Today's Headlines

Bloomberg:
- The yen dropped to a two-year low against the dollar and fell versus the euro after Japanese Chief Cabinet Secretary Hosoda said the government is unlikely to try to stem the decline.
- Johnson & Johnson is considering alternatives in its planned $25.4 billion purchase of Guidant Corp., CFO Darretta said.
- Crude oil and gasoline are falling as forecasts showed that Hurricane Wilma will move toward Florida, missing production platforms that are concentrated along the Louisiana and Texas coasts.
- President Bush’s tax advisory panel said it would recommend simplifying the current income tax by replacing popular deductions with credits and sharply reducing levies on dividends and capital gains.
- Japanese Prime Minister Junichiro Koizumi’s visit yesterday to a shrine honoring war dead will have “very serious political consequences,” for relations between China and Japan, China’s Foreign Ministry said.

Wall Street Journal:
- The US Food and Drug Administration has advised physicians not to install Boston Scientific’s Enteryx device for treating acid reflux.
- US sales of hybrid vehicles, that combine electric motors with traditional gasoline engines, are expected to more than triple by 2012 with an increase in model choices, citing analysts.
- The scandal surrounding Refco, the biggest US futures broker, which broke a week ago and led to an insolvency filing today, hasn’t yet caused significant disruption in financial markets.
- Fannie Mae, the largest US mortgage finance company, used its regional partnership offices mostly to lobby members of US Congress instead of promoting affordable homes, as the units were intended, a Dept. of Housing and Urban Development study said.

LA Times:
- The median price paid for a Southern California home rose 16% last month to $475,000, while sales volume increased 6% from the year-earlier period.

NY Times:
- Construction in China will hit a record 4.7 billion square feet or more this year, up from 2 billion in 1998.
- Nintendo of America plans to offer free wireless Internet at McDonald’s restaurants for people using its DS portable game system.
- Google has begun operating Internet sites in eight European countries, including France, Germany and Italy, using the local language to help users search for books online.

Denver Post:
- Xcel Energy and the US government plan to cooperate on a $1.75 million project to create hydrogen using the power of wind.

PPI Rises Above Expectations, Foreign Demand for US Assets Remains Strong

- The Producer Price Index for September rose 1.9% versus estimates of a 1.2% gain and a .6% rise in August.
- The PPI Ex Food & Energy for September rose .3% versus estimates of a .2% increase and an unchanged reading in August.
- Net Foreign Security Purchases for August rose to $91.3B versus estimates of $60.0B and $87.5B in July.

BOTTOM LINE: US producer prices rose in September by the most in 15 years after Hurricane Katrina pushed oil and gas prices to record highs and drove up costs of other materials such as plywood and chemicals, Bloomberg said. Core prices are now rising at a 2.5% annual rate. The 10-year T-note yield is lower to 4.47% on the news. I expect the PPI, which is highly correlated with the CRB Index, to decelerate meaningfully over the intermediate-term.
International investors increased their net holdings of US assets in August by the most since April 2004, as the US economy headed for a 10th straight quarter of better than 3% growth, the best streak since 1986, Bloomberg reported. US assets remain attractive to investors because the economy continues to outperform other developed nations. US GDP rose 3.6% in the second quarter versus a .6% gain in Germany, 2.1% rise in Japan and a 1.5% increase in the UK. I expect foreign demand for US stocks and bonds to remain strong as relative undperformance by emerging economies over the intermediate-term results in a flight of capital back to the US.

Links of Interest

Market Snapshot
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Real-time Intraday Chart/Quote

Tuesday Watch

Late-Night Headlines
Bloomberg:
- Rising fuel costs have “drained” consumers’ purchasing power and “will undoubtedly be a drag” for the global economy “from now on,” Federal Reserve Chairman Greenspan said. The Fed chairman said high oil prices are curtailing demand, spurring fuel efficiency research and reducing the energy intensity of total US output. US oil intensity, or the amount of oil it needs to produce $1 of gross domestic product, fell 53% between 1973 and 2004, according to calculations by Bloomberg. Greenspan also said “more rapid decreases in the intensity of energy use in the years ahead seem virtually inevitable.” Finally, Greenspan said “oil will be replaced by less expensive alternative energy before global reserves run out.”
- Refco said it signed a preliminary agreement to sell its futures units to a group led by buyout firm JC Flowers for $768M.

Financial Times:
- Bank of NY may this week offer to buy London-based fund manager Alcentra Group Ltd. for an undisclosed sum.

Standard:
- Suntech Power Ltd., a manufacturer of solar power equipment in China, plans to raise as much as $300 million in a US Nasdaq IPO this year.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on ACN.
- Reiterated Underperform on HMT.

Night Trading
Asian Indices are unch. to +.75% on average.
S&P 500 indicated +.03%.
NASDAQ 100 indicated +.19%.

Morning Preview
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Earnings of Note
Company/EPS Estimate
MMM/1.08
CDWC/.86
CAKE/.27
CYMI/.20
FITB/.71
FRX/.56
FCX/.85
GENZ/.58
GILD/.36
INTC/.33
JNJ/.86
KFT/.45
LLTC/.33
MER/1.18
MOT/.28
BTU/.85
RYL/2.29
STX/.53
STT/.67
TER/.00
WFC/1.15
YHOO/.14

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Producer Price Index for September is estimated to rise 1.2% versus a .6% gain in August.
- PPI Ex Food & Energy for September is estimated to rise .2% versus an unchanged reading in August.

