Thursday Watch

Late-Night Headlines
Bloomberg:
- Mittal Steel, Arcelor SA and Nippon Steel may have lower profits next year as rising Chinese steel production increases the cost of iron ore.

Sydney Morning Herald:
- The Sydney members of a group of alleged terrorists arrested by police in Australia had stockpiled enough chemicals to make at least 15 large bombs.

Economic Daily News:
- Quanta Display plans to expand capacity at its so-called “sixth-generation” liquid-crystal display plant next year because of excess demand.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on DOX, FDC, USB, AIG, BAC and SBUX.
- Reiterated Underperform on UIS.

Banc of America:
- Upgraded ZGEN to Buy, target $25.

Night Trading
Asian Indices are -.25% to +.25% on average.
S&P 500 indicated unch.
NASDAQ 100 indicated -.18%.

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Earnings of Note
Company/EPS Estimate
DWA/.00
DELL/.39
IGT/.30
KSS/.44
PSUN/.54
COL/.62
TGT/.45
URBN/.22

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Trade Deficit for September is estimated to widen to -$61.5B versus -$59.0B in August.
- The Import Price Index for October is estimated to fall .2% versus a 2.3% rise in September.
- Initial Jobless Claims for last week are estimated to fall to 320K versus 323K the prior week.
- Continuing Claims are estimated to fall to 2792K versus 2823K prior.

9:45 am EST
- Preliminary Univ. of Mich. Consumer Confidence for November is estimated to rise to 76.5 versus 74.2 in October.

2:00 pm EST
- The monthly budget deficit for October is estimated to shrink to -$50.0B versus -$57.3B in September.

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

Stocks Finish Slightly Higher Despite Headwinds

Indices
S&P 500 1,220.65 +.17%
DJIA 10,546.21 +.06%
NASDAQ 2,175.81 +.17%
Russell 2000 659.83 +.55%
DJ Wilshire 5000 12,200.43 +.19%
S&P Barra Growth 584.20 +.09%
S&P Barra Value 632.22 +.24%
Morgan Stanley Consumer 586.97 +.31%
Morgan Stanley Cyclical 732.74 -.01%
Morgan Stanley Technology 511.88 +.14%
Transports 4,004.37 +1.09%
Utilities 395.86 +.53%
Put/Call .82 -4.65%
NYSE Arms .76 -32.88%
Volatility(VIX) 12.80 -2.14%
ISE Sentiment 149.00 -14.86%
US Dollar 91.53 +.19%
CRB 316.54 -.53%

Futures Spot Prices
Crude Oil 58.79 -.14%
Unleaded Gasoline 154.70 -.43%
Natural Gas 11.60 -.06%
Heating Oil 178.30 -.66%
Gold 468.10 +.60%
Base Metals 136.62 +.38%
Copper 183.25 +.10%
10-year US Treasury Yield 4.64% +9.38%

Leading Sectors
Oil Tankers +3.26%
Gold & Silver +3.09%
Airlines +1.92%

Lagging Sectors
Energy -.86%
Restaurants -.88%
Coal -1.56%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on FD.
- Reiterated Underperform on WGR.

Afternoon/Evening Headlines
Bloomberg:
- Citigroup Inc. Chairman Sanford Weill told CNBC the US economy is in “good shape,” even after multiple hurricanes in the Gulf of Mexico.
- Google Inc. sought to patent a system that helps individuals and small businesses sell items online by automatically creating ads that appear next to Web search results.
- T. Boone Pickens, the Dallas hedge fund manager who predicted oil would continue rising after the hurricanes sent it to $72/bbl. is now saying prices will drop toward $50/bbl. in coming months.
- The US dollar rose against the euro for a fifth straight day, its longest winning streak since August, on continuing speculation the riots in France will result is an increase in demand for US assets.
- The Jordanian government said blasts at three hotels in the capital Amman late today were coordinated “terror operations,” probably carried out by homicide bombers.

NY Times:
- Reported Judith Miller, a key figure in a federal investigation into who divulged the name of a CIA agent, is retiring immediately from the NY Times.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Internet longs, Retail longs and Oil Tanker shorts. I took profits in an Oil Tanker short and exited an Internet long in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, most sectors rose and volume was slightly below average. Measures of investor anxiety were mostly lower into the close. Overall, today’s market action was positive given recent gains, the terrorist bombings, a morning rally in oil and a 9 basis point surge in the 10-year T-note yield could not send stocks lower. I expect better-than-expected readings on inflation, consumer confidence and the deficit to propel stocks higher tomorrow.

Stocks Slightly Higher Mid-day Even as Long-term Rates Rise

Indices
S&P 500 1,223.26 +.38%
DJIA 10,569.10 +.28%
NASDAQ 2,177.93 +.26%
Russell 2000 661.53 +.81%
DJ Wilshire 5000 12,225.22 +.38%
S&P Barra Growth 585.26 +.28%
S&P Barra Value 633.38 +.42%
Morgan Stanley Consumer 587.19 +.34%
Morgan Stanley Cyclical 733.59 +.11%
Morgan Stanley Technology 511.22 +.01%
Transports 3,993.43 +.80%
Utilities 396.86 +.79%
Put/Call .88 +2.33%
NYSE Arms .72 -36.82%
Volatility(VIX) 12.81 -2.06%
ISE Sentiment 139.00 -20.57%
US Dollar 91.50 +.14%
CRB 316.74 -.47%

Futures Spot Prices
Crude Oil 59.05 -1.11%
Unleaded Gasoline 155.00 -.79%
Natural Gas 11.67 -1.04%
Heating Oil 178.75 +.42%
Gold 467.60 +1.15%
Base Metals 136.62 +.28%
Copper 183.15 -.35%
10-year US Treasury Yield 4.63% +1.63%

Leading Sectors %
Oil Tankers +3.57%
Gold & Silver +2.69%
Airlines +1.86%

Lagging Sectors
Hospitals -.50%
Coal -.57%
Restaurants -.57%

BOTTOM LINE: The Portfolio is slightly lower mid-day on losses in my Internet longs, Energy-related shorts and Retail longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is about average. Measures of investor anxiety are mixed. Overall, market action is positive given the rise in long-term rates and recent gains. I expect US stocks to trade modestly higher from current levels into the close on short-covering and lower energy prices.

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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