coalition opposed to President Vladimir Putin.
- Sentiment among Japan’s largest manufacturers unexpectedly held near a two-year high last quarter as exports expanded even as US economic growth cools.

NY Times:
- China Toys a Boon to Lead-Testing Companies.
- At first blush, the iPhone from Apple(AAPL), the new microprocessor family from Intel(INTC) and the ubiquitous Google(GOOG) search engine have nothing in common. Yet all of these products depend on obscure process innovations that, while highly complex and lacking glamour, are an essential part of establishing a winning edge in commercial electronics.

CNBC.com:
- Cramer is still confident that the Dow Jones will reach his year-end target of 14,548. Eight stocks in particular, he said, should get the index there.

MarketWatch.com:
- EMC: more than just the VMware parent. Diversification has been a boon to storage-technology giant.
- Boeing Co.(BA) took the lead over Airbus in commercial airplane orders in the third quarter, according to an early tally, as both aircraft makers kept drumming up business from fast-growing Asian markets and got some late-period purchase from venerable European carriers.

Barron’s:
- London’s $2.27 billion RAB Special Situations was the top-performing hedge fund during the past three years, with a 47.7% cumulative return.
- The Dow Jones has climbed in the fourth quarter for nine consecutive years, and in 24 of the past 27 years. The S&P 500 has produced fourth-quarter rallies in 13 of the past 15 years and racked up an average 6.3% haul, according to researchers at Bespoke Investment Group.

BusinessWeek.com:
- A group of Midwest utilities is building a plant that will store excess wind power underground.

TheStreet.com:
- Coming Week: Bond Binge.

CNNMoney.com:
- 5 Ways to Slash Your Energy Bill.
- 4 Must Have Gadgets.
- 5 Blinged-out Tech Toys.

Newsweek:
- The search for renewable-energy sources is making clean-tech jobs hot.

Crain’s Chicago Business:
- Exelon Corp.(EXE) CEO John Rowe said the utility operator is interested in mergers and acquisitions.
- McDonald’s Corp.(MCD) forecasts its expanded offering of drinks will boost sales by more than $1 billion annually.

Crain’s NY Business:
- Morgan Stanley(MS) Co-President Zoe Cruz and Avon Products(AVP) Chairman and CEO Andrea Jung are among the 25 most powerful women in NY businesses.

USA Today:
- Returns from large-capitalization growth funds far outpaced those of other diversified equity funds in the July-September period as investors sought the safety and growth potential of big companies following the return of volatility and the stock market’s pullback from its mid-July highs.
- Advertisers who wanted to know more about radio listeners are finally getting an electronic audience measurement system that’s not only delivering more accurate results but also shaking up the broadcasting business.

Washington Post:
- In their debate Wednesday night in Hanover, NH, none of the three top Democratic presidential candidates would promise to have the US military out of Iraq by January 2013 – more than five years from now.

AP:
- Former Republican House Speaker Newt Gringrich won’t run for president in 2008 because exploring a bid would clash with his role as the head of a tax-exempt group.
- Iraq is seeking to replace a UN Security Council mandate for the US-led force in their country with a long-term security agreement, citing Foreign Ministry officials. Iraq wants to establish a bilateral agreement similar to ones the US has with Saudi Arabia, Kuwait, the UAE, Bahrain, Qatar and Egypt.

Financial Times:
- FT.com, the internet arm of the Financial Times, will on Monday announce an innovative charging system and a major expansion of the site, fueling debate about newspapers’ online business models.
- The UAW union could become General Motors’ biggest shareholder under a deal to transfer the carmaker’s healthcare obligations to a huge union-managed trust.

Times:
- Goldman makes $370 million after saving its black box hedge fund.

Sunday Telegraph:
- The UK Treasury has given the go-ahead to JC Flowers & Co. and Cerberus Capital to proceed with their bids for Northern Rock Plc.

Commercial Times:
- Taiwan Semiconductor Manufacturing’s chip shipments in the fourth quarter will rise between 7% and 10% from the third quarter. Taiwan Semi received orders to make more chips fro clients such as Qualcomm Inc.(QCOM), Nvidia Corp.(NVDA), and Broadcom(BRCM).

Tehran Emrooz:
- Iran plans to build hotels for women only in each of the 30 provinces of the Islamic Republic, citing deputy head of Iran’s cultural heritage and tourism organization, Mohammad Sharif Malekzadeh. Women are now required to explain the reason for their hotel trips to a specialized unit of the of the local police station and get official permission prior to booking a room.

