Stocks Fall Sharply, Finish Well Off Lows

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Stocks Sharply Lower into Final Hour on Credit Fears and Emerging Market Worries

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my I-Banking longs and Retail longs. I added to my (GS) long and took some profits in my (TLT) long today, thus leaving the Portfolio 75% net long. The tone of the market is very negative today as the advance/decline line is substantially lower, every sector is declining and volume is heavy. My intraday gauge of investor angst is at an elevated level. This gauge is now close to the levels seen during the lows in March. The VIX is jumping 26%. The NYSE Arms is an above-average 1.21. The CBOE total put/call is a high 1.51. The ISE Sentiment Index is plunging 17%, to a depressed 94.0. Given how large short interest is, how well many stocks have done this year, losses over the last few days and the potential for a positive catalyst to materialize tonight or tomorrow before the open, I suspect we could see some significant short-covering into the final hour. Deep cyclicals are getting hit the hardest, and growth stocks are substantially outperforming value stocks again. Tech shares are holding up relatively well, notwithstanding losses in the major averages. I continue to believe that we are just in the very early stages of a multiyear period of outperformance by the “growth” style over the “value” style. With the DJIA down 320, I am still seeing many growth stocks up or just slightly lower. Leading growth stocks are dramatically outperforming the market. Moreover, year-to-date outperformance of growth over value is becoming very large. I think this big story is barley mentioned due to the fact that there are very few true growth managers left after seven years of underperformance by the style. Take a look at Apple (AAPL), Google (GOOG), Intuitive Surgical (ISRG), Synchronoss Technologies (SNCR), Baidu (BIDU), Nvidia (NVDA), Illumina (ILMN), Celgene (CELG), EMC Corporation (EMC), F5 Networks (FFIV), Crocs (CROX), Riverbed Technology (RVBD), Qualcomm (QCOM), Garmin (GRMN), Research In Motion (RIMM), First Solar (FSLR), Omniture (OMTR), Psychiatric Solutions (PSYS), Cabot Microelectronics (CCMP), MEMC Electronic Materials (WFR), AU Optronics (AUO), Amazon (AMZN), etc. A significant change is under way. These types of stocks will lead the market for years, in my opinion. Apple (AAPL) is surging another 7% today after crushing third-quarter estimates and providing conservative fourth-quarter guidance. As I have said many times over the last few months, I believe the "halo effect" is accelerating at a much faster pace than analysts had expected. I had forecast a 50% gain for AAPL shares at the beginning of the year, however, given recent developments, $180 now looks likely before year-end. The stock remains my second largest long position. I expect US stocks to trade higher into the close from current levels on bargain-hunting, lower long-term rates, lower energy prices and short-covering.

Today's Headlines

Bloomberg:
- Democratic presidential candidate John Edwards unveiled a tax policy that raises the top capital gains rate to 28% from 15%.
- Then benchmark for US stock volatility, or VIX, surged to the highest in 13 months.
- Exxon Mobil Corp.(XOM) reported its first profit decline in more than three years.

Wall Street Journal:
- Porsche AG, the Stuttgart, Germany-based maker of 911 sports cars, is developing a hybrid gasoline-electric engine in conjunction with Volkswagen AG for its Cayenne sport-utility vehicle.
- Billionaire investor Warren Buffett took a stake of less than 5% in Kraft Foods(KFT), citing a person familiar with the investment by Berkshire Hathaway(BRK/A).
- Al-Rajhi Bank, Saudi Arabia’s largest lender by market value, is being monitored by the US government for allegedly financing extremists.
- Picnik is a useful photo-editing software program available free on an Internet Web site, which will soon become a mostly pay-for-use service, Walt Mossberg wrote.
- US home sales are still slumping, yet an increase in inventories of unsold houses is slowing, citing its own survey of 28 major metro markets.
- Nielsen Co. plans to present today the first results from Nielsen GamePlay Metrics, the service that tracks what games users are playing, on which devices and when.

