Core PPI Unchanged, Trade Deficit Improves

The Producer Price Index for August rose .6% versus estimates of a .7% gain and a 1.0% increase in July.
- The PPI Ex Food & Energy for August was unchanged versus estimates of a .1% increase and a .4% gain in July.
- The Trade Deficit for July shrank to -$57.9B versus estimates of -$59.8B and -$59.5B in June.

BOTTOM LINE: US producer prices rose less than forecast in August, suggesting limited signs of accelerating inflation before Hurricane Katrina sent crude oil to a record high and pushed up costs of other raw materials, Bloomberg said. The price of gasoline rose 9.5% last month. However, unleaded gasoline futures have declined around 35% over the last week. Moreover, passenger car prices fell 1.3 percent, food prices fell .3 percent, capital equipment prices declined .1 percent and computer prices declined .4% during August. This is a very positive number, however next month’s reading will likely show acceleration.
The US Trade Deficit unexpectedly narrowed to $57.9 billion in July as exports rose to a record and demand for imported pharmaceuticals, clothing and aircraft fell amid soaring energy prices, Bloomberg reported. Exports climbed .4%, while imports fell .7 percent in July. I would expect the deficit to widen in August to account for the increase in commodity prices during the month.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Toyota Motor plans to produce as many as 400,000 hybrids next year, at least 33% more than its 2005 goal, while trying to lower the vehicles’ cost.
- Crude oil was little changed in NY after falling to a three-week low yesterday on expectations petroleum product shipments from Europe will help ease shortages caused by Hurricane Katrina as summer gasoline demand wanes.
- China, the world’s second-largest oil consuming nation, will delay purchases of the fuel for its emergency stockpile because energy prices are too high, a government official said.

Wall Street Journal:
- Medtronic CEO Collins is interested in buying some stent technology from Johnson & Johnson or Guidant Corp.
- Delta Air Lines is in talks with its pilots union about a second pay cut within a year.

AFP:
- Pakistan President Musharraf plans to build a fence on the border with Afghanistan to help prevent movements by militants who are trying to destabilize the government in Kabul.

China Business Times:
- China may introduce trading in foreign-exchange futures next year as part of preparations to let the market play a bigger role in setting the value of the yuan.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on CVS, EBAY and TYC.

Banc of America:
- Upgraded GP to Buy, target $38.

Night Trading
Asian Indices are +.25% to +.50% on average.
S&P 500 indicated -.10%.
NASDAQ 100 indicated -.15%.

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Earnings of Note
Company/EPS Estimate
BBY/.38
DPTR/.14
LGND/-.14

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Producer Price Index for August is estimated to rise .7% versus a 1.0% increase in July.
- The PPI Ex Food & Energy for August is estimated to rise .1% versus a .4% increase in July.
- The Trade Deficit for July is estimated to widen to -$59.8B versus -$58.8B in June.

2:00 pm EST
- The Monthly Budget Statement for August is estimated to widen to -$49.9B versus -$41.1B in July.

BOTTOM LINE: Asian indices are higher as falling energy prices boosted exporters in the region. I expect US equities to open modestly lower on a higher-than-expected PPI reading and rally later in the afternoon on short-covering. The Portfolio is 100% net long heading into the day.

Stocks Finish Modestly Higher on Merger Activity and Falling Energy Prices

Indices
S&P 500 1,240.56 -.07%
DJIA 10,682.94 +.04%
NASDAQ 2,182.83 +.34%
Russell 2000 680.82 +.41%
DJ Wilshire 5000 12,403.63 -.03%
S&P Barra Growth 594.00 -.04%
S&P Barra Value 642.19 -.10%
Morgan Stanley Consumer 591.34 -.14%
Morgan Stanley Cyclical 750.64 +.46%
Morgan Stanley Technology 507.95 +.35%
Transports 3,647.88 +.70%
Utilities 420.57 -.11%
Put/Call .86 +13.16%
NYSE Arms .95 +27.97%
Volatility(VIX) 11.65 -2.75%
ISE Sentiment 176.00 -9.28%
US Dollar 87.68 +.91%
CRB 319.98 -1.03%

Futures Spot Prices
Crude Oil 63.22 -1.34%
Unleaded Gasoline 188.30 -3.91%
Natural Gas 10.87 -3.44%
Heating Oil 181.30 -4.40%
Gold 453.30 +.07%
Base Metals 128.63 +1.21%
Copper 163.80 +2.12%
10-year US Treasury Yield 4.17% +1.26%

Leading Sectors
Airlines +2.75%
Broadcasting +2.66%
I-Banks +1.11%

Lagging Sectors
Oil Tankers -1.77%
Energy -2.03%
Oil Service -2.66%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on ODP.

