Mid-day Update

S&P 500 1,122.34 +.78%
NASDAQ 1,863.61 +1.04%

Leading Sectors
Disk Drives +2.89%
Homebuilders +2.71%
I-Banks +2.28%

Lagging Sectors
Energy -.37%
Restaurants -.45%
Oil Service -1.05%

Other
Crude Oil 42.93 -2.41%
Natural Gas 4.75 +1.60%
Gold 401.00 -.37%
Base Metals 106.80 +1.07%
U.S. Dollar 89.35 -.23%
10-Yr. T-note Yield 4.26% -.77%
VIX 14.24 +2.37%
Put/Call .90 -11.76%
NYSE Arms 1.04 +4.0%

Market Movers
NFLX +16.6% after Newsweek reported that it entered an agreement with TiVo to let customers download movies into TiVo's digital video recorders.
RIMM +4.47% after announcing plans to enable BlackBerry Connect on Symbian OS-based devices, such as the Nokia 9500 Communicator.
TZOO +14.2% on short-squeeze.
FLE +11.9% after beating 1Q earnings estimates but missing its sales forecast.
CEPH +4.6% after saying it received a subpoena from U.S. prosecutors in Philadelphia for documents relating to sales and marketing practices from 1998 to the present.
PXD -4.6% after lowering its 3Q production forecast after hurricanes Charley and Earl forced worker evacuations and the company shut output at a Gulf of Mexico field.
HOV +7.7% after beating 3Q forecast and raising 05 outlook.
*Homebuilders up across the board on HOV report and falling interest rates.

Economic Data
None of note.

Recommendations
Goldman Sachs reiterated Underperform on PYX, LVLT, VRSN and T. Goldman reiterated Outperform on AIG, ASN, FD, IGT, FS, HOT, FDC, CZN, UST and ALL. Citi SmithBarney reiterated Buy on GE, target $38. OSG raised to Overweight at JP Morgan. GMR raised to Overweight at JP Morgan. SNIC rated Overweight at JP Morgan. ATRS raised to raised to Outperform at CSFB, target $30. CSCO raised to Sector Outperform at CIBC, target $25.

Mid-day News
U.S. stocks are higher mid-day on optimism over falling energy prices, declining interest rates and pro-business political rhetoric. The U.S. Navy is proposing cuts in its shipbuilding program that may hurt the industry, as the Pentagon considers shifting the military's focus from preparing for large-scale warfare to building resources for guerrilla warfare, long-term peacekeeping and counter-terrorism efforts, the Washington Post reported. Denver billionaire Philip Anschutz hired Frederick Anderson and Ryan McKibben to help study potential acquisitions among U.S. weekly or daily newspapers, the Denver Post reported. Disney's ABC broadcast network is experimenting with "ABC News Now," a 24-hour news broadcast available on the Internet, mobile phones and digital tv, the AP reported. Several pharmaceutical companies are participating in a $3 million pilot project to test a system for tracking and identifying prescription drug battles using radio frequency identification devices, the Boston Herald reported. Frank Quattrone, who earned $120 million at the height of the stock market bubble as Credit Suisse First Boston's top investment banker for technology companies, may receive 21 months in prison, Bloomberg reported. Hurricane Ivan, the fifth Atlantic hurricane this year, was racing west toward Trinidad, Tobago and other Caribbean islands on a track that's expected to take it past Cuba to the edge of the Gulf of Mexico by the weekend, Bloomberg reported. More than 2.5 million Floridians are still without power as of 9am local time as a result of Hurricane Frances, according to Florida's Emergency Management Department. Crude oil futures in New York are falling after Hurricane Frances missed U.S. offshore production facilities in the Gulf of Mexico, Bloomberg reported.

BOTTOM LINE: The Portfolio is substantially higher mid-day as my security, gaming, telecom equipment and internet longs are rising. I have not traded and the Portfolio is 125% net long. The overall tone of the market is good today. Interest rates are falling, oil and gasoline prices are declining, the CRB is dropping and the VIX/Arms are rising, which are all positives for stocks. While the CRB briefly broke below its 200-day moving average a couple of times over the last few months, it appears headed for a more substantial technical breakdown. This would be a very positive development with respect to future inflation readings. Commodity prices have been the main source of exaggerated inflation fears. I expect U.S. stocks to rise modestly into the close.

Tuesday Watch

Earnings of Note
Company/Estimate
CEN/.19
UTIW/.44
NMG/B/.36
HOV/1.35

Splits
RIO 3-for-1
TCB 2-for-1
GILD 2-for-1

Economic Data
None of note.

