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Monday Watch

Weekend Headlines
Bloomberg:
- Wal-Mart Stores said September sales at its US stores open at least a year are rising within its forecast, led by groceries.
- Iran will be referred to the UN Security Council after a divided nuclear safeguards group cited the Islamic Republic’s intention to make atomic fuel as evidence its motives might not be “peaceful.”
- Texas refineries probably escaped major damage from Hurricane Rita.
- Rita may cost insurers including Allstate Corp. and St. Paul Travelers Cos. $2.5 billion to $6 billion, less than some of last year’s storms in Florida.
- The two hurricanes that battered the southern US over the past month will have a “relatively modest” effect on the world’s largest economy, the president’s chief economic adviser and likely successor to Alan Greenspan said.
- Currency traders are the most bullish on the dollar since June as the highest yields on US Treasuries compared with Germany’s bunds in five years attract investors.
- Boeing reached a tentative labor agreement with its striking machinists after increasing pension payments and maintaining health-care benefits.
- The People’s Bank of China may name banks including HSBC Holdings, Citigroup and Bank of China as market makers in the yuan, a step toward a freely traded currency, bankers and traders familiar with the situation said.
- Nissan Motor will add more fuel-efficient cars next year and may follow with diesel-engine models, CEO Ghosen said.
- A London demonstration against the war in Iraq drew only 10,000 people after the turnout for a similar rally in Washington, DC fell far short of expectations on Saturday.
- Crude oil, gasoline and heating oil are falling in NY after refineries near Houston escaped a direct hit from Hurricane Rita, allowing the industry to prepare for increased energy demand as winter approaches.

Barron’s:
- Comcast and Time Warner may be interested in buying either of Viacom’s cable and CBS units when the company splits up, Legg Mason Wood Walker Managing Director Levin said.

Seattle Times:
- Microsoft Chairman Gates said the software maker has its most exciting products ever ready to be sold during the next 12 months.

NY Times:
- GE’s NBC Universal unit’s talks to acquire DreamWorks SKG probably won’t be finished by the end of their negotiating period next week.
- Yahoo! plans to add more video programs that are designed to be viewed online, citing the company.
- Christie Hefner, CEO and daughter of Playboy magazine founder Hugh Hefner, has plans to expand the company into online “entertainment” and licensing its brand.
- America Online’s decision to move from a subscription-based service to an advertising-based financial model is likely to succeed because of the company’s fiscal health and subscriber loyalty.

Crain’s Chicago Business:
- Chicago trails most of the nation when it comes to hiring people with skills in technology, such as computer programmers, according to a survey by Robert Half Technology.

Financial Times:
- Microsoft and Symantec will announce new company data-protection software this week after IBM released a product that can continuously back up information.

El Universal:
- Venezuela said it may seize or close oil fields operated by foreign companies if they don’t convert existing operating contracts to joint ventures by the Dec. 31 deadline.

Xinhua News Agency:
- China issued new regulations banning foreign investment in Web sites that carry news.

Gazeta Wyborcza:
- Google said it will open its first Polish office in the capital, Warsaw, citing the company.

Weekend Recommendations
Barron's:
- Had positive comments on AMD.

Goldman Sachs:
- Reiterated Outperform on ENH and RE.

Night Trading
Asian indices are +.25% to +1.25% on average.
S&P 500 indicated +.39%.
NASDAQ 100 indicated +.50%.

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Earnings of Note
Company/Estimate
JBL/.36
MU/-.08
WAG/.37

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- Existing Home Sales for August are estimated to fall to 7.12M versus 7.16M in July.

BOTTOM LINE: Asian Indices are higher, spurred by gains in exporting shares in the region as oil falls again. I expect US stocks to open modestly higher on lower energy prices, less damage than expected from Rita and gains in Asia. The Portfolio is 75% net long heading into the week.