9:00 am EST
- Net Foreign Securities Purchases for August are estimated to fall to $60.0B versus $87.4B in July.

1:00 pm EST
- NAHB Housing Market Index for October is estimated to fall to 64 from 65 in September.

BOTTOM LINE: Asian indices are higher, spurred by gains in commodity producing companies in the region. I expect US equities to open modestly higher on less hawkish Fed comments from Greenspan and optimism that Tropical Storm Wilma will not disrupt energy production in the Gulf. The Portfolio is 75% net long heading into the day.

Stocks Finish at Daily Highs on Light Volume

Indices
S&P 500 1,190.10 +.30%
DJIA 10,348.10 +.59
NASDAQ 2,070.30 +.26%
Russell 2000 633.37 +.03%
DJ Wilshire 5000 11,859.54 +.31%
S&P Barra Growth 572.79 +.21%
S&P Barra Value 613.10 +.38%
Morgan Stanley Consumer 582.87 +.62%
Morgan Stanley Cyclical 695.29 +.67%
Morgan Stanley Technology 493.37 +.76%
Transports 3,644.06 +.15%
Utilities 400.51 +1.64%
Put/Call .90 -14.29%
NYSE Arms .64 -4.46%
Volatility(VIX) 14.67 -1.34%
ISE Sentiment 144.00 -9.43%
US Dollar 89.94 +.54%
CRB 332.45 +1.47%

Futures Spot Prices
Crude Oil 64.05 -.48%
Unleaded Gasoline 179.90 -.90%
Natural Gas 13.74 -1.06%
Heating Oil 198.00 -.17%
Gold 476.40 -.04%
Base Metals 135.43 +2.85%
Copper 181.65 -.25%
10-year US Treasury Yield 4.49% unch.

Leading Sectors
Coal +2.99%
Gold & Silver +2.42%
Tobacco +2.06%

Lagging Sectors
Telecom -.79%
Drugs -.93%
Broadcasting -1.81%

Evening Review
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In Play

Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on BBY, YHOO and GOOG.
- Reiterated Underperform on FHN.

Afternoon/Evening Headlines
Bloomberg:
- New York City’s homicide rate has dropped about 5% so far in 2005, a trend that should it continue would bring the total by year’s end to 545 killings, least since 1962, Police Commissioner Raymond Kelly said.
- IBM said third-quarter net income fell 2.4% on costs to bring back profit earned overseas.

Financial Times:
- Saddam Hussein’s lawyers may say they have not been given enough time to review the prosecution’s evidence against the former Iraqi dictator, when his trial opens tomorrow, and will seek a six-month delay.

Economic Daily News:
- Intel may team up with Taiwan notebook-computer manufacturers and component makers such as Quanta Computer to standardize key laptop components.

BOTTOM LINE: The Portfolio finished unchanged today as gains in my Semiconductor longs and Internet longs were offset by losses in my Energy-related shorts. I covered some of my IWM and QQQQ shorts in the afternoon, thus leaving the Portfolio 75% net long. The tone of the market was neutral today as the advance/decline line finished almost unchanged, most sectors rose and volume was light. Measures of investor anxiety were mostly lower into the close. Overall, today’s market action was positive given the rise in energy prices and long-term rates. I will closely monitor the market's reaction to tomorrow's PPI report given a "bad" number should be priced into the market.

Stocks Slightly Higher Mid-day, Led by Energy Shares

Indices
S&P 500 1,185.40 -.09%
DJIA 10,299.51 +.13%
NASDAQ 2,059.12 -.28%
Russell 2000 628.32 -.75%
DJ Wilshire 5000 11,811.32 -.10%
S&P Barra Growth 570.71 -.13%
S&P Barra Value 610.92 +.04%
Morgan Stanley Consumer 580.99 +.32%
Morgan Stanley Cyclical 692.41 +.25%
Morgan Stanley Technology 491.47 +.38%
Transports 3,632.82 -.15%
Utilities 399.46 +1.38%
Put/Call .95 -9.52%
NYSE Arms .75 +11.76%
Volatility(VIX) 15.03 +1.01%
ISE Sentiment 143.00 -10.06%
US Dollar 89.80 +.37%
CRB 332.32 +1.43%

Futures Spot Prices
Crude Oil 64.05 +2.27%
Unleaded Gasoline 180.00 +2.94%
Natural Gas 13.82 +4.55%
Heating Oil 199.15 +2.13%
Gold 476.50 +1.0%
Base Metals 135.43 +2.85%
Copper 181.65 +3.44%
10-year US Treasury Yield 4.49% +.27%

Leading Sectors %
Gold & Silver +2.64%
Energy +1.35%
Utilities +1.35%

Lagging Sectors
Telecom -.95%
Drugs -1.16%
Broadcasting -1.46%

BOTTOM LINE: The Portfolio is unchanged mid-day as losses in my Energy-related shorts are offsetting gains in my Internet longs. I added to my IWM and QQQQ shorts this morning, thus leaving the Portfolio 50% net long. The tone of the market is negative as the advance/decline line is lower, sector performance is mixed and volume is below average. Measures of investor anxiety are mostly higher. Today’s overall market action is slightly negative considering the possibility of another hurricane. Earth Satellite Corp., a private forecaster, is currently estimating that the chances of Tropical Storm Wilma becoming a threat to Gulf natural gas production are only 5%. They also estimate there is only a 65% chance that the storm becomes a hurricane. I expect US stocks to trade mixed from current levels into the close as short-covering offsets hurricane fears.