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.

Stocks Soaring into Final Hour on Another Plunge in Oil, Financial Sector Strength, Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Medical longs, Biotech longs, Retail longs, Computer longs, Internet longs and Software longs. I took profits in some of my (TLT) long and added to my (ILMN) long this morning, thus leaving the Portfolio 100% net long. The overall tone of the market is exceptionally positive today as the advance/decline line is substantially higher, every sector is rising and volume is heavy. Investor anxiety is above average despite today’s sharp gains. The 10-year TIPS spread, one of the best indicators of inflation expectations, is falling another 4 basis points today and is down 14 basis points in two days. This is mainly the result of the breakdown in energy prices. Pundits are saying that today’s rally is mainly the result of fed rate cut expectations. However, fed fund futures have implied a near 100% chance for another cut at the upcoming meeting for several weeks. In my opinion, the huge move in the broad market the last couple of days is directly related to the sharp decline in oil and firming of the US dollar. As I have said many times, record oil prices have had a much greater negative impact on the broad market than is commonly perceived. Moreover, despite the spin from the media, retail sales over the weekend, both online and offline, were much better than expected. There remains little evidence of the imminent recession that has been predicted for several years. There is much evidence that the US housing slowdown, combined with booming exports, is leading to modestly below average growth over the intermediate-term. The current macro backdrop remains exceptional for true “growth” stocks. Growth stock leaders are significantly outperforming the broad market during both weak markets and strong ones like today. For the most part, the stocks that I have disclosed that I am long are performing spectacularly year-to-date. These include GOOG +50%, AAPL +113%, ISRG +238%, ILMN +42%, GILD +41%, AMSC +138%, NUAN +80%, BRCM -12%, UA -4%, PWR +39% and TLT +11%. I now believe the broad market and US dollar have bottomed for the intermediate-term and that oil has put in at the very least an intermediate-term top. I expect US stocks to trade mixed-to-higher into the close from current levels on financial sector strength, a firmer US dollar, short-covering, bargain-hunting and lower energy prices.

Today's Headlines

Bloomberg:
- The yen had the steepest two-day decline in three years versus the dollar as rallying global stocks persuaded investors to buy high-yielding assets funded by loans in Japan’s currency.
- William Ackman, whose hedge fund has short positions on bond insurers, said he will make “hundreds of millions of dollars” on his bets and plans to donate the proceeds to charity.
- Analog Devices(ADI) rose the most in nine months after analysts said the company will become more profitable.
- Freddie Mac(FRE) and Fannie Mae(FNM) rose the most in about two decades on optimism the mortgage-finance companies will raise enough capital to weather the housing slump.
- Chinese stocks are poised for their steepest monthly decline since at least 1995 as the government deflates a bubble that caused prices to quadruple in a year. The Shanghai Composite fell 19% so far in November.
- After 25 years of increases, US obesity rates were unchanged at about 34% in 2005-2006 compared with the previous two years, according to a survey by US health officials.
- Comcast, Time Warner and Charter Communications advanced after US regulators dropped for now a push to expand their oversight of the cable-tv industry.
- The US dollar gained the most in two weeks against the euro on speculation traders were scaling back bets on further declines in the US currency as stocks rallied.
- The Iraqi government has approved a plan to build an oil refinery with a capacity of 300,000 barrels a day in the southern city of Nasiriyah, Iraq’s oil minister said.
- Venezuela’s President Hugo Chavez alleged Time Warner’s(TWX) CNN is seeking to incite his assassination and called for an investigation of the cable-television news channel.
- The perceived risk of companies defaulting on their debt fell for a second day on optimism that financial companies will be able to shore up capital that was eroded by losses tied to subprime mortgages, according to credit default swap traders. Credit-default swaps tied to Citigroup(C) fell 8 basis points to 75 basis points. The contracts, used to speculate on a company’s ability to repay its debt or hedge against the risk it won’t, have dropped 17 basis points the past two days after reaching the highest in a least five years recently.
- Gold and silver fell for the second straight day after the dollar rebounded against the euro, reducing the appeal of the precious metals as alternative investments.
- US emissions of greenhouse gases fell 1.5% in 2006, the first annual reduction since 2001.
- Crude oil is falling another $3.30/bbl. in NY after a government report showed that US supplies declined less than expected and refineries increased fuel output.
- Nickel fell to its lowest in more than 2 months as stockpiles advanced for a 16^th straight day.