Weekly Outlook

There are a few important economic reports and some significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. - Existing Home Sales
Tues. - New Home Sales, Consumer Confidence
Wed. - Durable Goods Orders
Thur. - Final 2Q GDP, Final GDP Price Index, Final 2Q Personal Consumption, Initial Jobless Claims, Help Wanted Index
Fri. - Personal Income, Personal Spending, PCE Deflator, Final Univ. of Mich. Consumer Confidence, Chicago Purchasing Manager

A few of the more noteworthy companies that release quarterly earnings this week are:

Mon. - Jabil Circuit(JBL), Micron Technology(MU), Walgreen Co.(WAG)
Tues. - Lennar Corp.(LEN), Paychex Inc.(PAYX)
Wed. - Redhat Inc.(RHAT)
Thur. - Family Dollar Stores(FDO)
Fri. - Doral Financial(DRL), Saks Inc.(SKS), Tommy Hilfiger(TOM)

Other events that have market-moving potential this week include:

Mon. - UBS Global Life Sciences Conference, Thomas Weisel Partners Consumer Conference, Fed’s Moskow speaks
Tue. - Merrill Lynch Global Power Conference, Cambridge Energy Research Global Power Summit, CSFB Chemicals Conference, UBS Global Life Sciences Conference
Wed. - Merrill Lynch Global Power Conference, UBS Global Life Sciences Conference, CSFB Chemicals Conference
Thur. - CSFB Global Mining Equip. Conference, UBS Global Life Sciences Conference
Fri. - None of note

BOTTOM LINE: I expect US stocks to finish the week mixed. Equities will likely rise early in the week as Hurricane Rita’s damage was not as bad as feared. However, concerns regarding economic growth and earnings will likely pressure shares toward week’s end. My trading indicators are giving mostly bearish signals and the Portfolio is 75% net long heading into the week.

Economic Week in Review

ECRI Weekly Leading Index 134.30 -.30%

The NAHB Housing Market Index for September fell to 65 versus estimates of 67 and a reading of 67 in August. Optimism among US homebuilders was the lowest in more than two years in September as the cost of energy and lumber rose in the aftermath of Hurricane Katrina, Bloomberg said. “The housing market suddenly looks a little less frothy today,” said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi.

Housing Starts for August fell to 2009K versus estimates of 2025K and 2035K in July. Building Permits for August fell to 2124K versus estimates of 2130K and 2171K in July. US housing starts fell 1.3% last month, keeping construction on pace to surpass last year’s total, which was the highest since 1978, Bloomberg reported. Starts fell 5.2% in the Midwest, 4.1% in the Northeast and 6.6% in the South. Starts rose 13% in the West. Construction that was authorized but not yet started rose 5.7% to 238,700 units, which is the most since May 1979. “This number shows that activity is at least leveling off at a high rate,” said James O’Sullivan, a senior economist at UBS Securities.

The FOMC raised the benchmark interest rate 25 basis points to 3.75%. Federal Reserve Policy makers raised the Fed Funds rate for the 11th straight time and signaled they may do so again, saying the US economy faces only a “near-term” setback after Hurricane Katrina, Bloomberg reported. The US economy was “poised to continue growing at a good pace” before the storm, the Fed’s policy statement said. The policy statement also said “core inflation has been relatively low in recent months and longer-term inflation expectations remain contained.” “The bottom line: The strategy of gradually raising interest rates is not over, and unless the economy softens materially, more quarter-point hikes can be expected,” said Lynn Reaser, chief economist of the Investment Strategies Group at Bank of America.

Initial Jobless Claims for last week rose to 432K versus estimates of 450K and an upwardly revised 424K the prior week. Continuing Claims rose to 2666K versus estimates of 2690K and 2578K prior. Workers dislocated by Hurricane Katrina pushed first-time claims for unemployment benefits to the highest in more than two years, Bloomberg reported. About 103,000 claims last week were from people affected by the hurricane. In total, Katrina has been responsible for 214,000 jobless claims so far. The four-week moving-average of claims rose to 376,250 from 347,250 the prior week. The insured employment rate, which tracks the US unemployment rate, rose to 2.1% from 2.0%. “Initial Claims really only went up in places affected by the hurricane,” said Wesley Beal, chief US economist at IDEAglobal.com. “So, the one positive is there’s not a lot of evidence that there’s any weakness that’s developing nationwide.”

Leading Indicators for August fell .2% versus estimates of a .3% fall and a .1% decline in July. The index of leading US economic indicators fell in August for a second straight month as rising gasoline prices sapped consumer confidence. Five of the ten components of the index were actually positive. The declines in consumer confidence and building permits were mainly responsible for the overall decline. “The smaller than expected decline in the index is probably not as bad as the headline would suggest because it was mostly concentrated in consumer sentiment, which may likely bounce back if energy prices stabilize,” said Anthony Chan, senior economist at JPMorgan Asset Management.

