Stocks Soaring into Final Hour as Fed Cuts Discount Rate

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Medical longs, Semi longs and Retail longs. I covered the remainder of my (IWM)/(QQQQ) hedges, added to my (PWR) long and took some more profits in my (EEM) short today, thus leaving the Portfolio 100% net long. The overall tone of the market is very positive today as the advance/decline line is sharply higher, every sector is rising and volume is heavy. My intraday gauge of investor angst is still elevated. The AAII percentage of bulls fell to 42.22% this week from 45.76% the prior week. This reading is slightly below average levels. The AAII percentage of bears rose to 45.56% this week from 38.98% the prior week. This reading is now approaching elevated levels. Moreover, the 10-week moving average of the percentage of bears is currently at 37.4%, 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 36.5%, 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 still very close to eclipsing the peak in bearish sentiment during the 2000-2003 market meltdown, which I still find astonishing, notwithstanding the recent correction. Here are a few other gauges showing extreme bearishness:

1) The VIX hit the highest level since 2002 yesterday.

2) According to Hays Advisory, the NYSE Overbought/Oversold Ratio is the second-highest in 42 years.

3) The 10-day total put/call recently hit the second-highest reading in history.

4) The 10-day ISE Sentiment Index reading recently hit the second lowest on record.

5) The 21-day Arms Index is at the highest level since around the March lows.

6) The Rydex Nova/Ursa Ratio Sentiment Indicator is at levels last seen in 2002.

7) Domestic stock mutual funds continue to see significant outflows.

8) Money market fund assets soared this week and are at record levels.

9) At yesterday’s lows, the 2-year note yield had plunged 71 basis points in 6 days as investors sought safety.

10) Both public and professional short interest readings are at record levels.

11) Index futures traders are positioned at historically net short levels.

Finally, insider buying is at levels last seen right before the bull market took off in 2003. These reading are all indicative of a market that is at a meaningful bottom. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, less pessimism, subsiding credit fears, overseas gains and bargain hunting.

Today's Headlines

Bloomberg:
- In the world’s financial markets, the subprime mortgage collapse may finally be contained.
- Hurricane Dean strengthened into a major hurricane today as it slapped the islands of St. Lucia, Martinique and Dominica with torrential downpours and gusting winds, then plowed into the eastern Caribbean Sea.
- Research In Motion(RIMM), the maker of the BlackBerry e-mail device, rose as much as 7.4% in Nasdaq Stock Market trading after an analyst said the company’s third-quarter forecast will “blow away” estimates.
- Goldman Sachs(GS) said the Federal Reserve will cut the overnight target interest rate to 4.5% from 5.25% this year, citing “sharp tightening in financial conditions” and expectations the economy will slow.
- A majority of Americans surveyed in new CNN/Opinion Research Corp. poll said President Bush and the Democratic Congress are “failures.”

Wall Street Journal:
- With risks to the economy from financial market turbulence rising “appreciably,” the Federal Reserve on Friday lowered the rate it charges banks on loans they receive from the Fed’s discount window by one-half-percentage point to 5.75%, though it opted not to cut its primary policy tool, the federal funds rate.
- As a presidential candidate, Democrat John Edwards has regularly attacked subprime lenders, particularly those that have filed foreclosure suits against victims of Hurricane Katrina. But as an investor, Mr. Edwards has ties to lenders foreclosing on Katrina victims.
- With stocks advancing after the Federal Reserve stepped toward a possible cut in its key rate, Wall Street worked to assess just how much its move would matter for financial markets roiled by the drying-up of liquidity.
- The US needs more spending on infrastructure and fewer pork-barrel handouts, Harold Ford and Jim Hall wrote.

Digitimes:
- Nintendo Co. has delayed plans to expand production of its Wii games console because of a shortage of components.

