Wednesday Watch

Late-Night Headlines
Bloomberg:
- The Bank of Japan will probably keep interest rates unchanged this week as the economy’s expansion cools.
- Long-time Democratic Senator Joe Lieberman conceded defeat in the Connecticut Democratic primary, losing to anti-war cable mogul Ned Lamont. Lamont is the great-grandson of legendary JP Morgan Chairman Thomas W. Lamont. Lieberman said he intended to file papers to run as an independent in the November general election.
- Roger Goodell, who started as an intern at NFL headquarters and rose to chief operating officer, was named commissioner in a vote by the league’s 32 owners.
- The US dollar strengthened against the euro and yen as the US Fed suggested it may increase interest rates again after keeping them on hold for the first time in two years.

AP:
- Sprint Nextel(S) mobile phones will be able to play radio broadcasts of Major League Baseball games under an agreement with Major League Baseball Advanced Media LP that will be announced tomorrow.

China Daily:
- China’s passenger car sales growth slowed to 5.4% in July as consumers postponed buying new models to wait for discounts, citing the China Assoc. of Auto Manufacturers’ spokeswoman.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (CSCO), target $26.

Morgan Stanley:
- Reiterated Overweight on (CSCO), target $26.

Night Trading
Asian Indices are -1.0% to unch. on average.
S&P 500 indicated +.02%.
NASDAQ 100 indicated +.34%.

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Earnings of Note
Company/EPS Estimate
- (ACS)/.79
- (AIG)/1.39
- (RMK)/.36
- (CD)/.34
- (CTRP)/.21
- (DYN)/-.06
- (FD)/.44
- (FWLT)/.41
- (HB)/.72
- (HGSI)/-.46
- (IPG)/.02
- (KG)/.39
- (TWPG)/.21
- (VIA)/.44
- (DIS)/.44
- (WMS)/.31

Upcoming Splits
- (PCAR) 3-for-2

Economic Releases
10:00 am EST
- Wholesale Inventories for June are estimated to rise .6% versus a .8% increase in May.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude drawdown of 1,000,000 barrels. Gasoline supplies are expected to fall 1,000,000 barrels. Distillate inventories are estimated to rise by 700,000 barrels. Finally, Refinery Utilization is estimated to rise .33%.

BOTTOM LINE: Asian indices are mostly lower, pressured by commodity 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.

Stocks Finish Lower on Profit-taking after Fed Leaves Rates Unchanged

Indices
S&P 500 1,271.48 -.34%
DJIA 11,173.59 -.41%
NASDAQ 2,060.85 -.56%
Russell 2000 687.47 -1.23%
Wilshire 5000 12,702.11 -.45%
S&P Barra Growth 585.88 -.24%
S&P Barra Value 684.20 -.43%
Morgan Stanley Consumer 618.80 +.02%
Morgan Stanley Cyclical 784.58 -.90%
Morgan Stanley Technology 462.83 -.31%
Transports 4,287.82 -.66%
Utilities 433.44 +.71%
Put/Call .95 +10.47%
NYSE Arms 1.37 +35.25%
Volatility(VIX) 15.23 unch.
ISE Sentiment 116.00 -4.13%
US Dollar 84.83 +.11%
CRB 350.73 -.35%

Futures Spot Prices
Crude Oil 76.31 -.87%
Unleaded Gasoline 222.63 -1.12%
Natural Gas 7.16 +3.63%
Heating Oil 211.64 -1.26%
Gold 653.00 -.65%
Base Metals 230.67 +.09%
Copper 357.75 -.68%
10-year US Treasury Yield 4.91% -.04%

Leading Sectors
Utilities +.71%
Foods +.14%
Broadcasting +.07%

Lagging Sectors
Coal -2.18%
Disk Drives -2.33%
Homebuilders -2.47%

Evening Review
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Afternoon Recommendations
Think Equity:
- Rated (VPRT) Buy, target $31.

Afternoon/Evening Headlines
Bloomberg:
- The Federal Reserve kept the benchmark US interest rate at 5.25%, ending a record two-year run of increases while leaving room for further moves should inflation accelerate.
- Futures trades pared bets that the Fed will boost its overnight lending rate between banks by year-end after the central bank ended its streak of 17 consecutive increases.
- Cisco Systems(CSCO) said fourth-quarter profit was unchanged as stock-option costs countered the company’s fastest sales growth in two years. The stock rose 10% after-hours on the report.
- News Corp.(NWS/A) said fiscal fourth-quarter profit rose 19%, driven by blockbusters including the latest “X-Men” movie and revenue from cable-tv networks.
- Barr Pharmaceuticals(BRL) said US regulators told the company they would act quickly on a revised application to see its “morning after” contraceptive pill without a prescription.
- Bill Gross, CEO at PIMCO and manager of the world’s biggest bond fund, said the Fed has finished raising interest rates this economic cycle.
- Crude oil fell on speculation that US stockpiles are sufficient to make up for supply disruptions caused by the shutdown of Alaska’s Prudhoe Bay oil field.

