THEME: MARKET TOP

"My guess is that there will be some weakness in those stocks toward the end of the year. You are starting to see it now," Mr. McLaughlin (Terence McLaughlin, president and chief investment officer at New York money-management firm Lighthouse Growth Advisors) says. "It just amazes me that people have just clamored back into these names with no eye toward valuation," given the pain people suffered during the long bear market. "We are adding a bit to health-care and more recently, in the last six or eight weeks, adding to industrial-type names" such as 3M and United Parcel Service, he says.

"The prevailing sentiment is that the market will do better between now and year-end," says Andy Brooks, head of stock trading at Baltimore mutual-fund group T. Rowe Price. "I am looking at it that way. It is sort of that the economy is improving and that's all you need to know."

Note that ROTATION is always the beginning of a top. Its like Mario jumping from rock to rock, trying to avoid sinking into the flames...

MEME: PAUSE THAT REFRESHES

Sectors that didn't do as well during the market's eight-month run up, such as pharmaceuticals, are gathering steam as investors rotate money out of good performers, such as technology issues, said Alfred Goldman, chief market strategist for A.G. Edwards & Sons in St. Louis.

"This is very normal market action," Mr. Goldman said. "A pause to refresh."

Uncle Al is always on cue with this one. Not a reassuring sign as Uncle Al rode the bear all the way to the bottom.

MEME: SANTA CLAUS RALLY
1st appearance this year! From WSJ,

Should they sell, and lock in their big gains? Or should they hang on, betting on a Yuletide rally? (November, by the way, usually is a pretty good month, too.)
"The market is nervous," says Tim Heekin, director of trading at San Francisco brokerage firm Thomas Weisel Partners. "People are reluctant to make any big sales," for fear of missing out, he says, but "they want to preserve their gains. If there is a whiff of anything negative coming out, we could have a real selloff."

MEME: DON'T FIGHT THE FED
We have seen this one since 2001...Igor is a Gen-X bear to bull convert.
From Smartmoney, IGOR GREENWALD

ALL THE GREED, hope, hype, pain, fear and loathing of the stock market's ups and downs over the last six years can be plausibly reduced to a single causal relationship.
The rule since 1998: Stocks speed after the Federal Reserve pushes the gas pedal, and skid once it applies the brakes.
So it's notable that the Fed all but put its feet up on the dashboard in recent days to underscore its deep reluctance to slow down this gravy train any time soon.

THEME: CAPITULATION(?) & TECH
I have noted the overriding skepticism that fund managers, and in particular growth fund managers, have displayed towards tech. Now the Mother of All Funds is admitting that neglecting tech, and emphasizing financials and pharmaceuticals have hurt them. I think implicit in this admission is that steps have been made to correct the underperformance, i.e., Fidelity has capitulated and has finally bought tech. But have they dumped big pharma???

Fidelity Investments' flagship Magellan stock fund lagged the broad market in recent months and cost the biggest U.S. fund company millions of dollars in management fees, according to data released on Monday.

Robert Stansky, who has headed the biggest actively managed U.S. stock fund since 1996, said the fund trailed Standard & Poor's 500 index (SPX) recently and blamed bets he made on technology, financial and health care stocks.

"The fund's underweighting in the (technology) sector relative to the S&P 500 -- particularly in large tech bellwethers such as Intel and Cisco -- was the single biggest reason why it trailed the index during the six-month period," Stansky said on Fidelity's Web site.

The company's semiannual report, which was released alongside Stansky's remarks, showed Magellan's underperformance cost Fidelity $20.4 million in the first half of its fiscal year, which ends on March 31. In the same period a year ago, the fund's underperformance cost Fidelity only $388,000.

Stansky rarely speaks publicly about his portfolio and his comments offer a glimpse into how he invests the fund's $65 billion in assets under management.

He said major pharmaceutical companies like Pfizer, Merck and Schering-Plough underperformed the market and his decision to overweight financial stocks was "negated" by stocks that did not do well.

"He was in a defensive mode and underestimated investors' new appetite for risk," John Bonnanzio, editor of independent newsletter Fidelity Insight, said of Stansky.

Looking ahead, Stansky said he may consider making some adjustments to his holdings, particularly now that technology stocks have consistently been among the year's top performers.
He said a key sign will be the willingness among company executives to boost spending.

THEME: CHINA/COMMODITIES
From the FT

China effect convulses commodity markets
By Kate Burgess
Published: November 14 2003 13:53 | Last Updated: November 14 2003 13:53

Buying crazes are endemic to investment markets. This year it is commodities, which have been hailed as a newly attractive asset class driven by the growing power of China.

The traditional arguments for buying commodities are that prices of raw materials don't move in line with equity markets. Some advisers tout the virtues of commodities as real assets during times of geopolitical and economic uncertainty.

Others latch onto signs of recovery in the US, the world's biggest economy, citing the attraction of raw materials during the early phases of an economic cycle when global growth, demand for goods and production pick up.

A few also cling to the argument that commodities are a hedge against inflation. The theory is that the prices of raw materials rise when price indices rise. But the correlation has broken down over the past 20 years.

However, in recent months all the theories have been overshadowed by what analysts are calling the China effect. "Chinese demand for commodities is revolutionising global commodity markets," says Merrill Lynch Investment Managers. "China has already overtaken the USA as the largest consumer of iron ore, steel and copper."

In the first half of this year, iron ore imports to China rose by 45 per cent and copper imports by 40 per cent. This voracious appetite has pushed the copper price to a six-year high and nickel to a 14-year high.

