Today's Headlines

Bloomberg:
- A global effort to stem the spread of the deadly bird flu virus may help prevent an influenza pandemic, the World Health Organization said.
- Saddam Hussein’s trial on charges of crimes against humanity will start on time next week after his lawyers failed to get the proceedings delayed.
- GE’s third-quarter earnings climbed 15%, bolstered by higher demand for products ranging from credit cards to jet engines and the sale of a stake in a mortgage- and life-insurance company.
- Genentech’s Avastin, a drug intended for colon, lung and other cancers, may become more widely used as a treatment for a common cause of blindness.
- Electronic Arts signed film director Steven Spielberg to help create three games as the company tries to revive sales.
- Occidental Petroleum’s agreement to buy Vintage Petroleum values Vintage’s oil and gas fields between $8.50 and $9 a barrel versus $10.15 a barrel that Chevron paid for Unocal and $10.66 that China National Petroleum plans to spend for PetroKazakhstan, according to analysts.
- Bill Dudley said today that he is stepping down as chief US economist for Goldman Sachs at the end of next month.
- Crude oil is falling and gasoline is plunging to a 12-week low on indications that near-record prices are reducing fuel consumption in the US.

Wall Street Journal:
- EMC and other data storage companies are reaping a bonanza as large amounts of data overwhelm computers.
- Verizon Communications has been under pressure from cable companies’ Internet-based phone services, and if a joint venture of Google and Comcast acquires a minority stake in AOL, it will make matters worse.

ABC News:
- Saudi Arabia is pumping more than 10 million barrels of crude oil a day this month versus 9.58 million barrels/day during September, citing the nation’s leader King Abdullah.

NY Times:
- Five robots completed a 132-mile course in the Nevada desert in a milestone for artificial-intelligence research.
- Anadarko Petroleum is leading a number of companies that are seeking to find more oil and natural gas in the deep waters of the Gulf of Mexico.

Reuters:
- The Chicago Board of Trade still plans to proceed with its IPO next week even as futures brokerage Refco faces greater scrutiny and customers defect.

Inflation Tame Ex Energy, Retail Sales Remain Firm, Industrial Production Falls and Confidence Stays Low

- The Consumer Price Index for September rose 1.2% versus estimates of a .9% increase and a .5% gain in August.
- The CPI Ex Food and Energy for September rose .1% versus estimates of a .2% gain and a .1% rise in August.
- Advance Retail Sales for September rose .2% versus estimates of a .5% gain and a 1.9% decline in August.
- Retail Sales Less Autos for September rose 1.1% versus estimates of a .8% gain and a 1.0% increase in August.
- Industrial Production for September fell 1.3% versus estimates of a .4% decline and a .2% increase in August.
- Capacity Utilization for September fell to 78.6% versus estimates of 79.4% and 79.8% in August.
- Preliminary Univ. of Mich. Consumer Confidence for October fell to 75.4 versus estimates of 80.0 and a reading of 76.9 in September.

BOTTOM LINE: US consumer prices jumped last month after Hurricanes Katrina and Rita, Bloomberg reported. The core inflation rate hasn’t accelerated since March, suggesting companies can’t pass along higher raw materials price to consumers. Computer prices declined .8% after a 3.1% fall in the prior month. They are 18% cheaper than at this time last year. The cost of clothing also fell .1%, airfares fell 1.4% and used cars prices declined .4%. I expect the CPI to decelerate meaningfully over the intermediate-term as unit labor costs decelerate and commodity prices fall.

Sales at US retailers rose .2% last month as consumers spent more to fill up their gas tanks and bought furniture and electronics for their homes, Bloomberg said. Rising incomes and home equity have given Americans the means to increase spending even as gas prices rose. Sales at electronics and appliance stores rose .8%, furniture sales rose 1.2%, restaurant sales rose .2% and general merchandise sales rose .9%. September was the fourth warmest in 111 years which led to a .2% decline in clothing sales. I expect retail sales to accelerate into year-end on colder weather, lower energy prices and better consumer confidence.

US industrial production plunged 1.3% in September, the biggest drop in 23 years. However, excluding the effects of the hurricanes and lost production due to the Boeing strike, industrial production rose about .90%, according top economists. Capacity Utilization fell which suggests inflation will decelerate going forward. I expect industrial production to bounce back as the effects of the hurricanes diminish.