Weekend Recommendations
Louis Rukeyser's Wall Street had guests that were positive on HAL, NE, MSFT, RIG, GS, LXK, DNR, MNT, ISCA, YDNT and DRCT. Wall St. Week w/Fortune had guests that were positive on EDMC, BAC, PFE and WAT. Barron's had positive columns on IGT, VSEA, SMMX, LF, IMAX and negative columns on CAKE and CDN. Goldman Sachs reiterated Outperform on UDR, EBAY, SYMC, MERQ and ASN. Goldman reiterated Underperform on PBG. Byte and Switch has a positive article on Storage Networking.

Weekend News
Bank of China, the country's second-biggest lender, may choose Citibank and JP Morgan Chase as its strategic investors ahead of an IPO to overseas investors, the 21st Century Business Herald reported. OPEC is pumping at near capacity and providing oil that exceeds oil market demand, the Qatari Oil Minister told al-Hayat. Izzat Ibrahim al-Duri, Iraq's second in command under former President Saddam Hussein, was captured by Iraqi defense officials, al-Arabiya reported. Netflix and TiVo plan to announce an agreement where customers can download Netflix movies onto TiVo recorders, Newsweek reported. China's annual demand for gold may triple after the country deregulates its market of the precious metal, China Daily said. Saddam Hussein and other leaders of his ousted regime will face trial within a matter of weeks, the AP said. The online gambling industry is growing rapidly, fueled by the popularity of televised poker tournaments, the Washington Post reported. 9 in 10 American workers find their job at least somewhat satisfying, according to an AP survey. U.S. tv networks such as CBS and NBC are working to increase product-placement advertising in shows to counter falling ratings and new technology that allows viewers to skip commercials, the NY Times reported. U.S. companies are ranked first in a global survey of corporate governance standards, beating Canada and the U.K. for the first time, the Financial Times reported. Afghanistan's presidential election campaign begins today in preparation for voting Oct. 9 when 17 candidates will challenge President Karzai in the country's first nationwide election, the BBC reported. President Bush leads Senator Kerry by 11 percentage points, receiving a 13 point bounce, according to a poll conducted after the Republican National Convention, Newsweek reported. Tradesports.com is now showing a 61% chance of Bush's re-election versus 49% during the Democratic Convention. Russian President Putin vowed to strengthen his security forces to combat terrorism, as the number of dead from the school siege increased to at least 323, almost half of them children, Bloomberg reported. Capital spending in Japan rose 10.7% from a year earlier, prompting economists to raise their estimates for growth in the world's second-largest economy, Bloomberg reported. Former President Clinton, in a 90-minute telephone call from his hospital bed, gave Senator Kerry advice on how to revive his campaign, the NY Times reported. Wal-Mart said September sales are rising 2% to 4% as consumers bought more food, health and beauty products last week, Bloomberg said. Former President Clinton is recovering after undergoing successful heart bypass surgery at a NY hospital, Bloomberg reported. Crude oil futures are falling in New York after tropical storm Frances passed east of the main U.S. oil and natural gas-producing region in the Gulf of Mexico, Bloomberg said. Intel President Otellini today will outline plans for computer chips due next year that simultaneously run tasks such as burning CDs and playing video games as he seeks to allay concerns about product delays, Bloomberg said. Allstate, Ace and other insurers face $3 billion to $6 billion in losses from Hurricane Frances, a fraction of earlier estimates, after the storm weakened as it crossed Florida, storm modelers said.

Late-Night Trading
Asian indices are mixed, -.50% to +.50% on average.
S&P 500 indicated +.28%.
NASDAQ indicated +.18%.

BOTTOM LINE: I expect U.S. stocks to open higher in the morning on diminishing domestic terrorism fears, falling energy prices, pro-business political rhetoric and short-covering. The Portfolio is 125% net long heading into tomorrow.

Chart of the Week

Rydex Cash Flow Ratio


Bottom Line: The above chart illustrates one measure of investor sentiment that is currently at levels normally preceding substantial rallies.

Weekly Outlook

There are a few important economic reports and some significant corporate earnings reports scheduled for release this week. Economic reports include Consumer Credit, Import Price Index, Initial Jobless Claims, Continuing Claims, Wholesale Inventories, Producer Price Index and Trade Balance. The Producer Price Index has market-moving potential.

Neiman Marcus Group(NMG/A), Comverse Technology(CMVT), CBRL Group(CBRL), National Semiconductor(NSM), Quiksilver(ZQK), Take-Two Interactive(TTWO) and Hovnanian(HOV) are some of the more important companies that release quarterly earnings this week. There are also a number of other events that have market-moving potential. The Lehman Brothers Energy Conference, Citi SmithBarney Tech Conference, Greenspan's testimony on the economy to the House Budget Panel, Prudential Consumer Conference, Thomas Weisel Healthcare Conference, CSFB Software Conference, Goldman Sachs Retail Conference, August Chain Store Comp Sales, Fed's Yellen speech, Fed's McTeer speech and the Raymond James Small Cap Investor's Forum could also impact trading this week.

