Stocks Finish at Session Lows, Led Down by Energy Shares

Indices
S&P 500 1,214.47 -1.0%
DJIA 10,441.11 -.90%
NASDAQ 2,139.36 -.75%
Russell 2000 663.84 -1.0%
DJ Wilshire 5000 12,157.59 -1.0%
S&P Barra Growth 580.39 -.83%
S&P Barra Value 629.89 -1.15%
Morgan Stanley Consumer 587.05 +.21%
Morgan Stanley Cyclical 719.70 -1.09%
Morgan Stanley Technology 503.53 -.96%
Transports 3,695.78 -1.09%
Utilities 429.35 -1.89%
Put/Call .78 -11.36%
NYSE Arms 1.36 +27.18%
Volatility(VIX) 13.20 +5.94%
ISE Sentiment 212.00 -9.28%
US Dollar 90.13 +.04%
CRB 329.72 -1.05%

Futures Spot Prices
Crude Oil 63.86 -.06%
Unleaded Gasoline 202.00 +.21%
Natural Gas 14.29 +.50%
Heating Oil 205.25 +.14%
Gold 469.50 +.04%
Base Metals 130.33 +1.06%
Copper 175.95 -.37%
10-year US Treasury Yield 4.36% -.32%

Leading Sectors
Airlines +2.90%
Drugs +.66%
Disk Drives +.66%

Lagging Sectors
Energy -3.60%
Oil Tankers -3.66%
Computer Hardware -3.72%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on SLB, CSCO and GE.
- Rated IMCL Outperform.

Banc of America:
- Upgraded EXTR, ANDW and FRX to Buy.

Afternoon/Evening Headlines
Bloomberg:
- One billion people may die from smoking-related illnesses this century, citing Oxford University’s Professor Robert Peto.
- Google and Sun Microsystems will jointly offer online word processing and spreadsheet functions in a direct challenge to Microsoft’s Office products.
- Prudential Equity Group LLC fired its chief technical strategist, Ralph Acampora, as the firm shut its technical analysis department to cut costs.
- Crude oil and gas futures dropped sharply on signs that record prices are curtailing fuel demand as refiners repair units damaged by the hurricanes.

Financial Times:
- Procter & Gamble is considering using alternative ingredients, such as palm kernel oil or coconut oil, to replace crude oil used in detergents and shampoos, to reduce the effects of volatile oil prices, citing the company.

BOTTOM LINE: The Portfolio finished substantially higher today on gains in my Medical longs, Semiconductor longs, Airline longs and Energy-related shorts. I added to my IWM and QQQQ shorts and added OS short in the afternoon, thus leaving the Portfolio 25% net long. The tone of the market was negative today as the advance/decline line finished at session lows, most sectors fell and volume was above average. Measures of investor anxiety were mostly higher into the close. Overall, today’s market action was negative. I continue to expect stocks to trade mixed until later in the month when I expect a vigorous year-end rally to begin.

Stocks Modestly Lower Mid-day on Earnings Jitters

Indices
S&P 500 1,221.72 -.41%
DJIA 10,497.94 -.36%
NASDAQ 2,152.88 -.12%
Russell 2000 670.02 -.08%
DJ Wilshire 5000 12,232.98 -.39%
S&P Barra Growth 583.65 -.27%
S&P Barra Value 633.87 -.53%
Morgan Stanley Consumer 588.89 +.53%
Morgan Stanley Cyclical 724.89 -.38%
Morgan Stanley Technology 507.19 -.24%
Transports 3,732.71 -.12%
Utilities 433.13 -1.03%
Put/Call .65 -26.14%
NYSE Arms 1.17 +9.42%
Volatility(VIX) 12.51 +.32%
ISE Sentiment 235.00 unch.
US Dollar 90.09 -.04%
CRB 329.75 -1.04%

Futures Spot Prices
Crude Oil 63.85 -2.55%
Unleaded Gasoline 200.75 -2.65%
Natural Gas 14.20 +1.31%
Heating Oil 204.00 -2.09%
Gold 469.80 +.11%
Base Metals 130.33 +1.06%
Copper 176.60 +.40%
10-year US Treasury Yield 4.37% -.14%

