Stocks Mixed into Final Hour on Healthy Consolidation of Recent Gains

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Medical longs and Software longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is mixed today as the advance/decline line is mildly lower, sector performance is mixed and volume is above average. Investor anxiety is above average. Today’s overall market action is very healthy given the recent two-day advance that was the largest since near the major bear market low in 2002. The latest NYSE short interest data figures show a meaningful increase in short interest in the already heavily-shorted and beaten up financials and retailers. If I were one of the many bears that increased short positions meaningfully right near the lows, I would be very concerned by recent market action. The fact that the dollar is rallying nicely on today’s economic data and increased expectations for Fed rate cuts bodes well for my belief that the despised currency has at the very least put in place an intermediate-term bottom. This is one of the main reasons that oil is trading so poorly and failed to maintain this morning’s large gains related to the pipeline explosion. I continue to believe any meaningful decline in the price of oil would be a much larger positive for the broad US stock market than most investors perceive. The 10-year swap spread is falling again today and has declined 16% over five days, which is a large positive. As well, the investment grade credit default swap index has declined 9% over the last week and the Goldman Sachs(GS) credit default swap has plunged 31% over the last five days, which are big positives. I expect US stocks to trade mixed-to-higher into the close from current levels on bargain hunting and short-covering ahead of Fed chief Bernanke’s speech and Dell’s(DELL) earnings report tonight.

Today's Headlines

Bloomberg:
- Bank of England policy maker David Blanchflower said the UK’s benchmark interest rates should “come down now” as growth is poised to slow.
- The subprime crisis that’s caused so much trauma for hedge funds and investment banks has brought only good news for John Paulson. He’s the manager of more than $7 billion in hedge fund money keyed to mortgage credit.
- Treasury Secretary Henry Paulson met with mortgage companies including Wells Fargo(WFC) as regulators press the biggest lenders to change terms of existing subprime home loans before they default.
- The LCDX index, a benchmark of investor confidence in the US leveraged loan market, reached a three-week high on speculation that a Federal Reserve rate cut next month will buoy the market for the rest of the year.
- Goldman Sachs(GS) advised investors to sell gold on expectations turmoil in financial markets will ease and a slump in the dollar will slow. Gold may decline 15-20% next year, Goldman Chief Economist Jim O’Neill said.
- Oil rose $4/bbl. this morning after an explosion cut Canadian oil shipments through Enbridge Inc. pipelines that supply US refiners. However, the commodity plunged into the afternoon on US dollar strength and is $.41/bbl. higher on the day.
- Trex Co.(TWP), the maker of composite decking and fencing materials, posted its biggest gain in NY trading after the company raised forecasts for year-end sales.
- Holiday spending at US retailers climbed 6.5% to $20 billion over the Thanksgiving, according to ShopperTrak RCT Corp.

Wall Street Journal:
- E*Trade Financial(ETFC) said it is getting a $2.55 billion cash infusion from Citadel Investment Group, in a bid to restore confidence and liquidity in the discount brokerage sector.

CNNMoney.com:
- Credit Crunch Doesn’t Slow Small Business Growth.
- Venture investments in American clean technology firms reach a new high.

BusinessWeek.com:
- Skeptic abound, but Hank Paulson says a breakthrough is near that could rescue troubled homeowners.

Washington Post:
- Bill Clinton’s Claim of Opposing Iraq War From Outset Disputed.

Agencia Estado:
- The US may eliminate trade restrictions on Brazilian ethanol by 2009, citing US Representative Gregory Meeks.

3Q GDP Growth Surges 4.9%, Price Index Rises at Slowest Pace Since 1998, Jobless Claims Rise, New Home Sales Bounce as Inventories Fall

- Preliminary 3Q GDP rose 4.9% versus estimates of a 4.9% gain and prior estimates of a 3.9% increase.

- Preliminary 3Q Personal Consumption rose 2.7% versus estimates of a 2.9% gain and prior estimates of a 3.0% increase.

