Factory Orders Show Further Evidence of Strength in Manufacturing

- Factory Orders for August rose 2.5% versus estimates of a 2.0% increase and a 2.5% decline in July.

BOTTOM LINE: Orders placed with US factories rose 2.5% in August, the third increase in four months, signaling manufacturing was gaining strength ahead of Hurricanes Katrina and Rita, Bloomberg reported. Bookings for commercial aircraft surged 9.2% following a 21% decrease in July. Orders for capital goods excluding aircraft, a barometer for future business investment, gained 3.1% after a 3.9% decline in July. The inventory-to-shipments ratio fell to 1.18 months, the lowest level since December, versus 1.2 months the prior month. Unfilled orders rose 1.6% and have now risen 10% over the last 12 months. I continue to believe manufacturing will accelerate through year-end, adding to US growth, as hurricane rebuilding takes hold.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Chesapeake Energy said it agreed to buy Columbia Natural Resources LLC from Triana Energy Holdings LLC for $2.2 billion in cash to take advantage of rising natural-gas prices.
- Nissan Motor and Honda Motor, Japan’s No.2 and No.3 automakers, sold more small cars such as Nissan’s Sentra in the US last month, as Asian companies boosted their market share on demand for fuel-efficient vehicles.
- Australian mining engineers fresh out of college are earning as much as 60% more than graduates hired by investment banks as China’s commodities boom saps talent sought by producers including BHP Billiton.

Wall Street Journal:
- The US Agriculture Dept. plans to start testing seemingly healthy cattle for mad-cow disease.

Reuters:
- The Fed’s Guynn says that a “great deal” of policy accommodation has been removed.

Commercial Times:
- Quanta Computer’s global market share may rise in the second half on robust demand for notebook computers.

Taiwan News:
- The Taiwan government will ask Google to change its description of the island as a province of China.

Late Buy/Sell Recommendations
Goldman Sachs:
- None of note

Night Trading
Asian Indices are +.25% to +1.0% on average.
S&P 500 indicated +.02%.
NASDAQ 100 indicated -.09%.

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Earnings of Note
Company/EPS Estimate
- None of note

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- Factory Orders for August are expected to rise 2.0% versus a 1.9% decline in July.

BOTTOM LINE: Asian indices are higher, boosted by exporting companies in the region after the US dollar gained against the yen. I expect US equities to open modestly higher, led again by tech shares. The Portfolio is 100% net long heading into the day.

Stocks Finish Mixed as Strength in Tech Offset Weakness in Commodity Shares

Indices
S&P 500 1,226.70 -.17%
DJIA 10,535.48 -.31%
NASDAQ 2,155.43 +.17%
Russell 2000 670.55 +.41%
DJ Wilshire 5000 12,281.00 -.02%
S&P Barra Growth 585.25 -.31%
S&P Barra Value 637.25 -.04%
Morgan Stanley Consumer 585.81 -.26%
Morgan Stanley Cyclical 727.64 -.38%
Morgan Stanley Technology 508.39 +.36%
Transports 3,736.59 -.11%
Utilities 437.63 +1.21%
Put/Call .88 +7.32%
NYSE Arms 1.07 +25.55%
Volatility(VIX) 12.46 +4.53%
ISE Sentiment 237.00 +39.41%
US Dollar 90.13 +.68%
CRB 333.22 +.08%

Futures Spot Prices
Crude Oil 65.23 -.11%
Unleaded Gasoline 204.83 -.67%
Natural Gas 14.12 +.73%
Heating Oil 207.00 -.52%
Gold 469.00 -.06%
Base Metals 128.96 -.42%
Copper 175.80 -.06%
10-year US Treasury Yield 4.38% +1.37%

Leading Sectors
Utilities +1.21%
Computer Hardware +1.13%
HMOs +.99%

Lagging Sectors
Insurance -.72%
Steel -1.21%
Oil Tankers -1.25%

Evening Review
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In Play

Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on GOOG, QCOM, MYL and PFE.

Afternoon/Evening Headlines
Bloomberg:
- MCI Inc. said it will pay $315 million as part of a settlement with 15 states and the District of Columbia over tax claims.
- The US dollar rose to a 16-month high against the yen and gained versus the euro, while US Treasuries declined after an index of US manufacturing was higher than forecast.
- US Representative Tom Delay was indicted for a second time in a week by a Texas grand jury in connection with alleged campaign fundraising abuses.

