Today's Headlines

Canceled due to a scheduling conflict. I will post the Mid-day Scoreboard within the hour.

GDP Still Healthy, Chicago PMI Plunges, Distillate Inventories Rise Above Estimates

- Preliminary 2Q GDP rose 3.3% versus estimates of a 3.4% gain and a prior estimate of a 3.4% increase.
- Preliminary 2Q GDP Price Index rose 2.4% versus estimates of a 2.4% gain and a prior estimate of a 2.4% increase.
- Preliminary 2Q Personal Consumption rose 3.0% versus estimates of a 3.4% gain and a prior estimate of a 3.3% increase.
- The Chicago Purchasing Manager Index for August fell to 49.2 versus estimates of 61.0 and a reading of 63.5 in July.
- The EIA reported that crude oil inventories fell 1.52 million barrels vs. estimates of a rise of 1.0 million barrels. Gasoline inventories dropped 508,000 barrels vs. estimates of a 1.63 million barrel decline. Distillate inventories rose 2.75 million barrels vs. expectations of a 1.5 million barrel build.

BOTTOM LINE: The US economy expanded at a 3.3% rate in the second quarter. The Core PCE Price Index, the Fed’s favorite inflation gauge, rose 1.6% in the second quarter versus a 2.4% increase in the first quarter. Growth in the US economy has exceeded 3% for nine straight quarters, the best stretch since the 13 quarters that ended in January-March 1986, Bloomberg reported. A measure of demand, excluding inventories, rose 5.4% in the second quarter. Personal incomes rose at a 6.3% annual rate in the second quarter, twice as much as the Consumer Price Index. Rising incomes have boosted the US economy substantially even as energy prices reach records.

Manufacturing in the Chicago area unexpectedly contracted in August for the first time since April 2003, suggesting record oil prices are slowing factory demand, Bloomberg said. The new-orders component of the index fell to 46.5 from 69.6. The prices paid component rose to 62.9 from 61.3. The employment component of the index fell to 51.7 from 56.6. This sharp move lower is a worrisome development considering the recent spike in energy prices.

The EIA numbers would normally be viewed as bearish for oil.

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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%

Evening Review
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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.