Bottom Line: I expect U.S. stocks to finish the week higher on heavier volume as traders and investors return from vacation and boost shares on optimism over diminishing terrorism fears, pro-business political rhetoric, falling energy prices and economic data showing stabilizing sustainable growth. More nimble investors should begin building long positions over the next couple of weeks in semi/semi-equip. stocks as I believe these companies will outperform substantially during the fourth quarter. My short-term trading indicators are still giving Buy signals and the Portfolio is 125% net long heading into the week.

Market Week in Review

S&P 500 1,113.63 +.53%

Click here for the Weekly Wrap by Briefing.com.

Bottom Line: Overall, last week's market action was mixed. The S&P 500 gained for a fourth consecutive week, its longest winning streak since January, helping the benchmark erase its loss for the year. Most sectors registered gains outside of technology. Volume was 27% below this year's average as many investors and traders were on vacation. The semiconductor index, now down 36.2% from its January highs, made a new low for the year as Intel's gross margins and earnings guidance disappointed. Crude oil prices reversed on Thursday and Natural Gas prices continue to plunge. Base Metal prices are also on the verge of a technical breakdown. Notwithstanding the drops in some of the underlying commodities, commodity-related stocks led the market. Measures of investor anxiety were mixed last week, however most remained at relatively low levels. One measure of investor sentiment that stands out on the bullish side is the Rydex Cash Flow Ratio which is at levels that normally precede sharp rallies.

Economic Week in Review

ECRI Weekly Leading Index 131.10 -.23%

Personal Income for July rose .1% versus estimates of a .5% rise and a .2% increase in June. Personal Spending for July rose .8% versus estimates of a .7% increase and an upwardly revised .2% decline in June. The PCE Core Index rose 1.5% year-over-year versus estimates of a 1.5% increase and a prior estimate of 1.5%. "With the upward revisions there really wasn't any significant slowing in spending over the last couple of months," said Michael Englund at Action Economics. "We are going to see some pretty solid spending numbers." Englund is forecasting a 3% to 3.5% annualized increase in spending this quarter, Bloomberg reported. Wages and supplements to salaries increased 5.3% at an annual rate in the second quarter, up from 5.2% in the first three months of the year, Bloomberg said. Incomes in July were restrained by a decline in government transfer receipts because of a reduction in the federal matching rate of Medicaid reimbursements. Those payments had been boosted by last year's tax cuts, Bloomberg reported.

The Chicago Purchasing Manager Index for August fell to 57.3 versus estimates of 60.0 and a reading of 64.7 in July. "After growing briskly earlier in the year, manufacturing activity has slowed recently but was still expanding solidly," said Steven Wood, chief economist at Insight Economics. The Chicago purchasers' employment index rose to 51.1 from 45.6 in July, Bloomberg reported. The group's index of prices paid for raw materials surged to 86.6 from 77.6 in July, Bloomberg said.

Consumer Confidence for August fell to 98.2 versus estimates of 103.5 and a reading of 105.7 in July. Consumer confidence in the U.S. economy fell from a 2-year high as job growth slowed and oil prices reached a record, Bloomberg said. "The August reading still is high," the Conference Board's Smith said. "Peoples' assessment of the job situation is August is still a lot better than it was in April or May," said Stephen Stanley, chief economist at RBS Greenwich Capital Markets. Moreover, the survey was completed Aug. 24, before the recent decline in oil prices, Bloomberg reported. Retail gasoline prices have averaged $1.92 a gallon this month, down from $1.95 in July, according to figures from the U.S. Energy Department.

Construction Spending for July rose .4% to a record annual rate of $997.2 billion versus estimates of .4% and 0.0% in June. The rise was the fifth in six months, Bloomberg said. More favorable weather conditions, increased transportation expenditures and lower mortgage rates contributed to the increase in July, Bloomberg reported. "Interest rates are low, inflation is relatively low, the economy is growing at a healthy clip and we've had highly accommodative fiscal and monetary policies for the past three years – all of which adds up to solid growth within the construction industry," said Michael Englund.

ISM Manufacturing for August fell to 59.0 versus estimates of 60.0 and a reading of 62.0 in July. ISM Prices Paid for August rose to 81.5 versus estimates of 79.0 and a reading of 77.0 in July. The manufacturing index has shown expansion, marked by readings higher than 50, since June 2003, Bloomberg said. "The factory sector is just cooling from super strong to solid," said James O'Sullivan, a senior economist at UBS Securities.