- Preliminary 3Q GDP Price Index rose .9% versus estimates of a .8% gain and prior estimates of a .8% increase.

- Preliminary 3Q Core PCE rose 1.8% versus estimates of a 1.8% gain and prior estimates of a 1.8% increase.

- Initial Jobless Claims for this week rose to 352K versus estimates of 330K and 329K the prior week.

- Continuing Claims rose to 2665K versus estimates of 2575K and 2553K prior.

- New Home Sales for October rose to 728K versus estimates of 750K and a downwardly revised 716K the prior month.

BOTTOM LINE: Economic growth in the US surged in the third quarter to the most in 4 years, Bloomberg reported. A shrinking trade deficit, inventory rebuilding and more business investment than previously forecast were the primary contributors to the upward revision to third quarter growth. US I continue to believe inventory rebuilding, booming exports and decelerating inflation will more than offset the drag from housing over the intermediate-term, which will produce US economic growth has averaged a healthy 3.1% so far this year, despite the substantial drag from housing that began over 2 years ago. growth on average of around 2-2.5%.

The number of Americans filing first-time claims for unemployment benefits rose more than expected, Bloomberg reported. The four-week moving average of claims rose to 335,250 from 329,500 the prior week. The unemployment rate among those eligible to collect benefits, which tracks the US unemployment rate, rose to 2% from 1.9% the prior week, but remains historically low. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

New Home Sales rebounded in October after September sales fell more than previously thought, Bloomberg reported. The median price of a new home was $217,800. The number of new homes for sale at the current sales pace fell to 8.8 months’ worth from 9 months in September. New Home Sale rose 14% in the Midwest, 6.8% in the South and 1.8% in the Northeast. Sales fell 16% in the West. I expect New Home Sales to move higher next month as a result of the recent drop in mortgage rates and pent-up demand.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- China Investment Corp., the nation’s $200 billion sovereign wealth fund, wants to stabilize financial markets, which have been rocked by subprime mortgage defaults. “CIC wants to be a stabilizing force in the international capital markets,” Chairman Lou Jiwei told a conference in Beijing today. He cited a “recent example” in which a sovereign wealth fund invested in a financial institution with subprime losses. China Investment plans to set up overseas branches in major financial centers and will mainly invest in publicly traded securities.
- National Australia Bank, the nation’s largest, agreed to buy US-based Great Western Bancorporation for $798 million, its biggest acquisition since the 1998 purchase of HomeSide Lending.
- Radiation from CT scans may be responsible for up to 2% of cancers in the US, a report in the New England Journal of Medicine found. “If a physician chooses not to order a CT scan on you today to save you the radiation exposure, the physician takes on the risk of missing something, and if something is missed, there is a good chance you’ll sue the physician for not finding it,” said Elaine Rabin, an emergency room physician at Mount Sinai Hospital in NYC. GE(GE) plans to begin selling a high-definition CT scanner next year that provides clearer images than conventional CT machines using half the radiation.
- EBay Inc.(EBAY) and Amazon.com(AMZN) may “exceed” Sanford C. Bernstein’s earnings estimates, the brokerage wrote.
- Zinc, the worst-performer on the London Metal Exchange this year, will drop another 11% in 2008 as the market returns to surplus, National Australia Bank Ltd. said.
- Crude oil prices aren’t fundamentally sustainable at $90 per barrel, said Thomas Petrie, vice chairman of Merrill Lynch(MER). Petrie, in an interview today, responded to comments made earlier by Saudi Arabian Oil Minister Ali al-Naimi, who said there is “no relationship” between today’s price and fundamental supply and demand.
- Kellogg(K) and chemical maker DuPont(DD) led 13 borrowers into the US bond market today.

Wall Street Journal:
- In a sign of continuing woes for hedge funds that use computer models to trade, GMN Capital closed shop, CEO and Managing Partner James Claus confirmed.

NY Times:
- For Toddlers, Toy of Choice Is Tech Device.
- Qualcomm Chief Welcomes iPhone’s Spread.

