Friday Watch

Late-Night Headlines
Bloomberg:
- Japan’s consumer prices fell in September for a fourth month, suggesting more than seven years of deflation lingers and the central bank won’t end its policy of flooding the economy with cash anytime soon.
- Japan’s households spent less for the fourth month in five in September, signaling that the pace of consumer spending in the world’s second-largest economy may slow in the third quarter of the year.
- Japan’s industrial production rose less than expected as rising fuel prices heightened concern among manufacturers that export demand by slow, signaling the pace of growth in the world’s second-largest economy may ebb.
- Microsoft threatened to pull its Windows operating system from South Korea if antitrust regulators order the company to remove programming for instant message and movie player services.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on LLL, CRL, KLAC, IMCL, CFC, GP and HMA.
- Reiterated Underperform on UST, MRO, CAN, UHS and CTL.

Business Week:
- The shares of Advanta Corp.(ADVNA), the No. 3 issuer of credit cards to small businesses, may rise as much as 27% because it may be a takeover target.
- The shares of USG Corp.(USG), the No. 1 maker of gypsum wallboard, may decline on asbestos liabilities.
- Southwest Airlines may rise to $22 a share, or 42%, within a year because it has used financial instruments known as hedges to limit the effect of price variations on some of its fuel through 2009.

Night Trading
Asian Indices are -1.50% to -.50% on average.
S&P 500 indicated -.07%.
NASDAQ 100 indicated -.26%.

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Earnings of Note
Company/EPS Estimate
APC/2.89
ADM/.33
AVP/.29
BHI/.67
BMY/.33
CHKP/.31
CVX/1.90
COCO/.07
OSTK/-.51

Upcoming Splits
- GPN 2-for-1

Economic Releases
8:30 am EST
- Advance 3Q GDP is estimated to rise 3.6% versus a 3.3% gain in 2Q.
- Advance 3Q GDP Price Index is estimated to rise 2.8% versus a 2.6% rise in 2Q.
- Advance 3Q Personal Consumption is estimated to rise 3.3% versus a 3.4% gain in 2Q.
- Advance 3Q Employment Cost Index is estimated to rise .8% versus a .7% gain in 2Q.

9:45 am EST
- Final Univ. of Mich. Consumer Confidence for October is estimated to rise to 76.0 from a prior estimate of 75.4.

BOTTOM LINE: Asian indices are lower on worries over slowing growth in the US and Japan. I expect US equities to open lower and to rise modestly later in the day. The Portfolio is 50% net long heading into the day.

Stocks Finish Near Session Lows on Growing Economic Concerns

Indices
S&P 500 1,178.90 -1.05%
DJIA 10,229.95 -1.11%
NASDAQ 2,063.81 -1.73%
Russell 2000 624.03 -2.25%
DJ Wilshire 5000 11,742.89 -1.23%
S&P Barra Growth 564.94 -1.15%
S&P Barra Value 609.85 -.95%
Morgan Stanley Consumer 577.04 -.92%
Morgan Stanley Cyclical 698.28 -.95%
Morgan Stanley Technology 488.10 -1.35%
Transports 3,674.32 -1.63%
Utilities 387.03 -1.30%
Put/Call 1.11 +21.98%
NYSE Arms 1.58 +73.92%
Volatility(VIX) 16.02 +9.80%
ISE Sentiment 151.00 +10.22%
US Dollar 89.12 -.41%
CRB 323.41 -.25%

Futures Spot Prices
Crude Oil 61.04 -.08%
Unleaded Gasoline 159.40 +.09%
Natural Gas 13.52 -1.16%
Heating Oil 185.60 +.11%
Gold 475.60 unch.
Base Metals 133.45 +.28%
Copper 179.75 -.36%
10-year US Treasury Yield 4.55% -.57%

Leading Sectors
Insurance -.02%
HMOs -.05%
Banks -28%

Lagging Sectors
Oil Tankers -3.22%
Coal -3.36%
Broadcasting -3.43%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on FORM and ENH.
- Upgraded AET to Outperform.

