Core Producer Prices Unexpectedly Fall, NY Manufacturing Slows, Foreign Demand for US Assets Strong

- The Producer Price Index for July rose .1% versus estimates of a .4% gain and a .5% increase in June.
- The PPI Ex Food & Energy for July fell .3% versus estimates of a .2% gain and a .2% increase in June.
- Empire Manufacturing for August fell to 10.3 versus estimates of 15.0 and a reading of 16.6 in July.
- Net Foreign Security Purchases for June rose to $75.1 billion versus estimates of $65.0 billion and $63.6 billion in May.

BOTTOM LINE: Prices paid to US producers increased less than forecast in July, pointing to an easing of inflationary pressures anticipated by the Fed, Bloomberg said. Computer prices dropped 1.8% last month. Food prices fell .3%. Men’s clothing and new vehicle prices also declined last month. I continue to believe inflation fears have peaked for this cycle. During the next significant global downturn, I suspect deflation and overcapacity will be the new worries.

Manufacturing in NY state expanded at a slower pace in August as companies pared inventories, Bloomberg reported. The prices paid component of the index fell to 44.6 versus a reading of 50.5 in July. The outlook component of the index fell to 35.2 versus 45 the prior month. The new orders component rose to 19.1 from 11.3 the prior month. I expect manufacturing to slow to more average levels over the intermediate-term, but continue adding to US growth as inventories are rebuilt.

International investors increased purchases of US financial assets more than expected in June, Bloomberg said. The UK and China increased their holdings of US Treasury securities. I continue to believe we are in the initial stages of a chain reaction of events that will greatly increase the demand for US assets over the intermediate-term.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Microsoft(MSFT) grabbed 15% of the retail market for computer anti-virus software in June, taking sales from Symantec(SYMC) and McAfee(MFE) after releasing its own product in April.
- Dell Inc.(DELL) is recalling 4.1 million notebook PC batteries that may burst into flames.
- Japanese Prime Minister Koizumi visited the Yasukuni Shrine on the anniversary of Japan’s surrender in WWII, drawing a protest from China.
- Japan’s service economy slowed for the first month in three, as construction companies had fewer orders and rising fuel prices curbed consumer spending.
- China’s industrial production rose last month at the slowest pace since April as increasing fuel costs crimped demand for cars.

Wall Street Journal:
- Direct foreign investment in China fell 1.2% in the first seven months of this year.
- BP Plc(BP) may link the closed eastern part of its Prudhoe Bay oil field, in Alaska, to a nearby pipeline so as to get production going again in October, citing Craig Wiggs, a field manager for BP Alaska.

ABC News:
- Charitable funds intended to help victims of earthquake recovery efforts in Pakistan may have been diverted to help fund the alleged plot to explode aircraft over the Atlantic Ocean.

Xinhua News:
- China’s chemical emissions rose in the first six months this year amid a drive to reduce pollution, which may force the government to suspend approvals for some new power projects.

Australian:
- Microsoft(MSFT) will allow business customers to pay by installments for its Windows Vista and Office 2007 products.

Late Buy/Sell Recommendations
CSFB:
- Rated (GLW) Outperform, target $24.

Night Trading
Asian Indices are -.25% to +.25% on average.
S&P 500 indicated +.08%.
NASDAQ 100 indicated +.15%.

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Earnings of Note
Company/EPS Estimate
- (ANF)/.71
- (AEOS)/.46
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- (DE)/1.81
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Economic Releases
8:30 am EST
- The Producer Price Index for July is estimated to rise .4% versus a .5% increase in June.
- The PPI Ex Food & Energy for July is estimated to rise .2% versus a .2% gain in June.
- Empire Manufacturing for August is estimated to fall to 14.9 versus a reading of 15.6 in July.

9:00 am EST
- Net Foreign Security Purchases for June are estimated to fall to $67.5 billion versus $69.6 billion in May.

1:00 pm EST
- The NAHB Housing Market Index for August is estimated to fall to 38 versus a reading of 39 in July.

BOTTOM LINE: Asian indices are mixed as gains in technology shares are offsetting losses in commodity stocks in the region. I expect US equities to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 75% net long heading into the day.

