Today's Headlines

Bloomberg:
- Mittal Steel, the world’s largest steelmaker, said third-quarter profit dropped 64% amid a worldwide slump in prices.
- Blackstone Group LP, which is raising the world’s biggest buyout fund, agreed to buy hotel operator La Quinta and its La Quinta Properties unit for about $3.4 billion including debt.
- Natural Gas prices will drop to their levels before the Gulf Coast hurricanes as industrial users reduce consumption, Sanford C. Bernstein analyst Ben P. Dell says. He expects earnings estimates for gas producers to be lowered and their stocks to underperform the market.
- US Treasuries remained lower after the government sold $13 billion of five-year notes at the second of three debt auctions this week.
- France’s worst outbreak of urban violence since 1968 ebbed last night after President Chirac’s government authorized curfews and increased the police presence in ransacked neighborhoods.

Wall Street Journal:
- Exxon Mobil Chairman and CEO Lee Raymond said he thinks almost a third of the price of a barrel of oil is a “speculative” premium.
- US officials are trying to boost supplies of vaccines, antibiotics and biodefense drugs because the market place isn’t supplying enough to make sure citizens aren’t caught short.
- China’s oil imports have slowed greatly this year, and there’s increasing evidence that the surge in the country’s oil demand in 2004 was boosted by factors that are declining in significance or may not recur.
- BEA Systems and other companies based in California’s Silicon Valley are increasing the range of services they make available to employees so they don’t have to leave the office during working hours.
- The tax cuts passed into law by President Bush in 2003 shouldn’t be allowed to expire beginning in 2008 because they have helped the US economy recover from terrorism and recession, former Commerce Secretary Donald Evans said.

NY Post:
- US financial companies on Wall Street increased hiring by almost 15% in the past year, citing the Bureau of Labor Statistics.

NY Times:
- US chief executive officers are being held accountable for what they say in public by investors due to Regulation FD. Consequently, quarterly investor calls, generally broadcast on the Internet, have taken the manner of a White House press conference.
- ViroPharma Inc., which purchased the US rights to the antibiotic Vancocin last year, has benefited from increased demand for the drug, which treats a difficult intestinal bacterium.

Washington Post:
- A prominent Protestant pastor in China was sentenced yesterday to three years in prison for illegally printing and distributing Bibles and other religious books.

Inventories Adding to US Growth, Oil Supplies Rise Substantially

- Wholesale Inventories for September rose .6% versus estimates of a .3% increase and a .5% gain in August.
- Gasoline supplies rose 4.22M barrels vs. estimates of a 1.2M barrel increase. Distillate inventories fell 84,000 barrels vs. estimates of a 750,000 barrel rise. Refinery Utilization rose 1.51% vs. estimates of a 2.43% increase.

BOTTOM LINE: Sales at US wholesalers in September rose by the most in more than a year, exceeding a gain in inventories and suggesting companies may need to step up production to meet rising demand, Bloomberg reported. Sales surged 2.4% in September, which was the largest rise since March 2004. Moreover, the inventory-to-sales ratio fell to 1.15 in September, the lowest since May 2004. I expect inventory rebuilding to continue adding to economic growth at least through year-end.

Traders are paying more attention to the decline in distillate inventories than the substantial crude build. I expect the next down-leg in oil prices to begin as it gets colder over the next few weeks.

Links of Interest

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- After paying more than $12 billion in fines and settlements over four years, Wall Street firms including Goldman Sachs and Lehman Brothers are headed for their biggest profits since 2000.

Wall Street Journal:
- Microsoft is seeking to benefit from the Internet advertising and software boom as it introduces new Web-based services.
- A McDonald’s shareholder with a 4.9% stake has suggested the company sell a major portion of its company-owned restaurants in an IPO to provide holders more value.

London-based Times:
- GE, Mitsubishi Heavy Industries, Shaw Group and Toshiba are among the companies on the shortlist to buy British Nuclear Fuels Plc’s Westinghouse Electric, the world’s largest holder of nuclear technology.

South China Morning Post:
- The US and China will agree to resume military exchanges during President Bush’s meeting with President Jintao in Beijing next week.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on MDT, DISH, CBB, MSFT, FSH and KRG.
- Reiterated Underperform on AGI and PFG.

Night Trading
Asian Indices are -.25% to +1.25% on average.
S&P 500 indicated +.07%.
NASDAQ 100 indicated +.09%.

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Earnings of Note
Company/EPS Estimate
DOX/.38
CSCO/.24
FD/.23
FST/.94
HANS/.59
IPG/-.08
JDSU/.00
KG/.33
L/.00
MVL/.30
NVDA/.36
SNDA/.37
WFMI/.53

Upcoming Splits
SMG 2-for-1

Economic Releases
10:00 am EST
- Wholesale Inventories for September are estimated to rise .3% versus a .5% gain in August.

10:30 am EST
- Platt's estimates that weekly crude inventories rose 1.7 million barrels, gasoline inventories rose 1.1 million barrels and distillate supplies increased 600,000 barrels. Refinery utilization is expected to rise 2.3%.

