Thursday Watch

Late-Night Headlines
Bloomberg:
- The number of US broadband subscribers grew 34% last year to 38 million, the most of any country in the world, according to FCC Chairman Kevin J. Martin.
- Australia's government will consider sending more troops to Afghanistan, Prime Minister John Howard said.
- Oil is rising to another record of $61.62/bbl. in NY on speculation Hurricane Dennis may disrupt shipments along the US Gulf coast.
- Australian employers hired extra workers in June, unexpectedly cutting the jobless rate to the lowest in almost 29 years.
- The US dollar traded close to an 11-month high against the yen on expectations a US government report on Friday will show job growth more than doubled in June.

Wall Street Journal:
- China has started a new purchasing managers' index that is expected to become a leading economic barometer for the country. The index, which has data from January, shows a June reading of 51.7 points, representing a slide for the third consecutive month since March's 57.9. A reading above 50 indicates expansion in manufacturing, a reading below 50 a contraction.

Washington Post:
- CNOOC Ltd. Chairman and CEO Fu Chengyu said China's biggest offshore oil company may raise its $18.5 billion bid for Unocal Corp. to beat Chevron.

Financial Times:
- China does not meet the criteria to be considered a market economy, citing an interview with European Union Trade Commissioner Peter Mandelson.

Economic Times:
- Wipro Ltd., India's third-largest software maker, plans to buy for as much as $1 billion the information technology division of a US company after its split from the parent.

Harretz:
- The Hamas movement said its "lost faith" in Palestinian leader Mahmoud Abbas and may continue attacking Israel with mortars and rockets after the disengagement from Gaza is completed.

The Standard:
- China Mobile will seek to raise its share of non-voice services revenue to 30% from 15%.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on AMGN, DNA, GILD, AMLN, ARO, SBUX and IDIX.

Banc of America:
- Upgraded BLL to Buy.

Night Trading
Asian Indices are -.50% to +.25% on average.
S&P 500 indicated -.01%.
NASDAQ 100 indicated +.03%.

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Economic Releases
8:30 am EST:
- Initial Jobless Claims for last week are estimated to rise to 320K versus 310K the prior week.
- Continuing Claims are estimated to fall to 2582K versus 2600K prior.

BOTTOM LINE: Asian indices are mostly lower as rising energy prices spur further growth worries in the region. I expect US equities to open modestly lower on apprehension ahead of Hurricane Dennis and Friday's employment report. The Portfolio is 75% net long heading into the day.

Stocks Finish Lower as Energy Prices Rise

Indices
S&P 500 1,194.94 -.83%
DJIA 10,270.68 -.97%
NASDAQ 2,068.65 -.49%
Russell 2000 648.27 -.76%
DJ Wilshire 5000 11,915.84 -.76%
S&P Barra Growth 569.49 -.87%
S&P Barra Value 621.38 -.80%
Morgan Stanley Consumer 567.58 -.91%
Morgan Stanley Cyclical 716.66 -.57%
Morgan Stanley Technology 475.76 -.07%
Transports 3,521.21 -.38%
Utilities 383.17 -1.83%
Put/Call .96 +43.28%
NYSE Arms 1.51 +84.95%
Volatility(VIX) 12.27 +5.05%
ISE Sentiment 232.00 +87.10%
US Dollar 90.38 -.07%
CRB 313.32 +1.15%

Futures Spot Prices
Crude Oil 61.30 +.03%
Unleaded Gasoline 178.70 -.25%
Natural Gas 7.70 +.16%
Heating Oil 179.80 +.18%
Gold 424.80 +.07%
Base Metals 121.12 +1.88%
Copper 153.00 unch.
10-year US Treasury Yield 4.06 -.90%

Leading Sectors
HMOs +1.63%
Steel +1.25%
Semis +1.05%

Lagging Sectors
Oil Service -1.25%
Restaurants -1.55%
Energy -1.75%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Underperform on PVH.
- Rated DE Underperform.

Afternoon/Evening Headlines
Bloomberg:
- Yahoo! is hiring engineers and adding services to carve out a bigger piece of the expanding market for Internet-based calling.
- US 10-year Treasuries rose for the first day in three in NY on speculation yields that reached a two-week high failed to reflect expectations for tame inflation.
- President Bush selected former Senator Fred Thompson, a lawyer in real life and on tv, to advise the eventual nominee in the anticipated Senate confirmation fight to replace Justice Sandra Day O’Connor on the US Supreme Court.
- Crude oil surged to a record $61.35 a barrel in NY on speculation that Tropical Storm Dennis may disrupt shipments along the US Gulf coast.

Financial Times:
- The selection of London to host the 2012 Olympic Games will generate $3.5 billion for the UK’s tourism industry.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Internet and Homebuilding longs. I trimmed some existing longs in the afternoon, thus leaving the Portfolio 75% net long. The tone of the market was negative today as the advance/decline line finished at session lows, most sectors fell and volume was around average. Measures of investor anxiety were mostly higher into the close. Overall, today’s market action was modestly negative. Tech stocks outperformed throughout the day, finishing around breakeven. Stocks will likely remain under modest pressure until energy prices stabilize.

