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Friday Watch

Late-Night Headlines
Bloomberg:
- Gasoline futures are falling for the first day in five as some fuel pipelines shut by Katrina were reopened and as refiners prepared to restart plants along the Gulf coast.
- The US Senate approved $10.5 billion in Hurricane disaster aid tonight after returning early from an August recess at President Bush’s request.
- The US dollar is rising against the euro in Asia on speculation its two-day drop to the lowest in three months was excessive.
- Boeing’s machinists authorized a strike after rejecting the company’s wage and benefit offer, a move that will shut down commercial production at the world’s biggest aircraft maker.

AP:
- Hurricane Katrina damage may cost insurance companies $50 billion, including repairs to roads and bridges, citing Standard & Poor’s report.
- Katrina may reduce US GDP by .5 percent in the third quarter, S&P said.
- Louisiana Governor Kathleen Blanco said Arkansas National Guardsmen were prepared to use deadly force as they try to restore order in New Orleans.

Financial Times:
- European countries are preparing to send emergency petrol stockpiles to the US amid concerns that some oil refineries hit by Hurricane Katrina may remain shut for several months, citing the IEA.
- Massachusetts wants state employees to start using open-source software to create documents rather than Microsoft Word, Excel and other programs.

Maeil Business Newspaper:
- Samsung Electronics and Avaya Inc. may team up to make telecommunications network equipment.

Guardian:
- Microsoft and HMV Group Plc, the UK operator of music stores and bookshops, will jointly offer digital music downloads to compete with Apple Computer.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Underperform on HRB.

Business Week:
- Shares of Illinois Tool Works(ITW) could benefit from the expanding economy, citing analysts.
- Target Corp.(TGT) is expected to attract investors and its shares may rise at a time when demand for retail stocks is waning.

Night Trading
Asian Indices are unch. to +1.0% on average.
S&P 500 indicated -.08%.
NASDAQ 100 indicated -.16%.

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Earnings of Note
Company/EPS Estimate
- None of note

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Economic Releases
8:30 am EST
- The Change in Non-farm Payrolls for August is estimated at 190K versus 207K in July.
- The Unemployment Rate for August is estimated at 5.0% versus 5.0% in July.
- The Change in Manufacturing Payrolls for August is estimated at 0K versus -4K in July.

BOTTOM LINE: Asian indices are higher as falling energy prices and increased expectations that the US Fed will “pause” boosted exporters in the region. I expect US equities to open modestly higher and to move lower later in the day ahead of the holiday weekend. The Portfolio is 50% net long heading into the day.

Stocks Finish Modestly Lower, Showing More Resiliency

Indices
S&P 500 1,221.59 +.10%
DJIA 10,459.63 -.21%
NASDAQ 2,147.90 -.19%
Russell 2000 668.45 +.29%
DJ Wilshire 5000 12,216.72 +.14%
S&P Barra Growth 583.93 -.08%
S&P Barra Value 633.41 +.28%
Morgan Stanley Consumer 580.32 -.28%
Morgan Stanley Cyclical 737.28 +.15%
Morgan Stanley Technology 495.38 -.20%
Transports 3,670.83 -.27%
Utilities 416.23 +2.15%
Put/Call .87 +8.75%
NYSE Arms 1.23 +56.39%
Volatility(VIX) 13.15 +4.37%
ISE Sentiment 153.00 +14.18%
US Dollar 86.55 -1.18%
CRB 336.20 +2.06%

Futures Spot Prices
Crude Oil 69.56 +.90%
Unleaded Gasoline 238.00 +5.53%
Natural Gas 11.93 +4.0%
Heating Oil 219.25 +5.59%
Gold 447.40 +.20%
Base Metals 130.34 +.74%
Copper 164.40 -.24%
10-year US Treasury Yield 4.03 +.42%

Leading Sectors
Gold & Silver +3.53%
Steel +2.73%
Energy +2.68%

Lagging Sectors
Retail -1.81%
Restaurants -2.17%
Airlines -5.79%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on PFGC and DHR.

