Current Account Improves, Foreign Demand for US Assets Soars, Consumer Confidence Plunges on Katrina

- The 2Q Current Account Deficit shrank to -$195.7B versus estimates of -$193.0B and -$198.7B in 1Q.
- Net Foreign Security Purchases for July rose to $87.4B versus estimates of $60.0B and $80.9B in June.
- Preliminary Univ. of Mich. Consumer Confidence for September fell to 76.9 versus estimates of 85.0 and 89.1 in August.

BOTTOM LINE: The US current-account deficit narrowed last quarter for the first time since 2003, Bloomberg reported. The deficit accounted for 6.3% of GDP, down from a record 6.5% in the first quarter. I expect the current-account deficit to improve again during 3Q.

International investors increased their net holding of US assets by $87.4 billion in July, suggesting their optimism for the world’s largest economy. The increase in net holdings of Treasury notes, corporate bonds, stocks and other financial assets was the fourth straight, the first time that’s happened since 1985, Bloomberg reported. I expect foreign demand for US assets to remain strong over the coming months.

US consumer confidence fell to the lowest since 1992 after Hurricane Katrina devastated the Gulf Coast and pushed gasoline prices to a record high, raising concern that Americans may curtail spending, Bloomberg said. The current conditions component of the index fell to 97.7 from 108.2 last month. The expectations component of the index fell to 63.6 from 76.9. The severe decline in confidence should have been expected after Katrina. I expect confidence to remain depressed next month before rebounding into year-end.

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Friday Watch

Late-Night Headlines
Bloomberg:
- Some Microsoft workers are leaving the company because of compensation cuts and the perception of bureaucracy, Business Week reported.
- Hurricane Ophelia weakened to a tropical storm as it crawled along North Carolina’s coast, dumping as much as 17 inches of rain but causing little damage.
- OPEC may raise production quotas for the sixth time in 15 months, joining governments from the US to Japan in increasing supplies as oil and gas trade near records.
- President Bush pledged to help New Orleans and the Gulf Coast recover from Hurricane Katrina in what he said would be “one of the largest reconstruction efforts the world has ever seen.”
- Toyota Motor aims to slash to one year the time to get new models off the drawing board into production, a pace analysts say would be the industry’s fastest and could same tens of millions of dollars annually.

Wall Street Journal:
- China Petrochemical Corp. and China National Petroleum Corp. are keeping a low profile while making acquisitions because of sensitivity about China’s energy demands after the failed Unocal Corp. bid.
- American Sugar Refining’s Domino Sugar shut its Chalmette, Louisiana, plant after Hurricane Katrina, leaving half the state’s sugar cane crop without a refinery for processing.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on ETR and MSFT.

Banc of America Securities:
- Upgraded PCH to Buy.

Business Week:
- Honeywell International(HON) is expected to benefit from the recovering economy.
- The shares of Hyperion Solutions(HYSL) may rise 33% because it’s a buyout target and may increase earnings next year and in 2007.

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

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Economic Releases
8:30 am EST
- The 2Q Current Account Balance is estimated to shrink to -$193.0B from -$195.1B in 1Q.

9:00 am EST
- Net Foreign Security Purchases for July are estimated to fall to $60.0B from $71.2B in June.

9:45 am EST
- Preliminary Univ. of Mich. Consumer Confidence for September is estimated to fall to 85.0 from 89.1 in August.

BOTTOM LINE: Asian indices are mostly lower on weakness in technology 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 Mixed as Higher Long-term Rates Offset Lower Energy Prices

Indices
S&P 500 1,227.73 +.05%
DJIA 10,558.75 +.13%
NASDAQ 2,146.15 -.15%
Russell 2000 665.42 -.14%
DJ Wilshire 5000 12,262.57 +.02%
S&P Barra Growth 586.37 +.03%
S&P Barra Value 637.10 +.06%
Morgan Stanley Consumer 582.97 +.15%
Morgan Stanley Cyclical 733.58 -1.0%
Morgan Stanley Technology 501.74 -.51%
Transports 3,596.99 +.36%
Utilities 424.01 +1.01%
Put/Call .83 -6.74%
NYSE Arms .90 +4.33%
Volatility(VIX) 12.49 -3.25%
ISE Sentiment 108.00 -43.46%
US Dollar 88.10 +.49%
CRB 319.71 -.61%

Futures Spot Prices
Crude Oil 64.49 -.40%
Unleaded Gasoline 188.90 -.51%
Natural Gas 11.35 +.12%
Heating Oil 190.10 -.58%
Gold 459.30 unch.
Base Metals 125.32 -1.87%
Copper 160.25 -.12%
10-year US Treasury Yield 4.21% +1.16%

Leading Sectors
Gold & Silver +1.68%
Restaurants +1.37%
Utilities +1.01%

Lagging Sectors
I-Banks -.86%
Semis -1.01%
Airlines -2.94%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on FDC.

