Stocks Finish Sharply Lower on Earnings Worries

Indices
S&P 500 1,219.34 -1.18%
DJIA 10,513.45 -1.14%
NASDAQ 2,137.06 -1.38%
Russell 2000 654.61 -1.66%
DJ Wilshire 5000 12,152.38 -1.17%
S&P Barra Growth 583.58 -1.29%
S&P Barra Value 631.48 -1.07%
Morgan Stanley Consumer 585.69 -1.05%
Morgan Stanley Cyclical 741.10 -2.18%
Morgan Stanley Technology 495.93 -1.31%
Transports 3,705.06 -1.50%
Utilities 391.40 -1.45%
Put/Call 1.04 +57.58%
NYSE Arms 2.13 +138.27%
Volatility(VIX) 13.52 +10.28%
ISE Sentiment 137.00 -38.84%
US Dollar 87.39 +.08%
CRB 319.59 +.21%

Futures Spot Prices
Crude Oil 66.25 -.03%
Unleaded Gasoline 198.36 +1.10%
Natural Gas 9.75 +2.22%
Heating Oil 186.40 -.28%
Gold 451.40 +.85%
Base Metals 131.62 +.73%
Copper 170.60 -.09
10-year US Treasury Yield 4.20% -1.76%

Leading Sectors
Airlines +3.39%
Hospitals -.11%
Tobacco -.24%

Lagging Sectors
Retail -2.79%
Steel -2.99%
Computer Hardware -3.27%

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Afternoon Recommendations
Goldman Sachs:
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Standard & Poor’s said it may lower Delta Air Lines’ debt rating as shrinking cash holdings and rising fuel costs push the company closer to bankruptcy.
- A computer virus targeting Microsoft’s Windows software shut down machines at Time Warner’s CNN and Disney’s ABC network.
- US Treasuries rose for a third day in four after reports showed consumer prices and industrial production increased less than forecast, alleviating concern that economic growth will spark faster inflation.

Crain’s Chicago Business:
- The Chicago Board of Trade, the second-largest US futures market, rejected proposals to combine its business with other companies, opting instead to sell shares to the public as early as next month.

Financial Times:
- NetEase has stopped its music search service due to concerns about copyright piracy.

Nihon Keizai:
- Wal-Mart Stores will buy control of troubled Tokyo-based retailer Seiyu Ltd. and open outlets in Japan next year under the Wal-Mart name.

BOTTOM LINE: The Portfolio finished lower today on losses in my Medical, Retail and Computer longs. I did not trade in the afternoon, thus leaving the Portfolio 25% net long. The tone of the market was negative today as the advance/decline line finished substantially lower, most sectors fell and volume was below average. Measures of investor anxiety remained higher into the close. Overall, today’s market action was negative considering stabilizing energy prices and the fall in long-term rates. Investors are responding well to Hewlett-Packard and Applied Materials’ earnings reports after-hours. As I predicted on Sun., retail is coming under pressure this week. Best Buy is my favorite retailer through year-end and I will use any substantial pullback from current levels to add to my long position in the stock.

Stocks Lower Mid-day on Worries Over Consumer Spending

Indices
S&P 500 1,224.99 -.72%
DJIA 10,554.45 -.75%
NASDAQ 2,148.41 -.86%
Russell 2000 658.26 -1.11%
DJ Wilshire 5000 12,207.76 -.72%
S&P Barra Growth 586.53 -.79%
S&P Barra Value 634.28 -.63%
Morgan Stanley Consumer 587.55 -.74%
Morgan Stanley Cyclical 745.82 -1.56%
Morgan Stanley Technology 498.10 -.87%
Transports 3,729.87 -.85%
Utilities 394.17 -.75%
Put/Call .98 +48.48%
NYSE Arms 1.55 +73.66%
Volatility(VIX) 13.06 +6.53%
ISE Sentiment 154.00 -31.25%
US Dollar 87.54 +.25%
CRB 320.43 +.48%

Futures Spot Prices
Crude Oil 66.35 +.12%
Unleaded Gasoline 198.60 +1.22%
Natural Gas 9.76 +2.31%
Heating Oil 187.10 +.10%
Gold 451.00 +.76%
Base Metals 131.62 +.73%
Copper 171.20 +.26%
10-year US Treasury Yield 4.21% -1.58%

Leading Sectors
Airlines +3.69%
Gold & Silver +.28%
Hospitals +.12%

Lagging Sectors
Steel -1.74%
Retail -2.34%
Computer Hardware -3.04%

BOTTOM LINE: The Portfolio is lower mid-day on losses in my Computer, Medical and Retail longs. I added to my IWM and QQQQ shorts this morning, thus leaving the Portfolio 25% 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 higher. Today’s overall market action is negative, considering the decline in long-term rates and mostly positive economic data. The Johnson Redbook same-store sales index rose 3.80% year over year last week vs. a 4.0% rise the prior week. The string of 4%+ weekly gains ended at 6. However, this week's gain is still up from a 1.5% increase in late April and the 15th week in a row the index has exceeded 3%. I expect US stocks to trade mixed-to-lower from current levels into the close on worries over consumer spending.

Today's Headlines

Bloomberg:
- Investors worldwide raised stock holdings to a six-month high this month on speculation that economic and profit growth will accelerate, according to a Merrill Lynch survey.
- The US dollar gained against the euro for a third day as government reports reinforced speculation that the Fed would raise rates through year-end.
- US Treasuries are rising for a third day in four after reports showed consumer prices and industrial production increased less than forecast.
- Crude oil is falling for a second day, its biggest two-day drop in a month, on speculation the US is accumulating sufficient stockpiles of winter fuels.