Wall Street Journal:
- ‘Value’ Stock Funds Take a Beating in Subprime Crisis. Name a big-company stock you didn’t want to own this year, and there’s a good chance it’s in the portfolio of your large-cap value fund.

CNNMoney.com:
- LinkedIn Sale Would Cost More Than $1 Billion.

Nikkei English News:
- Apple’s(AAPL) Japanese unit and Nippon Telegraph and Telephone Corp. will offer free wireless Internet access to users of Apple’s iPod Touch media player.

Durable Goods Orders Decline, Existing Home Sales Fall Slightly

- Durable Goods for October fell .4% versus estimates of a .1% decline and a 1.4% fall in September.

- Durables Ex Transports for October fell .7% versus estimates of a .3% gain and an upwardly revised 1.1% gain in September.

- Existing Home Sales for October fell to 4.97M versus estimates of 5.0M and 5.03M in September.

BOTTOM LINE: Orders for US durable goods fell more than forecast in October, Bloomberg reported. Bookings for non-defense capital goods excluding aircraft, a gauge of future business investment, fell 2.3%, the most since February, after a 1.2% increase in September that was larger than previously thought. Boeing(BA) had orders for 56 aircraft in October versus 132 the prior month. However, demand this year so far for their planes reached a record 1,047. I expect durable goods order to bounce back next month on inventory rebuilding and better-than-expected demand.

Sales for previously owned homes fell slightly more than forecast last month, Bloomberg reported. The median home price is now $207,800. The number of homes for sale at the current sales pace is 10.8 months’ worth. Existing home sales fell 1.7% in the Midwest and 4.4% in the West. Sales were unchanged in the Northeast and the South. I expect sales to bounce higher next month as the average 30-year mortgage rate has declined 54 basis points since June and there is likely some pent-up demand at this point. Fed fund futures now imply a 94% chance for a 25 basis point rate cut at the upcoming December 11^th meeting and a 6% chance of a 50 basis point cut.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Mohamed Al-Hamli, president of OPEC, said producers are pumping enough oil to meet global demand. Al-Hamli said world economic data is “most important” to OPEC and that OPEC’s spare capacity is 3 million bbls./day. He also said OPEC is spending $50 billion on refining projects and $150 billion on capacity expansion by 2012. OPEC sees a “real risk” of “wasting” resources on expansion as spare capacity may not be needed.
- Samsung Electronics, the world’s second-largest mobile-phone maker, forecast shipments will rise by more than 25% next year, outpacing industry growth, on demand for handsets with faster download speeds.
- Online sales rose to a record $733 million yesterday as US consumer returned to work after Thanksgiving and continued holiday shopping online. Internet retail purchases increased 21%, with shoppers favoring Amazon.com(AMZN), Wal-Mart(WMT) and Target(TGT), ComScore said today.
- Florida and Chicago borrowed a total of almost $500 million for schools in today’s largest single sales of US municipal bonds, tapping the market as benchmark tax-exempt yields rose from an eight-month low.
- Japan’s retail sales rose at the fastest pace in more than a year as consumer bought new-model cars.
- BHP Billiton(BHP) got financing for its $120 billion proposal to buy rival Rio Tinto Group(RTP) from seven banks with a loan of as much as $70 billion.
- Crude oil fell for a third day in NY on speculation that OPEC will next month agree to raise output.

Wall Street Journal:
- Hedge funds came through the first three months of the credit crunch in reasonable shape. But November is turning out to be a different proposition. Average returns look likely to be back in negative territory for the first time since August.
- Verizon(VZ) to Open Cell Network to Others’ Phones.

NY Times:
- Oil Producers See the World and Buy It Up.
- Congressional negotiators are nearing agreement on a measure to set significantly higher fuel economy standards for cars and light trucks, according to aides and lobbyists following the talks.
- Google’s(GOOG) Next Frontier: Renewable Energy.

BusinessWeek:
- Abu Dhabi’s Citigroup(C) Bargain. The emirate’s investment arm grabs a chunk of the financial giant, as US woes offer tempting buys for cash-rich, Gulf state funds.