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Friday Watch

Late-Night Headlines
Bloomberg:
- Hewlett-Packard’s(HPQ) third-quarter profit rose 29% after the world’s largest personal-computer market took share from Dell Inc.(DELL). The company also forecast earnings that topped estimates, driving up the shares.
- Whole Foods Market’s(WFMI) $565 million purchase of Wild Oats(OATS) doesn’t violate federal antitrust law and can proceed, a federal judge ruled, allowing the two largest US natural foods grocers to combine.
- Bear Stearns(BSC) shares surged the most since October 1998 amid speculation the nation’s fifth-biggest securities firm may raise money from an outside investor.
- JC Penney(JCP), Kohl’s(KSS) and Nordstrom(JWN) posted second-quarter profit gains and forecast higher annual earnings on rising apparel sales.
- Countrywide Financial(CFC) credit default swaps fell 100 basis points, as bankruptcy speculation eased.
- MBIA Inc.(MBI) and Ambac Financial Group(ABK) shares rose today after a Morgan Stanley analyst estimated that the bond insurers’ losses on securities backed by subprime mortgages will be less than what many investors anticipated.
- The Fed should reduce interest rates “pretty soon” because mortgage market losses have created a “credit crunch,” Barton Biggs of Traxis Partners said. “Absolutely, I am positive on the market,” he said during an interview. “Senile, delusional, maybe both. But positive on the market.”

Wall Street Journal:
- Speculation intensified that the Federal Reserve is going to cut interest rates soon – or even has already in effect done so – without any clear signal from the Fed to encourage it.

CNNMoney.com:
- Paulson sees more bad news ahead. But the Treasury Secretary tells Fortune’s Nina Easton that the economy is strong enough to withstand the volatility.

Forbes.com:
- With Wall Street under pressure for most of the past five sessions, investors – most likely hedge funds – threw in the towel on Thursday and began to liquidate commodities holdings, apparently to raise cash.
- The Sunshine Economy. Solar power is the ultimate alchemy, using what’s free to create something valuable. Over the next 25 years solar is expected to be the fastest-growing alternative source of electric energy.

Financial Times:
- Kohlberg Kravis Roberts, PAI Partners and Carlyle Group are among more than 50 private-equity firms seeking to raise at least $52 billion of European leveraged buy-out funds, as they shrug off recent difficulties in the credit markets.

Reuters:
- A remarkable end-of-day rally pushed the benchmark S&P 500 higher on Thursday after investors snatched up financial stocks that looked cheap after weeks of pummeling by global credit market turmoil.

Late Buy/Sell Recommendations
Citigroup:
- Hewlett Packard(HPQ), a primary customer of PC-related semiconductor companies, reported strong 3Q07 (Aug) revenues and earnings and guided for above consensus 4Q07 (Oct) revenues and earnings. While share gain was an element to HP’s success, the company’s report underscores our view of a strong underlying PC market. Importantly, HP indicated that they have seen non deterioration in sales, indeed suggesting the quarter ended strongly. With OEM inventories under control, we reiterate our view that the industry inventory environment in solid. Despite recent reports of component tightness, HP suggested they were comfortable with current component availability. Nonetheless, the company did suggest that advantageous component pricing in 3Q07 would not be repeated in 4Q07. We note that y/y ASP trends for microprocessors continue to show improvement after bottoming in 3Q06. DRAM contract prices have increased 32% from their bottom. HP’s strong notebook performance(+71% y/y) bodes well for Intel(INTC), the dominant player in notebook MPU’s.

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S&P 500 futures -.20%.
NASDAQ 100 futures -.20%

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- Preliminary Univ. of Mich. Consumer Confidence for August is estimated to fall to 88.0 versus 90.4 in July.

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BOTTOM LINE: Asian indices are lower, weighed down by automaker and commodity stocks in the region. I expect US equities to open lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the day.

Stocks Stage Heavy Volume Reversal, Finish at Session Highs

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Stocks Lower on Emerging Market Worries, Credit Fears

BOTTOM LINE: The Portfolio is slightly lower into the final hour as losses in my Computer longs, Medical longs and Internet longs are more than offsetting my gains in my emerging market and commodity shorts. I took profits in a few of my (IWM)/(QQQQ) hedges, added to my (GOOG) long and took some profits in my (EEM) short today, thus leaving the Portfolio 75% net long. The overall tone of the market is negative today as the advance/decline line is lower, most sectors are declining and volume is very heavy. My intraday gauge of investor angst is very elevated. The CBOE total put/call hit the fourth highest level on record today and the VIX is at levels last seen in 2002. I am watching the financials closely. Their relative strength today bodes well for the possibility of a more positive finish to the day. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain hunting.