Thursday Watch

Late-Night Headlines
Bloomberg:
- Japan’s government bonds will decline after central bank Deputy Governor Kazumasa Iwata signaled that seven years of deflation may be ending, analysts at Goldman Sachs Group said.
- Investment in China’s factories, roads and other fixed assets grew 27.4% in the first eight months of the year as the government encouraged spending on coal mining and power generation to ease energy shortages.
- Google raised $4.18 billion in a stock sale that will fuel acquisitions and product development to fend off advances by Yahoo! and Microsoft.
- The euro is falling against the dollar in Asia for a third day this week on concern economic growth in Europe will be worse than that of the US.

Wall Street Journal:
- Electronic Data Systems may have its third-quarter earnings cut by 3 cents a share because of a write down related to Delta Air Lines airplane equipment leases.

Financial Times:
- Europe spent 10% more on oil than the US in the first six months of 2005 because its refineries are unable to process cheaper, low-quality crude oil, citing the IEA.

China Business News:
- Google has employed a senior executive from UTStarcom Inc. as chief operating officer in China.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on GILD, GNW, NKE, DIS and GE.
- Reiterated Underperform on CTL and OMI.

Night Trading
Asian Indices are -.25% to +.50% on average.
S&P 500 indicated +.11%.
NASDAQ 100 indicated +.16%.

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Economic Releases
8:30 am EST
- Empire Manufacturing for September is estimated to fall to 15.0 from 23.0 in August.
- The Consumer Price Index for August is estimated to rise .5% versus a .5% increase in July.
- The CPI Ex Food & Energy for August is estimated to rise .2% versus a .1% gain in July.
- Business Inventories for July are estimated to rise .1% versus an unchanged reading in June.
- Initial Jobless Claims for last week are estimated to rise to 350K from 319K the prior week.
- Continuing Claims are estimated to rise to 2600K versus 2593K prior.

12:00 pm EST
- Philly Fed for September is estimated to fall to 13.0 versus a reading of 17.5 in August.

BOTTOM LINE: Asian indices are mostly higher on gains in energy shares in the region. I expect US equities to open modestly lower and to rally later in the afternoon. The Portfolio is 50% net long heading into the day.

Stocks Finish at Session Lows on Higher Energy Prices and Google Secondary Offering

Indices
S&P 500 1,227.16 -.33%
DJIA 10,544.90 -.50%
NASDAQ 2,149.33 -1.03%
Russell 2000 666.35 -1.01%
DJ Wilshire 5000 12,260.73 -.39%
S&P Barra Growth 586.17 -.51%
S&P Barra Value 636.74 -.15%
Morgan Stanley Consumer 582.12 -.44%
Morgan Stanley Cyclical 741.01 -.42%
Morgan Stanley Technology 504.32 -1.14%
Transports 3,584.04 -.20%
Utilities 419.78 +.64%
Put/Call .89 -14.42%
NYSE Arms .87 -20.47%
Volatility(VIX) 12.91 +4.20%
ISE Sentiment 191.00 +37.41%
US Dollar 87.65 -.11%
CRB 321.66 +1.15%

Futures Spot Prices
Crude Oil 65.35 +3.55%
Unleaded Gasoline 194.95 +3.06%
Natural Gas 11.19 +4.01%
Heating Oil 194.15 +5.50%
Gold 454.30 +.96%
Base Metals 127.71 -.48%
Copper 160.80 -1.08%
10-year US Treasury Yield 4.16% +.93%

Leading Sectors
Gold & Silver +3.99%
Oil Service +1.35%
Energy +1.15%

Lagging Sectors
Networking -1.29%
Internet -1.39%
Restaurants -2.07%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on BBY and EL.

Afternoon/Evening Headlines
Bloomberg:
- A federal judge in California said that reciting the Pledge of Allegiance in public schools is unconstitutional, in a ruling that will rekindle a debate over the appropriateness of the use of the phrase “under God.”
- Delta Air Lines filed for bankruptcy protection as soaring fuel costs and pressure to discount fares reduced its cash.
- Northwest Airlines filed for bankruptcy after record fuel prices and a strike by mechanics compounded losses.
- GlaxoSmithKline Plc’s and Celgene’s experimental drugs for blood cancers should win US approval without the comparative testing normally required, a government committee said.

AP:
- Al-Qaeda leader Abu Musab al-Zarqawi declared “all-out war” against Iraqi Shiites in an audiotape attributed to him and posted on the Internet.

Financial Times:
- Samsung Electronics may scale back spending on LCDs as profitability declines and competition intensifies.

Nikkei English News:
- Fujitsu Ltd. plans to increase optical communications equipment shipments to the US as American companies spend more to develop broadband networks.