Stocks Finish Modestly Higher after Oil Falls

Indices
S&P 500 1,268.21 +.12%
DJIA 11,097.87 +.09%
NASDAQ 2,069.04 +.55%
Russell 2000 681.73 +.40%
Wilshire 5000 12,649.79 +.12%
S&P Barra Growth 586.49 +.19%
S&P Barra Value 680.04 +.05%
Morgan Stanley Consumer 621.45 +.24%
Morgan Stanley Cyclical 773.48 +.20%
Morgan Stanley Technology 469.17 +.99%
Transports 4,161.99 +.49%
Utilities 434.69 +.40%
Put/Call .80 -13.04%
NYSE Arms 1.07 -8.24%
Volatility(VIX) 14.26 -.28%
ISE Sentiment 112.00 +4.67%
US Dollar 85.61 +.14%
CRB 338.82 -1.66%

Futures Spot Prices
Crude Oil 73.19 -1.56%
Unleaded Gasoline 198.50 -3.84%
Natural Gas 6.92 -4.80%
Heating Oil 201.00 -1.50%
Gold 636.70 -.41%
Base Metals 225.15 +.13%
Copper 349.30 -.20%
10-year US Treasury Yield 4.99% +.61%

Leading Sectors
Airlines +1.63%
Networking +1.19%
Semis +1.11%

Lagging Sectors
Energy -1.84%
Coal -2.11%
Oil Service -2.24%

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Afternoon Recommendations
Bank of America:
- Rated (AL) and (X) Buy.

Afternoon/Evening Headlines
Bloomberg:
- Crude oil is likely to fall substantially because investments in the commodity by hedge funds and pension managers have pushed prices too high, said Ben Dell, an analyst at Sanford C. Bernstein.
- Two Michigan birds found to be infected with avian influenza don’t have the lethal form that is spreading elsewhere in the world, US officials said.
- Agilent Technologies(A), the world’s largest maker of scientific-testing equipment, said third-quarter profit more than doubled to $227 million as sales increased.
- US Treasury 10-year note yields rose to a more than two-week high on speculation government inflation data the next two days will boost the odds that the Fed will resume raising interest rates.
- Billionaire investor Icahn bought stakes in Take-Two Interactive(TTWO) and Symantec(SYMC) in the second quarter.

BOTTOM LINE: The Portfolio finished higher today on gains in my Semi longs, Computer longs and Commodity shorts. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was modestly positive today as the advance/decline line finished slightly higher, sector performance was mostly positive and volume was below average. Measures of investor anxiety were lower into the close. Overall, today's market performance was neutral as the major averages and breadth finished higher, but well off session highs. Despite the bounce in oil prices from session lows, most energy-related stocks finished down around 2%. As well, ethanol-related shares such as (ADM), (PEIX), (ANDE) and (MGPI) continued their recent plunge despite oil above $70/bbl. The U.S. dollar continues to strengthen despite last week's Fed pause and more calls for its imminent demise. I want to see the market’s reaction to upcoming inflation data before further shifting market exposure.

Stocks Modestly Higher into Final Hour as Energy Prices Continue Recent Decline

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Computer longs and Commodity shorts. I added to my (BBY), (AAPL) and (UARM) longs and to my (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 75% net long. The tone of the market is slightly positive as the advance/decline line is modestly higher, most sectors are rising and volume is below average. Many market-leading stocks are giving back too much of today’s gains. I want to see better price action before further shifting market exposure. I expect US stocks to trade mixed into the close from current levels as lower energy prices offset higher long-term rates.

Today's Headlines

Bloomberg:
- Gold in NY fell for the third straight session as lower energy costs reduced the appeal of the precious metal as a hedge against inflation.
- Crude oil fell and gasoline tumbled to a three-month lower after BP Plc(BP) dropped plans to shut the largest US oil field and a cease-fire began in Lebanon.
- Wall Street bonuses will jump 15% this year, with investment bankers and equities traders reaping the rewards of rising stock markets and record mergers and initial share sales.
- Israel said it was calling back some troops from southern Lebanon after its military and Hezbollah stopped fighting in compliance with a UN-brokered cease-fire.

Wall Street Journal:
- The Bush administration has approved new Cuban immigration rules to make it easier for people from the island to rejoin their families in the US.
- The US Transportation Security Administration is testing an Israeli-developed sensor that measures biometric responses for blood pressure, pulse and sweat levels to determine if someone may be a security risk.
- The shares of many re-insurers are trading at low multiples of the companies’ forecast profits and could be a good bet, since fears of another record storm season may well prove unfounded.
- Barclays Global Advisors and PowerShares Capital Management LLC both plan exchange-traded funds that would track preferred shares.

NY Times:
- Verizon Communications(VZ) plans to spend $3 billion to build a fiber optic phone, broadband Internet and video network for NYC’s 3.1 million homes and apartments. Verizon plans to spend about $20 billion by the end of the decade to extend its network to 16 million homes from Florida to California.

NY Daily News:
- IAC/InteractiveCorp’s(IACI) Home Shopping Network is offering a “Shop-By-Remote” service that will enable viewers to make purchases by using their cable TV remote control.

Financial Times:
- Cazenove Capital Management aims to raise as much as $142 million in an IPO of shares of a fund of hedge funds.

Fars:
- The volume of Iran’s trade with Venezuela will increase eightfold to $8 billion a year.