Stocks Modestly Higher Mid-day as Rita Falls to Category 3 Hurricane

Indices
S&P 500 1,217.21 +.21%
DJIA 10,435.26 +.13%
NASDAQ 2,119.73 +.42%
Russell 2000 656.10 +.76%
DJ Wilshire 5000 12,140.32 +.29%
S&P Barra Growth 581.85 +.13%
S&P Barra Value 630.95 +.26%
Morgan Stanley Consumer 577.99 +.23%
Morgan Stanley Cyclical 723.30 +.81%
Morgan Stanley Technology 496.27 +.40%
Transports 3,625.92 +.42%
Utilities 419.12 +.18%
Put/Call .98 -27.41%
NYSE Arms .75 +1.27%
Volatility(VIX) 12.93 -3.0%
ISE Sentiment 215.00 +10.82%
US Dollar 89.18 +.70%
CRB 322.35 -1.81%

Futures Spot Prices
Crude Oil 64.15 -3.53%
Unleaded Gasoline 201.50 -5.81%
Natural Gas 12.31 -3.75%
Heating Oil 192.50 -5.90%
Gold 467.00 -.70%
Base Metals 130.01 -.20%
Copper 170.00 -.58%
10-year US Treasury Yield 4.24% +1.53%

Leading Sectors %
Gaming +2.83%
Airlines +2.74%
HMOs +2.66%

Lagging Sectors
Oil Service -1.78%
Energy -1.93%
Oil Tankers -2.18%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Retail and Internet longs and Energy-realted shorts. I covered my QQQQ and IWM shorts this morning, thus leaving the Portfolio 75% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are higher and volume is below average. Measures of investor anxiety are lower. Today’s overall market action is positive given the risks posed by Hurricane Rita. The average 30-year mortgage rate rose to 5.80% this week from 5.74% the prior week. This is still down from 6.04% on April 1 and only 59 basis points away from record lows set in June 2003. The Homebuilding Index is up 2.4% over the last two days vs. a .85% gain for the S&P 500. The 10-year T-note yield has risen 8 basis points over this period. I expect US stocks to trade mixed into the close from current levels as lower energy prices offset worries over Hurricane Rita.

Today's Headlines

Bloomberg:
- Walt Disney, whose film unit said it will lose money in the fourth quarter, raised $505 million from investors to reduce the risk of financing movies, the first time it has done so in almost a decade.
- Insurers including Allstate Corp. and St. Paul Travelers cover an estimated $740 billion of property in Hurricane Rita’s path, twice as much as in the three states pummeled by Katrina last month.
- China widened the yuan’s trading band against the euro, yen and Hong Kong dollar, allowing the currency to trade more freely for the second time since July 21.
- Iran warned that the European Union’s US-backed resolution that would send the Islamic Republic to the UN Security Council for possible sanctions over its nuclear program would be a “dangerous” development that may lead to confrontation.
- Merrill Lynch, Goldman Sachs and Bear Stearns are hiring the most bankers and traders in at least five years as profits set records.
- Genentech stopped enrolling women with advanced ovarian cancer in a trial testing another use for its Avastin drug after researchers noticed higher rates of gastrointestinal perforations.
- Gasoline and crude oil are falling as Hurricane Rita was forecast to make landfall tomorrow to the east of the Houston refining center.

Wall Street Journal:
- The US Dept. of Homeland Security has mobilized military forces to assist in rescue missions after Hurricane Rita strikes.
- Wal-Mart Stores is offering more variations of digital music players and selling an eight-megapixel digital camera from Japan’s Canon for about $1,000.
- Merck researchers will double enrollment in a trial of its experimental AIDS vaccine after initial tests yielded positive results.
- Companies including UnitedHealth Group and Health Net are facing stiff competition to offer prescription-drug benefits to seniors, suggesting a future shakeout of the market.

NY Times:
- President Bush plans to visit Texas today before Hurricane Rita hits to lead federal efforts in anticipation of the storm.

Washington Post:
- The US, which has planned to deploy as many as 125,000 trailers in the Gulf Coast in the wake of Hurricane Katrina, yesterday had 10,100 trailer homes in Louisiana, Mississippi and Alabama.