Weekend Recommendations
Barron's:
- Made positive comments on (BWA), (AMR) and (NDSN).

Citigroup:
- West Texas Intermediate crude rebounded from a mid-week breach below $80 to finish the week at $81.77. However, support from financial speculators and refining margins has declined, leaving our model delta about $6. Against a backdrop of deteriorating storm concerns, downside risk to oil prices looks like a reality. Open interest fell 1%, almost entirely on higher non-commercial short positions. This follows the 6% decline that accompanied the 9/20 contract expiration and contrasts with the post expiration rebound seen typically in recent months. Our technical team remains cautious, targeting support around $74/bbl.

Night Trading
Asian indices are +.25% to +.75% on average.
S&P 500 futures +.06%.
NASDAQ 100 futures -.07%

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Pre-market Stock Quote/Chart
Before the Bell CNBC Video(bottom right)
Global Commentary
WSJ Intl Markets Performance
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Top 25 Stories
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Today in IBD
In Play
Bond Ticker
Economic Preview/Calendar
Daily Stock Events
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Upgrades/Downgrades
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Earnings of Note
Company/Estimate
- (WAG)/.47
- (PALM)/.08

Upcoming Splits
- (BCSI) 2-for-1
- (JCI) 3-for-1
- (TAP) 2-for-1

Economic Releases
10:00 am EST
- ISM Manufacturing for September is estimated to fall to 52.5 versus 52.9 in August.
- ISM Prices Paid for September is estimated to fall to 62.3 versus 63.0 in August.

Other Potential Market Movers
- The Jeffries Technology Conference could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by automaker and technology shares in the region. I expect US stocks to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the week.

Weekly Outlook

Click here for a weekly preview by MarketWatch.com.

Click here for Stocks in Focus for Monday by MarketWatch.com.

There are several economic reports of note and some significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. – ISM Manufacturing, ISM Prices Paid

Tues. – Pending Home Sales, Total Vehicle Sales, weekly retail sales

Wed. – Weekly MBA Mortgage Applications report, weekly EIA energy inventory report, Challenger Job Cuts, ADP Employment Change, ISM Non-Manufacturing

Thur. – Initial Jobless Claims, Factory Orders

Fri. – Change in Non-farm Payrolls, Unemployment Rate, Average Hourly Earnings, Consumer Credit

Some of the more noteworthy companies that release quarterly earnings this week are:

Mon. – Walgreen(WAG), Palm Inc.(PALM)

Tues. – Pepsi Bottling(PBG), Micron Tech(MU)

Wed. – Wolverine Worldwide(WWW), Immucor Inc.(BLUD), Arrow Intl.(ARRO), Gerber Scientific(GRB), IDT Corp.(IDT)

Thur. – Constellation Brands(STZ), Marriott Intl.(MAR), Acuity Brands(AYI), Family Dollar(FDO), Research In Motion(RIMM), Solectron(SLR)

Fri. – None of note

Other events that have market-moving potential this week include:

Mon. – Jeffries Technology Conference

Tue. – Citigroup Ethanol Conference, CIBC Industrials Conference, (IRM) analyst meeting, (KSS) investor day, (CIEN) analyst day, Deutsche Bank Leveraged Finance Conference, Jeffries Technology Conference

Wed. – Deutsche Bank Leveraged Finance Conference, William Blair Small-cap Growth Conference, CIBC Industrials Conference, BOE Policy Meeting, (CBRL) analyst meeting, (NSM) analyst meeting, (RENT) analyst presentation

Thur. – Fed’s Mishkin speaking, Fed’s Fisher speaking, ThinkEquity Healthcare Forum, (FLO) analyst meeting, Deutsche Bank Leveraged Finance Conference, BOE Policy Meeting, ECB Policy Meeting, (PRX) analyst meeting, (AEP) analyst meeting, (NSTK) analyst meeting

Fri. – None of note

BOTTOM LINE: I expect US stocks to finish the week modestly higher on less economic pessimism, diminishing credit market fears, lower energy prices, investment manager performance anxiety, a stronger US dollar and short-covering. My trading indicators are still giving bullish signals and the Portfolio is 100% net long heading into the week.

