Manufacturing Improving, Inflation Decelerating, Sentiment Rising

- Empire Manufacturing for July rose to 23.9 versus estimates of 10.0 and a reading of 10.5 in June.
- The Producer Price Index for June was unchanged versus estimates of a .4% increase and a .6% fall in May.
- The PPI Ex Food & Energy for June fell .1% versus estimates of a .1% rise and a .1% gain in May.
- Industrial Production for June rose .9% versus estimates of a .4% increase and a .3% gain in May.
- Capacity Utilization for June rose to 80.0% versus estimates of 79.6% increase and 79.4% in May.
- Preliminary Univ. of Mich. Consumer Confidence for July rose to 96.5 versus estimates of 95.0 and a reading of 96.0 in June.

BOTTOM LINE: Empire Manufacturing unexpectedly rose in July to its highest level this year as orders picked up and inventories shrank. The optimism component of the index for the next 6 months rose to 47 from 34 in June. The current orders index rose to 19.2, the highest since January. The measure of current shipments increased to 20.9 from 1 in June. The gauge of prices paid for materials fell to 21.6 in July, the lowest since December 2003. The index of expected prices paid six months from now fell to 28.4 from 44.4. Finally, the index of hiring expectations over the next six months rose to 23.9 this month from 14.7 in June.

US producer prices were unchanged in June, pulled lower by discounts at GM, as well as cheaper food and computers. Excluding food & energy, core raw materials prices fell 4.3% from last year, the most since May 2004. Food prices fell 1.1%, the largest drop since July 2004. Computer prices fell .8% after declining 4.8% last month.

US industrial production rose twice as much as expected last month, the most since Feb. 2004. Capacity Utilization rose to the best level since December 2000. Automakers resumed production after scaling back earlier this year to trim their inventories.

US consumer sentiment unexpectedly rose in July to the highest level this year led by stable employment prospects and rising home values. Consumers have become accustomed to rising gasoline prices, which reached a record last week. The expectations index, based on optimism about the next one to five years, increased to 86.6, the highest since December. The fact that consumer sentiment rose even with the London bombings, record gas prices and hurricanes in Florida bodes well for future readings.

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Friday Watch

Late-Night Headlines
Bloomberg:
- Crude oil is rising for the first day in three in NY on concern Hurricane Emily will disrupt oil production in the US Gulf of Mexico.
- Cnooc failed to persuade Unocal directors to accept a revised takeover bid because the Chinese company didn't raise the amount of cash shareholders would get from the $18.5 billion offer.
- Samsung posted a third straight quarterly profit drop as semiconductor and flat-panel display prices fell. The company expects an LCD industry glut to end this quarter and shipments of mobile phones to rise.

Wall Street Journal:
- Hewlett-Packard Co. may announce plans to restructure the printer and computer maker next week.

Financial Times:
- The US expects China to revalue its currency in August, ahead of a visit to Washington by Chinese President Hu Jintao.

Commercial Times:
- Taiwan Semiconductor Manufacturing expects third-quarter chip shipments to grow about 29% from the second quarter.

Economic Times:
- Indian car manufacturers may cut production because of sluggish sales since May.

Late Buy/Sell Recommendations
Goldman Sachs:
- None of note

Business Week:
- Shares of Merck(MRK) are an attractive buy, citing analysts.
- Spectrum Pharmaceuticals'(SSPI) shares will likely rise because the unprofitable biotech company is expected to sign a deal with a large drugmaker to market Satraplatin.

Night Trading
Asian Indices are unch. to +.25% on average.
S&P 500 indicated -.14%.
NASDAQ 100 indicated -.09%.

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ASPT/.10
FDC/.57
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Economic Releases
8:30 am EST
- Empire Manufacturing for July is estimated to fall to 10.0 versus a reading of 11.7 in June.
- The Producer Price Index for June is estimated to rise .4% versus a .6% decline in May.
- The PPI Ex Food & Energy for June is estimated to rise .1% versus a .1% increase in May.
- Business Inventories for May are estimated to rise .2% versus a .3% increase in April.

9:15 am EST
- Industrial Production for June is estimated to rise .4% versus a .4% gain in May.
- Capacity Utilization for June is estimated to rise to 79.6% versus 79.4% in May.

9:45 am EST
- Preliminary Univ. of Mich. Consumer Confidence for July is estimated to fall to 95.0 from 96.0 in June.

BOTTOM LINE: Asian indices are mostly higher, led by exporters in the region. I expect US equities to open modestly lower and rise later in the day. The Portfolio is 100% net long heading into the day.

