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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Federal Reserve Bank of Richmond President Jeffrey Lacker told Reuters he would support a cut in interest rates if financial turmoil led to a slowing in economic growth and inflation, while cautioning that outcome is “unclear.”
- Credit Suisse Group analyst Susan Roth Katzke lifted her estimates for Goldman Sachs Group’s(GS) third-quarter and full-year profit because she expects gains in fixed-income trading to more than offset losses on loans. She reiterated her Outperform rating and $250-$275 target.
- Asian stocks rose to a four-week high after Deutsche Bank said financial markets are stabilizing and a report showed global chip sales are climbing.
- Hedge funds in the US might leave the country if subjected to burdensome regulation, according to research by the Federal Reserve Bank of New York.
- Mattel Inc.(MAT) recalled about 848,000 Chinese-made Barbie and Fisher-Price products whose paint may contain excessive levels of lead, its third recall in the past five weeks.
- The yen fell for a fourth day against the Australian dollar as a rally in global stocks gave traders confidence to resume buying higher-yielding investments funded by loans in Japan.
- Australia’s central bank kept its benchmark interest rate unchanged at an 11-year high as Governor Glenn Stevens waits to see if an increase last month is enough to curb inflation.
- Palm Inc.(PALM) canceled plans to sell a portable computer as the company refocuses on mobile phones.

Wall Street Journal:
- Microsoft Corp.(MSFT) failed to make its Office software file format an international standard, losing a closely watched vote that reflects the software titan’s broader battles in Europe and around the world.

MarketWatch.com:
- Market-timing editors more bearish, which is a bullish sign.

Financial Times:
- Two competing efforts at creating benchmark futures contracts on Middle East crude oil have attracted limited investor interest, citing traders. Trading volume in the contracts fell in August and may not recover notably after the summer holiday period.

Late Buy/Sell Recommendations
Citigroup:
- Rated (DPZ) Buy, target $22.
- Reiterated Buy on (OI), target $48.
- Small-cap/Mid-cap banks derive 70%-80% of revenue from net interest income, and have low exposure to consumer lending and minimal exposure to non-traditional residential mortgage. With expected Fed rate cuts and wider spreads/fewer refis on CRE loans, plus higher losses in consumer lending, this should result in better credit quality and EPS growth than expected.
- Day 1 of the Tech Conference featured 3 electronics manufacturing services companies. Notebook demand appears strong, distribution inventory levels appear lean and EMS inventory levels are recently better aligned. Wednesday presenting companies include (PLXS), (SANM), (AVT), (FLEX), (CLS), (APH) and (ARW). Thursday presenting companies include (MOLX), (VSH) and (AVX).
- Upgraded (VCLK) to Buy, target $25.

CSFB:
- (ISIL) pre-announced upside to C3Q guidance. This is another data point supporting PC strength. While the company attributed the positive announcement to broad-based growth, we believe that strength is being primarily driven by the computing segment(25% of total sales), specifically new platform roll-outs at Intel(INTC). This is consistent with our view that the current robust PC market will provide a positive tailwind in 2H07 for semiconductor companies with exposure to the computing end market. In addition to (INTC) and (AMD) on the MPU side, analog companies within our coverage universe that will likewise benefit include (TXN), (MXIM), (ONNN), (FCS) and (MCRL).

Night Trading
Asian Indices are +.25% to +.50% on average.
S&P 500 futures -.30%.
NASDAQ 100 futures -.15%.

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Earnings of Note
Company/EPS Estimate
- (ABM)/.31
- (ADCT)/.23
- (CASY)/.47
- (DSW)/.30
- (JCG)/.29
- (MATK)/.18
- (SCMR)/.03

Upcoming Splits
- (MTW) 2-for-1
- (MDR) 2-for-1
- (NVDA) 3-for-2

Economic Releases
10:00 am EST
- Pending Home Sales for July are estimated to fall 2.0% versus a 5.0% gain in June.

2:00 pm EST
- The Fed’s Beige Book Report.

Other Potential Market Movers
- The Keefe Bruyette & Woods Insurance Conference, Thomas Weisel Healthcare Conference, CSFB Biotech Conference, Kaufman Brothers Investor Conference, Citigroup Tech Conference, Lehman Brothers Energy Conference, Goldman Sachs Global Retailing Conference, the Lehman Brothers Consumer Conference, weekly retail sales reports, weekly MBA mortgage applications report, Challenger Job Cuts, ADP Employment Change, BOE policy meeting, (DHR) analyst meeting, (USB) investor day, (JAVA) analyst meeting and (CSCO) analyst meeting could also impact trading today.

