Friday Watch

Late-Night Headlines
Bloomberg:
- The cost to protect investment-grade bonds from default fell as dealers started trading a new series of benchmark credit-default swap indexes that replace companies that have dropped below investment grade.
- The yen is falling against the 16 most-active currencies on speculation investors were resuming purchases of higher-yielding assets funded by loans in Japan.
- Microsoft Corp.(MSFT) co-founder Bill Gates is America’s richest individual for the 14^th consecutive year, followed by his friend Warren Buffett, according to Forbes magazine’s 400 Richest Americans list.
- Oracle Corp.(ORCL), the world’s largest software maker, posted a 25% jump in first-quarter profit, beating analysts’ estimates, after sales of new programs rose the most in 10 years.
- Nike Inc.(NKE), the world’s largest athletic-shoe maker, said first-quarter profit rose more than analysts anticipated on higher international sales and a tax gain, causing the shares to rise as much as 4.4%.

Wall Street Journal:
- As Oil Hits High, Mideast Buers Go on a Spree.

NY Times:
- Helped by Generics, Inflation of Drug Costs Slows.
- Viacom Chief’s Remark on Spielberg Stirs a Furor.

CNNMoney.com:
- Congress Is Urged To Limit Response To Mortgage Crisis.
- Bankers marketing the $5 billion loan for First Data Corp.’s(FDC) leveraged buyout have already found more than enough buyers for the deal, people familiar with the situation said Thursday.
- Google(GOOG) at $600 a share? Yes: here’s why.
- How Goldman Sachs defies gravity.

Forbes.com:
- Credit Easing Gives Bond Guarantors Bump.

Financial Times:
- Carlyle agreed on Thursday to sell a 7.5% stake in itself to an arm of Abu Dhabi’s government – the latest US private equity group to bring in a sovereign wealth fund as a big investor.
- A top fundraiser to presidential hopeful Hillary Clinton and other Democratic lawmakers was on Thursday charged with defrauding investors of more than $60 million and violating campaign finance rules.
- The US on Thursday signaled fresh steps to improve liquidity in credit markets and guard against future shocks to the global financial system.

Reuters:
- US mortgage lenders are cutting advertising budgets due to a global credit squeeze, but they are not likely to reduce Internet search marketing anytime soon, executives at search leader Google Inc.(GOOG) said on Thursday.

Guardian:
- Google Inc.(GOOG) is considering entering the UK wireless market after Ofcom, the telecommunications regulator, proposed retrieving more than a third of the 2G mobile phone spectrum used by Vodafone Group Plc and O2 Plc for 22 years to open it for new entrants.

China Daily:
- ZTgame, China’s third-largest online games provider, may sell shares in the US by the end of the year, citing the company’s financial adviser.

Late Buy/Sell Recommendations
Citigroup:
- We attended the Shop.org 2007 Annual Summit in Las Vegas. Attendance was strong, and we had an opportunity to interact with a broad range of suppliers and retailers. Based on the keynote presentations, and discussions with vendors, we found the following key themes & takeaways: 1) E-Commerce Expectations Remain Robust 2) Focus on Basics to Improve Conversion Rates 3) Industry Remains Competitive, More Promotions Expected and 4) No Sign of Consumer Weakness.

Morgan Stanley:
- Reiterated Overweight on (PCLN), target raised to $108.

Business Week:
- Apple Inc.(AAPL) may rise 50% in the next 12 months, citing an analyst. Shares of the maker of iPods and iPhones could reach $211, predicted Eugene Munster of Piper Jaffray.

Night Trading
Asian Indices are -.50% to +.25% on average.
S&P 500 futures -.01%.
NASDAQ 100 futures +.05%.

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Other Potential Market Movers
- The Fed’s Warsh speaking, Fed’s Plosser speaking, Fed’s Kohn speaking, Fed’s Mishkin speaking, (SYY) analyst meeting, (AGP) Investor Day, (POOL) Analyst Day and (KMT) Management Meeting could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by automaker 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 Slightly Lower on Healthy Profit-Taking After Recent Gains