NY Times:
- Mattel Inc.(MAT), which makes 65% of its toys in China, is a model for other toy companies doing business in the country.
- RC2 Corp.(RCRC) fired the Chinese-based producer of the lead paint and the maker of the wooden “Thomas & Friends” train toys that were recalled this year because of lead in the paint.

Xinhua News Agency:
- China will maintain a tight monetary policy to prevent the economy from “overheating,” reiterating the government’s top policy goal for the second half of 2007.

China Daily:
- China vowed to tighten rules ensuring the safety of its toy exports amid international concern over its product quality.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- South Korea’s won is “overshooting” and poised to drop from its strongest since 1997 because the nation’s current account surplus is shrinking, Deputy Finance Minster Kim Sung Jin said.
- The US dollar traded near the strongest in more than two weeks against the euro on speculation the world’s biggest economy can withstand rising mortgage defaults.
- Shares of Nintendo Co. rose to a record, bringing the company’s market value to $71 billion, after the maker of the top-selling Wii console raised its earnings forecast on demand for the console and game titles.
- New Zealand’s central bank raised its benchmark interest rate to a record 8.25% and said borrowing costs may be high enough to contain inflation, triggering a decline in the nation’s currency.

Wall Street Journal:
- Verizon Wireless(VZ) will back some rules for an auction of US airwaves that would force the winner to open its network to all devices, reversing its current stance.
- The European Union may restrict Chinese imports if China’s regulators don’t take firm steps to raise manufacturing standards, citing Meglena Kuneva, the EU consumer-safety commissioner.
- Political Ads Stage a Comeback in Newspapers.

AppleInsider:
- Notes of interest from Apple’s(AAPL) Q307 quarterly conference call.

Commercial Times:
- Taiwan’s debt rating may be downgraded by S&P on concern about the island’s budget deficit, citing an internal study by the credit rating company.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (TSCO), target $65.
- Reiterated Buy on (PSYS), $49.

Night Trading
Asian Indices are -.50% to +.25% on average.
S&P 500 futures +.23%.
NASDAQ 100 futures +.52%.

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Earnings of Note
Company/EPS Estimate
- (MMM)/1.17
- (AET)/.80
- (AAI)/.36
- (ALK)/1.24
- (AYE)/.30
- (ABC)/.62
- (AMGN)/1.06
- (APA)/1.91
- (AN)/.42
- (AVID)/.16
- (BZH)/.16
- (BDX)/.93
- (BDC)/.70
- (BDK)/1.73
- (BWA)/1.29
- (BMY)/.37
- (CELG)/.23
- (CMCSA)/.19
- (CROX)/.44
- (CMI)/1.58
- (CYMI)/.51
- (DECK)/.11
- (DLX)/.56
- (DRIV)/.36
- (DOW)/1.05
- (DHI)/-.34
- (XOM)/1.96
- (FSS)/.26
- (FII)/.54
- (F)/-.37
- (GR)/.84
- (GT)/.30
- (IM)/.36
- (ICE)/.76
- (K)/.70
- (KLAC)/.86
- (LLL)/1.44
- (LVLT)/-.12
- (LYO)/1.26
- (MBI)/1.52
- (MFE)/.37
- (MCK)/.72
- (ODP)/.43
- (OSI)/.40
- (QLGC)/.19
- (RTN)/.68
- (RVBD)/.12
- (RCL)/.59
- (SPF)/-.34
- (TDW)/1.63
- (TRV)/1.49
- (VSEA)/.66
- (VRSN)/.25
- (WEN)/.33
- (WDC)/.36
- (XMSR)/-.44

Upcoming Splits
- (DIOD) 3-for-2
- (GMCR) 3-for-1

Economic Releases
8:30 am EST
- Durable Goods Orders for June are estimated to rise 1.9% versus a -2.8% decline in May.
- Durables Ex Transports for June are estimated to rise .6% versus a -1.0% decline in May.
- Initial Jobless Claims for last week are estimated to rise to 310K versus 301K prior.
- Continuing Claims are estimated to fall to 2543K versus 2571K prior.

10:00 am EST
- New Home Sales for June are estimated to fall to 890K versus 915K in May.