MarketWatch.com:
- Nine-to-one. Up volume swamped down volume in Wednesday’s trading.
- Trash Talk. Not convinced we are succumbing to fear-mongering? US consumers have taken $3-a-gallon gas and a drop in our home equity in stride. Yet the media seems hell-bent on convincing us multinational banks’ subprime mortgage losses and a weak dollar will torpedo the economy in a way the stock market’s collapse, mass layoffs and 9/11 scarcely did in 2001. Five signs we’re jawboning ourselves into a recession.

BusinessWeek:
- Clear Skies for Airline Stocks.

USA Today.com:
- Tech Holiday Gift Guide. Tips help navigate the tech-buying maze.
- Resale values for Detroit makers’ vehicles go up.
- Robots dazzle at Japanese exhibit.

Reuters:
- Freddie Mac(FRE) shares post biggest gain in 19 years.
- Hedge fund firm Pequot Capital Management, whose flagship fund gained 37% this year, will soon shut down three smaller portfolios due to “poor” performance and meager assets.

Financial Times:
- The four US television networks in a pay dispute with Hollywood television writers over online video advertising are in line to generate $120 million of revenues in 2007 from free web streaming of their content, according to a leading media buyer.

China Daily:
- A Hong Kong-based maker of bead toys that caused recalls in the US and Australia apologized for using a toxic chemical and for damaging the reputation of the made-in-China label, citing the company.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (NRGY), target $39.
- Reiterated Buy on (VMW), target $134. VMW’s recently introduced ESX Server 3i, is a thin hypervisor, that six of the leading OEMs(Dell, Fujitsu, Fujitsu Siemens Computers, HP, IBM and NEC) will pre-install on servers. We believe this is a significant step towards enhancing VMW’s already dominant position in the virtualization industry and is a pre-emptive strike against future Microsoft and Citrix/Xen releases in the battle for control of the x86 server virtualization market.

Night Trading
Asian Indices are +1.5% to +3.0% on average.
S&P 500 futures -.03%.
NASDAQ 100 futures -.18%.

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Earnings of Note
Company/EPS Estimate
- (SFD)/.23
- (GRB)/.13
- (DLM)/.17
- (WMG)/.04
- (SHLD)/.53
- (AMWD)/.37
- (LULU)/.08
- (BF/B)/1.00
- (JCG)/.36
- (OVTI)/.32
- (BRCD)/.13
- (MENT)/-.02
- (HNZ)/.67
- (VIP)/.42
- (GCO)/.57
- (ZOLT)/.23
- (DELL)/.35
- (FRED)/.14
- (MIK)/.30
- (ZUMZ)/.28

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Preliminary 3Q GDP is estimated to rise 4.9% versus prior estimates of a 3.9% increase.
- Preliminary 3Q Personal Consumption is estimated to rise 2.9% versus a prior estimate of a 3.0% gain.
- Preliminary 3Q GDP Price Index is estimated to rise .8% versus prior estimates of a .8% gain.
- Preliminary 3Q Core PCE is estimated to rise 1.8% versus prior estimates of a 1.8% gain.
- Initial Jobless Claims for this week are estimated at 330K versus 330K the prior week.
- Continuing Claims are estimated to rise to 2575K versus 2566K prior.

10:00 am EST
- New Home Sales for October are estimated to fall to 750K versus 770K in September.

Other Potential Market Movers
- The Fed’s Bernanke speaking, 3Q House Price Index, weekly EIA natural gas inventories report, (SAF) analyst day, (GPRO) analyst day, (STEC) analyst day, Bear Stearns Commodities & Capital Goods Conference, UBS Global Real Estate Conference, CSFB Tech Conference and the CSFB Aviation Conference could also impact trading today.

