Wednesday Watch

Late-Night Headlines
Bloomberg:
- Saddam Hussein will stand trial today before the Special Tribunal in Baghdad for murdering fellow Iraqis, in one of the most high profile war crimes cases in world history.
- Crude oil is falling for a second day on forecasts Hurricane Wilma will miss rigs in the US Gulf and before a report that will probably show supplies rose.

Wall Street Journal:
- Wal-Mart Stores plans to start selling foods packaged in corn-based plastics instead of containers made from petroleum.
- The EPA began a criminal probe of Nabors Industries Ltd. after reports it dumped contaminated mud off the Alaska coast while operating a Pioneer Natural Resources oil-drilling rig.

Economic Daily News:
- Taiwan Semiconductor Manufacturing will produce advanced-technology chips for Qualcomm.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on YHOO, STN, CAKE, USB and FCX.
- Reiterated Underperform on TWMC and UIS.

Night Trading
Asian Indices are -2.0% to -1.0% on average.
S&P 500 indicated -.15%.
NASDAQ 100 indicated -.29%.

Morning Preview
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Earnings of Note
Company/EPS Estimate
ABT/.58
MO/1.33
AMGN/.82
BAC/1.02
CMA/1.19
EK/.66
EBAY/.20
ERTS/.04
EMC/.12
GD/1.76
ITW/1.36
JPM/.72
JNPR/.18
KMI/.99
LIN/.01
KRB/.53
ODP/.35
QLGC/.32
WM/.90

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Housing Starts for September are estimated to fall to 1970K versus 2009K in August.
- Building Permits for September are estimated to fall to 2075K versus 2138K in August.

10:30 am EST
- Platt's estimates weekly crude inventories rose 2.5 million barrels, gasoline inventories fell 1.1 million barrels, distillate inventories declined 2.1 million barrels and refinery utilization increased 5.0%.

2:00 pm EST
- Fed’s Beige Book

BOTTOM LINE: Asian indices are lower, spurred by losses in exporting companies in the region. I expect US equities to open lower on increasing worries over slowing economic growth. The Portfolio is 50% net long heading into the day.

Stocks Finish Lower as Energy Shares Plunge after Exxon Mobil Block Trade

Indices
S&P 500 1,178.14 -1.0%
DJIA 10,285.26 -.61%
NASDAQ 2,056.00 -.69%
Russell 2000 625.36 -1.26%
DJ Wilshire 5000 11,734.45 -1.05%
S&P Barra Growth 567.46 -.93%
S&P Barra Value 606.50 -1.08%
Morgan Stanley Consumer 578.16 -.81%
Morgan Stanley Cyclical 688.63 -.96%
Morgan Stanley Technology 491.35 -.41%
Transports 3,589.04 -1.51%
Utilities 392.14 -2.09%
Put/Call .94 +4.44%
NYSE Arms 1.61 +150.73%
Volatility(VIX) 15.33 +4.50%
ISE Sentiment 167.00 +15.97%
US Dollar 90.29 +.55%
CRB 329.18 -.98%

Futures Spot Prices
Crude Oil 62.82 -.60%
Unleaded Gasoline 172.05 -.85%
Natural Gas 13.30 -.86%
Heating Oil 191.84 -.82%
Gold 474.10 -.11%
Base Metals 135.07 -.27%
Copper 182.45 -.05%
10-year US Treasury Yield 4.47% -.40%

Leading Sectors
Airlines +.96%
Broadcasting +.57%
Hospitals -.02%

Lagging Sectors
Oil Service -4.48%
Energy -4.54%
Oil Tankers -4.99%

Evening Review
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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on GD, GILD, YHOO and STZ.