BOTTOM LINE: Overall, last week's economic data were modestly negative. Weather held down housing starts to an extent. August was the ninth-wettest month on record in the South and the sixth-wetting in the Central US. Moreover, starts in September will be negatively impacted by Hurricane Katrina. I continue to believe the nationwide housing market is slowing, not plunging, to more healthy and sustainable levels. So far, the US economy appears to be handling the effects of Katrina relatively well. However, a Fed “pause” is still likely before year-end as measures of inflation begin decelerating again over the coming months. I expect jobless claims to make another push higher this week as more Katrina/Rita victims file. September non-farm payrolls will fall substantially from recent levels as a result of the storm. However, payrolls will bounce back over the ensuing months as rebuilding begins in earnest. A rebound in consumer sentiment and increasing building permits should help boost the Leading Indicators during the fourth quarter. Finally, the ECRI Weekly Leading Index fell .30% to 134.30 and is forecasting decelerating healthy US economic growth.

Market Week in Review

S&P 500 1,215.29 -1.83%*



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was slightly negative considering another spike in unleaded gas futures and the potential catastrophic damage Hurricane Rita may have wrought. The advance/decline line fell, almost every sector declined and volume was slightly above average on the week. Measures of investor anxiety were mostly higher. The AAII % Bulls fell for the week and is now at below-average levels. In my opinion, while measures of investor fear are somewhat elevated from an intermediate-term standpoint, they are still registering too much complacency in the short-term for a sustainable rally to occur. One more shakeout is likely in October related to earnings worries which should set the stage for a strong year-end rally. The average 30-year mortgage rate rose to 5.80%, but is still only 59 basis points above all-time lows set in June 2003 and down from 2005 highs of 6.04% set in April. The benchmark 10-year T-note yield fell 3 basis points on the week as traders sought a safe haven from Rita and began to anticipate slower economic growth. The US dollar rose on increasing expectations for further Fed rate hikes and economic stagnation in Europe. Gold fell slightly on the week as traders worried less about inflation and more about slowing economic growth. Finally, most commodity prices rose in anticipation of further disruptions from another hurricane. While crude oil rose slightly on the week, it is still down around 12% from highs seen after Katrina. I continue to believe global oil demand destruction, which began a number of months ago, has accelerated meaningfully over the last few weeks and will send crude prices substantially lower over the intermediate-term.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,215.29 -1.83%
DJIA 10,419.59 -2.09%
NASDAQ 2,116.84 -2.01%
Russell 2000 655.46 -2.46%
DJ Wilshire 5000 12,123.85 -1.86%
S&P Equity Long/Short Index 1,068.45 +.12%
S&P Barra Growth 581.13 -1.51%
S&P Barra Value 629.95 -2.12%
Morgan Stanley Consumer 577.17 -1.88%
Morgan Stanley Cyclical 722.58 -1.86%
Morgan Stanley Technology 496.26 -1.62%
Transports 3,623.06 -.29%
Utilities 419.14 -2.26%
S&P 500 Cum A/D Line 7,072.00 -8.48%
Bloomberg Crude Oil % Bulls 62.0 +57.8%
Put/Call .94 +16.05%
NYSE Arms .82 +9.33%
Volatility(VIX) 12.96 +15.51%
ISE Sentiment 213.00 +97.22%
AAII % Bulls 39.47 -23.25%
US Dollar 89.29 +1.42%
CRB 323.11 +2.45%

Futures Spot Prices
Crude Oil 64.19 +1.37%
Unleaded Gasoline 208.56 +16.51%
Natural Gas 12.32 +10.73%
Heating Oil 194.90 +6.21%
Gold 467.40 -.57%
Base Metals 130.01 +4.68%
Copper 170.25 +2.75%
10-year US Treasury Yield 4.24% -.58%
Average 30-year Mortgage Rate 5.80% +1.05%

Leading Sectors
Oil Tankers +.91%
Energy +.49%
Oil Service -.20%

Lagging Sectors
Retail -3.29%
Airlines -3.70%
Computer Hardware -3.75%

One-Week High-Volume Gainers
One-Week High-Volume Losers

*5-Day % Change