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Stocks Best Rally Since July

The S&P 500 logged its best one-day percentage gain in three months on Thursday after GDP data showed the economy expanded at an annual rate of 3.5% in the third quarter.

Investors took the results to mean the economy was emerging from recession and corporations were on track to profit in the days ahead.

Also, weakness in the dollar underpinned the rally with oil and other commodities making gains.

What must you know about this market?

The GDP number is backward looking, explains Tim Seymour. I don’t want to understate Thursday's market action but I’m not sure it underscores the bullish thesis. We should have seen investors saying, ‘with GDP like this the Fed is back in play’ and higher rates should have roiled the markets. It doesn’t make sense to me.

I don’t think the Fed will be that quick to the trigger, counsels CNBC Sr. Economic Reporter Steve Liesman. We won’t have 0% interest rates forever but I don’t, for a minute, expect that they will make any moves until the economy can handle it.

I’m with Tim, says Karen Finerman. The stock market had a huge run already due to anticipation of economic growth. As far as I’m concerned we’re still in need of a catalyst to take stocks higher going forward.

The stock market action seems to underscore just how nervous everyone is on the Street, adds Joe Terranova. It seems to me the Street is bearish and the shorts continued to get crushed.

What’s the trade?

I’m short the TLT and long the TBT, counsels Karen Finerman as a bet against the long-end of the curve.

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TOPPING THE TAPE: GLOBAL GROWTH NAMES SURGE

The GDP report triggered bullish sentiment on global growth names with investors bidding up shares of bulldozer maker Caterpillar and aluminum giant Alcoa , making them among the biggest gainers on the Dow.

What’s the trade?

As the government tries to reflate asset prices I think natural resources will be the beneficiary, explains Joe Terranova.

Vale in Brazil had a great day and I'd put it on the radar, says Tim Seymour.

In the space I like Alcoa , counsels Steve Grasso, but you have to have a long-term horizon.

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TOPPING THE TAPE: CONSUMER STOCKS HIGHER ON RECESSION-END HOPES

Consumer Discretionary stocks closed higher after Procter & Gamble and Colgate-Palmolive issued results that both surpassed Street expectations.

What’s the trade?

I like the space but if we get another buoyant tape it’s probably not the place to be, says Karen Finerman.

I’d be concerned to hold long positions in companies such as Kellogg and Kraft and other names that benefit from low commodities costs, muses Tim Seymour. I think their best moment is now.

It wouldn’t surprise me to see consumers start spending more, adds Joe Terranova. I think the space could be okay.

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TOPPING THE TAPE: NASDAQ BACK ON TOP

The Nasdaq also broke its losing streak after Symantec posted a quarterly profit that eclipsed Wall Street's forecasts and as a result several brokerages raised their price target on the stock.

Also, shares of Motorola surged after the company forecast a higher-than-expected profit for the current quarter, and on optimism that its new Droid phone may be a game changer in its bid to regain ground lost to Apple's Phone.

What’s the tech trade?

I'm watching unusual options action in Intel and AMD, explains OptionMonster Jon Najarian. Where does he see both stocks going? Watch the video and find out!

You can find out interview with Jon Najarian at the end of the Word on the Street segment.


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ANALYZE THIS: BREAKING DOWN THE GDP REPORT

Can growth in the gross domestic product, the broadest measure of the nation's economy, be sustained?

That depends on what caused the components of GDP — things like consumer spending and business investment — to move up or down, and whether the growth was heavily dependent on government programs that are going away.

The 3.5 percent GDP growth rate in the July-to-September quarter represented the first positive GDP growth after four straight quarters of declining GDP. It was the largest gain in two years. But the concern is that this growth will falter given the huge problems still facing households.

Our news partner the Associated Press put together an in-depth look at the key components of GDP, showing how much each one contributed or subtracted from growth in the third quarter, along with forecasts for how they will perform going forward.