S&P 500 1,526.75 +.07%*

Click here for the Weekly Wrap by Briefing.com.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,526.75 +.07%
DJIA 13,895.63 +.55%
NASDAQ 2,701.50 +1.13%
Russell 2000 805.45 -.94%
Wilshire 5000 15,317.90 +.11%
Russell 1000 Growth 618.52 +.71%
Russell 1000 Value 851.0 -.34%
Morgan Stanley Consumer 747.03 +.81%
Morgan Stanley Cyclical 1,061.49 +.55%
Morgan Stanley Technology 667.98 +1.63%
Transports 4,836.32 +.19%
Utilities 501.54 -1.32%
MSCI Emerging Markets 149.47 +3.37%

Sentiment/Internals
NYSE Cumulative A/D Line 69,560 +2.01%
Bloomberg New Highs-Lows Index +250 +70.0%
Bloomberg Crude Oil % Bulls 16.0 -27.3%
CFTC Oil Large Speculative Longs 243,458 +2.2%
Total Put/Call 1.09 +26.7%
NYSE Arms 1.24 +49.4%
Volatility(VIX) 18.0 -5.26%
ISE Sentiment 110.0 -32.1%
AAII % Bulls 49.4 +25.8%
AAII % Bears 34.2 +8.0%

Futures Spot Prices
Crude Oil 81.62 -.01%
Reformulated Gasoline 204.25 -2.1%
Natural Gas 6.88 -1.38%
Heating Oil 222.55 -2.06%
Gold 749.70 +1.49%
Base Metals 250.74 +1.31%
Copper 363.05 +1.29%

Economy
10-year US Treasury Yield 4.58% -4 basis points
4-Wk MA of Jobless Claims 311,500 -3.1%
Average 30-year Mortgage Rate 6.42% +8 basis points
Weekly Mortgage Applications 654.20 -2.82%
Weekly Retail Sales +2.2%
Nationwide Gas $2.80/gallon unch.
US Cooling Demand Next 7 Days 15.0% above normal
ECRI Weekly Leading Economic Index 141.10 +.28%
US Dollar Index 77.75 -1.12%
CRB Index 333.67 +.16%

Best Performing Style
Mid-cap Growth +.72%

Worst Performing Style
Small-cap Value -1.75%

Leading Sectors
Steel +4.62%
Wireless +2.70%
Networking +2.56%
Defense +2.39%
Computer Hardware +2.23%

Lagging Sectors
Banks -2.29%
Oil Tankers -2.47%
Airlines -3.52%
Homebuilders -4.84%
Foods -5.5%

One-Week High-Volume Gainers

One-Week High-Volume Losers

*5-Day Change

Stocks Slightly Lower into Final Hour on End-of-Quarter Profit-Taking

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Networking longs, Retail longs and Internet longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is slightly negative today as the advance/decline line is mildly lower, sector performance is mostly negative and volume is below average. High Yield Corporate Bond Funds saw $405 million in inflows this week, the greatest amount since June 1, 2005, which is a big positive. Once again, domestic mutual funds, which have been completely shunned during this bull market, saw outflows while non-domestic mutual funds saw inflows. Keeping the public afraid of U.S. stocks remains one of the bears' most successful weapons. I still believe the eventual participation by the general public in U.S. stock gains will help contribute to the "mother of all short-covering rallies." The proliferation of hedge funds and significant increase in turnover by many other funds since the bubble burst in 2000 usually leads to mild profit-taking at quarter's end, in my opinion. Bespoke Investment Group recently said that, since the fourth quarter of 2002, the S&P 500 has averaged a -0.01% decline over the final two days of the quarter and a -0.28% decline on the final day of the quarter. The Fed's Lockhart made several comments this morning. He painted an economic picture of mildly below-trend growth and moderate inflation, which is what I have been saying for some time. He said he expects third-quarter growth to come in at 2.5% and fourth-quarter growth to be lower. I have been saying that growth would average around 2%-2.5% during the second half of the year, notwithstanding fed funds rate cuts. He also said the Fed's Sept. 18 rate cut action was a "tactical move" to reduce the risks facing the economy from the rout in financial markets that gathered momentum in August. Fed funds futures now imply an 84% chance of a 25-basis-point fed funds rate cut at the October meeting. The AAII percentage of bulls rose to 49.4% this week from 39.2% the prior week. This reading is now modestly above average levels. The AAII percentage of bears rose to 34.2% this week from 31.7% the prior week. This reading is now above average levels. Moreover, the 10-week moving average of the percentage of bears is currently at 39.4%, a high level. The 10-week moving average of the percentage of bears peaked at 43.0% at the major bear-market low during 2002. The 50-week moving average of the percentage of bears is currently 36.8%, an elevated level seen during only two other periods since tracking began in the 1980s. Those periods were October 1990-July 1991 and March 2003-May 2003, both of which were near major stock market bottoms. The extreme readings in the 50-week moving average of the percentage of bears during those periods peaked at 41.6% on Jan. 31, 1991, and 38.1% on April 10, 2003. We are currently very close to eclipsing the peak in bearish sentiment during the 2000-2003 market meltdown, which I still find astonishing, notwithstanding the recent correction. The S&P 500 is 108.6% higher from October 2002 lows and is only 1.3% lower from its recent record set in July. While the percentage of bulls has rebounded recently, I would have to see several readings in the high 50s-low 60s before becoming concerned. US stock mutual funds have seen outflows for most of the past 5 years, there has been an explosion in low correlation/negative correlation US stocks strategies, there have been huge spikes in gauges of investor anxiety over the last couple of years on relatively mild market pullbacks, a fairly large chunk of the public generally hates US stocks and says they won’t ever invest in them again, the mainstream press obsesses with what is wrong or what could go wrong and long-term investors are denigrated, while day-trading is championed as a crash is always seen as just around the corner. I continue to believe overall investor sentiment regarding US stocks has never been worse in history with the S&P 500 right near a record high, which bodes very well for further outsized gains. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain hunting, less economic pessimism, lower energy prices and investment manager performance anxiety.

