Stocks Finish Lower as Long-term Rates Close Near Session Highs

Indices
S&P 500 1,227.04 -.66%
DJIA 10,627.77 -.57%
NASDAQ 2,178.60 -.46%
Russell 2000 667.10 -1.54%
DJ Wilshire 5000 12,234.24 -.76%
S&P Barra Growth 589.77 -.53%
S&P Barra Value 632.84 -.79%
Morgan Stanley Consumer 584.42 -.47%
Morgan Stanley Cyclical 755.88 -.97%
Morgan Stanley Technology 498.53 -1.16%
Transports 3,779.59 +.27%
Utilities 388.62 -1.86%
Put/Call .92 +3.37%
NYSE Arms 1.40 +20.21%
Volatility(VIX) 10.97 +7.23%
ISE Sentiment 208.00 +36.84%
US Dollar 88.93 -.46%
CRB 300.76 -.86%

Futures Spot Prices
Crude Oil 57.32 -1.21%
Unleaded Gasoline 167.60 unch.
Natural Gas 7.30 -3.25%
Heating Oil 157.40 -1.48%
Gold 426.00 +.92%
Base Metals 124.47 +.13%
Copper 157.00 -1.35%
10-year US Treasury Yield 4.27 +2.84%

Leading Sectors
Gold & Silver +2.29%
Steel +2.03%
Defense +.56%

Lagging Sectors
Disk Drives -2.15%
Airlines -3.07%
HMOs -6.28%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on MSFT, GOOG, ACN and ALK.
- Reiterated Underperform on DJ, SGP, JBLU and EMC.

Afternoon/Evening Headlines
Bloomberg:
- China’s decision to end its currency peg to the dollar is unlikely to give Asia’s export-driven economies a boost, according to economists at Morgan Stanley and Deutsche Bank AG.
- Iraqi security forces are improving their capability to conduct combat operations on their own, with decreased US support, the Pentagon said in a report to Congress released today.
- German President Horst Koehler dissolved parliament, paving the way for an early election requested by Chancellor Gerhard Schroeder to avoid a year of political deadlock.
- Four of Saddam Hussein’s nephews were identified today by the US Treasury Department as having financed and directed groups carrying out attacks against Iraqi and coalition forces.

Financial Times:
- Volkswagen AG will boost its sales discounts and advertising in North America to regain market share and improve relations with its US and Canadian dealers.
- Russia’s levels of corruption have increased tenfold in four years, and is now worth $316 billion, citing a survey by Indem.

Golfweek:
- Teenage golfer Michelle Wie will turn professional in October and sign a multiyear endorsement contract with Nike’s golf division worth $10 million to $12 million.

BOTTOM LINE: The Portfolio finished lower today on gains in my Networking, Semiconductor, Homebuilding and Retail longs. I added to my GOOG long in after-hours trading with the stock down 27 and trimmed another tech long, thus leaving the Portfolio 75% net long. The tone of the market was negative today as the advance/decline line finished lower, most sectors fell and volume was heavy. Measures of investor anxiety were mostly higher into the close. Overall, today’s market action was neutral. The reaction to China's revaluation in the bond market seems overdone at this point. Ninety-five percent of China's foreign trade is denominated in dollars. Due to the political and economic ramifications, I seriously doubt any significant U.S. Treasury sell-down will occur.

Stocks Lower Mid-day on Terrorism Fears and Higher Long-Term Rates

Indices
S&P 500 1,227.54 -.62%
DJIA 10,632.15 -.53%
NASDAQ 2,180.19 -.38%
Russell 2000 669.69 -1.16%
DJ Wilshire 5000 12,247.56 -.66%
S&P Barra Growth 590.16 -.48%
S&P Barra Value 633.45 -.70%
Morgan Stanley Consumer 584.43 -.47%
Morgan Stanley Cyclical 757.51 -.73%
Morgan Stanley Technology 499.35 -1.0%
Transports 3,786.85 +.46%
Utilities 389.07 -1.74%
Put/Call .96 +7.87%
NYSE Arms 1.24 +1.13%
Volatility(VIX) 10.02 -4.11%
ISE Sentiment 234.00 +53.95%
US Dollar 88.70 -.71%
CRB 300.75 -.85%

Futures Spot Prices
Crude Oil 57.40 -1.07%
Unleaded Gasoline 167.50 +.12%
Natural Gas 7.28 -3.58%
Heating Oil 157.50 -1.42%
Gold 426.00 +.92%
Base Metals 124.47 +.13%
Copper 157.00 -1.35%
10-year US Treasury Yield 4.27% +2.75%

Leading Sectors
Gold & Silver +2.30%
Steel +1.88%
Broadcasting +.78%

Lagging Sectors
Networking -2.06%
Airlines -2.68%
HMOs -6.40%

BOTTOM LINE: The Portfolio is lower mid-day on losses in my and Networking longs. I exited a few longs this morning as they hit stop-losses, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is below average. Measures of investor anxiety are mixed so far. Today’s overall market action is neutral considering the rise in long-term rates and more terrorism in London. The decline in commodities today is likely signaling that China's economy, already on thin ice, will further weaken as a result of the yuan revaluation. The potential for a chronic terrorism problem in the U.K. is also weighing on the CRB. As I have said many times before, the CRB has been the main source of inflation worries. The 10-year T-note yield looks higher in the short term; however, I continue to see lower long-term interest rates in the intermediate term. I expect stocks to trade modestly higher into the close on short-covering and lower energy prices.