Afternoon/Evening Headlines
Bloomberg:
- The US government has asked United Nations Secretary-General Kofi Annan to put forward specific proposals by the middle of November to overhaul the scandal-tarnished management of the world body.
- Calpine bonds and shares fell on speculation it is considering default after a report by the NY Post that the power company hired bankruptcy and restructuring lawyers from Kirkland & Ellis LLP.
- The Federal Reserve probably needs to keep raising its benchmark interest rate, and the level at which it neither spurts nor restrains the economy may be as high as 5.5%, San Francisco Fed Bank Janet Yellen said.
- President Bush pledged to step up efforts to catch and expel people illegally entering the US and said he will work with Congress to create a better program allowing workers to enter they country legally for employment.
- Constellation Brands, the world’s largest winemaker, made a hostile bid of about $900 million for Canadian wine producer Vincor International after the company refused to negotiate a sale.
- The Chicago Board of Trade raised $172 million in an IPO offering today, more than expected, as investors sought a stake in the global $1,100 trillion futures industry.
- About $1.4 billion of Exxon Mobil shares were sold at a discount, resulting in the second-largest block trade by value on the NYSE this year. The transaction led to the second-busiest day for Exxon’s stock since at least 1980 and sent energy-related stocks reeling.
- Crude oil and natural gas fell, and gasoline lunged to the lowest in almost three months on forecasts showing that Hurricane Wilma will miss storm-battered production platforms off the Louisiana and Texas coasts.
- 15 of 20 US oil refineries near the Gulf of Mexico, including Exxon Mobil’s plant in Beaumont, Texas, have resumed operations after shutting in August and September for Hurricanes Katrina and Rita. Unleaded Gas futures have declined 41% since September highs even with extensive refinery shut-ins.

BOTTOM LINE: The Portfolio finished higher today on gains in my Steel shorts and Energy-related shorts. I added to existing 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 substantially lower, almost every sector fell and volume was below average. Measures of investor anxiety were mostly higher into the close. Overall, today’s market action was mildly negative as the major averages and breadth finished weaker even with a decline in long-term rates, falling energy prices and mostly strong earnings reports. The main positive takeaway from today's action was that losses in the major averages weren't worse given the 4%+ declines in energy-related stocks. Tech stocks outperformed throughout the day. I continue to believe the weakness in the energy complex will be viewed as hugely positive over the coming months.

Stocks Lower Mid-day, Pressured by Commodity Stocks

Indices
S&P 500 1,182.84 -.61%
DJIA 10,313.34 -.35%
NASDAQ 2,063.93 -.31%
Russell 2000 627.51 -.92%
DJ Wilshire 5000 11,783.04 -.65%
S&P Barra Growth 569.83 -.52%
S&P Barra Value 608.80 -.70%
Morgan Stanley Consumer 579.71 -.56%
Morgan Stanley Cyclical 688.64 -.96%
Morgan Stanley Technology 492.14 -.28%
Transports 3,598.26 -1.25%
Utilities 393.75 -1.68%
Put/Call .88 -2.22%
NYSE Arms 1.24 +92.92%
Volatility(VIX) 15.37 +4.77%
ISE Sentiment 197.00 +36.81%
US Dollar 90.34 +.61%
CRB 330.32 -.64%

Futures Spot Prices
Crude Oil 63.80 -.87%
Unleaded Gasoline 176.40 -2.83%
Natural Gas 13.54 -2.50%
Heating Oil 195.25 -1.55%
Gold 475.00 -.36%
Base Metals 135.07 -.27%
Copper 182.40 +.16%
10-year US Treasury Yield 4.47% -.36%

Leading Sectors %
Airlines +1.66%
Drugs +.23%
Hospitals +.21%

Lagging Sectors
Oil Service -2.61%
Energy -3.16%
Oil Tankers -4.42%

BOTTOM LINE: The Portfolio is slightly higher mid-day on gains in my Energy-related shorts and Steel shorts. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are lower and volume is light. Measures of investor anxiety are mixed. Today’s overall market action is negative considering the decline in energy prices, fall in long-term rates and mostly positive earnings reports. The Johnson Redbook same-store sales index rose 3.5% year-over-year last week vs. a 3.2% rise the prior week. This week's gain is up from a 1.5% increase in late April and the 24th week in a row the index has risen 3% or more. Considering last month was the sixth warmest September in U.S. history and saw a significant decline in consumer sentiment, it is a big positive that retail sales have remained brisk. I expect sales to beat lowered expectations this holiday season. I expect US stocks to trade mixed-to-higher from current levels into the close on short-covering.

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

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