Today's Headlines

Bloomberg:
- Crude oil is falling for the first day in four and natural gas has declined 15% in two days as Tropical Storm Chris weakened.
- Israeli planes pounded more than 120 targets in Beirut and troops pushed into Lebanon as eight civilians died in Hezbollah rocket attacks on northern Israel.
- July sales at the biggest US retailers, led by Wal-Mart(WMT), exceeded forecasts notwithstanding the 5th hottest July on record.
- Colorado State Univ. hurricane forecasters trimmed the number of intense hurricanes expected this year to 3 versus 7 last year.

Wall Street Journal:
- Technology companies such as Microsoft(MSFT), Cisco Systems(CSCO) and Oracle(ORCL) are courting hackers and so-called security researchers to work with them rather than against them.
- US venture capital firms are seeing earnings fall as excess capital is reducing returns.
- SABMiller Plc has dropped US television marketing for Foster’s beer, a drink it licenses in the country, and will spend its entire advertising budget on Internet ads instead.
- The new cell phone model sold by Verizon Wireless(VZ), called Chocolate, has a flawed design and isn’t yet a worthy competitor to Apple’s(AAPL) iPod, Walt Mossberg wrote.
- Auto dealers are adding their own discounts on top of automaker incentives to boost lagging sales and reduce inventory.

NY Times:
- Medtronic(MDT), Boston Scientific(BSX) and St. Jude Medical(STJ) are among medical-device makers expected to benefit from a final rule on Medicare payments to hospitals that was released this week by the federal government.

Chronicle of Higher Education:
- The number of workers at US colleges grew faster than the civilian workforce over a 10-year period, citing a US Education Dept. study of 3,186 institutions.

NY Post:
- Global diamond trading prices have declined as the fighting between Lebanon-based Hezbollah and Israel has disrupted Hezbollah’s reputed diamond smuggling.

Handelsblatt:
- Burger King Holdings(BKC) plans to open 50 restaurants a year in Germany.

Yonhap News:
- North Korea is building more missile bases and silos along its east coast to target Japan and US bases in Japan.

Mehr News:
- Iran’s volume of trade with major economies including China, Germany and France totaled $6.25 billion in the past four months, even as those countries discussed sanctions over Iran’s nuclear program.

Job Market Still Healthy, Factory Orders Climb, Service Sector Decelerates

- Initial Jobless Claims rose to 315K last week versus estimates of 308K and 301K the prior week.
- Continuing Claims rose to 2480K last week versus estimates of 2460K and 2469K prior.
- Factory Orders for June rose 1.2% versus estimates of a 1.8% gain and a 1.0% rise in May.
- ISM Non-Manufacturing for July rose to 54.8 versus estimates of 56.8 and a reading of 57.0 in June.

BOTTOM LINE: The number of US workers filing first-time applications for state jobless benefits rose last week while remaining at a level reflecting a tight labor market, Bloomberg said. The four-week moving average was almost unchanged at 313,750. The unemployment rate among those eligible to collect benefits, which tracks the US unemployment rate, remained at 1.9%. I continue to believe the labor market will remain healthy without generating substantial unit labor cost increases over the intermediate-term.

Orders placed with US factories rose for a second straight month in June, pointing to production gains that will buffer the economy, Bloomberg reported. June factory orders were limited by a fall of .7% in demand for petroleum products, chemicals and paper versus a 1.9% rise the prior month. Orders for capital goods excluding aircraft and defense, a gauge of future business spending, rose .4% versus a 1.3% rise the prior month. The inventory-to-shipments ratio rose to 1.16 months versus a record low of 1.15 months in May. I continue to expect manufacturing to decelerate, but remain healthy as companies rebuild depleted inventories.

Service industries in the US expanded at a slower pace in July as orders dropped to the lowest in more than three years, Bloomberg reported. The new orders component of the index fell to 55.6 versus 56.6 the prior month. The prices paid component of the index rose slightly to 74.8 from 73.9 the prior month. The employment component of the index rose to 54.5 from 52 the prior month. I expect consumer spending to remain around long-term average levels through year-end. However, the back-to-school selling season will likely exceed muted expectations.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- If insider selling is any guide, the stock-market rally for energy companies may be waning.
- The euro declined against the dollar and yen on bets European Central Bank President Jean-Claude Trichet won’t trigger speculation of a faster pace of increases after an expected interest-rate rise today.
- Morgan Stanley(MS) CEO Mack told the SEC that he had no advance knowledge of an acquisition in 2001 that’s now under scrutiny for possible insider trading, a persona familiar with his testimony said.
- Shares of Sina Corp.(SINA), owner of China’s biggest Internet portal, surged after the company forecast third-quarter sales that beat analyst estimates, allaying fears new mobile service rules would lower revenue.

Wall Street Journal:
- Labor unions at the major US and Japanese automakers last week agreed to start studying common issues.