Total Vehicle Sales for August were 16.6 million versus estimates of 16.8 million and 17.3 million in July. Domestic Vehicle Sales for August were 13.5 million versus estimates of 13.6 million and 14.1 million in July. Fuel prices have prospective buyers "evaluating whether they should move down to a car or a smaller SUV and that takes time," Global Insight forecaster Rebecca Lindland said. Automakers increased the amount they spent on incentives last month to $4,203 from $4,027 in July and almost unchanged from August 2003, Bloomberg reported.

Factory Orders for July rose 1.3% versus estimates of a 1.1% gain and an upwardly revised 1.2% increase in June. The increase was the most in four months as orders increased from commercial aircraft, appliances and business equipment, Bloomberg said. Rising profits and demand are giving companies the cash to replace aging equipment. Moreover, unfilled orders accelerated in July, suggesting production will pick up and boost the economy in the next few months, Bloomberg reported. "The strong performance of orders, shipments and backlogs indicates that the industrial sector is moving forward and concerns about the economy's soft spot may have been overstated," said Lynn Reaser, chief economist at Banc of America Capital Management.

The Unemployment rate for August fell to 5.4% versus estimates of 5.5% and 5.5% in July. Average Hourly Earnings rose .3% in August versus estimates of a .2% increase and an upwardly revised .4% gain in July. The Change in Non-farm Payrolls for August was 144,000 versus estimates of 150,000 and an upwardly revised increase of 73K in July. The Change in Manufacturing Payrolls for August was 22,000 versus estimates of 15,000 and 6,000 in July. The unemployment rate is now at its lowest level since October 2001 and below the average of the 1970's, 1980's and 1990's, Bloomberg reported. "It's a very reassuring report – one that indicates the economy is doing better in the third quarter than it did in the second," said Lyle Gramley, a former Fed governor that is now an adviser at Schwab Soundview. The economy has now added 1.4 million jobs this year, Bloomberg reported. Business has "been very consistent with a recovering economy, and we don't see any sign that things are slowing down at all," said William Zollars, CEO of Yellow Roadway, the biggest U.S. trucking company. As well, CEOs are more optimistic about the economy than they have been for two years, anticipating greater sales and hiring through the rest of this year and into 2005, according to a recently released survey by the Business Roundtable. 89% of executives polled predicted sales would rise over the next six months and 40% expected payrolls to increase, Bloomberg said.

ISM Non-Manufacturing for August fell to 58.2 versus estimates of 62.0 and a reading of 64.8 in July. However, a measure of employment rose, while the gauge of price increases fell, Bloomberg reported. "I think you have to say from our numbers this month, the soft patch was still with us in August," Ralph Kauffman, chairman of the non-manufacturing committee at the institute said. "People are going back to work and they're buying office supplies," Ron Sargent, president and CEO of Staples said. "We're seeing good momentum in every single part of the business. We're pretty upbeat and bullish about the economy in the second half of the year."

Bottom Line: Overall, last week's economic data were mixed. The bounce-back in employment growth is a very good sign. Several million jobs were likely created during the economic bubble in the later part of the 90's by hyped-up companies with flawed or fraudulent business models. While current employment growth is mild by mania standards, it is nonetheless solid and created by profitable companies with sustainable business models using much less "creative" accounting. Moreover, the unemployment rate is low by historical measures, notwithstanding the media's attempts to paint a negative picture of the job market. As well, multiple surveys point to continuing improvement in the labor market throughout the year. This will boost incomes which will result in increased confidence and sustain spending. The recent plunge in natural gas prices(-31.3%) and declines in gasoline(-10.3%) and oil prices(-10.1%) should also boost confidence and increase spending. The PCE Core Index, Greenspan's favorite inflation gauge, remained unchanged from the prior month and should decelerate in the future with declining commodity prices. As well, long-term interest rates, the best gauge of inflationary fears, remain very low by historic standards. Construction spending bounced back sharply in July after record setting bad weather in June for most of the country. Hurricanes Charley and Frances will result in strong construction spending throughout the remainder of the year. While the ISM readings on manufacturing and services continue to show deceleration from record-setting levels, I view this as temporary and expect them to follow factory activity and re-accelerate in the fourth quarter. I continue to expect energy prices to fall through year-end as terrorism fears diminish and demand slows from Asia as a result of decelerating Chinese economic growth. Furthermore, I continue to expect a sharp acceleration in U.S. economic growth during the fourth quarter. Diminishing terrorism fears, an end to the extreme negativity surrounding the U.S. election, better weather, companies purchasing equipment before tax incentives expire at year-end, lower energy prices, rebuilding in Florida and lower interest rates should boost economic growth to around 5% during the fourth quarter. This will likely result in a very large number of corporate earnings surprises as companies beat recently lowered estimates.