US consumer confidence unexpectedly fell for a third month to the lowest in more than 13 years as concerns persisted about high energy prices and hurricane-related economic disruption. The current conditions component of the index fell to 95.7 from 98.1 in September and the expectations component fell to 62.4 from 63.3. Consumers forecast inflation will accelerate to 3.1%, the fastest since 1997. However, unleaded gas futures have plunged 42.0% since September highs. I continue to believe sentiment will rebound strongly into year-end as energy prices fall, job growth bounces, interest rates remain low and the economy strengthens.

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Friday Watch

Late-Night Headlines
Bloomberg:
- The US dollar is poised for a fifth weekly advance against the yen, the longest winning streak since May last year.
- Samsung Electronics forecast prices for liquid-crystal displays and mobile phones will rise as demand recovers after four quarters of declining profit.
- Crude oil in NY is falling a second day on expectations increased refinery output will help ensure adequate supplies of gasoline and heating fuel.

Nihon Keizai:
- Toyota Motor will release a gasoline-electric hybrid version of its new Lexus LS in 2007.

Standard:
- Playboy Enterprises is in talks with partners to develop casinos in Macau and London, citing Chairwoman and CEO Hefner.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on BSX.

Night Trading
Asian Indices are -.50% to -.25% on average.
S&P 500 indicated +.14%.
NASDAQ 100 indicated +.16%.

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Earnings of Note
Company/EPS Estimate
NDN/.11
PLB/.05
ACI/.29
BBT/.77
BSG/.18
BSX/.44
FDC/.60
GE/.44
HIB/.49
JBHT/.33
KRI/.66
OSI/.47
RFX/.23
SKS/-.20
UNH/.63

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Consumer Price Index for September is estimated to rise .9% versus a .5% increase in August.
- The CPI Ex Food & Energy for September is estimated to rise .2% versus a .1% increase in August.
- Advance Retail Sales for September are estimated to rise .5% versus a 2.1% decline in August.
- Retail Sales Less Autos for September are estimated to rise .8% versus a 1.0% increase in August.

9:15 am EST
- Industrial Production for September is estimated to decline .4% versus a .1% increase in August.
- Capacity Utilization for September is estimated to fall to 79.4% versus 79.8% in August.

9:45 am EST
- Preliminary Univ. of Mich. Consumer Confidence for October is estimated to rise to 80.0 versus a reading of 76.9 in September.

10:00 am EST
- Business Inventories for August are estimated to rise .2% versus a .5% decline in July.

2:30 pm EST
- The Monthly Budget Surplus for September is estimated to rise to $36.0B versus $24.6B in August.

BOTTOM LINE: Asian indices are mostly lower, spurred by losses in commodity producing companies in the region. I expect US equities to open mixed-to-lower and to rally modestly later in the day. The Portfolio is 75% net long heading into the day.

Stocks Finish Near Session Highs, Led by Tech

Indices
S&P 500 1,176.84 -.07%
DJIA 10,216.59 unch.
NASDAQ 2,047.22 +.48%
Russell 2000 623.28 +.28%
DJ Wilshire 5000 11,711.87 -.10%
S&P Barra Growth 567.12 +.13%
S&P Barra Value 605.53 -.26%
Morgan Stanley Consumer 574.85 +.17%
Morgan Stanley Cyclical 684.92 +.04%
Morgan Stanley Technology 486.80 +.46%
Transports 3,589.50 -1.03%
Utilities 389.11 -2.78%
Put/Call 1.30 unch.
NYSE Arms .73 -9.17%
Volatility(VIX) 16.47 +1.54%
ISE Sentiment 149.0 unch.
US Dollar 89.81 +.20%
CRB 328.92 -.96%

Futures Spot Prices
Crude Oil 62.93 -.24%
Unleaded Gasoline 175.00 -.45%
Natural Gas 13.06 -.29%
Heating Oil 198.85 -.42%
Gold 474.40 +.13%
Base Metals 132.03 -1.59%
Copper 177.00 +.28%
10-year US Treasury Yield 4.46% +.63%

Leading Sectors
Computer Hardware +2.22%
Semis +2.14%
Biotech +1.80%

Lagging Sectors
Energy -2.70%
Utilities -2.78%
Coal -3.12%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on COH.