Afternoon/Evening Headlines
Bloomberg:
- Michael Brown resigned as head of the US Federal Emergency Management Agency.
- Federal Reserve Bank of Dallas President Richard Fisher said hw will “not rush to judgment” about the effects of Hurricane Katrina on the US economy and how central bankers ought to repond.
- Abbott Labs’ Xinlay prostate-cancer pill and OSI Pharmaceuticals’ Tarceva for pancreatic cancer both threaten serious side affects without doing much so slow cancer growth, US regulators said.
- Ford Motor agreed to sell Hertz Corp., the largest US car-rental company, to investors Clayton, Dubilier & Rice, Carlyle Group and Merrill Lynch’s buyout unit for about $15 billion.
- Oracle’s agreement to buy Siebel Systems caps $16.6 billion of US deals announced today, the busiest day for mergers in more than two months, and suggests companies are confident about the economy’s prospects.
- Parts of Los Angeles, the second-largest US city, lost electrical power this afternoon, affecting areas including the downtown and Hollywood.
- Crude oil and gasoline fell on signs record fuel prices and the disruptions cuased by Katrina will reduce consumption.

BOTTOM LINE: The Portfolio finished substantially higher today on gains in my Energy-related shorts, Internet longs, Retail longs, Airline longs and Semiconductor longs. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, sector performance was mixed and volume was slightly above average. Measures of investor anxiety were mostly higher into the close. Overall, today’s market action was slightly positive. I will be looking to add to my Best Buy (BBY) long on any temporary weakness surrounding tomorrow's earnings report. While I expect all of retail to outperform through year-end, Best Buy is my favorite stock in the group. Shares should rise substantially from current levels.

Stocks Modestly Higher Mid-day as Energy Prices Fall Again

Indices
S&P 500 1,239.93 -.12%
DJIA 10,677.25 unch.
NASDAQ 2,180.35 +.22%
Russell 2000 679.76 +.25%
DJ Wilshire 5000 12,400.48 -.05%
S&P Barra Growth 594.10 -.03%
S&P Barra Value 642.00 -.13%
Morgan Stanley Consumer 591.36 -.14%
Morgan Stanley Cyclical 749.08 +.25%
Morgan Stanley Technology 508.11 +.39%
Transports 3,652.60 +.84%
Utilities 419.65 -.33%
Put/Call .79 +3.95%
NYSE Arms .94 +26.82%
Volatility(VIX) 11.74 -2.0%
ISE Sentiment 195.00 +.52%
US Dollar 87.64 +.86%
CRB 319.84 -1.08%

Futures Spot Prices
Crude Oil 63.10 -1.53%
Unleaded Gasoline 187.50 -4.32%
Natural Gas 11.13 -1.09%
Heating Oil 181.50 -4.30%
Gold 453.70 +.15%
Base Metals 128.63 +1.21%
Copper 164.40 +2.49%
10-year US Treasury Yield 4.17% +1.45%

Leading Sectors %
Airlines +2.48%
Broadcasting +1.39%
Computer Hardware +1.15%

Lagging Sectors
HMOs -.99%
Energy -1.62%
Oil Service -1.94%

BOTTOM LINE: The Portfolio is substantially higher mid-day on gains in my Energy-related shorts, Semiconductor longs, Retail longs, Airline 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, sector performance is mixed and volume is about average. Measures of investor anxiety are mostly lower. Today’s overall market action is neutral given the increase in long-term rates and decline in energy prices. Unleaded gas futures have plunged about 35% since their peak during Hurricane Katrina about a week ago. This bodes well for the economy, but likely means a Fed “pause” is less likely. I expect US stocks to trade mixed-to-higher from current levels into the close.

Today's Headlines

Bloomberg:
- Reinsurers are seeking to increase premium rates for coverage of oil platforms in the Gulf of Mexico by about 35% following losses related to Hurricane Katrina.
- Goldman Sachs, riding a surge in fees from equity and debt underwriting and higher revenue from oil trading, probably led US securities firms to record third-quarter earnings.
- Palestinians set fire to synagogues and other buildings still standing in Israel’s Gaza Strip settlements, as Israeli troops left and Palestinian security forces moved in early today.
- The euro fell to a two-week low against the yen and dropped versus the dollar after Japanese Prime Minister Koizumi was re-elected and polls show none of Germany’s parties will get a majority in next weekend’s election.
- EBay agreed to buy Internet telephone company Skype Technologies SA for $2.6 billion in cash and stock.
- Wachovia Corp. agreed to buy Westcorp for $3.42 billion to expand its auto-finance group.
- Crude oil and gasoline are falling on signs that damage from Hurricane Katrina and record fuel prices will reduce fuel consumption.
- Oracle agreed to buy Siebel Systems for $5.85 billion, leapfrogging SAP AG to become the top seller of programs that manage customer relations.
- US Treasuries are falling as declines in oil and gasoline prices bolstered expectations that the Fed will raise interest rates next week.

Wall Street Journal:
- The FBI and the Defense Dept.’s Defense Intelligence Agency are investing in start-up companies in hope of developing new high-tech products.
- GM is discussing with parts suppliers around the world a reorganization of its purchasing department, as it seeks ways to cut costs.
- Wal-Mart Stores used back up plans for natural emergencies that helped move supplies quickly into regions devastated by Hurricane Katrina.

Barron’s:
- Glickenhaus investment firm founder Seth Glickenhaus said Countrywide Financial is one of the top 10 success stories among US stocks and may double its mortgage business within five years.

Financial Times Deutschland:
- SAP AG has taken 27 corporate clients from its US rival Oracle since January, citing SAP’s US chief.

Gulf News:
- The number of mobile-phone subscribers in the Middle East and North Africa is expected to almost double to 150 million during the next four years.