Stocks Mostly Lower Mid-day on Rising Energy Prices

S&P 500 1,200.45 -.38%
DJIA 10,3320.78 -.49%
NASDAQ 2,080.57 +.09%
Russell 2000 651.17 -.32%
DJ Wilshire 5000 11,967.10 -.33%
S&P Barra Growth 572.26 -.39%
S&P Barra Value 624.05 -.38%
Morgan Stanley Consumer 569.99 -.50%
Morgan Stanley Cyclical 719.99 -.10%
Morgan Stanley Technology 478.82 +.57%
Transports 3,536.11 +.04%
Utilities 386.69 -.93%
Put/Call 1.0 +49.25%
NYSE Arms 1.27 +56.15%
Volatility(VIX) 11.95 +2.31%
ISE Sentiment 222.00 +79.03%
US Dollar 90.34 -.11%
CRB 312.57 +.90%

Futures Spot Prices
Crude Oil 60.60 +1.69%
Unleaded Gasoline 176.80 +5.07%
Natural Gas 7.64 +2.21%
Heating Oil 178.20 +2.86%
Gold 424.60 +.17%
Base Metals 121.12 +1.88%
Copper 153.00 +1.39%
10-year US Treasury Yield 4.08% -.61%

Leading Sectors
Steel +2.18%
HMOs +1.88%
Semis +1.82%

Lagging Sectors
Oil Service -1.04%
Energy -1.27%
Restaurants -1.36%

BOTTOM LINE: The Portfolio is unchanged mid-day as gains in my Retail longs and Oil Tanker shorts are offsetting losses in my Internet and Restaurant longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly negative as the advance/decline line is slightly lower, sector performance is mixed and volume is below average. Measures of investor anxiety are mostly higher. Today’s overall market action is also slightly negative considering the better-than-expected ISM Non-manufacturing report and the rise in energy prices. The Johnson Redbook Same-store-sales Index rose 4.4% year-over-year last week vs. a 3.8% rise the prior week. This is up from a 1.5% gain in late April and the ninth week in a row the index has exceeded 3%. Moreover, this is the strongest reading since June 29, 2004. I continue to believe retail and other consumer-related sectors will outperform through year-end. I expect US stocks to trade mixed-to-higher into the close as short-covering and bargain hunting more than offsets higher energy prices.

Today's Headlines

Bloomberg:
- Retail sales in the 12 nations sharing the euro fell for the fifth month in six in June as unemployment and record oil prices weighed on consumer confidence.
- US mortgage applications rose last week as home purchases rebounded to the third-highest level on record and refinancing increased.
- French President Jacques Chirac, who flew to Singapore to present Paris’s bid to host the 2012 Olympics, came away empty-handed, suffering his fourth defeat in 15 months.
- London won the vote to stage the 2012 Summer Olympic Games, snatching the prize from the favorite Paris to become the first city to host the event three times.
- The US had no deaths from tornados between March and yesterday for the first time since official recordkeeping began in 1950, the National Oceanic and Atmospheric Administration said.
- Zions Bancorp, which operates almost 400 bank offices in eight Western US states, agreed to buy Amegy Bancorp for $1.7 billion to extend its branch network into Texas.
- Amvescap Plc, owner of the AIM mutual funds group, received an unsolicited takeover offer from CI Fund Management, Canada’s No. 3 fund manager.
- Tropical Storm Cindy left more than 318,000 people along the Louisiana coast without power, as Dennis headed toward the Gulf of Mexico and threatened to become the earliest hurricane to form in the Atlantic Ocean this year.
- PacifiCare Health Systems shares surged as much as 15% after the Wall Street Journal reported that the health insurance company is in “advanced” talks to be bought by United Health Group.
- Oil approached $61/bbl. in NY after Tropical Storm Cindy disrupted shipments along the US Gulf coast and another storm threatened the region.

Wall Street Journal:
- Eastman Kodak has become the biggest seller of digital cameras by concentrating on women and simplifying the processs.
- Maytag, AK Steel and other US companies could be forced to put more cash into their retirement plans in legislation proposed by a US House of Representatives committee last week.
- Disney may say today that it will market its own brand of mobile phones to children as young as eight and their parents.

NY Times:
- Methamphetamine is the largest drug problem for US law enforcement agencies, citing a survey of 500 local law officials.

Financial Times:
- The Chicago Board of Trade will impose limits on how many Treasury futures traders can hold in the days before a contract matures in order to curb volatility in the securitites.

Al-Hayat:
- More than 25 international companies are competing to win a $100 million contract to operate Iraq’s mobile phone network, citing the country’s communication minister.

Non-Manufacturing Remains Strong, Home Sales Moderating

- ISM Non-Manufacturing for June rose to 62.2 versus estimates of 58.7 and a reading of 58.5 in May.
- Pending Home Sales for May fell 2.0% versus estimates of a .5% increase and a downwardly revised 3.1% gain in April.

BOTTOM LINE: The ISM Non-Manufacturing Index, a measure of the health of service companies which compose the largest part of the US economy, exceeded estimates and a measure of hiring accelerated. The employment component of the index rose to 57.4, the highest in 4 months. The export orders component of the index fell to 50 from 62. The prices paid index rose slightly to 59.8 from 57.9. This bodes well for a continuation of recent healthy economic data.

Contracts to buy previously owned US homes fell in May for the first time in four months while remaining close to a record. The May number was the third highest in history. The level of pending re-sales suggests rising prices may be discouraging some prospective buyers, however home buying remains very strong by historic standards. I continue to believe a period of stagnation is near with respect to home price increases. However, a significant decline in prices is unlikely.

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