We thought you’d be interested:

CONSUMER SPENDING

HOW MUCH IT GREW: 3.4 percent rate in third quarter, best showing since early 2007.

CONTRIBUTION TO OVERALL GDP: 2.36 percentage points of the 3.5 percent third-quarter growth in GDP came from consumer spending. Car sales alone represented 1 percentage point of total growth, reflecting the success of the government's Cash for Clunkers program.

PROSPECTS: This is the biggest question facing the fledgling recovery, given that consumer spending represents 70 percent of total economic activity. Can consumers keep spending with unemployment at a 26-year high of 9.8 percent and expected to keep rising until next summer?

Economists are split. Some think the end of the Cash for Clunkers program in late August and the waning impact of various one-time tax cuts and individual payments from the $787 billion stimulus program will send consumer spending back into negative territory. That would represent a big blow to prospects for recovery.

Other analysts believe there is enough momentum that consumer spending will keep growing in the months ahead, just not as rapidly as in the third quarter.

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PRIVATE INVESTMENT

HOW MUCH IT GREW: 11.5 percent rate in third quarter, after declining for seven consecutive quarters.

CONTRIBUTION TO OVERALL GDP: 1.22 percentage points of the 3.5 percent GDP growth came from investment, with nearly half that strength coming from a surge in residential construction, an area that had been plunging since 2006. Business spending on computers and other equipment showed gains but spending on commercial structures such as office buildings and shopping centers continued to decline.

PROSPECTS: Economists believe commercial real estate will continue to suffer, given high office vacancy rates and the difficulty developers are having getting new financing because of rising loan defaults on commercial mortgages. Housing is expected to keep rising, a forecast that is based in part on the expectation that Congress will extend and expand the current $8,000 tax credit for first-time home buyers, which is scheduled to expire on Nov. 30.

Another potentially good sign for economic growth: Businesses are expected to begin rebuilding inventories that have been drawn down sharply during the recession.

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TRADE

INCREASE IN DEFICIT: Widened by $17.9 billion in third quarter compared to second quarter.

CONTRIBUTION TO OVERALL GDP: Reduced GDP by 0.53 percentage points in third quarter.

PROSPECTS: Economists believe that trade, which had been one of the few areas of strength in the past year, will be basically neutral in the coming quarters as the growth in exports will be offset by gains in imports. The gains in exports, however, are expected to help certain industries.

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GOVERNMENT SPENDING

HOW MUCH IT GREW: 2.3 percent rate in third quarter, slowing from 6.3 percent growth rate in second quarter.

CONTRIBUTION TO OVERALL GDP: 0.48 percentage points of GDP growth in third quarter came from the increase in government spending.

PROSPECTS: All the strength in third-quarter government spending came from a 7.9 percent rise in spending at the federal level, reflecting in part the boost from the stimulus program. That offset a 1.1 percent drop in state and local spending, where budgets have been hard-hit by the recession. The expectation is that the stimulus program, which is helping states weather the recession, will keep government spending growing in coming quarters.



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Trader disclosure: On October 29th, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Seymour Owns (AAPL), (AA), (BAC), (BX), (EEM), (MYL), (INTC), (MSFT), (VALE); Seymour Is Short (FXI); Grasso Owns (AAPL), (ABK), (BA), (C), (COST), (PFE), (WMT), (FAZ); Terranova Owns (IBM), (QCOM), (GS); Finerman Owns (BAC), (PDE), (TGT), (WMT); Finerman's Firm Owns (PDE), (FLS), (RIG), (TBT), (YUM); Finerman's Firm Owns (BAC) Preferred; Finerman's Firm Is Short (IJR), (MDY), (SPY), (IWM), (USO), (UNG), (TLT); Jon Najarian Owns (INTC) Calls, Jon Najarian Owns (AMD) Calls

For Steve Grasso
Stuart Frankel Owns (MSFT)
Stuart Frankel Owns (PFE)
Stuart Franked Owns (SDS)




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