Economic Releases

- None of note

Links of Interest

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Friday Watch

Late-Night Headlines
Bloomberg:
- Here is an interactive map of the oil rigs and platforms in the path of Hurricane Rita.
- Gasoline and crude oil are falling in NY after Hurricane Rita weakened its path toward Texas and shifted eastwards away from the heart of the refining industry. As well, the Bush administration said they would tap the Strategic Petroleum Reserve again if needed.

Wall Street Journal:
- Hurricane Rita’s affect on commercial-mortgage-backed securities by be three times as great as that of Hurricane Katrina’s.
- Time Inc., the largest US magazine publisher, received a subpoena from a federal prosecutor investigating the industry’s circulation practices.

Financial Times:
- China’s securities regulator is considering relaxing rules to allow foreign financial firms to take control of the nation’s securities brokers.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Underperform on DRI.

Business Week:
- Symmetry Medical(SMA), a designer and maker of implants used in joint replacements, may benefit as larger manufacturers outsource their needs, citing Craig Leighton of Lord Abbett.

Night Trading
Asian Indices are -.75% to -.25% on average.
S&P 500 indicated -.03%.
NASDAQ 100 indicated -.06%.

Morning Preview
US AM Market Call
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Earnings of Note
Company/EPS Estimate
GTK/.39
JLG/.59

Upcoming Splits
- None of note

Economic Releases
- None of note

BOTTOM LINE: Asian indices are lower as exporting shares in the region come under pressure again on increasing worries over global growth and Hurricane Rita. I expect US equities to open modestly lower on rising apprehension over Rita. The Portfolio is 50% net long heading into the day.

Stocks Finish Modestly Higher Ahead of Hurricane Rita

Indices
S&P 500 1,214.62 +.37%
DJIA 10,422.05 +.42%
NASDAQ 2,110.78 +.20%
Russell 2000 651.16 +.19%
DJ Wilshire 5000 12,105.59 +.29%
S&P Barra Growth 581.08 +.43%
S&P Barra Value 629.34 +.30%
Morgan Stanley Consumer 576.67 +.57%
Morgan Stanley Cyclical 717.49 +.65%
Morgan Stanley Technology 494.31 +.12%
Transports 3,610.58 +.38%
Utilities 418.38 -.81%
Put/Call 1.35 +20.54%
NYSE Arms .74 -49.28%
Volatility(VIX) 13.33 -3.34%
ISE Sentiment 177.00 +31.1%
US Dollar 88.57 +.49%
CRB 328.29 +.38%

Futures Spot Prices
Crude Oil 66.76 +.39%
Unleaded Gasoline 212.55 -.65%
Natural Gas 12.97 +1.41%
Heating Oil 203.62 -.47%
Gold 468.70 -.34%
Base Metals 130.27 +.31%
Copper 170.75 -.15%
10-year US Treasury Yield 4.18 +.32%

Leading Sectors
Restaurants +3.05%
Retail +2.43%
Homebuilders +2.18%

Lagging Sectors
Gold and Silver -.93%
Alternative Energy -1.08%
Oil Service -1.30%

Evening Review
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In Play

Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on HMA, ALK and TRI.
- Rated SEPR Outperform.

Afternoon/Evening Headlines
Bloomberg:
- Sun Microsystems had its credit rating cut to Ba1 or “junk” by Moody’s Investors Service.
- The US Senate Judiciary Committee approved John Roberts to be the nation’s 17th chief justice, clearing the way for his confirmation by the full Senate, as Democrats split on the decision.

BOTTOM LINE: The Portfolio finished higher today on gains in my Retail longs and Oil Tanker shorts. I did not trade in the afternoon, thus leaving the Portfolio 50% net long. The tone of the market was slightly negative today as the advance/decline line finished modestly lower, sector performance was mixed and volume was about average. Measures of investor anxiety were mostly lower into the close. Overall, today’s market action was slightly positive. Stocks will likely build on gains tomorrow if Rita is downgraded again overnight. However, if things remain the same or worsen, I would expect some more anxiety and profit-taking.