Today's Headlines

Bloomberg:
- Iran’s President Mahmoud Ahmadinejad stood by his comment that Israel “must be wiped off the map,” ignoring condemnation from the European Union, US and Russia.
- I. Lewis Libby was indicted by a grand jury investigating who leaked the name of an alleged covert CIA agent. Libby resigned shortly afterward. Karl Rove, who made four appearances before the grand jury, wasn’t charged.
- Natural gas prices continue to fall after a report yesterday showed US stockpiles were ample to meet winter demand.

Wall Street Journal:
- Verizon Communications faces demands from local authorities to fund a variety of projects in exchange for allowing the company to roll out its high-speed network.
- Oil prices at more than $60 a barrel are spurring increased interest in biofuels, including plants that use turkey feathers, bones, fat and even entire birds to produce diesel fuel.
- Esprit, a brand that largely disappeared from the US, is attempting a US comeback with high-fashion goods.
- Abigail Johnson, Fidelity Investments’ biggest shareholder, has reduced her stake in the US mutual-fund company, raising questions about whether she will succeed her father at the head of the firm.
- Delta Air Lines may end its Song discount carrier unit introduced in 2003, and apply some of the experience gained to Delta flights.

NY Times:
- The American Association of Retired Persons is seeking to attract more members by selling and endorsing products.
- The US oil and gas industry, awash with money, is facing a labor and equipment shortage.
- Fifth Third Bank of Cincinnati may be the subject of takeover interest as disappointing deposit growth reversed its fortunes and sent its stock down.

Washington Post:
- Rosa Parks, the African-American whose arrest helped spark the US civil-rights movement, may be honored by Congress with a vigil in the Capitol Rotunda to market her death on Oct. 24.
- The FBI may not monitor the locations of cellular phone users without showing evidence that a crime took place or is in progress.
- A federal program that has doled out more than $10 billion to help schools and libraries access the Internet has wasted millions of dollars.

Le Figaro:
- A French Islamist terrorist group has obtained shoulder-held anti-aircraft missiles from Chechnya with the intention of bringing down an airliner at a French airport, citing judicial documents.

US Growth Streak Best Since 1986, Inflation Contained, Confidence Remains Weaker

- Advance 3Q GDP rose 3.8% versus estimates of a 3.6% increase and a 3.3% gain in 2Q.
- Advance 3Q GDP Price Index rose 3.1% versus estimates of a 2.8% increase and a 2.6% increase in 2Q.
- Advance 3Q Personal Consumption rose 3.9% versus estimates of a 3.3% increase and a 3.4% gain in 2Q.
- 3Q Employment Cost Index rose .8% versus estimates of a .8% gain and a .7% increase in 2Q.
- Final Univ. of Mich. Consumer Confidence for October fell to 74.2 versus estimates of 76.0 and a prior estimate of 75.4.

BOTTOM LINE: US economic growth quickened to a 3.8% annual rate in the third quarter, faster than economists predicted and evidence the economy was able to withstand higher energy costs, Bloomberg reported. Companies pared inventories for the second quarter in a row which will likely boost growth in 4Q as companies rebuild inventories. US growth has exceeded 3% for 10 straight quarters, the best streak since the 13 quarters that ended in March 1986 and the best performance among the G-7, which includes Japan, Germany, the UK, France Italy and Canada. Consumer spending rose 3.9% last quarter, the most this year and higher than the 20-year average of 3.4%. The core personal consumption expenditures index, Greenspan’s favorite inflation gauge, rose at a 1.3% annual rate, the slowest since the second quarter of 2003. The trade deficit narrowed to $611.8 billion from $614.2 billion in 2Q, adding .08 percentage point to 3Q GDP after adding 1.1 percentage points in 2Q. This is the first time trade has added to growth in back-to-back quarters since the last half of 1995. I continue to believe growth slowed to below average levels after the hurricanes struck in September and that a bounce back to average growth will occur into year-end.

US consumer confidence fell below estimates this month as energy costs remained elevated, Bloomberg reported. The average price of gas is 38% higher than this time last year. The current conditions component of the index fell to 91.2 from 98.1 in September. Since reaching a record in September, the average price of gas has fallen five of the past eight weeks and was $2.60/gallon in the week ended Oct. 24. I continue to anticipate a sharp rebound in consumer sentiment over the next few months.

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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
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ADM/.33
AVP/.29
BHI/.67
BMY/.33
CHKP/.31
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COCO/.07
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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.