Afternoon/Evening Headlines
Bloomberg:
- Robert McTeer, former president of the Federal Reserve Bank of Dallas, said President Bush might persuade Fed Chairman Greenspan to cut rates to soften the economic impact of Hurricane Katrina.
- Ayman al-Zawahiri, top lieutenant to al-Qaeda leader Osama bin Laden, has claimed responsibility for the bombings on London’s transport system on July 7.
- Contributions for victims of Hurricane Katrina climbed to at least $82 million as President Bush asked his father and former President Clinton to lead a fund-raising effort.
- Almost 3,000 National Guard soldiers have been deployed in New Orleans to maintain order and 1,400 more will be added each day for the next three days, US Homeland Security Secretary Michael Chertoff said at a press conference in Washington.
- The US Congress will return early from its summer recess to address damage caused by Hurricane Katrina, according to a congressional aide who requested anonymity.
- President Bush will ask Congress to approve $10.5 billion in emergency spending to help pay for cleanup costs associated with Hurricane Katrina.
- Honda Motor led US auto-sales gains with a 23% increase in August, helping Asian carmakers capture record market share after being eclipsed in July by discounts at GM and Ford.

BOTTOM LINE: The Portfolio finished substantially higher today on gains in my Financial and Storage longs and Technology shorts. I did not trade in the afternoon, thus leaving the Portfolio 50% net long. The tone of the market was neutral today as the advance/decline line finished mostly unchanged, sector performance was mixed and volume was about average. Measures of investor anxiety were mostly lower into the close. Overall, today’s market action was modestly positive given the rise in energy prices and concerns over economic growth. Over the last couple of weeks, I have trimmed the size of my long positions in preparation for a temporary spike in fear related to hurricanes or terrorism. I still believe this is likely over the coming weeks. I plan to add back to these long positions at such time in preparation for a significant rally during the fourth quarter.

Stocks Modestly Lower Mid-day on Economic Concerns and Higher Energy Prices

Indices
S&P 500 1,221.28 +.08%
DJIA 10,460.03 -.21%
NASDAQ 2,147.31 -.22%
Russell 2000 666.70 +.02%
DJ Wilshire 5000 12,203.18 +.03%
S&P Barra Growth 583.61 -.13%
S&P Barra Value 632.80 +.18%
Morgan Stanley Consumer 580.53 -.25%
Morgan Stanley Cyclical 736.01 -.02%
Morgan Stanley Technology 495.91 -.18%
Transports 3,665.92 -.41%
Utilities 415.76 +2.04%
Put/Call .88 +10.0%
NYSE Arms 1.29 +64.11%
Volatility(VIX) 13.15 +4.13%
ISE Sentiment 181.00 +35.07%
US Dollar 86.65 -1.06%
CRB 334.43 +1.52%

Futures Spot Prices
Crude Oil 67.69.00 +.09%
Unleaded Gasoline 235.00 +4.20%
Natural Gas 11.56 +.77%
Heating Oil 214.00 +3.06%
Gold 446.50 +1.92%
Base Metals 130.34 +.74%
Copper 164.80 +1.73%
10-year US Treasury Yield 4.01% +.05%

Leading Sectors
Gold & Silver +3.25%
Steel +2.49%
Utilities +2.05%

Lagging Sectors
Retail -1.87%
Restaurants -1.97%
Airlines -4.88%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Storage and Financial longs and Semiconductor shorts. I covered some of my IWM and QQQQ shorts this morning, thus leaving the Portfolio 50% net long. The tone of the market is modestly negative as the advance/decline line is lower, sector performance is mixed and volume is about average. Measures of investor anxiety are mostly higher. Today’s overall market action is neutral given the disappointing economic reports and rise in energy prices. The AAII % Bulls fell to 31.76% this week from 36.14% the prior week; this reading is at below-average levels. Likewise, the % Bears rose to 37.65% from 31.33% the prior week; this is back to above-average levels. Sentiment will likely become more depressed next week. I expect US stocks to trade mixed from current levels into the close as worries over economic growth offset short-covering.

