Monday, November 19, 2007

Stocks Sharply Lower into Final Hour on Weakness in Financials and Retailers

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Retail longs and Biotech longs. I added to my (EEM) short and added (IWM)/(QQQQ) hedge this morning, thus leaving the Portfolio 75% net long. The overall tone of the market is very negative today as the advance/decline line is substantially lower, every sector is falling and volume is above average. Investor anxiety is high again. The Fed's Stern spoke in Singapore last night. Here is a summary of his comments via Bloomberg:

1. It is too early to say what future actions are needed.
2. The U.S. housing adjustment still has a way to go.
3. Mortgage foreclosures are likely to increase.
4. Home building will remain subdued.
5. The flowover effects from housing are modest at most.
6. Other areas of the U.S. economy are doing well.
7. Housing is only a small proportion of the U.S. economy.
8. The U.S. economy is very resilient and sound.
9. The Fed is dependent on incoming economic data.
10. Policy can be changed at the appropriate time.
11. Energy, food prices are going up.
12. U.S. inflation has been fairly modest.
13. U.S. consumers are in reasonably good shape.
14. Shouldn't exaggerate the U.S. housing impact.
15. U.S. exports are doing well.

Overall, I would classify these comments as mixed. Barring a significant deterioration in economic data over the next month, I still think the Fed will remain on hold at the Dec. 11 meeting. However, fed fund futures imply a 90% chance for another 25-basis-point cut at the upcoming meeting. S&P 500 large futures traders remain positioned near historically net short levels, public short sales are spiking again and the AAII bull ratio four-week average is registering extreme pessimism. The Rasmussen Investor Index fell today to the lowest level of the year and is now at the lowest since mid-March 2003. These readings come with the S&P 500 just 6.6% off an all-time high and insider activity exceptionally bullish. Hitwise is reporting today that Google (GOOG) had 64.5% of the U.S. search market in October vs. 63.6% in September. Yahoo! (YHOO) had 21.7% vs. 22.6% in September, and MSN had 7.4% vs. 7.8% in September. Google is trading down 1.8% to session lows as the broad market moves back to session lows. I expect Google to continue to take share over the long term. As well, video ads, which are just in their infancy, and new product additions should continue to propel growth to relatively high rates over the intermediate-term, notwithstanding any economic slowdown. The stock is becoming egregiously cheap again relative to the broad market and its Internet peers given its fundamentals. I plan to add to my long position on any significant further weakness from current levels. In my opinion, longer-term investors who are dumping the stock as indiscriminate selling takes hold will regret it. I expect US stocks to trade mixed into the close from current levels as bargain hunting and short-covering offsets global economic worries.

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