Tuesday Watch

Late-Night Headlines
Bloomberg:
- The US dollar may gain in the next month should the Fed leave borrowing costs unchanged today and hint that it will lift rates again to restrain inflation, according to UBS Securities.
- China’s M2 money supply rose 18.4% in July.
- A US appeals court reversed a ruling that an IBM(IBM) pension plan discriminated against older workers, saving the company more than $1 billion that it agreed to pay had it lost the decision.
- Japanese stocks rose after bank lending climbed at the fastest pace in a decade, suggesting an expanding economy will sustain profit growth.

Financial Times:
- Viacom Inc.(VIA) is considering a bid for Bebo, the social networking site that competes with News Corp.’s(NWS/A) MySpace.com.

China Securities Journal:
- China needs further interest rate hikes and more issues of central bank bills to curb liquidity and investment growth.

Australian:
- The Australian government is speeding plans to subsidize the use of ethanol in response to public anger about high gas prices.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are +.75% to +1.25% on average.
S&P 500 indicated +.19%.
NASDAQ 100 indicated +.20%.

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Earnings of Note
Company/EPS Estimate
- (ALKS)/.00
- (ADRX)/.17
- (BMC)/.26
- (CVC)/-.14
- (CMX)/.55
- (CHD)/.47
- (CSCO)/.28
- (CCU)/.41
- (DRC)/.26
- (ETR)/1.25
- (FDRY)/.11
- (JBX)/.66
- (LAMR)/.18
- (LNC)/1.14
- (NWS/A)/.23
- (OSG)/1.52
- (RL)/.67
- (RRI)/-.20
- (SLE)/.29
- (STX)/.41

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Preliminary 2Q Non-farm Productivity is estimated to rise .8% versus a 3.7% gain in 1Q.
- Preliminary 2Q Unit Labor Costs are estimated to rise 3.7% versus a 1.6% increase in 1Q.

2:15 pm EST
- The FOMC is expected to leave the benchmark Fed Funds Rate at 5.25%.

BOTTOM LINE: Asian indices are mostly higher, boosted by financial and commodity stocks in the region. I expect US equities to open mixed and to rally into the afternoon, finishing higher. I expect the Fed to leave the Fed Funds rate at 5.25% and make "hawkish" policy statements regarding the potential for future actions. The Portfolio is 75% net long heading into the day.

Stocks Finish Off Session Lows ahead of Tomorrow's Fed Meeting

Indices
S&P 500 1,275.77 -.28%
DJIA 11,219.38 -.19%
NASDAQ 2,072.50 -.60%
Russell 2000 696.05 -.74%
Wilshire 5000 12,759.68 -.34%
S&P Barra Growth 587.29 -.20%
S&P Barra Value 687.15 -.35%
Morgan Stanley Consumer 618.70 -.28%
Morgan Stanley Cyclical 791.71 +.16%
Morgan Stanley Technology 464.29 -.71%
Transports 4,316.43 -1.42%
Utilities 430.37 -.85%
Put/Call .86 -26.50%
NYSE Arms 1.01 -30.26%
Volatility(VIX) 15.23 +6.21%
ISE Sentiment 115.00 +6.48%
US Dollar 84.75 +.20%
CRB 351.95 +.54%

Futures Spot Prices
Crude Oil 77.13 +3.17%
Unleaded Gasoline 226.00 +1.28%
Natural Gas 6.92 -4.43%
Heating Oil 214.80 +2.79%
Gold 660.70 +.18%
Base Metals 230.46 +.38%
Copper 362.25 +.33%
10-year US Treasury Yield 4.91% +.49%

Leading Sectors
Steel +1.38%
Gold & Silver +1.13%
Homebuilders +.84%

Lagging Sectors
Biotech -1.45%
Disk Drives -1.54%
Broadcasting -2.67%

Evening Review
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In Play

Afternoon Recommendations
Merrill Lynch:
- Rated (EMMS) Buy, target $15.

Afternoon/Evening Headlines
Bloomberg:
- Rupert Murdoch’s News Corp.(NWS/A) chose Google(GOOG) to provide search for its MySpace.com Web site, handing a defeat to Microsoft(MSFT).
- Blackstone Group LP dropped plans to pursue a rival bid for HCA Inc.(HCA) because it would be too expensive.
- Energy Secretary Bodman said the US will release oil from the nation’s strategic reserve if asked to make up for the loss of supplies from Alaska, where BP Plc is shutting the nation’s biggest oil field.
- Borrowing by US consumers unexpectedly accelerated in June, a Fed report showed today.
- Wal-Mart(WMT) said it will raise the starting pay rates for employees at locations in the US.

