Stocks Slightly Higher into Final Hour on Short-Covering in Beaten Up Sectors

BOTTOM LINE: The Portfolio is slightly lower into the final hour as gains in my Commodity shorts, Biotech longs and Retail longs are more than offset by losses in my Internet longs, Computer longs and Semi longs. I added (IWM)/(QQQQ) hedges this morning, thus leaving the Portfolio 75% net long. The overall tone of the market is slightly positive today as the advance/decline line is mildly higher, sector performance is mostly positive and volume is above average. Investor anxiety is above average. Today’s overall market action is slightly bullish. Yesterday, I cautioned recent short interest data indicated that the many bears had recently increased their short positions in the most beaten up and most heavily shorted stocks right near their lows and that recent action in the market should make them very nervous. Today, many of those stocks are soaring. Homebuilders, financials and retailers are all posting meaningful gains. While these sectors have likely bottomed for the intermediate-term, they will not remain market leaders for long, in my opinion. I continue to favor true growth stocks for the longer-term as growth, interest rates and inflation remain below long-term average levels. Fed fund futures now imply a 40% chance for a 50 basis point rate cut and a 60% chance of a 25 basis point rate cut at the upcoming meeting. The average 30-year mortgage rate fell again this week to 6.1%, down from 6.74% in June, which is a big positive. The 10-year swap spread and G-7 currency volatility index are falling meaningfully again today, which are also positives. The US dollar continues to trade as if at the very least an intermediate-term bottom is in place. This, combined will decelerating global demand, should also continue to pressure most commodities over the intermediate-term. I expect US stocks to trade mixed-to-lower into the close from current levels on profit-taking.

Today's Headlines

Bloomberg:
- China Mobile Ltd., the world’s largest wireless-phone operator by subscribers, said it is still in discussions to offer Apple’s(AAPL) iPhone handset, denying a newspaper report that talks between the two have ended.
- Countrywide Financial(CFC), the biggest US mortgage company, rose as much as 29% on optimism among investors that the US Treasury’s plan to freeze subprime mortgage rates will stem losses from record foreclosures.
- ABX Indexes tied to subprime-mortgage bonds rose on speculation that a plan to stem foreclosures among subprime borrowers may curb losses on the securities.
- Crude oil is falling $2/bbl. to below $90/bbl. for the first time in a month on concern over falling global demand growth and as Saudi Oil Minister Ali al-Naimi said supplies in the market are “absolutely ample.”
- Lincoln Anderson, who helps manage about $165 billion as chief investment officer at LPL Financial Services, says the subprime issue has been “overblown” and that the “top is in” for crude oil prices.
- Walt Disney(DIS) and retailer Nordstrom(JWN) led companies selling at least $35 billion in the busiest week in more than two months as Treasury yields fell to the lowest since April 2004.

USAToday.com:
- The number of US combat deaths in Iraq this month is headed toward the lowest monthly level since March 2006, reflecting a turnaround in US efforts to establish security and defeat insurgents.

NY Post:
- A pair of hedge funds that are getting battered by the choppy markets of the past few months are serving as a stark reminder that the pain inflicted on the once white-hot hedge-fund sector isn’t only confined to those with subprime-bond exposure.

Cash Daily:
- Swisscom AG has been selected by Apple Computer(AAPL) to sell the iPhone in Switzerland.

Personal Incomes/Spending Rise Less Than Estimates, Inflation Contained, Chicago PMI Surges, Construction Spending Falls

- Personal Income for October rose .2% versus estimates of a .4% gain and a .4% increase in September.

- Personal Spending for October rose .2% versus estimates of a .3% gain and a .3% increase in September.

- The PCE Core for October rose .2% versus estimates of a .2% gain and a .2% increase in September.

- The Chicago Purchasing Manager November rose to 52.9 versus estimates of 50.5 and a reading of 49.7 in October.

- Construction Spending for October fell .8% versus estimates of a .3% decline and a .2% increase in September.

BOTTOM LINE: Consumer spending and incomes in the US rose less than forecast in October, Bloomberg reported. The Fed’s favorite inflation gauge, the Core PCE rose .2% for a second straight month and is up 1.9% year-over-year, which is within the Fed’s comfort zone. Consumer spending should accelerate next month on more seasonal weather and incomes will remain relatively healthy over the intermediate-term as unemployment stays low by historic standards. I continue to believe inflation concerns have peaked for this cycle.

A measure of US business activity expanded more than expected in November, as employment and production rebounded, Bloomberg reported. The Production Component surged to 57.4 from 46.9 the prior month. The New Orders component continued to show expansion, remaining at 53.9. The Order Backlogs component rose to 45.9 versus 39.9 the prior month. The Employment component of the index jumped to 54.4 from 49.5 the prior month. The Inventories component fell to 47.1 from 49.6 the prior month. The Prices Paid component rose to 76.2 from 74.7 the prior month. The gain in this index is a big positive. I continue to believe manufacturing will help boost overall economic growth to around 2-2.5% over the intermediate-term as companies gain confidence in the sustainability of the current expansion and rebuild depleted inventories as exports boom.

