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Friday Watch

Late-Night Headlines
Bloomberg:
- Israeli Defense Minister Amir Peretz ordered the army late today to advance into southern Lebanon up to the Litani River after almost 500 rockets fell on Israel in the past two days, killing nine civians.
- Many of the rockets Hezbollah is firing into Israel are made in Iran, demonstrating the Islamic republic’s success in copying Chinese and Russian technology to build its own weapons industry.
- The benchmark US 10-year Treasury yield touched the lowest since April on speculation inflation would decelerate after a private report showed growth in the service industries slowed for a third month.
- Apple Computer(AAPL) said it will probably restate earnings after an internal investigation into options backdating found additional suspicious grants.
- Copper prices in Shanghai fell after charts some traders use to predict price moves gave sell signals, indicating more declines may be in store.
- Crude oil fell in NY for a second day as Tropical Storm Chris dissipated.
- Chicago Mercantile Exchange Holdings(CME) will join the S&P 500 Index next week.

NY Times:
- Campaign donors in New York state have used limited liability corporations, or LLCs, to legally get around a prohibition against individuals giving more than $50,100 to statewide candidates. Eliot Spitzer, who is running for governor, received money from LLCs connected to hedge fund managers.

Business Week:
- Digg.com, the 24th-most popular US Web site, is worth about $200 million.

Nation:
- PTT Pcl, a Thai oil and gas company, is studying the start of large-scale production of bio-diesel as a cheap alternative to diesel refined from imported crude oil, citing Energy Minister Viset Choopiban.

Xinhua News:
- French Foreign Minister Philippe Douste-Blazy said he believes “more than ever” a durable ceasefire between Lebanon’s Hezbollah and Israel would come soon.

Late Buy/Sell Recommendations
Goldman Sachs:
- Rated (STP) Outperform, target $34.95.

Citigroup:
- Rated (DKS) Buy, target $47.

Business Week:
- Shares of Norfolk Southern(NSC) may rise 26% in the next year.
- Radiation Therapy Services(RTXS) may rise 28% within a year because fears that Medicare reimbursements would be cut, which caused shares to fall this year, were “overblown.”

Night Trading
Asian Indices are -.25% to +.50% on average.
S&P 500 indicated -.07%.
NASDAQ 100 indicated -.15%.

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Earnings of Note
Company/EPS Estimate
- (CRDN)/1.05
- (GT)/.18
- (MXIM)/.48
- (MEDX)/-.37
- (MHS)/.61
- (OXY)/2.79
- (OMG)/.80

Upcoming Splits
- (FUL) 2-for-1

Economic Releases
8:30 am EST
- The Change in Non-farm Payrolls for July is estimated at 144K versus 121K in June.
- The Change in Manufacturing Payrolls for July is estimated at 5K versus 15K in June.
- The Unemployment Rate for July is estimated at 4.6% versus 4.6% in June.
- Average Hourly Earnings for July are estimated to rise .3% versus a .5% increase in June.

BOTTOM LINE: Asian indices are mostly higher, boosted by financial and real estate stocks in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

***Alert***

I will be unable to post the Thursday Close due to a scheduling conflict. I will post the Friday Watch later this evening.

Stocks Higher into Final Hour on Strong Retail Sales, Falling Energy Prices and Lower Long-term Rates

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Biotech longs, Retail longs and Computer longs. I covered my (QQQQ) and (IWM) hedges this morning, 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. While I still suspect the Fed is done for this cycle, I am not ruling out the possibility of a hike and the suggestion of a pause in their policy statement. Either way, I believe stocks will rally. The futures are telegraphing a pause. However, I sense many equity managers are in an "I'll believe it when I see it" state. The S&P 500 has rallied 5% from recent lows and is now almost 4% higher for the year. I expect overwhelmingly bearish sentiment and performance anxiety will continue to propel stocks higher next week. I still expect the S&P 500 to return a total of about 15% for the year. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, lower long-term rates, lower energy prices, strong retail sales and bargain-hunting.

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.