China - the world's sixth largest economy, according to Merrill Lynch - now accounts of between a fifth and a third of the world's consumption of alumina, iron ore, zinc, copper and stainless steel.

"We've rarely seen this combination of cyclical recovery in the US and structural change in China," says Tom Elliott, JP Morgan Fleming's strategist. "The largest user of commodities is very rarely the fastest growing user as well; it is quite remarkable. It is difficult to see an end to the run".

Some of the materials imported are turned into finished goods for export. China exports much of the iron ore it imports once it has processed it into steel, for example. Similarly, China's alumina imports are turned into aluminium and exported.

China's exports are exceeded only by those from three nations: the US, Germany and Japan. If current growth rates are sustained they will exceed those of the US in less than a decade.

But the case for continuing growth rests heavily on the Chinese authorities' ambitious plans to develop the country's infrastructure and on hopes that the country's 1.3bn people are becoming avid consumers, clamouring for sophisticated goods.

"Already Volkswagen sells more vehicles in China than it does in Germany, while China consumes the same amount of global commodities as the US," says JPMorganFleming. "By value, demand in 2003 for non-oil commodity imports will be up to approximately $7bn compared with less than $2m in 1996. Growth is phenomenal and the impact on the world should not be underestimated."

Eric Lonergan, a strategist at Cazenove, points out that China's share of world copper consumption has risen from less than 5 per cent in 1990 to 20 per cent in 2003. This demand is growing in a similar fashion to those of Japan in the 1960s and early 1970s, an era that ended with a surge in commodity prices.

Lonergan believes this surge will continue, coinciding as it does with the end of a 20-year bear market in commodity prices, during which producers have clamped down on production and severe supply constraints have emerged.

Capital spending by mining companies has barely grown, in real terms, over the past 20 years, explains Lonergan. China may be pouring money into expanding production and capacity, but globally the rising costs of bringing on new capacity in many metal markets, as a result of environmental pressure and the long lead times between discovery and production, will keep the lid on supply.

The bull case assumes that China's pace of growth will be unchecked. Yet there are signs of unease in China itself. There are mounting concerns about what some see as runaway imports and an overheating economy.

Beijing has already made clear, say old China hands, that it wants to see a moderation in the growth of China's property, iron and steel, cement, aluminium and vehicle sectors by tightening bank reserve requirements to limit credit.

Even the bulls acknowledge that the greatest danger to a continued boom in growth and prices would be if tougher measures to put the breaks on growth coincide with too much investment in production capacity in China. If, as some suggest, Chinese producers have built up large inventories of metal, prices could tumble.

Some also admit to concerns about China's creaking banking sector. Banks are already burdened with a legacy of non-performing loans. According to official estimates they make up 23 per cent of bank loans. Unofficial estimates put the figure at nearer 50 per cent of banking assets.

Cazenove argues that making too much of China's banking problems misses the point. "China is unique in development history by growing at a sustained rate of close to 8 per cent and simultaneously accumulating net external assets," says Lonergan.

Previous growth miracles in the developing world, and in Asia other than Japan in the 1980s and 1990s, have been financed by large external borrowing. "China, by contrast, has no balance of payments, inflation or - in our view - banking sector problems," adds Lonergan.

Lonergan is more concerned by the amount of money flowing into commodities. He points out that annual production of gold, platinum, copper and aluminium is worth just 1.15 per cent of US pension assets. Even a tiny shift in asset allocation would have a huge impact on the supply/demand equation for metals. "It makes the sector very volatile," he says.

Instability represents the greatest danger for private investors. There may be merits in putting a few per cent of big portfolios into commodities as a diversifier, but only if investors can withstand shocks.

This time the risks are two-fold because the reason for buying commodities is as much an emerging market story as a commodities story.

THEME: INFLATION

"The things that make up the bulk of consumer expenditures for most U.S. households -- all of them seem to be moving up significantly," said Carlos Asilis, portfolio manager with the hedge fund Vega Asset Management.

So what's keeping the reading on inflation low? Asilis thinks one big piece of the picture is housing. In computing the CPI, the Bureau of Labor Statistics assigns a 22.2 percent weighting -- the most of any item -- to something called "owners' equivalent rent of primary residence." Basically, it's an estimate of what homeowners might pay in rent if they rented their homes instead of owning them.

To calculate this, the BLS looks at actual rents, compares them to owned residences and then uses that to calculate housing costs.

The problem? The low-interest rate environment has meant that many people who might otherwise rent now own -- in fact, home ownership rates are at record highs. As a result, rents have come under pressure, and "owners' equivalent rent" has grown at just 2.1 percent over the past year -- less than the overall CPI and far lower than the costs for education, health care and so on.

You can catch the circularity here. Because the inflation reading is low, rates are low, which has upped home ownership, which has pressured rents, which has put a cap on "owners' equivalent rent," which has helped keep the inflation reading low. Etc.

Another big chunk -- 8.2 percent -- of the CPI is new and used motor vehicles. Over the past year vehicle prices have fallen 3.6 percent, thanks to tough competition. Part of that is due, again, to a kind interest-rate environment. Although zero-percent financing doesn't factor directly into the box score the way the BLS calculates inflation, it has brought the cost of buying down, prompting many consumers to trade in their almost-new car for a brand new one.

"What you're seeing is a glut of gently used vehicles, and that's putting pressure on all vehicle prices," Lehman Brothers economist Joe Abate said.

As I said before, CPI is a dubious number