Stocks Finish Mostly Lower on Weakness in Commodity Shares

Indices
S&P 500 1,234.49 -.14%
DJIA 10,747.36 +.07%
NASDAQ 2,037.72 +.02%
Russell 2000 677.69 -.52%
Wilshire 5000 12,373.32 -.24%
S&P Barra Growth 570.36 -.06%
S&P Barra Value 662.56 -.21%
Morgan Stanley Consumer 601.10 -.03%
Morgan Stanley Cyclical 769.35 -.78%
Morgan Stanley Technology 459.13 +.04%
Transports 4,570.83 -.43%
Utilities 419.11 +.24%
Put/Call 1.07 -13.71%
NYSE Arms 1.04 -11.73%
Volatility(VIX) 18.64 +3.27%
ISE Sentiment 131.00 +3.15%
US Dollar 86.98 +1.02%
CRB 347.31 -2.77%

Futures Spot Prices
Crude Oil 75.39 +.12%
Unleaded Gasoline 228.60 +.03%
Natural Gas 5.75 -.57%
Heating Oil 202.72 +.39%
Gold 644.50 -1.14%
Base Metals 229.13 -3.20%
Copper 359.00 -.26%
10-year US Treasury Yield 5.06% -.04%

Leading Sectors
Restaurants +2.40%
Gaming +.95%
Retail +.93%

Lagging Sectors
Energy -3.08%
Gold & Silver -3.41%
Oil Service -4.42%

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Afternoon Recommendations
Bear Stearns:
- Reiterated Outperform on (UTX).

Afternoon/Evening Headlines
Bloomberg:
- Copper fell the most in five weeks leading a decline in metals prices, on concern that escalating violence in the Middle East will slow economic growth and curb demand for raw materials.
- Cocoa plunged 16% in London, the biggest one-day decline since at least 1989, on concern that record buying by speculators had inflated prices to unsustainable levels.
- The US dollar surged to the highest level in almost three months against the yen and strengthened versus the euro as investors sought a safe haven from escalating violence in the Middle East.
- Nymex Holdings, owner of the world’s largest energy marketplace, plans to sell $250 million of stock in an IPO as record oil prices and trading sparks interest in energy exchanges.
- Crude oil fell in NY by the most in five weeks, on speculation that Israel may stop its attack on Lebanon within days.

BOTTOM LINE: The Portfolio finished higher today on gains in my Computer longs, Networking longs and Commodity shorts. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was negative today as the advance/decline line finished lower, sector performance was mixed and volume was below average. Measures of investor anxiety were mixed into the close. Overall, today's market performance was mildly bearish. Given the decline in oil, I would have expected a better showing for the broad market. But the sharp declines in commodity stocks, which many perceive as market leaders, didn't do much damage to the broad market, which is a positive. The fact that the 10-year maintained recent gains, despite a somewhat calmer environment, is also a positive. My intraday measures of investor angst were above average throughout the day. I expect a better performance for stocks tomorrow.

Stocks Mostly Lower into Final Hour, Weighed Down by Energy Shares

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Networking longs, Computer longs and Commodity 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, sector performance is mixed and volume is below average. Considering the 4%+ losses in energy stocks, the broad market is holding up well. I am starting to wonder if Iran is to oil what Hurricane Katrina was to natural gas. A number of market-leading stocks are posting gains today. I still expect a calming of Middle Eastern tensions, increased Fed "pause" speculation and mostly positive earnings reports to spur a snapback rally over the next few days. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, lower energy prices and stable long-term rates.

Today's Headlines

Bloomberg:
- Emerging-market stocks dropped as the conflict between Israel and Lebanon entered its sixth day and traders sought to reduce exposure to the riskiest stocks.
- The dollar surged to the highest in almost three months against the yen and strengthened versus the euro as investors sought a haven from escalating violence in the Middle East.
- Bill Gross, manager of the world’s biggest bond fund, raised holdings of US Treasuries and agency debt in June after cutting the category for seven straight months to a four-year low.
- Natural Gas in NY had its biggest plunge in almost six months as plentiful inventories tempered concern about hot weather in the northern US.
- Crude oil closed floor-trading down almost $2/bbl. as speculators took profits and Middle Eastern tensions eased slightly.