Wall Street Journal:
- Strategic buyers, companies that buy businesses to add to their own, are returning to the acquisitions market in competition with private-equity buyers after spending years repairing their balance sheets.
- Lagging fund flows at Fidelity Investments have placed it ninth among fund companies in terms of fund growth and pushed it down to third place in terms of assets, behind Vanguard Group and American Funds.
- US government grants for medical research are being routinely misused by schools that receive them.

NY Times:
- More hedge-fund managers are following shareholder activist Carl Icahn in starting populist battles against company chief executive officers.
- Morgan Stanley, UBS, CSFB and Citigroup will probably say today that they’re joining Merrill Lynch and Citadel Derivatives in buying a stake in the Philadelphia Stock Exchange.
- IBM and AMD this week are expected to announce they have extended a three-year-old technology development agreement through 2011.

NY Post:
- Gap Inc. is offering free digital-music downloads from Apple Computer’s iTunes for trying out a pair of jeans.

San Francisco Chronicle:
- California public school students scored higher on state English and math tests than anytime in the examinations’ five-year history.

Reuters:
- President Bush isn’t planning to block a threatened strike of Northwest Airlines mechanics if they walk out as expected on Aug. 20.

AFP:
- Iraq increased oil production by 15% to 2.3 million barrels/day from its southern fields.

Dagens Nyheter:
- AstraZeneca Plc, the UK’s second-largest drugmaker, may move more of its research to the US if Sweden introduces a stricter animal-rights law.

Core Inflation Tame, Building Permits Soar, Industrial Production Weaker

- The Consumer Price Index for July rose .5% versus estimates of a .4% increase and an unchanged reading in June.
- The CPI Ex Food & Energy for July rose .1% versus estimates of a .2% gain and a .1% rise in June.
- Housing Starts for July rose to 2042K versus estimates of 2025K and an upwardly revised 2045K in June.
- Building Permits for July rose to 2167K versus estimates of 2100K and an upwardly revised 2132K in June.
- Industrial Production for July rose .1% versus estimates of a .5% gain and a .8% rise in June.
- Capacity Utilization for July fell to 79.7% versus estimates of 80.3% and 79.8% in June.

BOTTOM LINE: Prices paid by US consumers rose the most in three months, paced by surging fuel costs, Bloomberg reported. Excluding energy and food, the increase was less than expected, signaling fuel costs have yet to stoke inflation. Moreover, new car prices fell 1.0%, the largest decline since January 1975. As well, the cost of clothing fell .9%, the most since April 2001. Finally, computer prices fell 1.5% for a third consecutive month and are 16% cheaper than at this time last year. I expect inflation to remain contained in the intermediate-term and disinflationary trends to reassert themselves next year.

US Housing Starts fell .1% in July from a four-month high in June and building permits surged to the highest level in 32 years, suggesting demand for new homes is holding up as jobs increase and builders plan more communities, Bloomberg said. Starts rose the most in the Midwest, surging 9.1%. Starts fell in the South, declining 5.4%. I continue to believe home price appreciation is in the process of moderating, not plunging.

US industrial production rose by a less-than-expected .1% in July, as automakers GM and Ford cut production to sell inventory accumulated earlier in the year, Bloomberg reported. I expect industrial production to snap back next month as plant re-toolings wind down and automakers seek to boost inventories.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Delta Air Lines agreed to sell its Atlantic Southeast Airlines commuter unit to SkyWest for $425 million, raising cash as Delta tries to avoid filing for bankruptcy protection.
- The US dollar continued to strengthen in Asia against the euro after a government report showed international investors bought more US assets than expected.
- Crude oil is falling for a second day in NY on expectations stockpiles of heating fuel rose last week as refiners recovered from breakdowns.
- A magnitude 7.2 earthquake struck the Tohoku region north of Tokyo at 11:46 am, the US Geological Survey said on its Web site.
- Investment in China’s fixed assets grew at a faster pace for a sixth straight month in July as companies spent more money expanding oil refining and coal mining production capacity to help ease shortages.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on EBAY.

Night Trading
Asian Indices are -.50% to +.25% on average.
S&P 500 indicated +.06%.
NASDAQ 100 indicated +.06%.

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Earnings of Note
Company/EPS Estimate
ANF/.69
AEOS/.36
AMAT/.14
BJ/.43
DE/1.90
DKS/.45
EL/.41
HPQ/.31
HD/.80
JCP/.40
JWN/.48
PLAB/.30
SPLS/.19
TJX/.25
WMT/.65

Upcoming Splits
None of note

Economic Releases
8:30 am EST
- Consumer Price Index for July is estimated to rise .4% versus a 0.0% change in June.
- CPI Ex Food & Energy for July is estimated to rise .2% versus a .1% increase in June.
- Housing Starts for July are estimated to rise to 2025K versus 2004K in June.
- Building Permits for July are estimated to fall to 2132K versus 2100K in June.

9:15 am EST
- Industrial Production for July is estimated to rise .5% versus a .9% gain in June.
- Capacity Utilization for July is estimated to rise to 80.3% versus 80.0% in June.

BOTTOM LINE: Asian indices are mostly lower, led down by energy shares in the region. I expect US equities to open mixed-to-lower on increased inflation worries and retail sector earnings concerns. The Portfolio is 50% net long heading into the day.