Stocks Modestly Higher as Long-Term Rates Decline and Energy Prices Fall

Indices
S&P 500 1,240.91 +.75%
DJIA 10,671.40 +.72%
NASDAQ 2,173.76 +.36%
Russell 2000 676.75 +.47%
DJ Wilshire 5000 12,403.50 +.73%
S&P Barra Growth 594.26 +.70%
S&P Barra Value 643.02 +.92%
Morgan Stanley Consumer 592.60 +.80%
Morgan Stanley Cyclical 747.22 +.77%
Morgan Stanley Technology 506.14 +.55%
Transports 3,618.78 -.89%
Utilities 421.73 +1.39%
Put/Call .77 -10.47%
NYSE Arms .63 -43.27%
Volatility(VIX) 12.09 -6.50%
ISE Sentiment 207.00 +32.69%
US Dollar 86.89 -.17%
CRB 323.20 -.47%

Futures Spot Prices
Crude Oil 64.00 -.76%
Unleaded Gasoline 197.50 -2.97%
Natural Gas 11.28 -.55%
Heating Oil 190.25 -1.40%
Gold 453.20 +.55%
Base Metals 127.09 -.59%
Copper 160.65 -.74%
10-year US Treasury Yield 4.12% -.56%

Leading Sectors %
Gold & Silver +2.66%
Energy +2.44%
Homebuilders +1.84%

Lagging Sectors
Disk Drives -.27%
Oil Tankers -.55%
Airlines -1.79%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Oil Tanker shorts, Semiconductor longs and Internet longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is modestly positive as the advance/decline line is higher, almost every sector is higher and volume is slightly below average. Measures of investor anxiety are lower. Today’s overall market action is slightly positive given declines in energy prices and long-term interest rates. Global demand for oil is not strong and it will turn negative as a result of Katrina. Oil is $3 a barrel lower than its highs before the hurricane. Import prices have declined over the last four months excluding energy. Moreover, prices of goods from China have fallen 1.3% over the last 12 months. Copper is breaking down. It is also below the highs set before the hurricane. Steel prices in the U.S. fell for the 11th straight month in August, notwithstanding the rally in the stocks. The 10-year Treasury-note yield is 4.12%, which is still near historic lows. Unit labor costs may temporarily rise more than the Fed would like as a result of Katrina, however labor costs will begin decelerating again in the first quarter of next year. The bottom line is the market is viewing Katrina as a demand-destroying event, not an inflationary one. I expect US stocks to trade mixed-to-lower from current levels into the close ahead of the 9/11 anniversary.

Today's Headlines

Bloomberg:
- The International Energy Agency cut its estimate for 2005 world oil demand growth for a third month as record-high fuel prices curb sales in China, Thailand and other developing countries in Asia.
- US consumers can expect to pay at least $400 more for heating oil this winter compared with last year after the shutdown of refineries caused by Katrina pushed prices to all-time highs.
- Governments of the North Atlantic Treaty Organization approved the use of ships and planes to help transport European aid to victims of Hurricane Katrina.
- PalmSource is being sold to Japan’s Access for as much as $324 million in cash.
- Oyster beds on the Louisiana coast, the largest US source of the shellfish, were nearly wiped out by Katrina, boosting costs for buyers such as the Oyster Bar in NY’s Grand Central Station.
- US Treasuries rose on expectations higher energy prices in the aftermath of Hurricane Katrina will slow the world’s largest economy.
- Homeland Security Secretary Michael Chertoff will replace FEMA head Michael Brown from his role leading the relief efforts following Hurricane Katrina.

Wall Street Journal:
- Japan’s Honda Motor debuts a new version of the Civic this month that it hopes will revive the model’s appeal to young, sporty buyers in the US.
- The hurricane catastrophe on the Gulf coast will probably cut US second-half economic growth and employment, according to the 56 economists polled in this month’s forecasting survey.
- Disruption caused by Hurricane Katrina may mean more US students turn to distance learning through Internet courses.
- Some Mississippi casino operators are offering their staff transfers to properties in other states in an attempt to hang onto personnel in the wake of Katrina and before reopening their venues.
- The US government requested a federal takeover of local law enforcement in New Orleans after Katrina and was rebuffed by the Louisiana governor’s office.
- Shares of Valero Energy have risen 25% since Katrina wrecked Gulf coast oil installations, pushing refining margins sky-high.

NY Times:
- Ford Motor yesterday agreed to sell its Hertz car-rental unit to a group of buyout firms for about $15 billion in cash and debt.

Market International:
- China has no plan to sell US dollar assets, citing an economist at a state-owned research institute.

Import Prices Rise Less-than-expected

- The Import Price Index for August rose 1.3% versus estimates of a 1.4% increase and a downwardly revised .8% gain in July.

