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Wednesday Watch

Late-Night Headlines
Bloomberg:
- US drivers braced for gasoline prices that may average $3 a gallon for regular grade in coming days, after Hurricane Katrina shut down oil refineries near the Gulf of Mexico.
- Japanese government bonds gained, sending 10-year yields to the lowest in more than four weeks, after a government report showed industrial production dropped more than twice as much as expected in July.
- The death toll from Hurricane Katrina may be in the hundreds.
- Australia’s July building approvals fell the most in three years and credit growth had the smallest increase since October 2003, signaling the fifth-biggest Asian Pacific economy is slowing.

Late Buy/Sell Recommendations
Goldman Sachs:
None of note

Night Trading
Asian Indices are -.50% to -.25% on average.
S&P 500 indicated -.17%.
NASDAQ 100 indicated -.29%.

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Economic Releases
8:30 am EST
- Preliminary 2Q GDP is estimated to rise 3.4% versus a prior estimate of 3.4%.
- Preliminary 2Q GDP Price Index is estimated to rise 2.4% versus a prior estimate of a 2.4% gain.
- Preliminary 2Q Personal Consumption is estimated to rise 3.4% versus a prior estimate of a 3.3% increase.

10:00 pm EST
- Chicago Purchasing Manager for August is estimated to fall to 61.0 from 63.5 in July.

10:30 pm EST
- Platt's estimates weekly crude inventories fell 800,000 barrels, gasoline inventories fell 1.7 million barrels, distillate inventories rose 1.4 million barrels and refinery utilization rose .75%.

BOTTOM LINE: Asian indices are lower on increasing concerns over the impact of energy prices on exporters in the region. I expect US equities to open lower, however shares may rise modestly later in the day on short-covering and month-end window-dressing. The Portfolio is 50% net long heading into the day.

Stocks Continue to Display Resilence as Gas Prices Soar

Indices
S&P 500 1,208.41 -.32%
DJIA 10,412.82 -.48%
NASDAQ 2,129.76 -.37%
Russell 2000 653.76 -.24%
DJ Wilshire 5000 12,062.75 -.28%
S&P Barra Growth 578.90 -.44%
S&P Barra Value 625.24 -.20%
Morgan Stanley Consumer 577.92 -.70%
Morgan Stanley Cyclical 730.06 -.33%
Morgan Stanley Technology 492.32 -.34%
Transports 3,648.30 -1.0%
Utilities 403.18 +.07%
Put/Call 1.03 +3.0%
NYSE Arms 1.11 +45.03%
Volatility(VIX) 13.65 +.96%
ISE Sentiment 144.00 +5.11%
US Dollar 88.35 +.11%
CRB 331.19 +2.46%

Futures Spot Prices
Crude Oil 70.50 +.99%
Unleaded Gasoline 249.10 +.65%
Natural Gas 12.08 +3.61%
Heating Oil 208.55 +.46%
Gold 435.90 +.09%
Base Metals 130.35 +.28%
Copper 164.25 -.27%
10-year US Treasury Yield 4.09 -1.80%

Leading Sectors
Oil Service +1.98%
Energy +1.81%
HMOs +.58%

Lagging Sectors
Restaurants -2.17%
Disk Drives -2.77%
Airlines -2.97%

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Afternoon Recommendations
Goldman Sachs:
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Hurricane Katrina devastated parts of Louisiana, Mississippi and Alabama, killing dozens of people, cutting off power to 2 million and leaving most of New Orleans flooded by water as deep as 20 feet. US and state officials say it may be the nation’s worst natural disaster.
- Billionaire financier Carl Icahn may make a tender offer for as much as 10% of Time Warner, adding pressure on the media company to buy back shares and spin off its cable-tv unit.
- President Bush is cutting short a scheduled vacation to return to Washington tomorrow to supervise the federal response to Hurricane Katrina.
- Surging fuel prices will probably filter into the cost of other US consumer goods at least temporarily, possibly curbing spending and economic growth, Federal Reserve policy makers said at their Aug. 9 meeting.
- The hurricane that struck the US Gulf Coast this week may prompt S&P to lower its ratings on $7.86 billion of municipal bonds sold by Louisiana, Mississippi and other borrowers along the storm’s path.
- Cardinal Health said it is restating earnings for changes including inventory valuation and is discussing a settlement to resolve a US regulatory investigation.
- Crude oil and gas rose to a record for a second straight day after Hurricane Katrina shut 95% of production in the Gulf of Mexico.
- US Treasuries surged, led by the biggest rally in two-year notes this year, on speculation record energy costs will temper economic growth.

BOTTOM LINE: The Portfolio finished unchanged today as gains in my Oil Tanker shorts and Telecom Equipment longs offset losses in my Retail and Internet longs. I did not trade in the afternoon, thus leaving the Portfolio 50% net long. The tone of the market was negative today as the advance/decline line finished lower, most sectors fell and volume was light. Measures of investor anxiety were mostly higher into the close. Overall, today’s market action was slightly negative. While the market’s relatively muted reaction to $70 oil is impressive, I am worried that measures of anxiety are too low given the risks that are forming. The possibility of a fear-induced blow-off spike in oil have increased considerably over the last 24 hours.