Nikkei English News:
- Matsushita Electric Industrial, Hitachi Ltd. and Pioneer Corp. plan to unveil a plasma display panel that runs on half the power consumed by current plasma sets.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs, Semiconductor longs, Airline longs and Oil Tanker shorts. I exited my IWM and QQQQ shorts and added PWR long in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was modestly positive today as the advance/decline line finished slightly higher, most sectors rose and volume was above average. Measures of investor anxiety were mostly lower into the close. Overall, today’s market action was neutral. The Utility Index is up 51.33% over the last 12 months and is hitting an all-time high today. Historically, this index would be showing some weakness if a substantial increase in inflation was on the horizon.

Stocks Mixed Mid-day as Energy Prices Fall and Long-term Rates Rise

Indices
S&P 500 1,226.29 -.21%
DJIA 10,538.04 -.29%
NASDAQ 2,156.83 +.24%
Russell 2000 670.10 +.35%
DJ Wilshire 5000 12,275.70 -.06%
S&P Barra Growth 585.69 -.24%
S&P Barra Value 636.99 -.08%
Morgan Stanley Consumer 585.31 -.35%
Morgan Stanley Cyclical 728.08 -.32%
Morgan Stanley Technology 508.97 +.48%
Transports 3,733.07 -.20%
Utilities 436.67 +1.0%
Put/Call .88 +7.32%
NYSE Arms 1.01 +18.29%
Volatility(VIX) 12.55 +5.29%
ISE Sentiment 204.00 +20.0%
US Dollar 90.16 +.71%
CRB 332.92 -.02%

Futures Spot Prices
Crude Oil 65.80 -.74%
Unleaded Gasoline 208.00 -.80%
Natural Gas 14.10 +1.36%
Heating Oil 209.00 -1.86%
Gold 469.90 -.51%
Base Metals 128.96 -.42%
Copper 175.90 +1.82%
10-year US Treasury Yield 4.37% +1.23%

Leading Sectors %
Semis +1.17%
HMOs +.94%
Utilities +.89%

Lagging Sectors
Oil Tankers -.85%
Telecom -.85%
Steel -1.04%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Internet longs, Semiconductor longs, Airline longs and Oil Tanker shorts. I exited the remainder of my TLT long this morning and added IWM and QQQQ shorts, thus leaving the Portfolio 75% net long. The tone of the market is slightly positive as the advance/decline line is modestly higher, sector performance is mixed and volume is slightly above average. Measures of investor anxiety are mostly higher. Today’s overall market action is neutral given the rise in long-term rates, decline in energy prices and the mostly positive economic data. During the week ended Sept. 30, the financial industry saw the greatest net insider selling in the S&P 500. Insiders sold $27,440,469 worth of stock and bought $50,922. Overall, insider selling in the S&P 500 dropped considerably for the second week in a row. I expect US stocks to trade modestly higher from current levels into the close on declining energy prices and stabilizing long-term rates.

Today's Headlines

Bloomberg:
- A surge in stock sales and mergers made for the best third quarter ever for investment bankers.
- The US dollar is rising to the highest in 16 months against the yen after the Bank of Japan’s Tankan survey showed business confidence rose less than economists expected.
- RH Donnelley Corp., a publisher of yellow pages telephone directories, agreed to buy Dex Media for $4.2 billion to expand in new markets in the Midwestern US.
- Gasoline prices are falling even as traders worry over US refineries that remain shut from the hurricanes and French facilities that are closed because of union strikes.
- US Energy Secretary Bodman said the US government will help Americans conserve energy in their homes and businesses to east the pain of record natural gas and heating oil prices this winter.
- US Treasuries are falling after an industry report showed manufacturing growth in September unexpectedly accelerated after Hurricane Katrina.
- President Bush chose White House Counsel Harriet Miers to succeed Sandra Day O’Connor on the Supreme Court.

Wall Street Journal:
- US companies have announced plans to bring home $206.2 billion of foreign profits so far this year, spurred on by a one-year tax concession.
- EBay’s $2.6 billion purchase of Skype Technologies SA has been met with a chilly reception from investors.
- The LA Times has turned to shorter reporting, more regional stories, and coverage of celebrities to boost years of sagging circulation and advertising.
- Europe is seeing a head of steam developing for the idea of a flat-rate tax on income, to be paid by all citizens, rich and poor.

NY Post:
- Retailers gearing up for the coming holiday season are cutting prices on some popular toys to lure customers facing higher gasoline prices and a hurricane-damaged economy.
- Marine Corps recruiters in NY are using craigslist.com, a free Internet posting service, to help attract enlistees, citing military officials.