Spending on US construction projects fell in October, Bloomberg reported. Private residential construction spending fell 2%, the 20^th consecutive decline. Non-residential construction rose .1%. I continue to believe overall construction spending will remain muted over the intermediate-term as homebuilders pare down inventories.

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Friday Watch

Late-Night Headlines
Bloomberg:
- Federal Reserve Chairman Ben S. Bernanke said volatility in credit markets has “affected” the economy’s prospects and policy makers must decide whether the risks between growth and inflation have now shifted.
- UMC Japan rose 22%, the most in almost nine years, after the Japanese unit of Taiwan’s United Microelectronics Corp. said it expected to post a narrower full-year loss on increased output of higher-value memory chips and lower production costs.
- India’s gold production in the seven months to October rose 16.8% to 8 metric tons from 6.85 tons a year earlier.
- Crude oil was little changed near $91 a barrel in New York as Enbridge Inc. re-opened three out of four pipelines closed after an explosion cut shipments of Canadian oil to US refiners.
- The yen fell against the dollar after a rally in Asian stocks prompted investors to buy higher-yielding assets with funds borrowed in Japan.
- The US dollar is headed for its biggest weekly gain in two months against the euro.

Wall Street Journal:
- Sprint Nextel(S) rejected a $5 billion investment offer from a group led by South Korea’s SK Telecom that would have made former Chairman Tim Donahue the company’s CEO.
- The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled subprime loans, according to people familiar with the matter.
- Bernanke Hints Rate Cut Possible.
- Why Citadel Pounced On Wounded E*Trade.

MarketWatch.com:
- China aims to play a stabilization rose in global markets through its $200-billion sovereign wealth fund, the China Investment Corp., Lou Jiwei, the fund’s chairman, said Thursday.

BusinessWeek:
- Move Over, ‘Cyber Monday’ Online retailers, bracing for a record holiday season, say their business day will come in December’s second week; eBay calls it “Green Monday”
- Honda’s Home Hydrogen Fueling Station. Honda has come up with a way to get around the problem of fueling its hydrogen cars – do it at home.

CNBC.com:
- Which Home Renovations Really Pay Off?

Morningstar.com:
- The credit crisis: Chicken Little or a game of chicken? Investors are running for the hills – or at least for safer havens including cash and gold. Yet at Morningstar, our analysts are recommending an unprecedented number of financial-services stocks, even names that have been badly beaten up such as Countrywide Financial(CFC), PMI Group(PMI) and Citigroup(C).
- US revised oil demand in September was .8% below year-ago levels, at 20.385 million barrels a day and the lowest for any month since April 2006, federal data released Thursday show. Demand was revised down from an earlier estimate, which would have shown a .3% decline from a year ago.

USA Today.com:
- Rates on 30-year mortgages fall to lowest point in 2 years.
- China dropping subsidies that aided exporters.

Economic Times:
- Temasek Holdings Pte, Singapore’s state-owned investment company, may be selling shares in Chinese companies to buy stakes in US and European financial institutions. Temasek has recently held discussions with US and European financial institutions and “the pricing is reasonable,” citing people familiar with the situation. The talks prompted it to pare its holdings to raise capital for potential acquisitions, it added. Temasek manages more than $100 billion in assets.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (INTC), target $33. Dell(DELL) reported their October quarter results Thursday after the close. While much of the conference call’s focus was on Dell’s strategic initiatives, their commentary reinforces our positive view of Intel. We continue to see upside margin surprise and market share momentum.
- Reiterated Buy on (BRCD), target $10.

Morgan Stanley:
- Reiterated Overweight on (OVTI), target $28.

Night Trading
Asian Indices are +.25% to +1.75% on average.
S&P 500 futures -%.
NASDAQ 100 futures -%.

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- (BIG)/.12
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Economic Releases
8:30 am EST
- Personal Income for October is estimated to rise .4% versus a .4% gain in September.
- Personal Spending for October is estimated to rise .3% versus a .3% gain in September.
- The PCE Deflator for October is estimated to rise .2% versus a .2% gain in September.

9:45 am EST
- The Chicago Purchasing Manager report for November is estimated to rise to 50.5 from 49.7 in October.

10:00 am EST
- Construction Spending for October is estimated to fall .3% versus a .3% gain in September.

Other Potential Market Movers
- The Fed’s Poole speaking, Fed’s Kroszner speaking, Fed’s Plosser speaking, NAPM-Milwaukee, (NVO) analyst meeting and UBS Global Real Estate Conference could also impact trading today.

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

Stocks Finish Slightly Higher on Healthy Consolidation of Recent Sharp Gains

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