Retail Sales Still Healthy, Industrial Production Slows from Katrina, Gasoline Supplies Rise

- Advance Retail Sales for August fell 2.1% versus estimates of a 1.4% decline and a 1.8% gain in July.
- Retail Sales Less Autos for August rose 1.0% versus estimates of a .5% increase and a .5% gain in July.
- Industrial Production for August rose .1% versus estimates of a .3% gain and a .1% increase in July.
- Capacity Utilization for August was 79.8% versus estimates of 79.8% and 79.8% in July.
- The Energy Information Agency (EIA) reported that crude inventories fell 6.56 million barrels vs. estimates of a 2-million-barrel decline. Gasoline inventories rose 1.89 million barrels vs. estimates of a 2.2 million barrel decline. Distillate inventories fell 1.11 million barrels vs. estimates of a 150,000 barrel rise.

BOTTOM LINE: US retail sales fell in August by the most since November 2001 as auto purchases slumped after a buoyant July, Bloomberg reported. Excluding autos and purchases at service stations, sales rose .5%, right at the long-term average. This is remarkable considering the recent headwinds. Auto purchases fell as employee discounts were phased out. Sales accelerated for building and heath care products.

US industrial production rose .1% in August, less than expected, as Hurricane Katrina disrupted oil, gas and chemicals production in the US Gulf Coast region, Bloomberg said. Year-over-year gains in industrial production averaged 3.3% in the first seven months of this year versus a 4.1% gain last year. Historically, oil prices are highly correlated to global industrial production.

Oil is rising to $64.27 on the EIA report, notwithstanding the rise in gas supplies.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Three New Orleans suburbs will be reopened to residents tomorrow morning.
- US Representative William Jefferson, a Democrat from New Orleans, was escorted by the National Guard to his home in that city to retrieve personal belongings while rescues were still under way. FBI officials raided Jefferson’s home in New Orleans last month and another in Washington in connection with a federal probe.
- LS-Nikko Copper, operator of the world’s largest copper smelter, said prices may fall as much as 30% next year amid expectations increasing supply will meet demand driven by China.
- China’s President Hu Jintao, meeting with President Bush in NY, said his government is “working hard” to address the trade imbalance with the US that has been a source of tension.
- Australian consumer confidence slumped in September to the lowest in more than two years as record gasoline prices threaten to damp spending and curb growth in Asia-Pacific’s fifth-largest economy.

Wall Street Journal:
- H&R Block is trying to lure brokers from larger firms to increase profit at its investment-services unit.

Independent:
- Wal-Mart’s Asda, the second-biggest UK grocery chain, has drawn up a plan to get rid of its union.

Shanghai Securities News:
- China will ease rules for companies to sell shares and list on stock exchanges.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on MSFT, DNA, BBY and ACN.
- Reiterated Underperform on LSI.

Night Trading
Asian Indices are -.50% to +.25% on average.
S&P 500 indicated +.10%.
NASDAQ 100 indicated +.06%.

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8:30 am EST
- Advance Retail Sales for August are estimated to fall 1.4% versus a 1.8% gain in July.
- Retail Sales Less Autos for August are estimated to rise .5% versus a .3% increase in July.

9:15 am EST
- Industrial Production for August is estimated to rise .3% versus a .1% gain in July.
- Capacity Utilization for August is estimated to rise to 79.9% versus 79.7% in July.

10:30 am EST
- Platt's estimates weekly crude inventories fell 2.3 million barrels, gasoline inventories fell 2.5 million barrels, distillate inventories rose 750,000 barrels and refinery utilization rose 2.0%.

BOTTOM LINE: Asian indices are mostly lower as worries over US consumer confidence weighed on exporters in the region. I expect US equities to open modestly lower. The Portfolio is 75% net long heading into the day.

Stocks Finish Lower on Profit-taking and Consumer Worries

Indices
S&P 500 1,231.20 -.75%
DJIA 10,597.44 -.80%
NASDAQ 2,171.75 -.51%
Russell 2000 673.13 -1.13%
DJ Wilshire 5000 12,308.65 -.77%
S&P Barra Growth 589.20 -.81%
S&P Barra Value 637.68 -.70%
Morgan Stanley Consumer 584.69 -1.12%
Morgan Stanley Cyclical 744.12 -.87%
Morgan Stanley Technology 510.16 +.44%
Transports 3,591.21 -1.55%
Utilities 417.12 -.82%
Put/Call 1.04 +20.93%
NYSE Arms 1.09 +14.68%
Volatility(VIX) 12.39 +6.35%
ISE Sentiment 139.00 -21.02%
US Dollar 87.75 +.09%
CRB 318.00 -.62%

Futures Spot Prices
Crude Oil 63.23 -.17%
Unleaded Gasoline 189.75 +1.27%
Natural Gas 10.62 -3.73%
Heating Oil 184.80 +1.86%
Gold 450.50 -.71%
Base Metals 128.32 -.24%
Copper 162.05 -1.43%
10-year US Treasury Yield 4.12% -1.06%

Leading Sectors
Wireless +.42%
Software +.33%
Semis +.23%

Lagging Sectors
Oil Tankers -2.44%
Broadcasting -2.86%
Airlines -6.98%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on FCEA, PSSI, KR, ENH and FCX.

