Growoth Slows, Wages Rise, Consumer Confidence Beats Estimates

- Advance 2Q GDP rose 2.5% versus estimates of 3.0% and a 5.6% gain in 1Q.
- Advance 2Q Personal Consumption rose 2.5% versus estimates of a 2.1% increase and a 4.8% gain in 1Q.
- Advance 2Q GDP Price Index rose 3.3% versus estimates of a 3.5% increase and a 3.3% gain in 1Q.
- Advance 2Q Core PCE rose 2.9% versus estimates of a 2.9% gain and a 2.1% increase in 1Q.
- The 2Q Employment Cost Index rose .9% versus estimates of a .8% increase and a .6% gain in 1Q.
- The Final Univ. of Mich. Consumer Confidence Index rose to 84.7 versus estimates of 83.0 and prior estimates of 83.0.

BOTTOM LINE: The US economy grew at a 2.5% annual rate last quarter, less than half the pace of the previous three months, as companies and consumers reined in spending, Bloomberg said. A separate report from the Labor Dept. showed wages rose by the most in three years. Business Fixed Investment, which includes spending on commercial construction as well as equipment and software, increased at a 2.7% annual rate in the second quarter after a 13.7% gain in the first quarter. I continue to believe the Fed is done hiking rates for this cycle and that inflation fears have peaked. The 10-year T-note, the best predictor of future inflation, is rallying on this report.

Confidence among US consumers came in above estimates this month despite higher gas prices, a stock market correction and increased violence in the Middle East, Bloomberg reported. I expect Consumer Confidence to make new cycle highs over the intermediate-term as gas prices fall, stocks rise, inflation decelerates, mortgage rates fall, housing stabilizes and the job market remains healthy.

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Friday Watch

Late-Night Headlines
Bloomberg:
- Shares of Sony Corp.(SNE) rose after the company posted profit that exceeded analyst estimates, helped by higher sales of Bravia televisions and Cyber-shot digital cameras.
- Shares of Sohu.com(SOHU), China’s third-biggest Internet portal, plunged 8.4% after the company forecast third-quarter sales that may miss analysts’ estimates.
- Japan’s consumer prices climbed for an eighth month and the prospect of finding a job rose to a 14-year high, supporting economists’ expectations that the central bank may increase interest rates for a second straight time this year.

Financial Times:
- The US government is to step up its prosecution of cartels, with executives involved at increased risk of extradition, citing an interview with Thomas Barnett, who heads the US Department of Justice’s antitrust division.

Colorado Gazette:
- A Colorado man serving a life sentence for murdering a teenage girl has told authorities he is responsible for 48 deaths across the US and overseas, a claim which, if true, would make him one of the more prolific serial killers in history.

AP:
- Left-wing anti-war protester Cindy Sheehan bought five acres of land in Crawford, Texas, near President Bush’s ranch. Sheehan purchased the property with some of the insurance money she received from the death of her son, Specialist Casey Sheehan.

Guardian:
- Google Inc.(GOOG) is the fastest growing brand in the world, citing an annual survey by brand consultants Interbrand.

Late Buy/Sell Recommendations
Goldman Sachs:
- Cut (ACH) to Underperform.
- Cut (WBMD) to Underperform, target $40.

Business Week:
- Shares of Bally Technologies(BYI), the second-largest maker of slot and lottery machines, may climb, and the company may be bought after it completes late securities filings, citing David Bain of Merriman Curhan Ford.

Night Trading
Asian Indices are -.50% to +.50% on average.
S&P 500 indicated +.02%.
NASDAQ 100 indicated -.03%.

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Earnings of Note
Company/EPS Estimate
- (ALEX)/.49
- (AMT)/.02
- (AXL)/.35
- (ANDE)/.71
- (ADRX)/.18
- (ATW)/.72
- (BHI)/.98
- (BDX)/.79
- (CRDN)/1.05
- (CVX)/2.21
- (CEG)/.46
- (CVH)/.82
- (DLB)/.13
- (FPL)/.74
- (GPN)/.38
- (IDXX)/.63
- (IR)/.95
- (ITT)/.77
- (MSTR)/1.19
- (MGAM)/.02
- (ODP)/.40
- (OSTK)/.86
- (WMI)/.43

Upcoming Splits
- (MON) 2-for-1

Economic Releases
8:30 am EST
- Advance 2Q GDP is estimated to rise 3.0% versus a 5.6% gain in 1Q.
- Advance 2Q GDP Price Index is estimated to rise 3.5% versus a 3.1% gain in 1Q.
- Advance 2Q Personal Consumption is estimated to rise 2.1% versus a 5.1% gain in 1Q.
- Advance 2Q PCE Core is estimated to rise 2.9% versus a 2.0% increase in 1Q.
- 2Q Employment Cost Index is estimated to rise .8% versus a .6% gain in 1Q.