Afternoon/Evening Headlines
Bloomberg:
- French President Chirac threatened to derail international trade talks by ruling out further cuts in European Union farm subsidies and tariffs.
- GM, which gets more than a quarter of its revenue from large pickups and sport-utility vehicles, is adding a line of small SUVs that will get better fuel mileage than the larger models.
- DaimlerChrysler AG, Siemens AG, and Volvo AB are among 2,253 companies that paid illegal kickbacks to Saddam Hussein to win business from the oil-for-food program which was designed to allow Hussein to sell oil to buy food and medicine for impoverished Iraqis, former US Fed chairman Volcker said today in a report.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Retail longs, Semi longs and Medical longs. I did not trade in the afternoon, thus leaving the Portfolio 50% net long. The tone of the market very negative today as the advance/decline line finished substantially lower, every sector declined and volume was average. Measures of investor anxiety were mostly higher into the close. Overall, today’s market action was negative. A variety of stocks sustained meaningful damage. Buyers walked away in many cases. We are approaching the type of action I would expect to see at a tradable market bottom. I expect stocks to hold recent lows seen two weeks ago and embark upon a strong rally next month.

Stocks Lower Mid-day on Economic Concerns

Indices
S&P 500 1,185.32 -.52%
DJIA 10,280.14 -.63%
NASDAQ 2,075.80 -1.15%
Russell 2000 626.61 -1.85%
DJ Wilshire 5000 11,800.84 -.75%
S&P Barra Growth 567.84 -.64%
S&P Barra Value 612.94 -.45%
Morgan Stanley Consumer 579.40 -.52%
Morgan Stanley Cyclical 701.08 -.56%
Morgan Stanley Technology 490.47 -.87%
Transports 3,686.48 -1.32%
Utilities 390.43 -.43%
Put/Call 1.03 +13.19%
NYSE Arms 1.23 +34.77%
Volatility(VIX) 15.32 +5.0%
ISE Sentiment 155.00 +13.14%
US Dollar 89.07 -.47%
CRB 323.69 -.17%

Futures Spot Prices
Crude Oil 61.15 +.73%
Unleaded Gasoline 160.00 +.98%
Natural Gas 13.67 -2.35%
Heating Oil 185.75 +.08%
Gold 475.60 +.55%
Base Metals 133.45 +.28%
Copper 180.40 -.77%
10-year US Treasury Yield 4.56% -.40%

Leading Sectors %
HMOs +1.00%
Insurance +.47%
Gold & Silver +.30%

Lagging Sectors
Networking -2.66%
Oil Tankers -3.02%
Coal -3.27%

BOTTOM LINE: The Portfolio is slightly lower mid-day as gains in my Energy-related shorts and Steel shorts are more than offset by losses in my Semiconductor longs, Retail longs and Medical longs. I added to my IWM and QQQQ shorts, thus leaving the Portfolio 50% net long. The tone of the market is negative as the advance/decline line is substantially lower, most sectors are lower and volume is around average. Measures of investor anxiety are mostly higher. Today’s overall market action is negative considering the decline in long-term rates and fall in energy prices. The EIA reported natural gas stockpiles rose 77 bcf to 3139 bcf vs. estimates of a 66 bcf rise. Natural gas inventories continue to rise above the five-year average for this time of the year, even with substantial production still shut in the Gulf. As this production comes back and demand fails to meet expectations this winter, natural gas should see a substantial decline beginning next month. I expect US stocks to trade modestly higher from current levels into the close on short covering.