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

Stocks Post Largest 2-day Gain Since Near Major Bear Market Low in 2002

Indices
S&P 500 1,469.02 +2.86%
DJIA 13,289.45 +2.55%
NASDAQ 2,662.91 +3.18%
Russell 2000 770.04 +3.60%
Wilshire 5000 14,753.22 +2.86%
Russell 1000 Growth 612.01 +2.80%
Russell 1000 Value 795.60 +2.91%
Morgan Stanley Consumer 751.65 +1.80%
Morgan Stanley Cyclical 983.23 +3.76%
Morgan Stanley Technology 622.85 +3.45%
Transports 4,625.43 +3.55%
Utilities 529.67 +1.21%
MSCI Emerging Markets 150.87 +2.98%

Sentiment/Internals
Total Put/Call .89 +9.88%
NYSE Arms .29 -56.7%
Volatility(VIX) 24.11 -8.26%
ISE Sentiment 96.0 -27.27%

Futures Spot Prices
Crude Oil $91.47 -3.13%
Reformulated Gasoline 229.33 -3.36%
Natural Gas 7.20 -4.68%
Heating Oil 260.0 -2.01%
Gold 812.0 -1.12%
Base Metals 218.24 -1.0%
Copper 303.70 +1.49%

Economy
10-year US Treasury Yield 4.02% +8 basis points
US Dollar 75.18 +.12%
CRB Index 343.78 -1.15%

Leading Sectors
I-Banks +5.95%
Homebuilders +5.78%
Computer Hardware +4.57%

Lagging Sectors
Energy +1.66%
Utilities +1.21%
HMOs +.74%

Evening Review
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Afternoon Recommendations
Oppenheimer:
- Rated (ARG) Sector Outperformer.

Citigroup:
- Rated (CBEY) Buy, target $33.
- Rated (GLBC) Buy, target $25.
- Rated (TWTC) Buy.

Afternoon/Evening Headlines
Bloomberg:
- US stocks staged the biggest two-day rally in five years, led by financial shares, after Federal Reserve Vice Chairman Donald Kohn buttressed expectations for another interest rate cut.
- Natural gas in NY plunged 4.2% today on an outlook that above-average supplies are ample for winter.
- Crude oil fell another $3.03/bbl, reaching its largest 2-day drop since January, as a US government report showed that supplies declined less than expected and the US dollar rose further.
- SunPower Corp.(SPWR), the largest US supplier of solar panels, surged after it said Morgan Stanley(MS) will provide up to $190 million in financing for future projects.
- Treasury two-year notes had their biggest two-day decline since 2004 as a stock rally pared demand for the relative safety of government debt.
- Sigma Designs said net revenues for the third quarter rose 56% from the prior quarter and 164% from the same quarter last year. The stock is jumping 12% in after-hours trading.

CNNMoney.com:
- This bonus season, investment banks are doling out golden handcuffs.

BOTTOM LINE: The Portfolio finished higher today on gains in my Medical longs, Biotech longs, Semi longs, Computer longs, Internet longs, Software longs and Retail longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was exceptionally positive today as the advance/decline line finished substantially higher, every sector rose and volume was heavy. Measures of investor anxiety were above average into the close, despite today’s sharp gains. Today's overall market action was very bullish. As is usually the case in the current “US negativity bubble”, pundits spent most of their time today trying to scare investors and consumers with much talk of recession and bear markets, while stocks were in the midst of their best 2-day advance since near the major bear market bottom in 2002. Market leading growth stocks gained significant traction into the afternoon with many rising 6-9% on the day. Despite the recent pullback, the Nasdaq is still 11% higher year-to-date and large-cap growth stocks are 12% higher so far this year. The 10-year swap spread fell another 1.7 basis points today to 67.0 basis points over Treasuries. This is down from 87.5 basis points over Treasuries just six days ago, which is a big positive. The yen remained weak throughout the day again, which is also a positive. As well, the G-7 currency volatility index fell another 2% today. Nikkei futures are indicating a +400 open in Japan. Today's rally was of much higher quality than other recent advances that have failed. While some healthy consolidation days are likely in the near-term, I suspect a significant year-end rally is now underway.