Leading Sectors %
Airlines +3.98%
Disk Drives +1.21%
Networking +.94%

Lagging Sectors
Computer Hardware -2.57%
Energy -2.60%
Oil Tankers -2.83%

BOTTOM LINE: The Portfolio is substantially higher mid-day on gains in my Semiconductor longs, Airline longs, Medical longs and Energy-related shorts. I added back IWM and QQQQ shorts, thus leaving the Portfolio 75% net long. The tone of the market is neutral as the advance/decline line is about even, sector performance is mixed and volume is above average. Measures of investor anxiety are mixed. Today’s overall market action is negative given the slight decline in long-term rates, decline in energy prices and positive economic data. The Johnson Redbook same-store sales index rose 3.2% year-over-year last week vs. a 3.1% rise the prior week. This week's gain is up from a 1.5% increase in late April and the 22nd week in a row the index has risen 3% or more. Moreover, Mastercard said retail sales other than gasoline and autos rose 6.6% in the week ended Sept. 16 from the year-earlier period. The Morgan Stanley Retail Index has stabilized over the last week and a half, rising about 2.0%. Retail should outperform through year-end. 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:
- Physical exercise in mid-life may lower the risk of developing neurological diseases such as Alzheimer’s or dementia in later years, especially in people who may be genetically predisposed, according to a study published online by the medical journal the Landet.
- Manhattan apartment prices fell 13% in the third quarter, the most in 16 years, evidence the most expensive market in the US may have peaked.
- El Paso, owner of the largest US network of interstate natural-gas pipelines, proposed a new line connecting rising production in Rocky Mountain sates to the eastern US.
- Gasoline prices may fall as the shock of $3/gallon at the pump prompts US motorists to drive less.
- GM’s credit rating may drop more than one level when a review is completed in January, Standard & Poor’s analyst Scott Sprinzen said.
- The US dollar rose to a 16-month high against the yen and traded near a three-month high versus the euro on increasing foreign demand for US assets.
- Crude oil is dropping more than $2/bbl. on signs that record prices are curtailing fuel demand as refiners repair units damaged by the hurricanes.
- American consumers may be defying predictions that they would cut spending after Hurricane Katrina pushed up gas prices and undercut confidence, data from MasterCard International show.
- US Treasuries are rising for the first day in four as yields at the highest in more than seven weeks attracted buyers.

Wall Street Journal:
- World steel industry officials are concerned that over-capacity in China could hurt steel prices in the future even though demand worldwide is currently growing.
- Japanese fans of the ancient 31-syllable tanka style of poetry are using cell phones in growing numbers to write and send verses.
- Several House Republicans are backing a measure to guarantee college students can hear “dissenting” views while protected from retaliation against their politics or religion.
- Mississippi state legislators have approved a bill to allow casinos to move onshore in a bid to help gambling companies recover from damage caused by Hurricane Katrina.
- Time Warner’s AOL unit singed an agreement to distribute its Netscape Web browser in Hewlett-Packard personal computers sold in North America, starting early in 2006.

NY Times:
- Microsoft may announce new games for its new Xbox 360 console at an Amsterdam exhibition this week, including one partially developed by David Jones, an inventor of the Grand Theft Auto and Lemmings series.
- A new US program to provide low-cost health insurance benefits for part-time workers has started to enroll employees at six companies.
- Almost every US city has experienced a real-estate market slowdown since the scorching sales of the spring.
- The NY City school system inappropriately billed Medicaid for almost $200 million of transportation costs from 1993 to 2001.

Bond Buyer:
- Louisiana, Texas, Alabama and Mississippi may issue as much as $60 billion in tax-exempt bonds backed by federal guarantees to provide assistance repairing damage from hurricanes Katrina and Rita.

Philadelphia Inquirer:
- EarthLink Inc. was selected by a Philadelphia city group yesterday to build and maintain a local wireless network.

Washington Post:
- The FBI opened about half as many criminal cases last year as it did four years earlier.

Yale Daily News:
- John Bolton, the US ambassador to the United Nations, was hissed yesterday during a speech on foreign policy at Yale University yesterday.

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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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.