Hurricanes' Effects on Job Creation Less-than-expected, Inventories Rise

- The Change in Non-farm Payrolls for September was -35K versus estimates of -150K and an upwardly revised 211K in August.
- The Change in Manufacturing Payrolls for September was -27K versus estimates of -33K and an upwardly revised -9K in August.
- The Unemployment Rate for September rose to 5.1% versus estimates of 5.0% and 4.9% in August.
- Average Hourly Earnings for September rose .2% versus estimates of a .2% increase and a .1% gain in August.
- Wholesale Inventories for August rose .5% versus estimates of a .4% increase and a .1% rise in July.

BOTTOM LINE: Hurricane Katrina pushed the US unemployment rate up to 5.1% in September as the economy lost 35,000 jobs, fewer than expected and evidence that the storm wasn’t strong enough to derail the expansion, Bloomberg reported. The hurricanes Katrina and Rita may have eliminated up to 480,000 jobs temporarily, according to the latest estimates from the Congressional Budget Office. I expect job growth to rebound sharply over the coming months, but not back to recent highs.

Stockpiles at US wholesalers rose in August by the most in four months as companies rebuilt inventories to meet growing demand before the two hurricanes ripped into the Gulf Coast, Bloomberg reported. The inventory-to-sales ratio fell to 1.17 months. I expect inventory rebuilding to add to GDP growth through year-end.

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Friday Watch

Late-Night Headlines
Bloomberg:
- Japan’s 10-year government bonds headed for a fifth week of declines on concern the Bank of Japan will tighten its monetary policy next year.
- Crude oil may decline as US fuel imports increase and demand falls because of near-record prices, a Bloomberg survey showed.

China Daily:
- China’s Ministry of Commerce forecast that the nation’s trade surplus will rise to as much as $100 billion this year, from $32 billion in 2004, adding pressure for a yuan revaluation.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on CVS, GE, FD, MSFT and SYMC.
- Reiterated Underperform on DRI.

Business Week:
- Cheniere Energy(LNG), which develops liquefied natural gas terminals, may benefit as natural gas becomes a bigger component of the US energy market.
- Shares of Encysive Pharmaceuticals(ENCY), whose Thelin drug treats pulmonary arterial hypertension may rise 64% on regulatory approval and interest from potential buyers of the company.

Night Trading
Asian Indices are -.25% to +.50% on average.
S&P 500 indicated +.15%.
NASDAQ 100 indicated +.13%.

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Earnings of Note
Company/EPS Estimate
SFNT/.39
GY/-.16

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Change in Non-farm Payrolls for September is estimated to be -150K versus 169K in August.
- The Unemployment Rate for September is estimated to rise to 5.0% versus 4.9% in August.
- The Change in Manufacturing Payrolls for September is estimated to be -33K versus -14K in August.
- Average Hourly Earnings for September are estimated to rise .2% versus a .1% gain in August.

BOTTOM LINE: Asian indices are mostly higher, boosted by financial companies in the region after several strong earnings reports. I expect US equities to open mixed and to rise later in the day. The Portfolio is 50% net long heading into the day.

Stocks Finish Lower Despite Tumbling Energy Prices on Fed Worries

Indices
S&P 500 1,191.49 -.41%
DJIA 10,287.10 -.29%
NASDAQ 2,084.08 -.90%
Russell 2000 639.45 -.86%
DJ Wilshire 5000 11,891.88 -.54%
S&P Barra Growth 570.61 -.29%
S&P Barra Value 616.74 -.52%
Morgan Stanley Consumer 580.14 -.13%
Morgan Stanley Cyclical 698.38 -1.0%
Morgan Stanley Technology 492.44 -.96%
Transports 3,650.21 +.74%
Utilities 408.68 -1.56%
Put/Call 1.07 +5.94%
NYSE Arms 1.14 -47.91%
Volatility(VIX) 14.96 +2.82%
ISE Sentiment 165.00 +6.45%
US Dollar 88.68 -1.44%
CRB 323.93 -1.30%

Futures Spot Prices
Crude Oil 61.77 +.64%
Unleaded Gasoline 185.70 +.90%
Natural Gas 13.30 -.56%
Heating Oil 196.84 +.91%
Gold 476.20 +.25%
Base Metals 132.76 +.70%
Copper 178.30 unch.
10-year US Treasury Yield 4.38% +1.09%

Leading Sectors
Airlines +4.43%
Gold & Silver +2.79%
Restaurants +1.03%

Lagging Sectors
Energy -2.45%
Biotech -2.69%
Alternative Energy -3.37%

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In Play

Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on IMCL, AMGN and RE.