Afternoon/Evening Headlines
Bloomberg:
- Bonds of Albertson’s, the grocer that put itself up for sale on Sept.2, were cut to “sell” from “neutral” by Banc of America.
- Richard Scruggs, a key architect of the $246 billion settlement between the tobacco industry and US states, plans to file a lawsuit against some insurance companies next week on behalf of residents of Mississippi and Alabama.
- Allstate Corp., State Farm Mutual Automobile Insurance, and three other insurers were sued by Mississippi Attorney General Jim Hood for not covering flooding damage to homes in the wake of Hurricane Katrina.
- Delta Air Lines intends to cut $ 1 billion in annual costs by 20008 as part of its plan to reorganize under bankruptcy protection.
- The Chicago Board of Trade increased the price at which it will sell its first shares to the public by as much as 48%, valuing the exchange at about $2.5 billion.
- GE is forming a venture with Barry Sternlicht’s Starwood Capital Group LLC to invest in coal, gas and wind power generation projects.

Alternative Investment News:
- PIMCO, manager of the world’s largest bond fund, is planning a global credit hedge fund.

Financial Times Deutschland:
- The IMF cut its forecasts for economic growth in the euro region and the UK in 2005 and 2006 after oil prices climbed to a record.

BOTTOM LINE: The Portfolio finished unchanged today as losses in my Semiconductor longs were offset by my Energy-related shorts. I added to 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 lower, sector performance was mixed and volume was about average. Measures of investor anxiety were mixed into the close. Overall, today’s market action was neutral. The ISE Sentiment Index hit 95.0 mid-day. This is the first time it has breached 100.0 since mid-June. In isolation, this is bullish for stocks. I expect talk of a Fed "pause" after a September hike will increase after tomorrow's Consumer Confidence report.

Stocks Mixed Mid-day as Long-term Rates Rise and Oil Falls

Indices
S&P 500 1,227.11 unch.
DJIA 10,551.67 +.07%
NASDAQ 2,147.65 -.08%
Russell 2000 665.81 -.08%
DJ Wilshire 5000 12,258.98 -.01%
S&P Barra Growth 586.28 +.02%
S&P Barra Value 636.99 +.04%
Morgan Stanley Consumer 582.93 +.13%
Morgan Stanley Cyclical 733.87 -.96%
Morgan Stanley Technology 502.09 -.44%
Transports 3,599.95 +.45%
Utilities 423.11 +.80%
Put/Call .91 +2.25%
NYSE Arms 1.0 +15.60%
Volatility(VIX) 12.54 -2.87%
ISE Sentiment 106.00 -44.50%
US Dollar 88.13 +.54%
CRB 319.99 -.52%

Futures Spot Prices
Crude Oil 64.50 -.83%
Unleaded Gasoline 189.50 -2.18%
Natural Gas 11.18 +.13%
Heating Oil 189.80 -1.40%
Gold 459.10 +1.19%
Base Metals 125.32 -1.87%
Copper 160.45 -.40%
10-year US Treasury Yield 4.21% +1.16%

Leading Sectors %
Gold & Silver +1.69%
Restaurants +1.29%
HMOs +1.10%

Lagging Sectors
Computer Hardware -.89%
Semis -.95%
Airlines -1.83%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Internet longs and Energy-related shorts. I added to my GOOG long, got stopped-out of an existing long and covered a few existing shorts this morning, thus leaving the Portfolio 75% net long. The tone of the market is 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 slightly negative given the rise in long-term rates. The AAII % Bulls rose to 51.43% this week from 42.31% the prior week; this reading is now above average levels. Likewise, the % Bears fell to 28.57% from 32.69% the prior week; this is right at average levels. I would like to see investor sentiment dip again to set the stage for the vigorous 4Q rally I still anticipate. I expect US stocks to trade modestly higher from current levels into the close on increasing worries over high energy prices.

Today's Headlines

Bloomberg:
- Microsoft will begin selling its new Xbox 360 machine on Nov.22 in North America in time for the Christmas shopping season.
- Manufacturing growth in the Philly area slowed more than expected this month as companies scaled back in anticipation of higher costs and weaker demand after Katrina.
- MasterCard said it plans to sell as much as $2.45 billion of stock in an IPO that values the company at about $5 billion.
- US Treasuries are falling as reports showed a surge in prices paid by manufacturers.
- The euro is falling to a two-week low against the dollar as German opinion polls suggested opposition leader Angela Merkel will be forced into a coalition with Chancellor Gerhard Schroeder’s party after weekend elections.

Wall Street Journal:
- Dell will phase out its last computer based on Intel’s Itanium microprocessor, a move that shows how the chip is losing popularity.
- US airline seating occupancy rose this year according to the US Dept. of Transportation, contradicting assertions by industry executives that airlines need to reduce capacity.
- MGM Mirage would back a change in Mississippi law allowing gambling complexes to be built on land so long as they are situated near the coast.
- Blackstone Group LP may buy US health insurer UICI to enter the business of selling health plans to students, self-employed workers and entry-level employees.
- US car dealerships are cutting prices this month by as much as $2,000 in addition to the employee-pricing discounts offered by automakers.
- Delta Air Lines and Northwest Airlines bankruptcies will create longer lines, delays, and fuller flights for US travelers as the carriers cut back on stag and flights.

NY Post:
- Bed Bath & Beyond is considering an acquisition of Linens ‘n Things, which recently hired an investment bank to explore a possible sale.

Washington Post:
- President Bush plans to increase federal spending to help Hurricane Katrina victims with jobs, housing, education and health care.

AP:
- Boeing won’t be able to deliver 25-30 airplanes as scheduled this month because of the strike by its machinists union.

Handelsblatt:
- Microsoft aims to expand its computer mice and keyboard businesses.