AFP:
- Lebanon is ready to send 15,000 troops in the south up to the Israeli border when Israel pulls all of its soldiers from the area, citing Lebanese Information Minister Gazi Aridi.

BOTTOM LINE: The Portfolio finished lower today on losses in my Medical longs, Computer longs and Commodity shorts. I added (QQQQ) and (IWM) hedges 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 mostly negative and volume was below average. Measures of investor anxiety were mostly lower into the close. Overall, today's market performance was mildly bearish. Consumer Credit for June just came in at $10.3 billion vs. estimates of $3.6 billion and an upwardly revised $5.9 billion in May. I still see little evidence that consumer spending is slowing substantially.

Stocks Lower into Final Hour on Rising Apprehension ahead of Fed Meeting and Higher Energy Prices

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Medical longs, Computer longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are falling and volume is below average. The S&P Case-Shiller Housing Composite futures point to a 5.1% decline in the average home price by May 2007 from current levels. I would hardly classify this as a hard landing, considering how much the median home price is up over the last decade. I expect a stabilizing housing market will be another catalyst for higher stock prices over the intermediate-term. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain-hunting ahead of tomorrow’s Fed announcement.

Today's Headlines

Bloomberg:
- The US should merge the SEC and the Commodity Futures Trading Commission to create one federal regulatory body because distinctions between stocks and futures are growing increasingly blurred, former SEC Chairman Arthur Levitt said.
- KKR’s purchase of Royal Philips Electronics’ semiconductor unit last week ended a 10-day stretch of $46.7 billion worth of deals, almost a fifth of all leveraged takeovers this year.
- Gilead Sciences(GILD), maker of the world’s best-selling AIDS treatment, is offering to help generic-drug makers in India produce the medicine, a move intended to get the life-saving pill to millions more people in the world’s poorest countries.
- BHP Billiton(BHP) faces a strike today at Escondida, the biggest copper mine in the world, after failing to reach a wage agreement with the labor union.
- Vanguard Group and Fidelity Investments are among companies that will benefit from almost $2 trillion in new money likely to be pumped into US retirement funds as a result of pension legislation Congress passed last week.
- Natural gas may fall in the US on forecasts the hurricane season won’t be as severe as initially predicted, easing concern that Gulf of Mexico production will be disrupted.
- US Democratic Senator Joe Lieberman trails Ned Lamont, his anti-war challenger, by 51% to 45% among likely Democratic voters in tomorrow’s Connecticut primary, a Quinnipiac Univ. poll found.
- Crude oil surged above $77/bbl. in NY after BP Plc(BP) said it will shut Alaska’s Prudhoe Bay field, the largest in the US, at a time of peak gasoline consumption.
- CommScope(CTV) offered to buy Andrew Corp.(ANDW) for about $1.5 billion, outbidding ADC Telecom(ADCT).

Wall Street Journal:
- Kindred Healthcare(KND) and AmerisourceBergen(ABC) are close to an agreement to combine their institutional-pharmacy business and put them into a separate, publicly traded company.
- MGA Entertainment, the maker of Bratz fashion dolls, plans to sell a virtual-reality electronic gadget, putting it into more direct competition with Hasbro(HAS) and Mattel(MAT).
- Home Depot(HD) is developing a new unit to increase orders from professional customers in the $400-billion-a-year wholesale building-supply market in the US.

NY Times:
- Fifteen US states in the past year have expanded their self-defense laws, allowing crime victims to use deadly force against their aggressors.
- Asia and Central and Eastern Europe may be the world’s fastest growing regions for movie audiences over the next five years as attendance declines in the US.
- Costco Wholesale(COST) and other retailers are phasing out television models using glass cathode-ray tubes as consumers prefer wide-screen plasma and LCD flat panel sets.

Crain’s NY Business:
- NYC may allow Verizon Communications(VZ) and other phone companies to provide cable tv.

Washington Post:
- President Bush is expected to sign an executive order requiring federally financed health care providers adopt quality-measurement tools and uniform standards for keeping records.

Financial News:
- Warburg Pincus LLC is in talks with private equity firms Apollo Management LP and BC Partners about making a bid for HCA Inc.(HCA), the target of the biggest leveraged buyout.

Economic Releases

- None of note

Links of Interest

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