Afternoon/Evening Headlines
Bloomberg:
- Federal Reserve Bank of Dallas President Richard Fisher said policy makers must prevent an “inflation virus” from disrupting the US economy and financial system.
- JPMorgan Chase and Morgan Stanley, forced to spit by lawmakers more than 70 years ago, may reunite, Prudential’s Mayo said.
- Sales at US retailers jumped 4% in September, beating analysts’ estimates, even as two hurricanes disrupted business.
- Merck said an experimental vaccine prevented cervical cancer caused by two common forms of a sexually transmitted virus, which infects more than 5.5 million Americans each year.
- UTStarcom, the biggest supplier of wireless-telephone systems in China, said third-quarter sales missed its forecast and US regulators began a probe of the company’s financials.
- NY police stepped up counter-terrorism patrols on the city’s subways after receiving a “specific threat,” Mayor Bloomberg said.
- Crude oil tumbled to a two-month low and gasoline slid for a sixth session as US fuel imports surged and demand stagnated.

Financial Times:
- The US has dismissed EU hopes that the decision by Airbus SAS shareholders to build a new aircraft without state aid could restart trans-Atlantic negotiations over aircraft subsidies.

BOTTOM LINE: The Portfolio finished substantially higher today on gains in my Energy-related shorts, Steel shorts, Internet longs and Retail longs. I added SCHN short and took some profits in other shorts in the afternoon, thus leaving the Portfolio 50% net long. The tone of the market was negative today as the advance/decline line finished lower, most sectors declined and volume was heavy. Measures of investor anxiety were lower into the close. Overall, today’s market action was negative. Take a look at the charts of ENER (-10.1%), CPST (-7.06%), NGS (-23.6%), ABP (-19.9%), SGY (-14.14%), SYNM (-3.44%) and BCON(-12.1%). There are many, many others. These formally loved speculative energy stocks are collapsing. This reminds me very much of what happened to the Internet stocks in March of 2000. There were many vigorous rallies thereafter and they were all sells.

***Alert***

Due to market volatility I am unable to post the Mid-day Scoreboard. I am currently 50% net long. I expect stocks to rise modestly into the close.

Today's Headlines

Bloomberg:
- Venezuela said it plans to seize as many as 50 of the country’s large farming estates this year as part of a land redistribution plan.
- Sprint Nextel CEO Forsee told CNBC the wireless carrier is now combining the networks of Sprint and Nextel and is expected to be finished by 2008.
- Sandy Berger, the US national security adviser under President Clinton, was arrested again two days after being sentenced for taking classified documents from the National Archives, violating his probation.
- The two-year rally in oil prices and stocks such as BP Plc is over for now as surging energy costs hurt demand, said Neil McMahon, an analyst at Sanford C. Bernstein.
- GE said third quarter profit rose to the high end of its forecast.
- The euro is rising the most since January 2004 against the dollar after the European Central Bank President Jean-Claude Trichet said the bank is prepared to raise interest rates for the first time since 2000.
- Crude oil is tumbling to a 2-month low and gasoline slid for a sixth session as US fuel imports surged and demand fell.

Wall Street Journal:
- Gains this year for emerging market debt may be coming to an end, according to “market watchers.”
- The Jewish Family Services and other community assistance and refugee organizations are starting to step in to help provide assistance to victims of Hurricane Katrina.
- US House Committee on Resources Chairman Richard Pombo and Florida Governor Jeb Bush are close to an agreement to exempt some states from federal restrictions on offshore drilling for natural gas on federal land.
- AT&T and MCI Inc. will intensify their longstanding rivalry for business customers after they are separately acquired by Verizon Communications and SBC Communications.

NY Times:
- As much as 80% of operations at the Port of New Orleans remain closed a month after Hurricane Katrina came ashore.
- Video companies are turning directly to the Internet to lure viewers instead of trying to work with movie studios and television networks as a way to gain TV audiences.
Washington Post:
- The FDA may soon clear for human consumption milk from cloned animals and meat from their naturally reproduced offspring.
- France, for the first time in history, is distilling some of its fine wines into fuel because of a worldwide wine glut.

Boston Globe:
- The Massachusetts Senate will vote today on a bill that would allow as many as 2,000 slot machines at the state’s four racetracks.

Financial Times:
- The International Organization of Securities Commissions, a global body for financial market regulators, has begun investigating hedge funds’ increasing influence.

Kauppalehti:
- Nokia Oyj’s handheld device for e-mail messaging and Internet browsing will be delayed by a few weeks because it took longer than expected to complete the device’s software.

Kyodo:
- Japanese Prime Minister Junichiro Koizumi asked his ruling Liberal Democratic Party to devise a plan to slash the number of central and local government workers by 20% over a 10-year period.