Today's Headlines

Bloomberg:
- European Union leaders condemned Iranian President Mahmoud Ahmadinejad’s comment that Israel “must be wiped off the map,” adding to tensions over Iran’s nuclear program.
- Israel’s forces struck the Gaza Strip from the air and arrested Palestinian militants in the West Bank as Prime Minister Sharon ordered a military buildup in response to a bombing that killed five Israelis.
- Harriet Miers withdrew her nomination for the Supreme Court, saying “I am concerned that the confirmation process presents a burden for the White House and our staff that is not in the best interest of the country.”
- OPEC is scheduled to ship 2% more oil in the four weeks ending Nov. 12 than in the previous four weeks, consulting company Oil Movements said.
- Crude oil and heating oil are falling after an Energy Dept. report showed that US stockpiles of natural gas, a competing fuel, rose more than expected last week even though over 50% of Gulf of Mexico production remains shut-in.

Wall Street Journal:
- Altria Group is designing an inhaler to treat various ailments, including smoking-related lung disease.
- A group of investors that lost money when WorldCom collapsed has reached a $651 million litigation settlement, with most of the money to be paid by the company’s banks.
- Yahoo! and Microsoft’s instant-messaging services allow phone calls through the Internet, although some problems exist that can disrupt international connections.

NY Times:
- Mammograms have helped to reduce the number of deaths in the US caused by breast cancer, citing the National Cancer Institute.
- The United Nations oil-for-food program had the participation of 4,500 companies, of which more than half illegally gave money to Saddam Hussein to build weapons stockpiles, citing an investigation into the program. Hussein and companies from 60 countries benefited from the $64 billion UN program that was introduced to help feed the Iraqi people.
- Intel co-founder Andrew Grove donated $26 million to City College of NY, the school’s biggest cash gift.

NY Post:
- JPMorgan Chase is introducing a new credit card that will allow users to instantly pay for transactions by touching the card to a checkout scanner.
- Google said it’s considering ways to expand its advertising business to add buying and selling television ad time.

AP:
- Yahoo! said it will double the price of its music-service subscription starting Nov. 1.

INA:
- Iranian President Mahmoud Ahmadinejad called Israel’s withdrawal from Gaza a “trick” and said the Islamic world would “wipe Israel away.”

Durables and Jobless Claims Fall, New Home Sales Rise

- Durable Goods Orders for September fell 2.1% versus estimates of a 1.5% decline and an upwardly revised 3.8% gain in August.
- Durables Ex Transportation for September fell 1.0% versus estimates of an .8% gain and an upwardly revised 5.1% increase in August.
- Initial Jobless Claims for last week fell to 328K versus estimates of 340K and 356K the prior week.
- Continuing Claims rose to 2904K versus 2862K prior.
- New Home Sales for September rose to 1222K versus estimates of 1250K and a downwardly revised 1197K in August.

BOTTOM LINE: US durable orders fell more than forecast in September, a sign that rising energy prices may have made companies more wary about purchasing new aircraft, computers and communications equipment, Bloomberg said. A machinist strike at Boeing contributed to a 42% plunge in aircraft orders. Bookings for non-defense capital goods excluding aircraft, an indication of future business investment, fell 1.2% in September after rising 4% the prior month. I expect Durable Goods Orders to rebound through year-end on lower energy prices and hurricane rebuilding.

The number of American filing first-time claims for unemployment benefits declined for a second week as filing waned from workers displaced by the Gulf Coast hurricanes, Bloomberg said. The four-week moving average of jobless claims fell to 366,500 from 376,500 the prior week. The insured employment rate, which tracks the US unemployment rate, rose to 2.3% from 2.2%. The labor market should continue improving from the effects of the hurricanes through year-end.

US new home sales rose in September from the second-lowest level of the year, suggesting that rising energy costs and mortgage rates have yet to damp the housing market, Bloomberg said. The median price of a new home fell to $215,700 from $228,800 in August. New homes sales are still on pace to set another annual record. The supply of new homes for sale at the current pace was unchanged from August at 4.9 months. New home sales rose 24.9% in the Midwest and 5.6% in the South. Sales fell 20% in the Northeast and 11.8% in the West. I continue to believe the housing market is slowing to more healthy sustainable levels.

Links of Interest

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