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Tuesday Watch

Late-Night Headlines
Bloomberg:
- President Bush, capping a day of ceremonies marking the anniversary of the Sept. 11 terrorist attacks, said the war against terrorists that began that day must be won in Iraq and elsewhere to ensure that future generations will live in freedom.
- Oil may extend its two-month slide after OPEC kept its production at current levels amid waning demand. “If OPEC doesn’t do anything, oil will continue to fall,” said Fadel Gheit, an analyst at Oppenheimer. “If we cross $55 a barrel, OPEC will panic and they will reduce supply. They aren’t afraid of $55 oil per se, but what’s below that.”
- Royal Dutch Shell Plc. and other companies independent of Petroleo Brasileiro SA, Brazil’s state-controlled oil company, plan to spend $8 billion hunting for oil in Brazil by 2011, Shell Brasil’s exploration chief said.
- Asian-American women have the top life expectancy in the US of 86.7 years.
- NYSE Group(NYX) said its share of trading in the stocks it lists had the biggest monthly drop since 2004 after the exchange raised some transaction fees.
- China, whose record trade surplus has fueled tension with trading partners including the US, may cut tax rebates for exporters to rein in overseas sales, Commerce Minister Bo Xilai said.
- China reported the slowest growth in government and corporate spending this year, the strongest indication so far that a government clampdown on investment is starting to bite.

Wall Street Journal:
- Most Americans want electronic health-care services, such as scheduling doctor visits online, which a majority say aren’t available to them.

Australian Broadcasting Corp.:
- A former commander in the Southeast Asian terrorist group Jemaah Islamiyah warned that one of the alleged masterminds of the 2005 Bali suicide bombings is planning more attacks this year. Noordin Mohammad Top has ordered supporters to carry out attacks every year since the 2002 bombings on Bali, which killed more than 200 people, 88 of them Australians.

Dong-a Ilbo:
- The US suggested holding multi-nation talks on North Korea’s nuclear weapons program at a UN meeting in New York as soon as this month.

Xinhua:
- China’s money supply slowed “significantly” last month after the central bank took measures to reduce liquidity, citing Deputy Central Bank Governor Su Ning.

Wall Street Journal Asia:
- Zhang Guobao, vice chairman of the National Development & Reform Commission, said China and the US should jointly develop oil fields to minimize risks of supply disruptions and rising costs of production.

Late Buy/Sell Recommendations
Citigroup:
- The Softline retail sector is due for a rally given our belief that sales trends continue to strengthen against a backdrop of negative investor sentiment and peak short interest. We recommend broad ownership of the stocks. Buy ARO, CHS, PLCE, GPS, HOTT, JCG, LTD, ROST, TJX and URBN.
- Reiterated Buy on (MNST), target $48.

CSFB:
- Reiterated Buy on (TXN), target $42.

Morgan Stanley:
- Reiterated Overweight on (AAPL), target $90. Top pick into year-end.

Night Trading
Asian Indices are -.50% to +.25% on average.
S&P 500 indicated unch.
NASDAQ 100 indicated +.03%.

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Earnings of Note
Company/EPS Estimate
- (BBY)/.44
- (CBRL)/.78
- (ENER)/-.15
- (GS)/2.97
- (JW/A)/.36
- (KR)/.29
- (PLL)/.46

Upcoming Splits
- (CXW) 3-for-2

Economic Releases
8:30 am EST
- The Trade Deficit for July is estimated to widen to -$65.5 billion versus -$64.8 billion in June.

BOTTOM LINE: Asian indices are mixed as losses in commodity stocks are offsetting gains in technology shares 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 Slightly Higher as Commodity Prices Continue to Plunge

Indices
S&P 1,299.54 +.05%
DJIA 11,396.84 +.04%
NASDAQ 2,173.25 +.34%
Russell 2000 707.57 -.14%
Wilshire 5000 12,973.19 -.03%
S&P Barra Growth 604.40 +.24%
S&P Barra Value 692.96 -.14%
Morgan Stanley Consumer 647.43 +.57%
Morgan Stanley Cyclical 798.58 -1.06%
Morgan Stanley Technology 507.10 +.88%
Transports 4,229.16 +.81%
Utilities 431.73 -.55%
Put/Call 1.01 unch.
NYSE Arms 1.01 -10.60%
Volatility(VIX) 12.98 -1.37%
ISE Sentiment 95.0 -24.0%
US Dollar 85.91 -.06%
CRB 313.73 -2.08%

Futures Spot Prices
Crude Oil 65.47 -1.18%
Unleaded Gasoline 159.80 -.69%
Natural Gas 5.68 +.09%
Heating Oil 180.50 -2.07%
Gold 596.50 -.13%
Base Metals 229.17 -3.44%
Copper 340.50 -.38%
10-year US Treasury Yield 4.79% +.50%

Leading Sectors
Semis +2.36%
Retail +1.83%
HMOs +1.48%

Lagging Sectors
Oil Service -4.18%
Steel -4.30%
Gold & Silver -7.04%

Evening Review
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In Play

Afternoon Recommendations
CSFB:
- Rated (ROC) and (NRF) Outperform.

Afternoon/Evening Headlines
Bloomberg:
- US gasoline at the pump fell for a fifth week, dropping 10.9 cents to a nationwide average $2.62/gallon, a government report showed.
- Crude oil continued its biggest decline in 10 months and longest losing streak in 3 years on signs the world economy is slowing, and gold, copper, aluminum and silver tumbled.
- France is a target of Islamic terrorism even if the country opposed the US liberation of Iraq, said Defense Minister Michele Alliot-Marie on the fifth anniversary of the Sept. 11 attacks in the US.
- Texas Instruments(TXN) narrowed its third-quarter sales and profit forecasts as handset demand remains steady.
- Pride among Lebanese in surviving the war with Israel has given way to questioning why it all happened, with measures of blame heaped on Hezbollah, the Shiite Muslim militia that triggered the conflict.
- Federal Reserve Bank of St. Louis President Poole said the US economy is “robust” as commercial construction picks up slack from a slowing housing market that may otherwise threaten the expansion.
- Latin American shares fell for a fifth day, led by Brazilian oil company Petroleo Brasileiro SA, on concern that the end of a five-year global mania in commodities will curtail exports and profits.