Incomes Rise, Spending Jumps, Inflation Decelerates, Manufacturing Healthy, Construction Spending Rebounds, Confidence Still Low

- Personal Income for August rose .3% versus estimates of a .4% gain and a .5% increase in July.

- Personal Spending for August rose .6% versus estimates of a .4% gain and a .4% increase in July.

- The PCE Core for August rose .1% versus estimates of a .1% gain and a .1% increase in July.

- The Chicago Purchasing Manager Index for September rose to 54.2 versus estimates of 53.0 and 53.8 in August.

- Construction Spending for August rose .2% versus estimates of a .3% decline and a downwardly revised .5% decline in July.

- Final Univ. of Mich. Consumer Confidence for September fell to 83.4 versus estimates of 84.0 and a reading of 83.8 in August.

BOTTOM LINE: Consumer spending in the US rose more than forecast in August, despite the credit market turmoil, and real consumer spending rose the most in more than 2 years, Bloomberg reported. Moreover, the core PCE, the Fed’s favorite inflation gauge, rose 1.8% year-over-year, the smallest gain since February 2004. This inflation gauge is also well below the long-term average of 2.5%. Inflation-adjusted spending on durable goods, autos, furniture, and other long-lasting items, surged 2.8%. Receipts at automobile dealerships and parts stores rose the most since July 2006. Considering the gloom and doom perpetuated 24-7 in almost every media outlet during the month of August, the consumer spending number was very impressive. As well, the 10-year yield is falling another 3 basis points today as investors continue to ratchet down long-term inflation expectations. I still think inflation worries have peaked for this cycle and the long-term trend of disinflation remains firmly in tact, despite the rise in commodities and decline in the dollar which are being driven mostly by investment fund speculation. I expect consumer spending to remain relatively healthy over the intermediate-term as sentiment improves, housing fears subside, inflation continues to decelerate, interest rates remain low, the job market stays healthy, the unemployment rate remains historically low and stocks continue their major bull run.

US business activity accelerated more than expected this month as production and employment expanded and a measure of prices companies paid fell to the lowest since January, Bloomberg reported. The new orders component of the index fell to 56.2 from 58.4 in August. The inventories component fell to 38.2 from 44.6 the prior month. The order backlogs component jumped to 50.5 from 38.8 in August. The prices paid component plunged to 59.0 from 71.8 the prior month. Moreover, the NAPM-Milwaukee Index soared to 70, the highest on record going back to 1998. As well, the New Orders component of this index jumped to 81, also the highest on record. 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.

The final reading on consumer confidence for September came in slightly below estimates, Bloomberg reported. I expect consumer sentiment to rebound sharply during the fourth quarter as stocks make new record highs, energy prices fall and housing fears subside to an extent. I still expect both main gauges of sentiment to rebound back near cycle highs over the intermediate-term.