Stocks Finish Sharply Lower, Led Down by Commodity Stocks on Increasing Signs of Slowing Demand

Indices
S&P 500 1,196.39 -1.49%
DJIA 10,317.36 -1.19%
NASDAQ 2,103.02 -1.70%
Russell 2000 644.98 -2.84%
DJ Wilshire 5000 11,956.32 -1.66%
S&P Barra Growth 572.28 -1.40%
S&P Barra Value 619.97 -1.57%
Morgan Stanley Consumer 580.90 -1.05%
Morgan Stanley Cyclical 705.44 -1.98%
Morgan Stanley Technology 497.23 -1.25%
Transports 3,623.52 -1.96%
Utilities 415.17 -3.30%
Put/Call 1.01 +29.49%
NYSE Arms 2.18 +60.12%
Volatility(VIX) 14.55 +10.23%
ISE Sentiment 155.00 -34.60%
US Dollar 89.98 -.13%
CRB 328.20 -.46%

Futures Spot Prices
Crude Oil 62.43 -.57%
Unleaded Gasoline 189.35 -.75%
Natural Gas 14.17 -.08%
Heating Oil 200.00 -.73%
Gold 468.10 -.26%
Base Metals 131.84 +1.16%
Copper 178.15 -.28%
10-year US Treasury Yield 4.34% -.45%

Leading Sectors
Restaurants +.11%
Banks -.55%
Insurance -.73%

Lagging Sectors
Oil Service -3.84%
Coal -4.79%
Steel -5.29%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on DHR, GE, MMM, TYC, FDC, NFX and UTX.

Afternoon/Evening Headlines
Bloomberg:
- Crude oil fell after a government report showed that US fuel demand dropped as refinery operating rates plunged because of hurricane Rita.
- Gasoline fell for the fifth straight session on indications that demand is ebbing because of high prices at the pump.
- Apple Computer may introduce a version of the best-selling iPod device that also plays videos.

Financial Times:
- Louisiana will ask the US government for $1 billion to help rebuild its tourism industry as it recovers from damage caused by Hurricane Katrina, citing Angele Davis, the state’s depart of culture, recreation and tourism secretary.

BOTTOM LINE: The Portfolio finished unchanged today as gains in my Energy-related shorts and Steel shorts offset losses in my Semiconductor longs and Medical Information Systems longs. I exited a few of my IWM and QQQQ shorts in the afternoon, thus leaving the Portfolio 25% net long. The tone of the market was very negative today as the advance/decline line finished at session lows, almost every sector fell and volume was above average. Measures of investor anxiety were higher into the close. Overall, today’s market action was negative. I completely disagree with those who say today's sell-off was because of inflation fears. In my opinion, the drop is a result of worries that high commodity prices and a hawkish Fed will greatly hurt the economy. I expect these fears will increase over the coming weeks during earnings pre-announcement season. However, this will set the stage for a very strong year-end rally as commodity prices continue to fall, Fed worries subside and the economy remains healthy.

Stocks Falling Mid-day, Led Lower Again by Commodity Shares

Indices
S&P 500 1,206.18 -.68%
DJIA 10,390.14 -.49%
NASDAQ 2,121.15 -.85%
Russell 2000 652.25 -1.71%
DJ Wilshire 5000 12,060.53 -.80%
S&P Barra Growth 577.26 -.54%
S&P Barra Value 625.58 -.68%
Morgan Stanley Consumer 585.10 -.33%
Morgan Stanley Cyclical 712.47 -1.0%
Morgan Stanley Technology 501.01 -.51%
Transports 3,673.60 -.61%
Utilities 421.99 -1.71%
Put/Call .95 +21.79%
NYSE Arms 1.31 -2.98%
Volatility(VIX) 13.65 +3.41%
ISE Sentiment 174.00 -26.58%
US Dollar 89.95 -.17%
CRB 329.14 -.19%

Futures Spot Prices
Crude Oil 63.45 -.70%
Unleaded Gasoline 195.50 -3.01%
Natural Gas 14.35 +.89%
Heating Oil 202.50 -1.21%
Gold 469.20 -.02%
Base Metals 131.84 +1.16%
Copper 178.65 +1.16%
10-year US Treasury Yield 4.35% -.23%

Leading Sectors %
Restaurants +.65%
Insurance +.14%
Banks +.11%

Lagging Sectors
Energy -2.21%
Coal -3.77%
Steel -4.14%

BOTTOM LINE: The Portfolio is slightly higher mid-day on gains in my Steel shorts and Energy-related shorts. I added to my IWM and QQQQ shorts this morning, thus leaving the Portfolio market neutral. The tone of the market is negative as the advance/decline line is substantially lower, almost every sector is declining and volume is above average. Measures of investor anxiety are mostly higher. Today’s overall market action is negative given the decline in long-term rates and energy prices. Unleaded gas futures are down about 35% from highs seen last month. This is with refinery utilization down to 69.8%. Demand for gasoline is no longer decelerating. It is falling. I expect US stocks to trade mixed-to-lower from current levels into the close as worries over earnings offsets lower energy prices and rates.

