Service Sector Remains Strong, Distillate Inventories Rise Slightly Below Estimates

- The ISM Non-Manufacturing Index for July fell to 60.5 versus estimates of 61.5 and a reading of 62.2 in June.
- The EIA reported that crude oil inventories rose 196K barrels versus estimates of a 1.3M barrel decline. Gasoline inventories declined 4.02M barrels versus estimates of an 800K barrel fall. Distillate inventories rose 1.49M barrels versus estimates of a 2.0M barrel increase.

BOTTOM LINE: July sales at US services companies remained close to the three-month high reached in June, suggesting growth may accelerate in the second half of the year, Bloomberg reported. This gauge represents 87% of the US economy and is still near its all-time high of 66.9 set in April. The new orders component of the index rose to 61.9 from 59.5 the prior month. The backlogs component of the index rose to 53.5 from 52.5 and the export orders component rose to 53.5 from 50. These reading bode well for further US economic strength over the coming months.

Oil is down modestly on the inventory data. As peak gasoline season is coming to an end, distillate supplies will further dominate trading in the commodity.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Toyota Motor, Nissan Motor and Honda Motor, Asia’s largest automakers, raised US sales in July at least 8% each and lost market share as US rivals’ discounts drew even more buyers.

Wall Street Journal:
- Adidas-Saloman AG, the world’s second-largest sporting-goods maker, is in talks to acquire Reebok International Ltd.
- Sony Corp. was voted for the sixth consecutive year in the US the best brand in a Harris Interactive poll.

London-based Times:
- JPMorgan Chase may spend as much as $4 billion in strengthening its US retail banking unit.

China Daily:
- Dell expects to open its second China factory in the first quarter of 2006, helping to double its output of personal computers in the country.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on COH, NFP and PAYX.
- Reiterated Underperform on MKL, CHTR, HCC, SIRI, BMC and VICL.

Night Trading
Asian Indices are unch. to +1.0% on average.
S&P 500 indicated -.06%.
NASDAQ 100 indicated -.09%.

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Company/EPS Estimate
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CI/1.55
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Economic Releases
10:00 am EST
- ISM Non-Manufacturing for July is estimated to fall to 61.5 versus a reading of 62.2 in June.

10:30 am EST
- Platt’s is estimating crude inventories to fall 1.9M barrels, gasoline inventories to fall 1 million barrels and distillate inventories to rise 1.8M barrels.

BOTTOM LINE: Asian indices are mostly higher on gains in exporting shares in the region. I expect US equities to open modestly lower and to rally later in the afternoon. The Portfolio is 100% net long heading into the day.

Stocks Finish at Session Highs, Led by Tech and Energy Shares

Indices
S&P 500 1,244.12 +.71%
DJIA 10,683.74 +.57%
NASDAQ 2,218.15 +1.04%
Russell 2000 688.51 +.84%
DJ Wilshire 5000 12,441.73 +.73%
S&P Barra Growth 597.31 +.79%
S&P Barra Value 642.34 +.63%
Morgan Stanley Consumer 592.19 +.46%
Morgan Stanley Cyclical 765.07 +.55%
Morgan Stanley Technology 507.36 +1.12%
Transports 3,817.16 +.24%
Utilities 402.41 +2.51%
Put/Call .94 +3.30%
NYSE Arms .93 +8.69%
Volatility(VIX) 11.75 -2.73%
ISE Sentiment 168.00 -21.50%
US Dollar 88.76 -.15%
CRB 317.57 +.91%

Futures Spot Prices
Crude Oil 61.89 -.02%
Unleaded Gasoline 178.05 -.06%
Natural Gas 8.37 -.04%
Heating Oil 172.75 +.14%
Gold 437.70 unch.
Base Metals 128.13 +.76%
Copper 166.10 -.09%
10-year US Treasury Yield 4.33% +.56%

Leading Sectors
Steel +3.06%
Utilities +2.51%
Semiconductors +2.49%

Lagging Sectors
Homebuilders -.21%
Oil Tankers -.31%
Airlines -1.34%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on TAP and CEM.
- Reiterated Underperform on MMC and BMC.

Afternoon/Evening Headlines
Bloomberg:
- Drugmakers mad a voluntary pledge today to comply with federal advertising rules as the industry faces threats by Congress to curb their annual $4.01 billion consumer marketing campaigns.
- An Air France jet trying to land at Toronto Pearson International Airport skidded off the runway into a ravine and caught fire.