Afternoon/Evening Headlines
Bloomberg:
- Google won a court ruling that allows a former Microsoft executive to recruit staff at the company’s research center in Beijing.
- Gtech Holdings may be sold in pieces to buyers interested in its global lottery operations and gaming equipment business, analysts said.
- US Treasury Tax receipts rose 13% during August on strong corporate profits.
- Morgan Stanley money-management head Mitchell Merin is leaving the firm, the third senior executive close to ousted CEO Purcell to exit since John Mack became CEO in June.
- Duke Energy said it will shut its money-losing wholesale power and trading business, selling 6,200 megawatts of generation and taking a third-quarter pretax charge of about $1.3 billion.
- Louisiana’s attorney general filed 34 criminal charges against the husband and wife who owen St. Rita’s Nursing Home in St. Bernard Parish, where 34 decomposing bodies were found after Hurricane Katrina swept through the state.

NY Times:
- Northwest Airlines and Delta Air Lines may seek bankruptcy protection as soon as tomorrow.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Energy-related shorts, Internet longs and Semiconductor longs. I added IWM and QQQQ shorts in the afternoon, thus leaving the Portfolio 75% net long. The tone of the market was negative today as the advance/decline line finished lower, most sectors declined and volume was slightly above average. Measures of investor anxiety were higher into the close. Overall, today’s market action was negative. Tech shares outperformed substantially today. The Morgan Stanley Tech Index is now up about 3% for the month, which bodes very well for a strong fourth quarter.

Stocks Modestly Lower Mid-day on Profit-taking

Indices
S&P 500 1,238.18 -.19%
DJIA 10,662.09 -.19%
NASDAQ 2,182.98 +.01%
Russell 2000 676.94 -.57%
DJ Wilshire 5000 12,367.96 -.29%
S&P Barra Growth 592.44 -.26%
S&P Barra Value 640.57 -.25%
Morgan Stanley Consumer 587.63 -.62%
Morgan Stanley Cyclical 747.68 -.39%
Morgan Stanley Technology 512.27 +.84%
Transports 3,603.60 -1.21%
Utilities 418.94 -.39%
Put/Call 1.04 +20.93%
NYSE Arms .94 -.87%
Volatility(VIX) 11.91 +2.40%
ISE Sentiment 132.00 -25.00%
US Dollar 87.76 +.09%
CRB 318.46 -.48%

Futures Spot Prices
Crude Oil 63.05 -.46%
Unleaded Gasoline 188.70 +.71%
Natural Gas 10.81 -2.0%
Heating Oil 183.10 +.92%
Gold 450.00 -.82%
Base Metals 128.32 -.24%
Copper 162.55 -1.13%
10-year US Treasury Yield 4.13% -.74%

Leading Sectors %
Wireless +.85%
Semis +.78%
Software +.78%

Lagging Sectors
Oil Tankers -2.04%
Broadcasting -2.23%
Airlines -5.41%

BOTTOM LINE: The Portfolio is slightly higher mid-day on gains in my Energy-related shorts, Semiconductor longs and Internet longs. I added to my BBY and GNSS longs and various shorts this morning, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are lower and volume is slightly below average. Measures of investor anxiety are higher. Today’s overall market action is negative given the better-than-expected PPI reading and lower long-term rates. The Johnson Redbook same-store sales index rose 3.2% year-over-year last week vs. a 3.0% rise the prior week. This week's gain is up from a 1.5% increase in late April and the 19th week in a row the index has risen 3% or more. The Morgan Stanley Retail Index is down 0.91% today as traders point to Best Buy's (BBY) report as evidence of a "weak consumer.” I disagree with this assessment. I expect US stocks to trade higher from current levels into the close on short-covering.

Today's Headlines

Bloomberg:
- Iraqi President Talabani told the Washington Post that the US might remove 50,000 troops, more than a third of its force, by the end of the year because Iraq’s own security personnel can replace them.
- Brown-Forman, maker of Jack Daniel’s and Southern Comfort, and UK billionaire Richard Branson will introduce Virgin Vines, a line of wines geared toward young adults.
- Toyota Motor said all its vehicles may eventually be run by hybrid gasoline-electric motors, as record fuel prices curb demand for conventional autos.
- Nokia Oyj raised its revenue and profit forecasts for this quarter as handset sales exceeded the company’s expectations.
- Power may be restored to the center of New Orleans and the historic French Quarter in as soon as a week, clearing the way for more businesses to return.
- US 10-year Treasuries rose the most in almost two weeks after a government report showed wholesale prices increased less than forecast in August.

Wall Street Journal:
- Amazon.com will introduce a service today that will sell gift certificates in exchange for change at Coinstar coin-counting machines in the US.
- Goldman Sachs’ private-equity unit has made an unsolicited expression of interest in acquiring US-based computerized lottery operator Gtech Holdings.
- GM CEO Wagoner said the world’s largest automaker “will continue to tighten capacity” in the US and continue to cut its workforce.
- The SEC will probably give small companies another year to comply with a Sarbannes-Oxley rule designed to improve controls over financial reporting.
- Churches from the southern US are sending an average of six buses a day to Baton Rouge’s convention center to help Hurricane Katrina survivors who have taken shelter there.
- PowerShares WilderHill Clean Energy Portfolio, a US exchange-traded fund that concentrates on alternative-energy companies, saw its assets grow 58% in the two weeks ended Sept.9, during which Hurricane Katrina devastated the Gulf coast.

NY Times:
- The US is seeking to build 30,000 homes every two weeks that may reach 30,000 within weeks in a bid to bring back people to Louisiana, Mississippi and Alabama in the wake of Hurricane Katrina.

Kuwait News Agency:
- Algeria, Africa’s third-largest oil producer, plans to boost output by 23% next year to 1.6 million barrels a day.