Stocks Close Modestly Higher on Good Economic Data and Decline in Oil

Indices
S&P 500 1,226.50 +.26%
DJIA 10,628.89 +.68%
NASDAQ 2,152.82 +.41%
Russell 2000 663.02 -.69%
DJ Wilshire 5000 12,214.20 +.09%
S&P Barra Growth 586.99 +.36%
S&P Barra Value 635.21 +.17%
Morgan Stanley Consumer 582.50 +.55%
Morgan Stanley Cyclical 741.30 +.41%
Morgan Stanley Technology 500.52 +.41%
Transports 3,661.90 +1.45%
Utilities 392.68 -1.06%
Put/Call .70 -10.26%
NYSE Arms .70 -1.61%
Volatility(VIX) 10.81 -.28%
ISE Sentiment 139.00 -10.32%
US Dollar 89.46 +.24%
CRB 309.11 -.78%

Futures Spot Prices
Crude Oil 58.16 +.61%
Unleaded Gasoline 169.60 +.65%
Natural Gas 7.92 +1.03%
Heating Oil 166.80 +.67%
Gold 420.40 +.05%
Base Metals 123.55 +.64%
Copper 154.75 +.03%
10-year US Treasury Yield 4.17 +.47%

Leading Sectors
Biotech +1.53%
Semis +1.26%
Computer Hardware +.75%

Lagging Sectors
Energy -2.35%
Gold & Silver -2.47%
Oil Service -2.56%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Underperform on TRB.

Afternoon/Evening Headlines
Bloomberg:
- US aviation regulators told lawmakers today that restrictions on mobile phone use on aircraft will remain in place even if the Federal Communications Commission lifts its ban on the devices.
- Support for suicide bombings has fallen in five mainly Muslim countries during the past two years, according to a survey carried out before Britons died last week in the first such attacks on their soil.

Financial Times:
- China is prepared to use nuclear weapons against the US if it is attacked during a confrontation over Taiwan, citing Zhu Chenghu, a military official.
- Procter & Gamble’s $57 billion takeover of Gillette may get European approval soon.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Internet and Medical longs and Energy-related shorts. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was slightly negative today as the advance/decline line finished modestly lower, sector performance was mixed and volume was above average. Measures of investor anxiety were mostly higher into the close. Overall, today’s market action was neutral. Worldwide copper usage fell 4.4% in the four months ended April from a year earlier with declines in demand from Europe, the U.S. and Japan, the International Copper Study Group said today. The U.S. showed a 12% drop in demand. This is amazing considering the booming U.S. housing market. As well, Chinese demand slowed to 3.1% from 6.4% in 1Q. Copper is holding at relatively high price levels due to supply issues. I still plan to short Phelps Dodge (PD) again over the coming weeks.

Stocks Modestly Higher Mid-day as Oil Falls and Rates Rise

Indices
S&P 500 1,226.00 +.22%
DJIA 10,626.08 +.65%
NASDAQ 2,152.37 +.38%
Russell 2000 663.57 -.61%
DJ Wilshire 5000 12,211.19 +.06%
S&P Barra Growth 586.77 +.33%
S&P Barra Value 635.04 +.14%
Morgan Stanley Consumer 582.26 +.51%
Morgan Stanley Cyclical 740.52 +.30%
Morgan Stanley Technology 501.60 +.63%
Transports 3,646.37 +1.02%
Utilities 391.04 -1.47%
Put/Call .67 -14.10%
NYSE Arms .67 -6.43%
Volatility(VIX) 11.02 +1.66%
ISE Sentiment 163.00 +5.16%
US Dollar 89.44 +.21%
CRB 308.39 -1.01%

Futures Spot Prices
Crude Oil 57.70 -3.85%
Unleaded Gasoline 168.50 -3.94%
Natural Gas 7.80 -1.20%
Heating Oil 165.60 -3.66%
Gold 420.20 -1.04%
Base Metals 123.55 +.64%
Copper 154.70 -.16%
10-year US Treasury Yield 4.19% +.85%

Leading Sectors
Semis +1.17%
Computer Hardware +1.16%
Biotech%

Lagging Sectors
Oil Tankers -2.09%
Energy -2.49%
Oil Service -2.60%

BOTTOM LINE: The Portfolio is slightly higher mid-day on gains in my Internet and Medical longs and Energy-related shorts. I added to some existing Energy shorts this morning and to my AUO, PMCS and NOK longs, thus leaving the Portfolio 100% net long. The tone of the market is modestly negative as the advance/decline line is modestly lower, sector performance is mostly positive and volume is slightly above average. Measures of investor anxiety are mostly lower. Today’s overall market action is neutral considering recent gains, positive economic reports and the fall in energy prices. This report from the China Securities Journal via China Daily says China has entered a "mild" slowdown that could last one to two years. They expect 8.2% growth in the fourth quarter, down from a 9.5% rate in the fourth quarter of last year. They said the property market would slow significantly and that there were no assurances that a soft landing in the sector could be achieved. Finally, they said export growth would decelerate significantly. This is why I think it is so absurd that the IEA is forecasting Chinese crude demand growth to rebound to 9.4% during the second half of the year when it fell 1% in the second quarter with 9%+ GDP growth. I expect US stocks to trade mixed-to-higher into the close on short-covering and lower energy prices.