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

Stocks Finish Near Session Highs, Boosted by Tech, Financial and Energy Shares

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In Play

Stocks Sharply Higher into Final Hour on Diminishing Credit Fears, Bargain-Hunting, Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Internet longs, Biotech longs, Semi longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is very positive today as the advance/decline line is substantially higher, almost every sector is rising and volume is below average. My intraday gauge of investor angst is slightly above-average levels, despite today’s gains. The 3-month t-bill yield is up 74 basis points from last Thursday's lows in a sign that investor flight to safety is subsiding. The CEO of Deutsche Bank said today that there are signs the credit crisis is easing, and the Broker/Dealer Index is 3.1% higher and at session highs. I still believe this index just has to remain stable for the major averages to push higher. Growth stocks are once again outperforming value stocks and growth tech is especially strong. Kulicke & Soffa (KLIC) boosted 4Q guidance by 6.6%, citing additional orders for wire bonding products. Bank of America boosted its price target on Intel(INTC) to $31 after the SIA said chip sales rose 3.2% from June. As well, Piper upped their 12-month price target on Apple Inc. to $211, which I view as very reasonable. The analyst said iPhones and iMacs are exceeding his sales estimates. I still think Apple will exceed $180 before year-end and the stock remains my second-largest long position behind Google Inc.(GOOG). As I said a few months ago, I still believe tech will continue to outperform the major averages over the intermediate term. According to TrimTabs, hedge funds saw $32 billion in outflows during the month of July, the most since 2000, and August is likely to see even more. Moreover, funds of fund saw 5% of their total assets leave the door. I continue to believe that the record explosion in short interest over the last year had mainly been a result of the massive infusion of capital into low/negative correlation U.S. stock strategies, such as market-neutral funds, that had marketed themselves as a safe alternative to other strategies and the market. However, market-neutral funds, as a whole, have performed poorly (in both up and down markets) for several years. Considering what has transpired over the last couple of months, I expect a significant portion of the capital fleeing these types of funds to find its way back into more positively correlated U.S. stock strategies over the coming months. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, diminishing credit fears, strength in the tech sector and bargain hunting.

Today's Headlines

Bloomberg:
- US investors are returning from summer vacation to the cheapest stock market in almost 12 years, and some of the biggest fund managers say they’re ready to load up on shares of technology, energy and industrial companies.
- Emulex Corp.(ELX) CEO said technology spending is unaffected by the subprime mortgage rout.
- Deutsche Bank AG CEO Ackerman said financial markets are stabilizing after central banks pumped more than $200 billion into the world’s money markets.
- Steve Forbes, CEO of Forbes, says “now is the time” to put money in US stocks.
- The yen fell against the US dollar on speculation gains in US stocks may encourage investors to borrow the Japanese currency to buy riskier assets.
- Copper is falling the most in two weeks on concern over construction spending and rising stockpiles.
- Toyota Motor(TM) passed Ford Motor(F) to become second in US sales of cars and light trucks this year through August.
- Apple’s(AAPL) iPhone became the best-selling advanced US mobile phone in its first full month of sales, research firm iSuppli said.
- Intel(INTC) rose to a seven-week high after Banc of America(BAC) and CSFB boosted their earnings estimates for the world’s biggest semiconductor maker on growing demand for personal computers and laptops.
- MetroPCS Communications offered to buy Leap Wireless Intl. for about $5.5 billion to expand in the fastest-growing part of the cell-phone market.

Wall Street Journal:
- Slew of Online Tools Let Consumers Create and Mange Their Digital Medical Records.
- Trading spreads on many of the newest exchange-traded funds have widened during recent market fluctuations.

Business Week:
- If Credit Markets Thaw, Recession Is Unlikely.

CNET News.com:
- Apple might start making enterprise-class iPhones or incorporate more enterprise-friendly features into existing models, a Gartner analyst has predicted.

CNNMoney.com:
- Investors sold $32 billion of hedge funds assets in the month of July, the largest outflow since 2000; August may be higher.

Times Online:
- The emergence of a patent filing has stoked speculation that Google(GOOG) is working on a mobile phone-based payments service dubbed “Gpay” that could be rolled out by the internet search giant with a new phone handset.