BOTTOM LINE: The Portfolio finished higher today on gains in my Semi longs, Retail longs, Internet longs and Commodity shorts. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished slightly lower, most sectors rose and volume was about average. Measures of investor anxiety were mostly higher into the close. Overall, today's market performance was bullish. While the major averages finished only slightly higher, the underlying action was quite positive. International stocks fell meaningfully and closed near session lows, yet U.S. shares hung firm in the face of significant declines in most commodity stocks. My intraday gauges of investor angst registered above-average readings throughout the day. A significantly positive change in the U.S. investment landscape is currently underway, in my opinion. However, I suspect it will take a few weeks before the changes become obvious.

Stocks Mixed into Final Hour as Falling Commodity Shares Offset Gains Elsewhere

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Computer longs, Semi longs and Commodity shorts. I have not traded 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 higher and volume is about average. OPEC is saying there is a "clear imbalance" between supply and demand and that they will consider an output cut at the December 14 meeting. As well, OPEC's Daukoru said 872,000 bpd are shut-in in Nigeria and that output should come back in 3-6 months. I suspect an OPEC output cut and a substantial increase in oil tanker supply over the intermediate-term will send oil tanker shares substantially lower from current levels. My favorite short in the group remains OMI Corp. (OMM). I expect US stocks to trade modestly higher into the close from current levels on bargain hunting, short covering and declining energy prices.

Today's Headlines

Bloomberg:
- President Bush prepared to address the nation tonight as Americans marked the fifth anniversary of the Sept. 11 attacks with somber memorial ceremonies and moments of silence.
- Louisiana, the second-largest oil refining state in the US, is proposing to crude-producing nations to turn farms into an oil refinery, said Dane Revette, the state’s director of energy development. The last refinery built in the US was Marathon Oil’s Garyville, Louisiana, plant, which opened 30 years ago.
- US Treasury Secretary Henry Paulson, attending Group of Seven meetings in Singapore this week, will “steer G-7 thinking away from the notion of dollar devaluation as the solution to anything,” according to economists at High Frequency Economics.
- OPEC agreed to keep production levels unchanged, the group said after its meeting today in Vienna, setting aside concern that prices have tumbled 16% in two months.
- The European Union said it opposes the Chinese government’s decision giving the Xinhua News Agency sole power to regulate the operations of foreign news services, calling it a “very negative development.”
- Gold fell below $600 an ounce for the first time in 10 weeks on speculation demand from investors and jewelers won’t rebound in the fourth quarter.

Wall Street Journal:
- US-based Alcoa Inc.(AA) and Canada’s Alcan(AL), long among the world’s biggest aluminum makers, are being challenged by manufacturers in countries such as Russia and those in the Mid-east who have access to cheap power.
- The Canadian steelmaker, Ipsco Inc., is planning to buy Newport, Kentucky-based steel-tube maker NS Group(NSS) for about $1.46 billion to attract more oil and natural-gas company business.
- Unofficial volunteer “ambassadors” who tend to the Shanksville, Pennsylvania site where United Airlines Flight 93 crashed on Sept. 11, 2001, say their lives have been changed by the episode.
- Expeditors Intl.(EXPE) of Washington could be a good investment because it remains a fast-growing business even though “quick-trigger momentum investors” have been scared off by a 30% stock drop.
- Iraq is the “linchpin” of terrorists’ efforts in the Middle East, a location that they believe, if won, could serve “as a base from which to destabilize the surrounding nations,” Secretary of Defense Rumsfeld wrote.
- General Electric(GE) Chairman and CEO Immelt is reshaping the company by using new technology to increase sales, tapping global markets and relying more on the talents of his managers.

NY Times:
- The goal of US Democrats to capture as many as five House of Representatives seats in NY as they seek to win control of the House is “increasingly remote.”
- Freescale Semi(FSL) may be sold for more than $16 billion, in what would be the largest buyout in the technology industry’s history.
- Wealthier Medicare recipients, who have traditionally paid the same premiums as lower-income beneficiaries, will have increased costs next year.

Washington Post:
- Counterterrorism officers of the CIA have signed up in growing numbers for a government-reimbursed private insurance plan that would cover their civil judgments and legal expenses if they are charged with criminal wrongdoing.

USA Today:
- Sept. 11, 2001, marks two events in American history: the anniversary of the most deadly terrorist attacks on US soil and the day government officials “broke the pattern of inconsistent response” to Islamic fundamentalists, wrote Rudy Giuliani, former mayor of NYC.

Financial Times:
- The value of alternative investments such as hedge funds or commodities has topped $3 trillion worldwide on increasing demand from Pension funds, citing a JPMorgan Chase study.
- Microsoft Corp.(MSFT) may have a lot more research and development money available soon, yet that may not give it an advantage over its Internet search engine rival, Google Inc.(GOOG).

International Herald Tribune:
- Vivendi SA and Electronic Arts(ERTS) are among video-game makers exploring the market for casual games that can be completed in a shorter length of time.

Les Echos:
- France’s national welfare system will post a deficit of 16 billion euros($20.3 billion) in 2006 and a shortfall of 37 billion euros for the 2006-2009 period, citing a government report. The deficits will require higher taxes and new savings, the report said.

Economic Releases

- None of note