Reuters:
- Aluminum Corp. of China Ltd.(ACH), the world’s second-biggest producer of alumina, has cut the price of alumina for some smelters by 20% from Aug. 1, citing officials.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are unch. to +.50% on average.
S&P 500 indicated -.12%.
NASDAQ 100 indicated -.07%.

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Earnings of Note
Company/EPS Estimate
- (ATVI)/-.10
- (ATK)/1.06
- (ALTR)/.22
- (AOC)/.60
- (CAH)/.87
- (CECO)/.49
- (CBS/A)/.50
- (CEPH)/1.01
- (CCI)/-.07
- (CVS)/.37
- (D)/.79
- (DUK)/.38
- (IRF)/.46
- (ITG)/.55
- (IVGN)/.85
- (KMG)/1.11
- (FLSH)/.22
- (CLI)/.30
- (MMC)/.43
- (MGM)/.53
- (NBL)/1.16
- (OMX)/.14
- (PTEN)/.95
- (PMI)/1.12
- (PPL)/.48
- (QSII)/.24
- (TSG)/.41
- (SRE)/.63
- (SKYW)/.60
- (S)/.33
- (SFY)/1.13
- (RIG)/.44
- (TYC)/.48
- (UVN)/.31
- (WMB)/.22

Upcoming Splits
- (FUL) 2-for-1

Economic Releases
8:30 am EST
- Initial Jobless Claims are estimated to rise to 308K versus 298K the prior week.
- Continuing Claims are estimated to fall to 2460K versus 2575K prior.

10:00 am EST
- Factory Orders for June are estimated to rise 1.8% versus a .7% gain in May.
- ISM Non-Manufacturing for July is estimated to fall to 56.8 versus a reading of 57.0 in June.

BOTTOM LINE: Asian indices are mostly higher, boosted by consumer and commodity stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Finish Higher as Long-term Rates Continue Drop

Indices
S&P 500 1,278.55 +.60%
DJIA 11,199.93 +.67%
NASDAQ 2,078.81 +.82%
Russell 2000 696.81 +1.0%
Wilshire 5000 12,788.39 +.63%
S&P Barra Growth 588.32 +.61%
S&P Barra Value 688.93 +.59%
Morgan Stanley Consumer 618.57 +.63%
Morgan Stanley Cyclical 783.11 +1.30%
Morgan Stanley Technology 465.17 +1.32%
Transports 4,327.59 +.75%
Utilities 438.05 -.04%
Put/Call .80 -12.09%
NYSE Arms 1.01 -5.68%
Volatility(VIX) 14.34 -4.72%
ISE Sentiment 127.00 +11.40%
US Dollar 85.15 +.18%
CRB 353.69 +1.18%

Futures Spot Prices
Crude Oil 76.09 +.37%
Unleaded Gasoline 234.85 +.46%
Natural Gas 7.92 +1.55%
Heating Oil 214.00 +.50%
Gold 662.50 -.24%
Base Metals 229.72 +.53%
Copper 358.45 -.18%
10-year US Treasury Yield 4.95% -.37%

Leading Sectors
HMOs +3.69%
Software +2.88%
Gaming +2.82%

Lagging Sectors
Insurance -.22%
Broadcasting -.25%
Drugs -.33%

Evening Review
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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Comerica(CMA) may sell its Munder asset-management unit to Crestview Partners LLC, a private-equity firm founded by two former partners of Goldman Sachs(GS).
- Wall Street companies dimmed their lights, cut back on air-conditioning and shut down their signs and advertising displays to do their part to reduce energy use during a punishing heat wave in NY.
- Shares of Starbucks(SBUX) dropped 7.5% after the company said July sales at stores open more than a year rose 4%, missing analysts’ estimates.

BOTTOM LINE: The Portfolio finished higher today on gains in my Medical longs, Computer 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 positive today as the advance/decline line finished higher, sector performance was mostly positive and volume was about average. Measures of investor anxiety were lower into the close. Overall, today's market performance was mildly bullish. The averages and most stocks are slowly mending technically. Google's (GOOG) recent weakness is disappointing considering the overwhelmingly strong fundamentals and reasonable valuation. I expect it is caught in the same type of technical selling that recently engulfed Apple Computer (AAPL). I will be very surprised if Google isn't substantially higher by year-end. I remain long the stock. Tomorrow's retail sales could be disappointing to some as I suspect a few shoppers just chose to stay out of the heat all together. I still expect the back-to-school selling season to exceed lowered expectations.

Stocks Higher into Final Hour, Led by Tech Shares

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Biotech longs and Computer longs. I covered my (QQQQ) and (IWM) hedges this morning and then added them back today, thus leaving the Portfolio 75% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is average. Given the large percentage of market participants that are bears and weak bulls, I suspect this is the beginning of another push higher in the major averages. While the employment report Friday could result in a "pause" in the rally, I expect investors to react most positively to the Fed's announcement next week. I expect US stocks to trade mixed into the close from current levels as short-covering, lower long-term rates and bargain-hunting offsets worries over tomorrow’s retail sales reports.