Producer Prices Rise, Distillate Inventories Gain Less-than-expected

- The Producer Price Index for July rose 1.0% versus estimates of a .5% increase and an unchanged reading in June.
- The PPI Ex Food & Energy for July rose .4% versus estimates of a .1% increase and a .1% fall in June.
- The EIA reported that crude inventories rose 241K barrels vs. estimates of a 1.25M gain. Gas inventories fell 4.97M barrels vs. estimates of a 1.5M barrel fall. Distillate inventories rose 1.19M barrels vs. estimates of a 1.9M barrel rise.

BOTTOM LINE: Prices paid to US producers rose in July by the most in nine months as energy costs surged, Bloomberg reported. As well, the core measure rose the most since January. Costs of intermediate goods rose 1.0% versus a .1% gain in June. Food prices fell .3% after a 1.1% decline in June and capital equipment prices rose .5% following a decline of .2%. The Producer Price Index has a high correlation with the Commodity Research Bureau Index. The last time we saw a run-up in the CRB and the PPI spiked, worries that increases would spill over into the CPI proved unfounded. I expect the same this time.

This is the first time in recent memory that oil has reacted negatively to bullish inventory data. Crude is down $1.20/bbl. This is bullish for stocks.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- The US dollar is rising for a fourth day against the euro in Asia on speculation international investors are increasing purchases of US debt to boost returns.
- Qwest Communications International and a union representing its workers tentatively agreed on a new contract for 25,000 employees.

NY Times:
- Arizona and New Mexico are diverting federal and state money to strengthen local law enforcement near the border.

Newsweek:
- NYSE CEO Thain is willing to settle a lawsuit with the Big Board’s former CEO Grasso for $25 million.

ABC News:
- Police in California disrupted what they said was a plot to attack Jewish sites and military targets in the LA area on the anniversary of the Sept. 11 terror attacks.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on SYMC.
- Reiterated Underperform on DE and AMAT.

Night Trading
Asian Indices are -.50% to unch. on average.
S&P 500 indicated +.12%.
NASDAQ 100 indicated +.09%.

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BEAS/.09
BLI/-.11
HOTT/.03
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MW/.46
NTAP/.15
ROST/.29
CRM/.04
SNPS/.08
TLB/.34
TOO/.11

Upcoming Splits
None of note

Economic Releases
8:30 am EST
- The Producer Price Index for July is estimated to rise .5% versus an unchanged reading in June.
- The PPI Ex Food & Energy for July is estimated to rise .1% versus a .1% decline in June.

BOTTOM LINE: Asian indices are mostly lower, led down by exporters in the region. I expect US equities to open mixed-to-higher as strength in the tech sector more than offsets inflation and energy worries. The Portfolio is 25% net long heading into the day.

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.