Today's Headlines

Bloomberg:
- Saddam Hussein pleaded not guilty to charges of torture and murder in a massacre of Iraqi villagers, as a five-member special tribunal in Baghdad began a trial that may end in the ousted dictator’s execution. The trial was adjourned until Nov. 28.
- Shares of the Chicago Board of Trade surged more than 50% in their first day of trading as investor demand for a stake in the global $1,100 trillion futures industry overshadowed the collapse of broker Refco.
- Russia confirmed an outbreak of a lethal strain of bird flu south of Moscow while Romania said a second location in its Danube River delta area was hit by the virus that has killed 60 people in Asia.
- Crude oil and gasoline fell after the Energy Dept. reported an unexpected increase in US inventories of the motor fuel, which have been stretched since Hurricanes Katrina and Rita moved through the Gulf of Mexico.
- Hurricane Wilma, the strongest on record in the Atlantic Ocean, intensified into a Category 5 storm with 175mph winds and is forecast to strike Florida’s western coast between Tampa and the Keys by this weekend.

Wall Street Journal:
- Internet search engines such as Google and Yahoo! are being blamed for the rise in phony Web logs known as “splogs”, created to carry advertisements that promote other Web Sites.
- GM, DaimlerChrysler AG and Volkswagen AG are among world automakers racing to develop their own versions of hybrid-fuel engines to challenge Toyota’s popular Prius models.

USA Today:
- The White House plans to nominate a successor to retiring Fed chairman Greenspan in early to mid-November.

NY Times:
- The US and the Red Cross said 200,000 Hurricane Katrina evacuees are living in hotels, not 600,000 as previously stated.
- New York’s Metropolitan Transportation Authority plans to reduce fares this holiday season by tapping into an unexpected surplus.
- New Jersey will create a statewide umbilical and placental blood bank to be used by stem cell researchers and transplant doctors.
- Johnson & Johnson has told Guidant that it wants to negotiate a lower price than the $25.4 billion it agreed in December to pay for Guidant.

LA Times:
- The Orange County, California, commercial office market had its lowest vacancy rates in a decade as growing companies sought more space, citing Cushman & Wakefield.

Tehran Times:
- Iran restarted production at two oilfields developed by Royal Dutch Shell Plc after shutting them down for a week.

Financial Times Deutschland:
- Symbian Ltd., a maker of mobile operating systems partly owned by Nokia Oyj, is in talks with SAP AG to start a cooperation agreement.

Die Welt:
- The US and Canada attract more well-educated migrants than the European Union with 87% of people moving to the EU being poorly educated or having no education at all.

Housing Still Strong, Oil Inventories Jump

- Housing Starts for September rose to 2108K versus estimates of 1970K ad 2038K in August.
- Building Permits for September rose to 2189K versus estimates of 2189K and 2075K in August.
- The EIA just reported crude oil inventories rose 5.55M barrels versus estimates of a 2.3M barrel rise. Gasoline supplies rose 2.91M barrels versus estimates of a decline of 1.5M barrels. Distillate inventories fell 1.92M barrels versus estimates of a 2.3M barrel fall.

BOTTOM LINE: US housing starts unexpectedly increased last month, suggesting demand is holding up even as borrowing costs rise, Bloomberg said. The rise in building permits was the greatest since February 1973. Applications for home purchases rose 7.3% last week, the Mortgage Bankers Association said. Construction that was authorized but not yet begun rose .8% to 235,300 units, the best since 1979. Starts rose 6.9% in the South and 1.9% in the Midwest. Starts were unchanged in the West and Northeast. Concerns over a nationwide plunge in housing are vastly overstated at this point. I continue to believe housing will slow modestly to more healthy sustainable rates, not plunge.

The EIA energy inventory data were very bearish for crude oil considering how much capacity is still shut-in.

Links of Interest

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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%.

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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.