Australian:
- Australia will increase its military presence in Afghanistan starting next month to counter the threat from Taliban forces in the south of the country.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Retail longs and Computer longs. I did not trade in the final hour, thus leaving the Portfolio 100% 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 about average. Measures of investor anxiety were mostly higher into the close. Overall, today's market performance was mildly bearish. Homebuilders and Retail were especially weak as investors continue to anticipate a hard-landing in consumer spending despite few signs that this is occurring. The 10-year maintained recent gains despite dovish Fed talk, which is a positive. Moreover, a number of market leading stocks were higher today despite broad market weakness. I expect equities to perform better later this week as investors reposition their portfolios to reflect today's positive developments.

Stocks Modestly Lower into Final Hour on Profit-taking after Fed "Pause"

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Retail longs and Computer longs. I covered my (IWM) and (QQQQ) hedges today, thus leaving the Portfolio 100% net long. The tone of the market is slightly negative as the advance/decline line is modestly lower, most sectors are falling and volume is above average. The Johnson Redbook same-store sales index rose 3.2% year over year last week vs. a 2.7% rise the prior week. The long-term average is a gain of around 2.8%. I still see little evidence that a significant decline in consumer spending is beginning, even as investors continue to price this into stocks. The back-to-school selling season will likely exceed lowered expectations. I still expect retail sales to stabilize around average levels over the intermediate term. The FOMC left rates unchanged. The ensuing policy statement was more dovish than expected. This is a significant surprise. So far, the market's reaction is mildly negative. I expect US stocks to trade higher into the close from current levels on short-covering, an end to the Fed rate hikes, lower energy prices and bargain-hunting.

Today's Headlines

Bloomberg:
- Crude oil fell on speculation US supplies will be adequate after the government offered to make up for shortfalls caused by the shutdown of Prudhoe Bay.
- GM(GM) will reduce the cost to build new midsize car models by a third as it rolls out a system for sharing parts, vehicle designs and factories.
- Sanofi-Aventis SA and Bristol-Myers Squibb(BMY) are facing generic competition in the US for their top-selling Plavix blood-thinning pill five years earlier than planned.

Wall Street Journal:
- Sprint Nextel(S) will build a $3 billion wireless Internet network based on technology backed by Intel(INTC).
- Coca-Cola(KO), Nike(NKE) and Visa Intl. are among the 36 companies that have acquired marketing rights to China’s 2008 Olympics.
- The US health-care industry, concerned about competition, is hiring people to pose as customers to evaluate service and treatment at hospitals and doctors’ offices.
- Time Warner’s(TWX) AOL Internet unit is leaving many of its 17.7 million customers confused by not communicating clearly how and when they can switch to a new free service.

USA Today:
- US airlines will increase their seat capacity on domestic flights by almost 2% in November and 3% in December, marking the first time they have added seats since last summer.

Washington Post:
- Carlyle Group and Allen & Co. are among investors who have put $100 million into health Web sites, seeking to tap the 95 million American adults disappointed with online healthy information.

Khaleej Times:
- Ruby Tuesday(RI) plans four restaurants in Saudi Arabia after signing its second Middle East franchise agreement.

Productivity and Unit Labor Costs Rise More Than Estimates

- Preliminary 2Q Non-farm Productivity rose 1.1% versus estimates of a .8% increase and an upwardly revised 4.3% gain in 1Q.
- Preliminary 2Q Unit Labor Costs rose 4.2% versus estimates of a 3.7% gain and an upwardly revised 2.5% increase in 1Q.

BOTTOM LINE: US productivity gains eased and labor costs rose the most since the end of 2004, Bloomberg reported. Hours worked rose at a 1.4% pace in 2Q versus a 2.3% gain the prior quarter. Productivity at non-financial companies which is reported with a one-quarter lag, a gauge closely monitored by the Fed, soared 7.2% in the first quarter. The 10-year yield is only 1 basis point higher on this report. I continue to believe productivity will remain relatively high and unit labor costs will stay subdued over the intermediate-term.

Links of Interest

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