BOTTOM LINE: The Portfolio finished lower today on losses in my Internet longs, Medical Tech longs and Semiconductor longs. I covered some of my IWM and QQQQ shorts in the afternoon, thus leaving the Portfolio 50% net long. The tone of the market was negative today as the advance/decline line finished substantially lower, most sectors declined and volume was about average. Measures of investor anxiety were most lower into the close. Overall, today’s market action was negative. Oil is back above $65/bbl. This, combined with the Google secondary and expiration, pressured shares this afternoon. I would like to see measures of investor anxiety move to higher levels before month’s end to set the stage for the strong fourth quarter I expect.

Stocks Lower Mid-day on Bounce in Energy Prices and Long-term Rates

Indices
S&P 500 1,228.64 -.21%
DJIA 10,567.82 -.28%
NASDAQ 2,157.66 -.65%
Russell 2000 667.84 -.79%
DJ Wilshire 5000 12,276.87 -.26%
S&P Barra Growth 587.37 -.32%
S&P Barra Value 636.98 -.11%
Morgan Stanley Consumer 582.51 -.37%
Morgan Stanley Cyclical 741.34 -.37%
Morgan Stanley Technology 505.06 -1.0%
Transports 3,586.76 -.13%
Utilities 419.82 +.64%
Put/Call .81 -22.12%
NYSE Arms .64 -41.54%
Volatility(VIX) 13.11 +6.05%
ISE Sentiment 191.00 +37.41%
US Dollar 87.63 -.14%
CRB 320.02 +.64%

Futures Spot Prices
Crude Oil 64.30 +1.89%
Unleaded Gasoline 190.00 +.44%
Natural Gas 10.99 +2.11%
Heating Oil 189.25 +2.84%
Gold 453.90 +.87%
Base Metals 127.71 -.48%
Copper 161.10 -.89%
10-year US Treasury Yield 4.16% +.89%

Leading Sectors %
Gold & Silver +3.08%
Oil Service +1.45%
Energy +1.22%

Lagging Sectors
Networking -.67%
Gaming -.67%
Restaurants -1.14%

BOTTOM LINE: The Portfolio is slightly lower mid-day on losses in my Internet longs, Medical Technology longs and Semiconductor longs. I added to my existing shorts this morning, including IWM and QQQQ, thus leaving the Portfolio 25% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are lower and volume is about average. Measures of investor anxiety are mostly lower. Today’s overall market action is slightly negative given the bounce in energy prices and rise in long-term rates. Insider Buy of Note: A director of Trimeris Inc.(TRMS) recently purchased 197,600 shares between $11.35-$12.02. He now holds 383,100 shares. TRMS is up 5.9% today on above-average volume. I expect US stocks to trade modestly lower from current levels into the close on increasing worries over high energy prices.

Today's Headlines

Bloomberg:
- Google may raise $4.41 billion today in its first stock sale since going public, the largest such offering in more than 10 years.
- Morgan Stanley Chief Economist Stephen Roach, who in May said he was no longer bearish on bonds after “a number of years,” has flip-flopped back to calling for a decline.
- Merrill Lynch agreed to buy Advest Group from French insurer Axa SA for $400 million, adding more than 500 financial advisers.
- Crude oil and heating oil jumped after the EIA reported a larger-than-expected decline in US inventories last week as Hurricane Katrina cut production.

Wall Street Journal:
- GE’s Universal Pictures, Sony Corp., Time Warner’s Warner Bros. and other film companies are making a growing number of movies in China because of low production costs.
- Aggressive patent suits filed by small companies with a broad patent pose a growing problem for large companies including Microsoft.
- The US Dept. of Homeland Security plans to send investigators to areas affected by Hurricane Katrina to ensure that federal aid isn’t misspent.
- US carmakers may now longer be able to set the price paid to parts suppliers, if Collins & Aikman, an interiors maker, wins a court hearing tomorrow.
- Mark Lanier, the plaintiffs’ attorney who won a $253 million ruling in Texas against Merck related to the withdrawn painkiller Vioxx, told financial news network CNBC that the drugmaker is “probably set to win” at trial in New Jersey.

NY Times:
- US companies have contributed $312 million so far toward helping Americans on the Gulf Coast recover from the devastation wrought by Katrina.

NY Post:
- Martha Stewart Living Omnimedia is planning a new lifestyle magazine that will focus on women in their 30s.

Financial Times:
- Federal Reserve policy makers will raise interest rates at their meeting on Sept. 20 and discuss changes to the wording of their policy statement.
- GE plans to sell some industrial units in the next few months.
- Linens ‘n Things is considering putting itself up for sale.

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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