Wall Street Journal:
- Esmark Inc., the closely held steel distributor, plans to start a proxy fight as early as today for control of Wheeling-Pittsburgh(WPSC) as part of a bid to combine the two companies.
- Intel Corp.(INTC) plans to introduce tomorrow the first in its line of Itanium chips containing the equivalent of two electronic brains on a single piece of silicon.
- Federated Dept. Stores(FD) CEO Lundgren is betting that he can turn around a 20-year decline in US department-store sales by creating the industry’s first nationwide chain.

LA Times:
- News Corp.(NWS) Chairman Murdoch may be close to a deal to buy EchoStar Communications(DISH), citing unidentified money managers attending Allen & Co.’s conference in Silicon Valley.

Washington Post:
- Democracy Alliance, a coalition of almost a hundred of the US’s richest donors, has given more than $50 million to liberal think tanks and advocacy groups in the last nine months to compete against conservatives. The group was formed last year with backing from billionaires including George Soros and Colorado software entrepreneur Tim Gill. The donations have made some Democratic groups uncomfortable because the alliance requires that groups agree to protect the identity of donors.

NY Times:
- About $10 billion in US aid is starting to reach people in Mississippi and Louisiana who lost their homes in last year’s hurricanes, an unprecedented level of direct assistance to homeowners.
- CBS Corp.(CBS) will advertise its fall television shows on eggshells.

Financial Times Deutschland:
- Delta Air Lines is under time pressure to buy or lease more planes by the end of this decade to replace aircraft going out of commission, COO Whitehurst said.

Empire Manufacturing Decelerates, Industrial Production Rises, Capacity Utilization Increases

- Empire Manufacturing for July fell to 15.6 versus estimates of 20.0 and a reading of 29.0 in June.
- Industrial Production for June rose .8% versus estimates of a .5% increase and a .1% gain in May.
- Capacity Utilization for June rose to 82.4% versus estimates of 82.0% and 81.8% in May.

BOTTOM LINE: Manufacturing in New York state expanded at a slower pace in July as fewer factories reported increases in orders and sales, Bloomberg reported. The component measuring the outlook for six months from now increased to 44.8 from 33.7 the prior month. The new orders component fell to 10.3 from 25.8 the prior month. The prices paid component fell to 50.5 versus 52.9 in June. I expect manufacturing to continue to slow to more average levels.

Industrial Production in the US rose more than forecast last month as an unseasonably warm June boosted electricity use and factories turned out more communications equipment, Bloomberg reported. Production of consumer durable goods, which includes electronics, automobiles and furniture, rose 2.2% versus a .5% fall the prior month. I expect production and capacity utilization to begin decelerating modestly next month.

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Monday Watch

Weekend Headlines
Bloomberg:
- Israel extended its attacks on targets in Lebanon after Hezbollah forces fired rockets into Haifa, Israel’s third-biggest city in the north as the conflict entered its sixth day.
- The G-8 condemned “extremists” who triggered violence in the Middle East, calling on Hamas and Hezbollah to cease missile attacks on Israel and for Israel to limit its retaliation.
- Russia’s bid to join the World Trade Organization stalled over its barriers to US meat exports, officials from both countries said, hours after a statement from President Bush that a deal was “almost reached.”
- The UN Security Council voted 15-0 to adopt a resolution demanding that North Korea suspend its missile program and barring the communist nation from acquiring or selling missile technology.
- South Korean and Taiwanese stocks may be among Asia’s worst performers in the next six months as higher US interest rates and fuel prices threaten exports that powered their economies since 2002.
- Boeing Co.(BA) expects record oil prices to push US airlines to order new, more fuel efficient planes next year.
- When European Union officials created a market for trading pollution credits, they boasted it was a “cost-conscious way” to save the planet from global warming. Five years later, the 25-nation EU is failing to meet the Kyoto Protocol’s carbon-dioxide emission standards. Rather than help protect the environment, the trading system has led to increases in electricity prices of more than 50% and record profits for utility companies.
- Phelps Dodge(PD) boosted its friendly offer for Canadian nickel producers Inco Ltd.(N) and Falconbridge Ltd. to $36.3 billion in cash and stock, attempting to thwart hostile suitors in the biggest mining takeover ever.