BOTTOM LINE: Asian indices are mostly higher, spurred by gains in technology shares in the region. I expect US equities to open modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Modestly Lower as Long-term Rate Fall on Perceived Weakness in Housing

Indices
S&P 500 1,218.59 -.35%
DJIA 10,539.72 -.44%
NASDAQ 2,172.07 -.28%
Russell 2000 656.23 -.76%
DJ Wilshire 5000 12,177.21 -.38%
S&P Barra Growth 583.66 -.32%
S&P Barra Value 630.69 -.36%
Morgan Stanley Consumer 585.18 -.36%
Morgan Stanley Cyclical 732.80 -.76%
Morgan Stanley Technology 511.17 -.13%
Transports 3,961.24 -.46%
Utilities 393.77 -.21%
Put/Call .86 +2.38%
NYSE Arms 1.13 +19.49%
Volatility(VIX) 13.08 -.15%
ISE Sentiment 175.00 -7.41%
US Dollar 91.40 +.12%
CRB 318.24 +.25%

Futures Spot Prices
Crude Oil 59.59 -.20%
Unleaded Gasoline 156.10 -.08%
Natural Gas 11.87 +.65%
Heating Oil 177.30 -.31%
Gold 462.00 -.06%
Base Metals 136.24 -.01%
Copper 183.65 -.08%
10-year US Treasury Yield 4.55% -1.41%

Leading Sectors
Disk Drives +.80%
Oil Service +.77%
Energy +.75%

Lagging Sectors
Papers -1.66%
Gaming -2.51%
Homebuilders -5.38%

Evening Review
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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on ADP and COF.
- Reiterated Underperform on INFA.

Afternoon/Evening Headlines
Bloomberg:
- Pixar, the computer-animation film studio run by Steven Jobs, posted a 22% rise in profit on surging home-video sales from movies such as “The Incredibles.”
- Bank of New York agreed to pay $38 million to settle two criminal investigations, after admitting it failed to report $7 billion in suspicious transactions from Russia that were linked to money laundering.

AP:
- American Airlines faces a possible fine after a man boarded a Miami-bound flight at Newark, New Jersey’s Liberty International Airport without a ticket or boarding pass.

BOTTOM LINE: The Portfolio finished lower today on losses in my Internet longs, Homebuilding longs and Retail longs. I exited a Homebuilding long in the afternoon and added to some existing longs, thus leaving the Portfolio 100% net long. The tone of the market was negative today as the advance/decline line finished lower, most sectors fell and volume was about average. Measures of investor anxiety were mostly higher into the close. Overall, today’s market action was modestly negative given recent gains and the losses in the Homebuilding sector. Two of the main arguments for Fed rate hikes have been excessive speculation in housing and rising commodity prices. The speculative froth in many housing markets has been greatly curtailed over the last few months. As well, energy prices have dropped substantially from September highs. While these two trends may need to persist for a bit longer to get the Fed's attention, it is becoming much easier for them to justify a "pause" in the pace of rate hikes.

Stocks Modestly Lower Mid-day on Weakness in Homebuilders

Indices
S&P 500 1,219.34 -.28%
DJIA 10,550.29 -.34%
NASDAQ 2,173.78 -.21%
Russell 2000 656.35 -.74%
DJ Wilshire 5000 12,180.61 -.36%
S&P Barra Growth 584.16 -.24%
S&P Barra Value 630.52 -.39%
Morgan Stanley Consumer 585.76 -.26%
Morgan Stanley Cyclical 733.26 -.70%
Morgan Stanley Technology 510.86 -.19%
Transports 3,960.28 -.48%
Utilities 393.65 -.24%
Put/Call .84 unch.
NYSE Arms 1.11 +17.48%
Volatility(VIX) 13.18 +.61%
ISE Sentiment 176.00 -6.88%
US Dollar 91.38 +.10%
CRB 317.61 +.05%

Futures Spot Prices
Crude Oil 59.40 -.12%
Unleaded Gasoline 154.75 -.55%
Natural Gas 11.73 -1.20%
Heating Oil 176.30 -1.29%
Gold 462.30 +.41%
Base Metals 136.24 -.01%
Copper 183.80 -.51%
10-year US Treasury Yield 4.57% -1.06%

Leading Sectors %
Oil Service +.79%
Energy +.74%
Disk Drives +.73%

Lagging Sectors
Papers -1.46%
Gaming -2.30%
Homebuilders -4.72%

BOTTOM LINE: The Portfolio is lower mid-day on losses in my Internet longs, Homebuilding longs and Retail longs. I added to my NTES long this morning and to existing shorts, thus leaving the Portfolio 100% net long. I am using a close below $60 as a stop on this position. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is about average. Measures of investor anxiety are mostly higher. The Johnson Redbook same-store sales index rose 4.2% year-over-year last week even with unseasonably warm weather vs. a 3.8% rise the prior week. This week's gain is up from a 1.5% increase in late April and the 27th week in a row the index has risen 3% or more. I continue to believe while consumer sentiment remains depressed, spending remains healthy. There remains little evidence of any widespread consumer slowdown. I expect US stocks to trade modestly higher from current levels into the close on short-covering.