BOTTOM LINE: The Portfolio finished higher today on gains in my Medical, Medical Information Systems and Retail longs. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, almost every sector rose and volume was about average. Measures of investor anxiety were mostly higher into the close. Overall, today’s market action was positive. I continue to believe that we are in the early stages of a reversal in several major trends. Massive amounts of capital have flowed into market neutral and negatively correlated market strategies over the last five years. Individuals have shown relatively little interest in stocks since the bursting of the bubble. Overseas investments have been garnering a disproportionate amount of new capital. I believe these three trends are in the early stages of reversing. While I can't argue that in the short-term the major averages are extended and due for a period of consolidation, the emerging trend of getting long U.S. stocks is still in the early stages.

Stocks Higher Mid-day, Led Again by Tech

Indices
S&P 500 1,242.40 +.57%
DJIA 10,674.49 +.48%
NASDAQ 2,213.10 +.81%
Russell 2000 686.14 +.49%
DJ Wilshire 5000 12,420.97 +.56%
S&P Barra Growth 596.32 +.63%
S&P Barra Value 641.57 +.51%
Morgan Stanley Consumer 591.75 +.39%
Morgan Stanley Cyclical 764.84 +.52%
Morgan Stanley Technology 506.52 +.95%
Transports 3,518.05 +.19%
Utilities 402.07 +2.43%
Put/Call 1.0 +9.89%
NYSE Arms .88 +3.43%
Volatility(VIX) 11.82 -2.15%
ISE Sentiment 156.00 -27.10%
US Dollar 88.72 -.19%
CRB 317.31 +.82%

Futures Spot Prices
Crude Oil 61.35 -.36%
Unleaded Gasoline 175.85 +.65%
Natural Gas 8.37 +2.65%
Heating Oil 171.50 -.11%
Gold 437.70 unch.
Base Metals 128.13 +.76%
Copper 166.10 -.12%
10-year US Treasury Yield 4.32% +.23%

Leading Sectors
Steel +3.21%
Utilities +2.40%
Semis +2.20%

Lagging Sectors
Oil Tankers -.15%
Homebuilders -.44%
Airlines -1.38%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Medical Information Systems and Semiconductor longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly positive as the advance/decline line is modestly higher, most sectors are higher and volume is about average. Measures of investor anxiety are mostly higher. Today’s overall market action is positive considering recent gains and stubbornly high energy prices. The Johnson Redbook same store sales index rose 4.4% year over year last week vs. a 4.3% rise the prior week. The last time weekly sales exceeded 4.0% for five consecutive weeks was May/June 2004. This week's gain is also up from a 1.5% increase in late April and the 13th week in a row the index has exceeded 3%. I expect stocks to trade mixed from current levels into the close as earnings optimism offsets higher energy prices.

Today's Headlines

Bloomberg:
- General Motors will extend a program that gives employee discounts on cars and trucks to all customers.
- Ford Motor and DaimlerChrysler AG posted US sales increases of more than 25% in July.
- US scientists said this year’s Atlantic hurricane season will be stormier than previously forecast, producing as many as 21 tropical storms and 11 hurricanes.

Wall Street Journal:
- JPMorgan Chase executives are laying the groundwork for possible future acquisitions and some investors are uncomfortable.
- The FDA’s ban on an antibiotic used in poultry production, combined with moves by some companies to market antibiotic-free meat, have dented the market for animal growth drugs.
- Vonage Holdings, the largest Internet-phone company, will work with TowerStream, a wireless-broadband service, to provide businesses with voice and high-speed Internet services.
- The FDA may announce today a review of rules governing the way drugmakers advertise their products, potentially leading to tougher regulation.
- US families sent by their companies to more isolated cities in China are experiencing profound culture shock adjusting to local conditions.
- Time Warner, Cablevision Systems, Comcast and other cable-tv stocks may get a boost as the companies start reporting growth in their digital-telephone services.
- Some US private-equity funds are giving investors the chance to invest as little as $25,000, compared with as much as $10 million demanded by others.

NY Times:
- The US ambassador to Iraq outlined a plan for a gradual withdrawal of American troops.

CNBC:
- Bill Gross, chief investment officer at PIMCO, said he expects the Fed to raise rates to 3.75% or 4.0%.

Reuters:
- Iran’s decision to resume activities at a nuclear plant in the central city of Isfahan is “irreversible.”

Moscow Times:
- Google may open a center in St. Petersburg, Russia, and hire 3,000 workers.