Other Potential Market Movers
- The weekly EIA natural gas inventory data, (MSFT) Analyst Meeting, (AMD) Technology Analyst Day and Morgan Keegan Insurance Conference could also impact trading today.

BOTTOM LINE: Asian indices are mixed, as weakness in mining shares is offsetting strength in technology stocks in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the day.

Stocks Finish Higher on Earnings Optimism and Stability in Financial Shares

Indices
S&P 500 1,518.09 +.47%
DJIA 13,785.07 +.50%
NASDAQ 2,648.17 +.31%
Russell 2000 812.50 +.08%
Wilshire 5000 15,248.40 +.33%
Russell 1000 Growth 608.06 +.23%
Russell 1000 Value 855.10 +.51%
Morgan Stanley Consumer 728.18 +.21%
Morgan Stanley Cyclical 1,078.42 -.92%
Morgan Stanley Technology 652.17 +1.52%
Transports 5,231.96 -.63%
Utilities 497.89 +.21%
MSCI Emerging Markets 140.35 -.50%

Sentiment/Internals
Total Put/Call 1.04 -26.76%
NYSE Arms .82 -48.06%
Volatility(VIX) 18.10 -2.43%
ISE Sentiment 113.0 +.89%

Futures Spot Prices
Crude Oil 76.08 +3.43%
Reformulated Gasoline 209.10 +2.11%
Natural Gas 5.98 +2.11%
Heating Oil 206.80 +1.83%
Gold 675.10 -1.42%
Base Metals 260.25 -2.18%
Copper 357.0 -1.37%

Economy
10-year US Treasury Yield 4.90% -1 basis point
US Dollar 80.62 +.67%
CRB Index 319.13 +.39%

Leading Sectors
Biotech +1.68%
Energy +1.64%
Insurance +1.59%

Lagging Sectors
Coal -1.47%
Papers -1.61%
Gold -1.75%

Evening Review
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Afternoon Recommendations
Citigroup:
- Added (WLP) to Conviction Buy list.

Afternoon/Evening Headlines
Bloomberg:
- WSI Corp., a weather-forecasting company, reduced the number of hurricanes it’s predicting this year because of cooler-than-expected water temperatures in the North Atlantic.
- The Canadian dollar fell the most in almost a month amid a strengthening US dollar and weaker base metal prices.
- Apple Inc.(AAPL) said third-quarter profit soared 73% on record orders for its Macintosh notebook computers. The shares are +10 to $147.26 in after-hours trading.
- The Fed’s Beige Book said today that ‘capital spending increased,’ ‘manufacturing continued to expand,’ ‘employment increased in most regions,’ and the ‘commercial real estate market was generally more active.”
- Baidu.com(BIDU) said total revenues in the second quarter increased 109.4% to $52.7 million. The stock soared 18.2% in after-hours trading.
- Symantec Corp.(SYMC) reported profit and sales that beat analysts’ estimates after orders from consumers rose. The shares jumped 11.2% in extended trading.
- Akamai Technologies(AKAM) said second-quarter profit almost doubled as customers upgraded Web sites to carry more video. The shares declined 9% in after-hours trading after profit margins and new customers fell short of forecasts.

GlobeSt.com:
- GE Real Estate bought nine suburban Chicago properties from Blackstone Group LP for $1 billion, then immediately sold one of the buildings to Keystone Property Group.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Computer longs, I-Banking longs and Software longs. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was slightly negative today as the advance/decline line finished mildly lower, sector performance was mixed and volume was heavy. Measures of investor anxiety were above average into the close. Today's overall market action was neutral. The broker/dealers outperformed today, with Goldman Sachs (GS) finishing near session highs, which is a big positive. Overall trading, however, was sloppy throughout the day, with little conviction being displayed in the broad market. A number of sectors were down, as well. Cyclical shares were especially weak with the MS Cyclical Index dropping 0.73%. I will closely monitor the market’s reaction to earnings reports and economic data tomorrow morning before shifting market exposure. I still think the major averages are consolidating recent gains before another substantial surge higher later this quarter.