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In Play

Stocks Mildly Lower into Final Hour on Healthy Consolidation of Recent Gains

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Internet longs, Semi longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is mildly negative today as the advance/decline line is lower, sector performance is mixed and volume is around average. Goldman Sachs (GS) blew away estimates by 40% and posted its second highest revenue in history. Bear Stearns (BSC) disappointed, but did say the "worst is likely behind us." The Goldman report is mind-boggling. Overall, so far, I would say that the broker reports are much better than feared and provide more evidence that, in the current U.S. negativity bubble, the worst case is almost always priced into stocks rather than the most likely scenario. The dollar-based three-month Libor rate is falling another 3 basis points and is now down 22 basis points in nine days, which is a big positive. The 10-year TIPS spread, which is a gauge of inflation expectations, is currently at 2.328%. This is down from 2.35% on Monday, before the Fed cut rates, and down from 2.5% as recently as June. Inflation expectations, as measured by this indicator, are well off the highs seen during March 2005 (at 2.78%) and May 2006 (at 2.74%). Gold hit its recent low on Aug. 16, the day the stock market hit its low as investor worries over credit market turmoil bringing down the global economy, specifically emerging markets, peaked. In my opinion, gold is much more correlated with perceptions of emerging market demand than inflation expectations. Every main gauge of inflation that I follow is below long-term average rates. I think the recent rise in the 10-year yield is more a function of investors taking out the recession that they were pricing in rather than a meaningful increase in inflation expectations. Based on market action during August, I am more convinced than ever that the secular trend of disinflation remains firmly in tact. I plan to add back to my long iShares Lehman 20+ Year Treasury Bond (TLT) position on any unexpected move in the 10-year yield back near 5%. One of the funniest things about the current excessively pessimistic backdrop is how quickly we move from worries over inflation to deflation back to inflation. I expect US stocks to trade mixed into the close from current levels as short-covering, bargain-hunting and less economic pessimism offsets higher oil prices and long-term rates.

Today's Headlines

Bloomberg:
- Former Fed chief Greenspan said the odds of the US economy slipping into recession have fallen and that home prices will probably fall less than 10%.
- Gold is rising again as the US dollar fell, economic worries subsided and investment funds increased speculation that inflation may accelerate.
- Crude oil is rising to a record in NY after the US said that production in the Gulf of Mexico was shut because of a storm threat. More than 360,000 barrels, or 28%, of daily oil production was idled, the US Minerals Management Service said.
- Fed Chairman Bernanke told lawmakers that the central bank is “actively working” to avoid a repeat of the subprime-mortgage rout.
- Goldman Sachs’(GS) Viniar Says Mortgage Market Is ‘Closer to the Bottom.’
- Warren Buffett’s Berkshire Hathaway sold PetroChina shares for a third time in three months after the stock gained sevenfold since the US billionaire first invested in China’s largest oil producer.
- Goldman Sachs(GS) reported the third-best profit in its 138-year history after betting against the mortgage bonds that roiled credit markets and left Bear Stearns(BSC) with its biggest earnings decline in more than a decade.

Wall Street Journal:
- US Democratic presidential candidate Hillary Clinton’s new health-care proposals echo her older plans in that they assume “Washington knows best,” said Mitt Romney.
- Clinton Campaign Vows To Check Contributions Solicited by Support.

NY Times:
- Decline in Retail Prices Offers Grace Note to Fed.

Arab News:
- A football match in Saudi Arabia was stopped after a 12-year-old girl was spotted attending the game. The girl was eventually asked to leave before the match resumed. Women are not allowed to attend football matches in Saudi Arabia.

Job Market Still Healthy, Leading Indicators Fall, Philly Fed Jumps

- Initial Jobless Claims fell to 311K versus estimates of 321K and 320K the prior week.

- Continuing Claims fell to 2544K versus estimates of 2575K and 2597K prior.

- Leading Indicators for August fell .6% versus estimates of a .4% decline and an upwardly revised .7% increase in July.

- Philly Fed for September rose to 10.9 versus estimates of 2.6 and 0.0 in August.

BOTTOM LINE: The number of US workers filing claims for jobless benefits unexpectedly fell last week, easing concern the labor market was softening, Bloomberg reported. The four-week moving-average of claims fell to 320,750 from 324,250 the prior week. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, fell to a low 1.9% from 2.0% the prior week. Claims have been resilient even after a jump in firings by mortgage lenders following the credit turmoil in August, according to economists. So far this year, jobless claims have averaged 318,000, just slightly higher than last year’s 313,000. I continue to believe the US job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

The index of leading US economic indicators fell in August by the most in six months reflecting lower confidence and a rise in jobless claims, Bloomberg reported. A .22 percentage point subtraction came from the Univ. of Mich. consumer sentiment index and a .19 percentage point subtraction came from the uptick in jobless claims. Money supply adjusted for inflation added .33 percentage points to the indicator. I expect leading indicators to bounce back next month on lower jobless claims, better sentiment and higher stock prices.

Manufacturing in the Philly region accelerated more than forecast this month as orders and sales improved, Bloomberg said. As well, new orders came in at 15.1 vs. 7.1 in August. The prices paid component rose to 23.1 from 15.4, but this is still well off May 2006 highs of 54.0. The future outlook component of the index fell to 35.7, down slightly from 36.2 in August. I continue to believe manufacturing will help boost economic growth over the intermediate-term as companies gain confidence in the sustainability of the current expansion and rebuild depleted inventories.