Afternoon/Evening Headlines
Bloomberg:
- Samsung Electronics agreed to pay $300 million, the second largest criminal antitrust fine in US history, to settle charges it took part in a global scheme to fix the price of computer chips used in PCs, mobile phones and other electronic devices.
- Emerging-market stocks, bonds and currencies declined on expectations the Federal Reserve will raise the US benchmark lending rate through next year to curb inflation, sapping demand for riskier securities.
- Refco, reeling from the disclosure that its CEO hid unpaid debts, today blocked clients from withdrawing funds from one of its units that doesn’t have enough liquidity to keep doing business.
- Crude oil fell and gasoline plunged to a two-month low after an Energy Department report showed that US consumption of the motor fuel fell as refiners increased output.
- New hedge funds quadrupled in Asia this year as US firms, led by Citadel Investment Group LLC and Tremont Capital Management, took a bigger share of the region’s $85 billion market.
- GM and the UAW are “making progress” on the company’s request for contract changes to lower its $5.6 billion annual expense for health care, UAW President Ronal Gettelfinger said.
- Occidental Petroleum will buy Vintage Petroleum for $3.8 billion.

Reuters:
- The Federal Reserve is on alert for an acceleration of inflation and will take the steps that are necessary to ensure price stability, Federal Reserve Bank of Kansan City President Hoenig said. He also said core inflation around 2.2% is not alarming and that the steps needed to ensure price stability are still open to analysis.

Financial Times:
- Excessive patent and copyright protections are suppressing scientific investigation and artistic creativity, citing a group working for the Royal Society of Arts in London.

BOTTOM LINE: The Portfolio finished substantially higher today on gains in my Computer longs, Semiconductor longs, Airline longs, Steel shorts and Energy-related shorts. I did not trade in the afternoon, thus leaving the Portfolio 75% net long. The tone of the market was slightly positive today as the advance/decline line finished almost unchanged, most sectors rose and volume was about average. Measures of investor anxiety were mixed into the close. Overall, today’s market action was encouraging. It is a big positive to see the major averages hold up even with the losses in the commodity stocks. I want to see investors’ reaction to tomorrow’s economic data before getting more aggressive on the long side.

Stocks Higher, Led by Tech, on Further Declines in Energy Prices

Indices
S&P 500 1,176.72 -.07%
DJIA 10,215.63 unch.
NASDAQ 2,048.12 +.52%
Russell 2000 622.88 +.22%
DJ Wilshire 5000 11,718.82 -.04%
S&P Barra Growth 568.18 +.32%
S&P Barra Value 605.40 -.26%
Morgan Stanley Consumer 575.51 +.29%
Morgan Stanley Cyclical 684.11 -.06%
Morgan Stanley Technology 487.70 +.65%
Transports 3,588.02 -1.08%
Utilities 390.35 -2.47%
Put/Call 1.42 +9.23%
NYSE Arms .79 +.25%
Volatility(VIX) 16.43 +1.29%
ISE Sentiment 142.0 -5.33%
US Dollar 89.94 +.36%
CRB 328.98 -.94%

Futures Spot Prices
Crude Oil 63.15 -1.59%
Unleaded Gasoline 175.50 -3.97%
Natural Gas 13.10 -2.91%
Heating Oil 199.75 -.78%
Gold 473.30 -.69%
Base Metals 132.03 -1.59%
Copper 176.45 -1.62%
10-year US Treasury Yield 4.47% +.77%

Leading Sectors %
Computer Hardware +2.17%
Semis +1.89%
Biotech +1.71%

Lagging Sectors
Energy -2.20%
Oil Tankers -2.85%
Coal -3.30%

BOTTOM LINE: The Portfolio is substantially higher mid-day on gains in my Computer longs, Airline longs, Semi longs, Steel shorts and Energy-related shorts. I covered some of my IWM and QQQQ shorts this morning, thus leaving the Portfolio 75% net long. The tone of the market is slightly positive as the advance/decline line is around even, most sectors are higher and volume is above average. Measures of investor anxiety are higher. Today’s overall market action is positive given the steep losses in commodity stocks. The AAII % Bulls fell to 38.96% this week from 50.0% the prior week; this reading is now below average levels. Likewise, the % Bears rose to 48.05% from 27.42% the prior week; this is now at elevated levels. I expect sentiment to weaken further next week which is a big positive for equities over the intermediate-term. I expect US stocks to trade modestly higher from current levels into the close on short-covering.