Hurricane Rita Spurs Another Surge in Jobless Claims

- Initial Jobless Claims for last week rose to 390K versus estimates of 350K and an upwardly revised 369K the prior week.
- Continuing Claims rose to 2905K versus estimates of 2819K and a downwardly revised 2787K prior.

BOTTOM LINE: The number of Americans filing first-time claims for jobless benefits rose unexpectedly last week as workers displaced by Hurricane Rita joined Katrina’s victims, Bloomberg reported. About 70,000 claims were related to Katrina. The four-week moving-average of claims rose to 404,500 from 388,750 the prior week. The insured employment rate, which tracks the US unemployment rate rose to 2.3% from 2.2% the prior week and 2.0% before the hurricanes. Rita’s effects appear to be larger than most expected. I still expect jobless claims to begin heading lower again next week. Tomorrow’s jobs report will be ugly, but is likely factored in at this point.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- Toyota Motor’s purchase of a stake in Fuji Heavy Industries, the maker of Subaru cars, may help Japan’s biggest automaker gain expertise in hybrid systems and all-wheel-drive vehicles.
- Crude oil is falling for a fifth day on expectations surging fuel imports will help compensate for reduced production caused by hurricanes in the Gulf of Mexico.

International Oil Daily:
- World oil consumption fell to 82.62 million barrels a day in September, down .12% from a year earlier. Demand in industrialized countries fell .6% from a year earlier last month, while demand growth in developing countries slowed to .6%. Revisions to oil consumption data for July and August imply that demand plunged after oil surpassed $50/bbl. September demand should be revised even lower.

Financial Times:
- Morgan Stanley may win approval from Chinese regulators to become the first overseas investment bank to hold stakes in two local brokerages.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on SBUX, CL and YHOO.
- Reiterated Outperform on GOOG, raised earnings estimates and price target to $356-$396 from $333.
- Reiterated Underperform on ESRX.

Night Trading
Asian Indices are -2.0% to -1.25% on average.
S&P 500 indicated +.02%.
NASDAQ 100 indicated +.09%.

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Company/EPS Estimate
ACN/.36
STZ/.41
COST/.64
SCHN/.85

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Initial Jobless Claims for last week are estimated to fall to 350K versus 356K the prior week.
- Continuing Claims are estimated to rise to 2819K versus 2802K prior.

BOTTOM LINE: Asian indices are lower, dragged down by commodity-related companies in the region on worries over falling global demand. I expect US equities to open lower and rise modestly later in the day. The Portfolio is 25% net long heading into the day.

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%.