9:45 am EST
- Final Univ. of Mich. Consumer Confidence for July is estimated at 83.0 versus a prior estimated of 83.0

BOTTOM LINE: Asian indices are mixed, as gains by technology stocks are being offset by losses in real estate stocks in the region. I expect US equities to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Finish Mostly Lower on Profit-taking and Lingering Economic Worries

Indices
S&P 500 1,263.20 -.41%
DJIA 11,100.43 -.02%
NASDAQ 2,054.47 -.77%
Russell 2000 685.69 -1.26%
Wilshire 5000 12,626.31 -.56%
S&P Barra Growth 582.01 -.45%
S&P Barra Value 679.81 -.37%
Morgan Stanley Consumer 616.26 -.12%
Morgan Stanley Cyclical 767.62 -.88%
Morgan Stanley Technology 459.05 -.21%
Transports 4,305.46 -1.36%
Utilities 432.59 -.75%
Put/Call 1.04 -1.89%
NYSE Arms 1.11 +4.15%
Volatility(VIX) 15.0 +2.60%
ISE Sentiment 124.0 -25.75%
US Dollar 85.86 unch.
CRB 344.38 +.71%

Futures Spot Prices
Crude Oil 74.57 +.04%
Unleaded Gasoline 229.60 -.01%
Natural Gas 7.04 +2.25%
Heating Oil 198.80 +.42%
Gold 645.50 unch.
Base Metals 220.57 +.59%
Copper 348.00 +.04%
10-year US Treasury Yield 5.03% +.12%

Leading Sectors
I-Banks +1.08%
Semis +1.07%
Telecom +.88%

Lagging Sectors
Gold & Silver -2.93%
Networking -3.68%
HMOs -5.19%

Evening Review
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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- McAfee(MFE) said second-quarter profit fell 25% because of stock-option expenses. Sales gained 13%.
- Genesis Microchip(GNSS), a world leader in the development of image processing technologies for flat-panel TVs, monitors and other consumer display products, today announced its financial results for the first quarter of fiscal year 2007.

BOTTOM LINE: The Portfolio finished lower today on losses in my Medical longs, Networking longs and Biotech longs. 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, most sectors fell and volume was above average. Measures of investor anxiety were mixed into the close. Overall, today's market performance was bearish with the major averages and breadth finishing well off session highs. On the positive side, the bears were unable to gain significant downside traction. My intraday measures of investor angst were above average throughout the day. The 10-year held recent gains despite the mostly positive economic data. Tomorrow's GDP report will likely further increase speculation for a Fed pause.

Stocks Mostly Lower into Final Hour on Profit-taking

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Medical longs, Networking longs and Biotech longs. I added to my (ISRG) and (BBY) longs and to my (IWM) and (QQQQ) shorts today, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are falling and volume is above average. The AAII percentage of Bulls rose to 34.88% this week from 23.85% the prior week. This reading is still at below average levels. The AAII percentage of Bears fell to 43.02% this week from 57.80% the prior week. This reading is still at above average levels. Moreover, the 10-week moving average of the % Bears is 46.04%. The 10-week moving-average of % Bears has been this high only 1 other time since record-keeping began in 1987, the significant market bottom during the 1990 recession and Gulf War. It never even reached current levels during the depths of one of the greatest stock market collapses in US history during 2002. I continue to believe overall investor sentiment toward U.S. stocks remains at levels associated with meaningful market bottoms. I expect US stocks to trade modestly higher into the close from current levels on short-covering, mostly positive earnings reports and bargain-hunting.

Today's Headlines

Bloomberg:
- The Chicago Board Options Exchange will join with four securities firms to establish an exchange to trade equity securities early next year.
- Prime Minister Olmert decided today against widening Israeli military operations in southern Lebanon.
- Time Warner’s(TWX) board may approve as early as today a plan to give away its AOL service to high-speed Internet users in an attempt to revive the ailing unit.

Wall Street Journal:
- Five telecom equipment makers will announce today network technology that will enable service providers to bring in combined telephone, television and Internet features more quickly.
- Friendster, a Web company that brings people together and that’s losing users to competitors such as MySpace.com, may sue its peers for alleged patent violation.
- Shares of Automatic Data Processing(ADP) are considered cheap by some analysts as the company tries to recover form two embarrassments.
- The town of Monroe, Oregon, is getting Internet protocol television delivered over phone lines, a service that uses high speed connections to deliver video programming.
- Vanguard Group said it’s adopting consumer security systems made by RSA Security(RSAS) and popular with banks to protect its customers from fraud.
- US exchange-traded funds, worth $325 billion in May, are confusing investors by multiplying too quickly and becoming excessively specialized.
- The proportion of US employers offering benefits for workers who care for elderly relatives has risen to a quarter.

USA Today:
- The city of Portland, Oregon, is a leading proponent of so-called eco-friendly or “green” construction that seeks to use natural materials and promotes energy efficiency.

Philadelphia Inquirer:
- The Pennsylvania Turnpike Commission will be the first client for Duet, a software program by Microsoft(MSFT) and SAP AG(SAP), which will cost $30 million and take 30 months to implement.

AP:
- Palestinian Authority President Abbas said an “imminent solution” may be found for the release of an Israeli soldier who was kidnapped last month by Hamas.

Financial Times:
- Reuters Plc(RTRSY) could entice investors as a possible recovery story, though it’s far from being a growth stock.