CNNMoney.com:
- $100 oil and the ‘S’ word. Is it growing demand and tight supply, or merely rampant speculation that has pushed crude to record highs?
- 25 most powerful business people.

CNBC.com:
- Dell(DELL) to Sell Google(GOOG) Business Search Devices.

ABCNews.com:
- California’s Gold Coast. No Sign of Real Estate Slump Among the Priciest Homes.

Reuters:
- GM(GM) to build hybrid cars in China from 2008: report.
- Insiders snapping up shares at Fannie Mae(FNM).
- Short interest on the NASDAQ rose 1.5% in mid-November, the exchange said on Tuesday, suggesting an increase in bearish sentiment in the stock market.

Financial Times:
- A derivatives index tracking subprime mortgage securities is up from record lows this week, after loan performance data showed the pace of deterioration in the mortgage market slowed slightly in October. An analysis of the ABX indices by Goldman Sachs last week showed the index was pricing in cumulative losses of $402 billion, or 29% of the subprime mortgage market, roughly double the $211 billion it has estimated. This figure assumes 32% of the losses priced into the ABX will come from loans issued in 2007, and 39% of losses will come from loans issued in 2006, with the balance relating to prior years. Goldman said the AAA-rated slice of the index had fallen too far, and should have no losses, regain their 22% losses and trade at par.
- Investment funds from the Middle East and Asia have invested an estimated $37 billion in shares of western financial companies this year in a sign the funds are taking a more optimistic view than other investors of the growth prospects for banks, exchanges and asset managers.
- Some 48% of Americans now believe the US military effort in Iraq is going well, compared with 30% in February, according to the latest poll by the Pew Research Center.

Economic Daily News:
- High Tech Computer, the world’s largest maker of mobile phones using Microsoft’s(MSFT) Windows operating system, may post record monthly sales of $433 million this month on demand for its handsets. High Tech said sales will rise at least 10% next year as the company releases models with more features. Handset shipments will increase about 20% in 2008 from the estimated 11 million phones to be sold this year.

China Daily:
- China’s ruling Communist Party will continue to guide the government to strengthen macroeconomic controls next year in order to promote “sound and rapid” economic growth, particularly by limiting fixed asset investments.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (SPW), target $115.
- Maintained Buy on (ADBE), target $56.
- Maintained Buy on (ATVI), target $29.
- Reiterated Buy on (DELL), target $35.
- Reiterated Buy on (TECD), target $56.
- Buy (SNPS) ahead of earnings report on 12/6, target $35.

Night Trading
Asian Indices are -.50% to +.50% on average.
S&P 500 futures -.13%.
NASDAQ 100 futures -.16%.

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Earnings of Note
Company/EPS Estimate
- (BWS)/.66
- (CBRL)/.66
- (DLTR)/.37
- (MW)/.69
- (ARO)/.47
- (SIGM)/.53
- (JAS)/.25
- (CWTR)/-.12

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Durable Goods Orders for October are estimated to fall .1% versus a 1.7% decline in September.
- Durables Ex Transports for October are estimated to rise .3% versus a .3% increase in September.

10:00 am EST
- Existing Home Sales for October are estimated to fall to 5.0M versus 5.04M in September.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -1,000,000 barrels versus a -1,071,000 barrel decline the prior week. Gasoline supplies are estimated to rise by 500,000 barrels versus a 163,000 barrel increase the prior week. Distillate Inventories are expected to fall by -1,200,000 barrels versus a -2,407,000 barrel decline the prior week. Finally, Refinery Utilization is expected to rise by .55% versus a .66% decline the prior week.

2:00 pm EST
- Fed’s Beige Book

Other Potential Market Movers
- The Fed’s Mishkin speaking, Fed’s Fisher speaking, Fed’s Kohn speaking, weekly MBA Mortgage Applications report, weekly EIA energy inventory report, (ROH) analyst day, (ERF) analyst meeting, Bear Stearns Commodities & Capital Goods Conference, CSFB Tech Conference, CSFB Aviation Conference, FBR Investor Conference, JPMorgan Homebuilding Conference, CIBC Mid & Small Cap “Best Ideas” Conference, Lazard Healthcare Conference, Piper Jaffray Healthcare Conference and Merrill Lynch Health Services Conference could also impact trading today.

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