Stocks Lower Mid-day on Fears Over Rising Energy Prices

Indices
S&P 500 1,204.15 -.66%
DJIA 10,377.16 -.82%
NASDAQ 2,122.62 -.72%
Russell 2000 652.15 -.49%
DJ Wilshire 5000 12,022.63 -.61%
S&P Barra Growth 576.75 -.80%
S&P Barra Value 623.15 -.53%
Morgan Stanley Consumer 576.58 -.93%
Morgan Stanley Cyclical 726.63 -.79%
Morgan Stanley Technology 490.17 -.77%
Transports 3,642.72 -1.15%
Utilities 400.98 -.47%
Put/Call 1.03 +3.0%
NYSE Arms 1.19 +56.01%
Volatility(VIX) 13.95 +3.18%
ISE Sentiment 143.00 +4.38%
US Dollar 88.45 +.23%
CRB 331.13 +2.47%

Futures Spot Prices
Crude Oil 69.40 +3.27%
Unleaded Gasoline 243.00 +17.93%
Natural Gas 11.65 +4.59%
Heating Oil 202.50 +6.09%
Gold 435.60 -1.31%
Base Metals 130.35 +.28%
Copper 164.70 +1.57%
10-year US Treasury Yield 4.11% -1.34%

Leading Sectors
Oil Service +1.76%
Energy +1.45%
HMOs +.51%

Lagging Sectors
Retail -2.18%
Disk Drives -2.91%
Airlines -3.13%

BOTTOM LINE: The Portfolio is slightly lower mid-day on losses in my Internet and Retail longs. I exited a few longs this morning as they hit stop-losses and added back IWM and QQQQ shorts, thus leaving the Portfolio 50% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are lower and volume is light. Measures of investor anxiety are mostly higher. Today’s overall market action is modestly negative given another rise in energy prices. I expect US stocks to trade mixed-to-higher from current levels into the close on short-covering and bargain-hunting.

Today's Headlines

Bloomberg:
- American Express, Goldman Sachs and Allianz AG will sign a nonbinding agreement to buy a $3 billion stake in Industrial & Commercial Bank of China.
- High school students achieved the highest average math score ever recorded on the SAT examination, the most widely used college-entrance test, as they reaped the rewards of more-challenging coursework.
- GM said it doesn’t expect sales of large SUVs to regain peak levels of the past amid rising fuel prices and changes in consumer tastes.
- US Treasuries are rising, pushing yields on 10-year notes to the lowest since mid-July, on speculation record energy costs will temper economic growth.
- Crude oil is rising to another record for a second day after Hurricane Katrina shut about 92% of production in the Gulf of Mexico.
- The US dollar is rising the most in a month against the yen after Japanese government reports showed household spending unexpectedly declined and the jobless rate rose from a seven-year-low.

Wall Street Journal:
- Hurricane Katrina, which slammed into Louisiana’s Gulf Coast yesterday and is now moving steadily north-northeast, will cause delays and cancellations in US air travel for much of this week.
- Hurricane Katrina left a potential public health disaster in its wake.
- Sprint Nextel is nearing an agreement to buy two of its wireless affiliates for a combined price of about $700 million.
- Supervalu, the owner of Save-A-Lot, has built one of the most successful grocery chains in the US by expanding in low-income neighborhoods.
- Nextel Communications, Verizon Wireless and Cingular Wireless are among mobile-phone companies that have cut their international calling rates as they bid for a share of the growing overseas phone-call market.
- EchoStar Communications plans to offer multiple image, or “mosaic,” screens to its “Dish Home” channel.

NY Times:
- Apple Computer and Motorola plan to introduce next week a cellular phone that will play music using Apple’s iTunes software.
- Chinese police raided the offices of a human rights group in Beijing yesterday.
- Seven oil rigs are adrift in the Gulf of Mexico following the passage of Hurricane Katrina.
- UK retail sales fell for a sixth month in August, a survey of 109 companies showed.
- A jump in fuel prices caused by production and supply bottlenecks after Hurricane Katrina would do more to slow the US economy than the demand-driven price increases of the last two years, economists said.

Washington Post:
- The US Air Force issued rules yesterday saying that prayers aren’t appropriate at most official events.

Confidence About Jobs Best Since Before 9/11, Factory Orders Decline After Recent Gains

- Consumer Confidence for August rose to 105.6 versus estimates of 101.0 and a reading of 103.6 in July.
- Factory Orders for July fell 1.9% versus estimates of a 2.3% fall and a .9% increase in June.

BOTTOM LINE: Consumer confidence in the US unexpectedly rose in August as more jobs and rising incomes eased concerns about high gas prices, Bloomberg said. Americans are now more optimistic about finding jobs than at any time since the month of the terrorist attacks in 2001. The component of the index that measures consumers’ expectations for the next 6 months rose to 93.7 from 93.2. A measure of optimism about the present situation rose to 123.6, also the best since September 2001. The proportion of US consumers expecting to buy a new car in the next six months rose to 3.3% from 3.0%. This reading is a huge positive for investors and I continue to believe all measures of confidence will reach cycle highs during the fourth quarter.

US factory orders declined last month for the first time since January, reflecting less demand for aircraft, computers and machinery, Bloomberg reported. The decline follows a two-month surge. Orders for non-defense capital goods excluding aircraft, a measure of future business investment, declined 4.1% versus a 4.9% gain the prior month. The inventory-to-shipments ratio held at 1.19 months in July. Unfilled orders rose 1.0% after a 2.8% gain in June, which also points to rising production next quarter. I expect factory orders to accelerate next month.