Today's Headlines

Bloomberg:
- The US-led multi national force in Iraq officially handed over military control of Baghdad to the Iraqi Army’s Sixth Division, the US military said.
- Delphi Corp. and several former and current senior executives engaged in a series of sham sales of worthless inventory designed to boost the company’s bottom line, shareholders claim in a lawsuit in NY.
- US Treasuries are rising for a second day after an index showed the biggest part of the US economy in September was weaker than forecast.
- Crude oil retreated after a government report showed that US fuel demand fell last week when refinery operating rates plunged because of Hurricane Rita.

Wall Street Journal:
- President Bush urged Congress to help find funding for relief efforts after Hurricane Katrina by trimming the growth in entitlement programs.
- Asian stock markets are booming and benchmark share indices in India, South Korea and Australia have reached records recently, but analysts warn that high energy prices and rising interest rates might curb the rally.
- Honda Motor plans to introduce cars designed to help transport pets.
- Mazda Motor will introduce a concept car this month that runs on a combination of gasoline, electricity and hydrogen, citing the engineer and manager in charge of the automaker’s hydrogen-fuel program.

NY Times:
- Delphi, the biggest US auto-parts supplier, is ready to file for bankruptcy as early as this week.
- Drugmakers such as Pfizer and Sanofi-Aventis SA are investing in treatments that stimulate the human immune system against diseases such as cancer and hepatitis.
- Hackers could disrupt cellular networks in US cities by sending more text messages than the systems can handle.

Boston Globe:
- Genzyme Corp. plans to begin building a research laboratory in Framingham, Massachusetts, which is part of a $210 million expansion of manufacturing and research.

USA Today:
- The acting chief of FEMA promised to meet an Oct. 15 deadline set by President Bush to move Hurricane Katrina evacuees out of shelters and at least offer them temporary housing.

Nihon Keizai:
- Toyota Motor has raised its stake in its fuel cell venture with Matsushita Electric Industrial to 60% from 40%.

ISM Non-Manufacturing Falls on Hurricanes, Pending Home Sales Hit Record

- ISM Non-Manufacturing for September fell to 53.3 versus estimates of 60.0 and a reading of 65.0 in August.
- Pending Home Sales for August rose 3.2% versus estimates of a .5% decline and a .7% fall in July.

BOTTOM LINE: US service industries expanded at the slowest pace in more than two years in September as Hurricanes Katrina and Rita shut down Gulf Coast businesses and pushed costs for materials and supplies to a record, Bloomberg reported. The Prices Paid component of the index rose to 81.4 from 67.1. The employment gauge fell to 54.9 from 59.6. The New Orders component of the index fell to 56.6 from 65.8. I expect this index to bounce back next month as consumer spending has remained healthy despite the effects of the hurricanes.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Futures-market predictions that the Federal Reserve will raise its interest rate target by a half-percentage point over two remaining meetings this year are “reasonable,” St. Louis Fed Bank President William Poole said.
- DaimlerChrysler AG’s Chrysler, the No. 3 US automaker, will add a fourth new small sport-utility vehicle next year as near-record gasoline prices push US buyers to more fuel-efficient cars and trucks.

Wall Street Journal:
- TDC A/S, Denmark’s biggest telecommunications operator, received a takeover bid worth about $12 billion from a group of four US and UK private-equity firms.

Financial Times:
- Hewlett-Packard will develop its profitable printer division, rather than sell it, citing an interview with CEO Hurd.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on MSFT, MYL, MERQE and GE.

Night Trading
Asian Indices are -1.25% to -.25% on average.
S&P 500 indicated -.03%.
NASDAQ 100 indicated -.06%.

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Earnings of Note
Company/EPS Estimate
RI/.33
SLR/.04

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- ISM Non-Manufacturing for September is estimated to fall to 60.0 versus a reading of 65.0 in August.
- Pending Home Sales for August are estimated to fall .5% versus a 1.0% decline in July.

BOTTOM LINE: Asian indices are mostly lower, dragged down by commodity-related companies in the region after the US Fed insinuated further rate hikes. I expect US equities to open mixed and fall modestly later in the day. The Portfolio is 25% net long heading into the day.