BOTTOM LINE: Prices of goods imported into the US rose in August by the most in five months as crude oil costs climbed even before Hurricane Katrina struck the Gulf Coast, Bloomberg said. The price of crude hit a record the day after Katrina struck. The cost of most other imported industrial goods and consumer products either declined or were mostly unchanged. Excluding petroleum, prices were up 1.8% year-over-year, the smallest increase since March 2004. As well, excluding energy, import prices have now fallen over the last four months. Moreover, the price of goods from China has declined 1.3% over the last 12 months. This is likely the reason the 10-year T-note yield is falling again today to 4.10%. Looking past the temporary effects of Katrina, bond investors see decelerating inflation readings once again.

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Friday Watch

Late-Night Headlines
Bloomberg:
- Asian semiconductor-related stocks are rising, led by NEC Electronics and Chartered Semiconductor Manufacturing, after Texas Instruments and Intel said sales will be better than expected.

Wall Street Journal:
- Boeing and the US Justice Dept. are negotiating a settlement of criminal charges stemming from a military procurement scandal that may mean the company pays as much as $500 million.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on ENH, DDR, NSM, CMX, EMC, DO and PFE.
- Reiterated Underperform on MKL.

Business Week:
- Earnings at CVS Corp.(CVS) are likely to rise because of revenue growth from the stores it bought from Eckerd Corp. last year.
- Chesapeake Energy(CHK) will likely see its shares climb as demand for energy grows in the aftermath of Hurricane Katrina.
- AMN Healthcare Services(AHS), which provides nurse staffing, is likely to benefit from the surge in demand for such services in the aftermath of Hurricane Katrina.

Night Trading
Asian Indices are -.50% to unch. on average.
S&P 500 indicated +.02%.
NASDAQ 100 indicated +.03%.

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Earnings of Note
Company/EPS Estimate
- None of note

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Import Price Index for August is estimated to rise 1.4% versus a 1.1% gain in July.

BOTTOM LINE: Asian indices are mostly lower as rising energy prices pressured exporters in the region. I expect US equities to open modestly lower and rally later in the afternoon. The Portfolio is 100% net long heading into the day.

Stocks Finish Modestly Lower on Losses in the Homebuilding Sector

Indices
S&P 500 1,231.67 -.38%
DJIA 10,595.93 -.35%
NASDAQ 2,166.03 -.28%
Russell 2000 673.47 -.57%
DJ Wilshire 5000 12,313.38 -.38%
S&P Barra Growth 590.14 -.31%
S&P Barra Value 637.18 -.44%
Morgan Stanley Consumer 587.90 -.56%
Morgan Stanley Cyclical 741.48 -.86%
Morgan Stanley Technology 503.37 -.08%
Transports 3,651.30 -.98%
Utilities 415.93 -.96%
Put/Call .86 +2.38%
NYSE Arms 1.12 +58.16%
Volatility(VIX) 12.93 +3.27%
ISE Sentiment 156.00 -9.83%
US Dollar 87.06 +.10%
CRB 324.71 +.16%

Futures Spot Prices
Crude Oil 64.72 +.54%
Unleaded Gasoline 203.80 +.78%
Natural Gas 11.40 +1.78%
Heating Oil 194.20 -1.03%
Gold 451.00 +.45%
Base Metals 127.84 -1.34%
Copper 161.85 -1.73%
10-year US Treasury Yield 4.14% +.19%

Leading Sectors
Gold & Silver +1.71%
Semis +1.14%
Wireless +.40%

Lagging Sectors
Utilities -.96%
Retail -.99%
Homebuilders -1.96%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on FCE/A.
- Reiterated Underperform on PAS.

Afternoon/Evening Headlines
Bloomberg:
- A new semiconductor design may boost the data-storage capacity of mobile telephones to that of personal computers.
- The Fed’s need to continue raising interest rates is “not as obvious” as it was and yet remains a “probable scenario” for the central bank, Fed Bank of San Francisco President Yellen said.
- Borrowing by US consumers increased for a second month in July as Americans financed new cars at discounted prices.
- Texas Instruments said third-quarter sales and profit will exceed earlier forecasts because of stronger-than-expected demand.
- Intel said third-quarter sales will be within previous forecasts amid rising demand for laptops.
- Yellow Roadway cut its third-quarter profit forecast, citing the impact of Hurricane Katrina and increased costs at its Roadway Express unit.

Boston Globe:
- Boston was ranked as the most expensive metropolitan area in the US because of rising home and rental costs.

BOTTOM LINE: The Portfolio finished higher today on gains in my Energy-related shorts, Internet longs, Medical Information System longs and Semiconductor longs. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was negative today as the advance/decline line finished lower, most sectors fell and volume was slightly below average. Measures of investor anxiety were higher into the close. Overall, today’s market action was slightly negative. Insider buy of note: A director at Petco Animal Supplies (PETC) recently purchased 1,818,600 shares of the stock at $21.86-$21.94. The stock is down 40% this year.