Today's Headlines

Bloomberg:
- Google is likely to report today that profit rose more than fourfold as it lured Web surfers from Yahoo! and attracted advertisers with a popular new online map.
- China loosened its fixed-exchange rate against the dollar for the first time in a decade, letting the yuan fluctuate versus a basket of currencies.
- Alcoholism should be treated with drugs, much like depression, a US scientific institute said for the first time, a suggestion that could help prompt a shift in treatment emphasis from counselors to doctors.
- Treasury notes dropped after China let its currency strengthen, boosting speculation the country will reduce purchases of US government debt.
- Manufacturing in the Philadelphia region rebounded this month after a first-quarter inventory build prompted companies to place few orders.
- Three London subway trains and a bus were targets of attempted bombings today, leaving parts of the Underground network paralyzed, two weeks after the worst attack on the capital since WWII.
- Crude oil is falling for a second day after a government report yesterday showed that US inventories fell less-than-expected last week and traders speculated that China’s demand for the commodity will decline after the yuan revaluation.

Wall Street Journal:
- Dow Jones said it will sell its stake in CNBC’s television channels in Asia and Europe to NBC Universal to cut costs.
- Barclays Global Investors, the biggest provider of exchange-traded funds, will shift all but one of its products now traded on the American Stock Exchange to the NYSE and the electronic market run by Archipelago Holdings, which the NYSE is buying.
- Delta Air Lines senior management is debating whether the carrier might be forced to file for Chapter 11 bankruptcy protection.
- Gemstar-TV Guide International, the publisher of TV Guide, may cut the circulation guarantees it gives advertisers by at least a third.
- Comcast and other cable suppliers including Time Warner and Cox Communications are developing transmissions to give customers a bigger array of channels.
- Nike and Bausch & Lomb plan to introduce a new type of tinted prescription contact lenses next month for athletes who don’t want to wear sunglasses.

NY Times:
- Medicare will begin giving doctors record-keeping computer software for patient records as soon as next month.

AP:
- US cyclist Lance Armstrong’s success has helped boost sales of closely held Trek Bicycle, the nation’s top bike manufacturer.

Globe and Mail:
- Biovail is in talks with investors to have them buy the company and take it private.

Initial Jobless Claims Fall by Most in Almost 3 Years, Leading Indicators Rise More Than Expectations

- Initial Jobless Claims for last week fell to 303K versus estimates of 325K and 337K the prior week.
- Continuing Claims fell to 2577K versus estimates of 2589K and 2618K prior.
- Leading Indicators for June rose .9% versus estimates of a .5% rise and an upwardly revised 0.0% reading in May.

BOTTOM LINE: The number of US workers filing first-time applications for state jobless benefits fell to 303,000 last week, the lowest level since April, as automakers completed factory retooling more quickly than government statisticians expected, Bloomberg reported. The decline was the largest since December 2002. The four-week moving-average of claims fell to 318,000 from 321,250. The insured employment rate, which tracks the US unemployment rate, fell to 2.0% from 2.1%.

The Leading Indicators report shows the first major revision in how the index is compiled since 1996. Higher consumer confidence, building permits and stock prices spurred gains in the index.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- JP Morgan Chase is joining dollar bulls Morgan Stanley and Barclays Plc in predicting a third consecutive quarterly gain in the currency.
- Cnooc Ltd. may abandon its effort to buy Unocal Corp. and instead seek other US oil producers, such as Marathon Oil Corp., Amerada Hess or Murphy Oil, investors and analysts said.
- Crude oil prices are falling tonight in NY for a second day after a US Energy Department report yesterday showed stockpiles declined less than analysts forecast and supplies of heating oil and other distillate fuels rose.
- Liberal groups and their Democratic Senate allies, facing an uphill task to stop the confirmation of John G. Roberts to the US Supreme Court, plan to press hard for information about his views on legal issues as they try to muster opposition to the nomination.

NY Times:
- Sprint and Cingular Wireless were accused in complaints filed with California state regulators of improperly charging cell-phone users.

Financial Times:
- Iran has agreed to extend a $1 billion credit facility to Iraq.

AP:
- Canada today made gay marriages legal, becoming the world's fourth nation to give same-sex couples full legal rights and benefits.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on EBAY, PFE, AMLN, IDIX, DOX, COF, FORM and CVD.
- Reiterated Underperform on NFB, OMI, UIS, VRTX and KEA.

Night Trading
Asian Indices are unch. to +.25% on average.
S&P 500 indicated +.02%.
NASDAQ 100 indicated +.19%.

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Earnings of Note
Company/EPS Estimate
ABC/.86
AVID/.42
BAX/.44
BRCM/.25
CAT/1.00
DHI/1.09
EMC/.12
LLY/.66
GOOG/1.21
GDT/.65
IR/1.62
MCD/.42
MRK/.62
MSFT/.31
NXTL/.44
NUE/1.96
ODP/.24
PMCS/.03
RBK/.58
SGP/.05
SFA/.41
SIRI/-.15
UPS/.85
XLNX/.21

Upcoming Splits
None of note

Economic Releases
8:30 am EST
- Initial Jobless Claims for last week are estimated to fall to 325K versus 336K the prior week.
- Continuing Claims are estimated to fall to 2589K versus 2617K prior.

10:00 am EST
- Leading Indicators for June are estimated to rise .5% versus a .5% decline in May.

12:00 am EST
- Philadelphia Fed. for July is estimated to rise to 10.0 versus -2.2 in June.

2:00 pm EST
- Minutes of June 30 FOMC Meeting

BOTTOM LINE: Asian indices are mostly higher, led by automaker and technology stocks in the region. I expect US equities to open modestly higher, spurred by tech shares. The Portfolio is 100% net long heading into the day.