Wall Street Journal:
- Wal-Mart Stores(WMT), France’s Carrefour SA and other overseas retailers may face higher costs expanding in China, where new rules are planned to regulate big shopping outlets.
- Chinese Premier Wen Jiabao called for stronger economic-control measures because of concern that the country’s rapidly growing economy could overheat.

Forbes:
- Hedge funds are leading a $25 billion bet on this year’s hurricane season.

NY Times:
- US oil imports may be completely eliminated by 2030 with an aggressive approach to energy efficiency and commercialization of already-demonstrated technologies for making fuels, citing a study by the Southern States Energy Board.

Washington Post:
- The Environmental Protection Agency ordered US dry cleaning shops in residential buildings to stop using a toxic solvent in their machines by 2020.
- A bipartisan group of US senators is gathering support for legislation that would create military tribunals based on military law and rules of courts martial to try suspected terrorists.

Star-Ledger of Newark:
- New Jersey and New York residents, faced with rising housing prices and higher taxes, are moving across the Delaware River to Pennsylvania.

Business Week:
- Toyota Motor(TM) may make an overture to General Motors(GM) to keep it from forging an alliance with Nissan Motor and Renault SA.

AP:
- Arab foreign ministers holding an emergency summit in Cairo on the conflict between Israel and Lebanon can’t agree on the legitimacy of Hezbollah’s attacks on Israel, citing unidentified delegates. Saudi Arabian Foreign Minister Pricnce Saud Al-Faisal said Hezbollah’s actions were “unexpected, inappropriate and irresponsible.” That’s a view shared by Egypt, Jordan, Kuwait, Iraq, the Palestinian Authority, the United Arab Emirates and Bahrain, the AP said.

Financial Times:
- One in five western Europeans trust Russian President Putin and fewer consider his nation a democracy.

Xinhua News Agency:
- Unsold residential and commercial floorspace in China was 18% higher at the end of May than a year earlier, and price increases are slowing.
- China’s government is struggling to boost consumer spending, making it difficult to reduce dependence on exports for economic growth, Qiu Xiaohua, director of the country’s National Bureau of Statistics said.

WirtschaftsWoche:
- DaimlerChrylser AG’s Mercedes Benz unit plans to sell its first hybrid car at the beginning of 2008.

Weekend Recommendations
Barron's:
- Had positive comments on (AAPL), (MGM), (HET), (LVS), (STN), (BYD), (IGT), (YHOO) and (RSG).
- Had negative comments on (PNRA).

Night Trading
Asian indices are -1.25% to -.75% on average.
S&P 500 indicated +.02%
NASDAQ 100 indicated -.03%.

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Earnings of Note
Company/Estimate
- (SCHW)/.20
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- (CMVT)/.19
- (ETN)/1.63
- (HDI)/.91
- (MI)/.78
- (MAT)/.04

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Economic Releases
8:30 am EST
- Empire Manufacturing for July is estimated to fall to 20.0 versus a reading of 29.0 in June.

9:15 am EST:
- Industrial Production for June is estimated to rise .5% versus a .1% decline in May.
- Capacity Utilization for June is estimated to rise to 82.0% versus 81.7% in May.

BOTTOM LINE: Asian Indices are lower, weighed down by exporting shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the week.