Today's Headlines

Bloomberg:
- The Fed is “finished” raising its interest-rate target because Hurricane Katrina will have a “profound effect” on the economy, said Paul McCulley, a managing director at PIMCO.
- President Bush urged “zero tolerance” on looters and other lawbreakers as rescuers stepped up efforts to evacuate more than 40,000 people from New Orleans.
- Gasoline futures rose more than 9% on expectations that refineries shut by Hurricane Katrina will take weeks to recover.
- President Bush will take a ground and another air tour tomorrow of the Gulf region.
- Billionaire investor Kirk Kerkorian will increase his stake in GM to 9.53% from about 7.2%.
- Sales at US retailers including Wal-Mart and Federated rose a healthy 3.6% in August on demand for fall clothing and school supplies.
- The US dollar is headed for its biggest two-day decline versus the euro since mid-July on worries over slower US growth.

Wall Street Journal:
- Hurricane Katrina, which has closed New Orleans port and stranded thousands of loaded barges on the Mississippi River, has depressed prices for corn, wheat and soybeans.
- US government emergency funding for victims of Katrina may add as much as $20 billion to the US deficit.
- Katrina may have left as many as two million people without food or shelter.
- US and foreign carmakers may become indirect victims of Katrina as soaring gas prices prompt consumers to shun gas-guzzling large vehicles that have provided the highest profit in recent years.
- A San Francisco-based startup company, Zoom Systems, hopes Americans will buy costly items such as Bose’s headphones and Apple’s iPod sound systems at vending machines.

NY Times:
- Utilities companies, including New York’s Consolidated Edison, have sent utility crews and trucks to help Entergy, Southern Co. and Cleco restore power in hurricane-damaged areas.

Incomes/Spending Remain Strong, Jobless Claims Still Healthy, Housing and Manufacturing Slowing

- Personal Income for July rose .3% versus estimates of a .5% gain and a .5% increase in June.
- Personal Spending for July rose 1.0% versus estimates of a 1.0% gain and a 1.0% increase in June.
- PCE Core(MoM) for July rose .1% versus estimates of a .1% gain and an unchanged reading in June.
- Initial Jobless Claims for last week rose to 320K versus estimates of 315K and 317K the prior week
- Continuing Claims rose to 2607K versus estimates of 2575K and 2571K prior.
- Construction Spending for July was unchanged versus estimates of a .5% increase and a .6% decline in June.
- Pending Home Sales for July fell 1.0% versus estimates of an unchanged reading and a .6% fall in June.
- ISM Manufacturing for August fell to 53.6 versus estimates of 57.0 and a reading of 56.6 in July.
- ISM Prices Paid for August rose to 62.5 versus estimates of 52.0 and a reading of 48.5 in July.

BOTTOM LINE: US personal spending rose 1.0% for a second month in July, outstripping income gains. The spending increase matched June’s rise as the biggest since May 2004 as consumers jammed automobile showrooms, Bloomberg said. American incomes have now risen 6.3% over the past year, over 2 times the rate of inflation.

The Fed’s favorite inflation gauge, the PCE Core, rose .1%(MoM). So far there is very little evidence that soaring commodity prices are resulting in an inflation issue.

The number of Americans filing first-time claims for jobless benefits edged higher to 320,000 last week, as soaring home sales and strong consumer demand sustained job creation, Bloomberg reported. Jobless claims have now remained at or below 320,000 for seven straight weeks, the best stretch since before the stock market bubble burst in 2000. The four-week average of claims rose to 316,750. The insured employment rate which tracks unemployment rate held steady at 2.0%. I expect jobless claims to rise over the coming weeks due to the effects of Katrina.

US Construction Spending was unchanged in July from a month earlier as a rise in homebuilding was offset by a decline in the value of government-funded projects such as roadwork, Bloomberg said. Continued strength in homebuilding, rebuilding from Katrina and the passage of the highway bill will boost construction substantially over the remainder of the year.

US Manufacturing unexpectedly slowed in August as energy prices surged, Bloomberg said. The Prices Paid component of the index rose by the most in 15 years as commodity prices soared. The component of the index that measures order backlogs rose to 50.5 from 49, which is a positive. I expect manufacturing to continue to slow in the near-term, before rebounding several months from now.