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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Crude oil traded near its lowest in more than five months after falling for a seventh day as the IEA lowered consumption forecasts. “We’re in the midst of a tectonic change,” said Peter Beutel, president of Cameron Hanover, an energy consultant. “The rally in oil that has lasted five years may be over. We keep seeing lower demand estimates which show the impact of very high prices.”
- China’s industrial production grew last month at the slowest pace in 17 months as government lending curbs began to cool the world’s fastest-growing major economy.
- China, the world’s biggest maker of steel, made 17% more of the metal last month from a year earlier, the National Bureau of Statistics said.
- Gold in Asia fell for the sixth day, the longest losing streak in three months, after declining crude oil prices reduced the metal’s appeal as an inflation hedge. Movements in oil and gold prices are 81% correlated, Merrill Lynch said in a recent report.

Wall Street Journal:
- Institutional investment in Asian real estate has climbed so high it has reached what one property executive calls “nosebleed levels.”

AP:
- US Senator Hillary Clinton, seeking re-election, turned back a Democratic primary challenge in NY from an anti-war candidate today, and Eliot Spitzer bested his opponent to win the party’s gubernatorial nomination.

Financial Times:
- Hedge funds have increased their purchase of high-risk corporate instruments in Europe amid forecasts that a corporate restructuring will take place soon.
- French Interior Minister Nicolas Sarkozy said he is “proud” of his “friendship” with the US. Though Israel’s response in Lebanon was “clumsy and disproportionate,” Israel has the right to defend itself against Hezbollah, which was the “aggressor,” Sarkozy said.

China Securities Journal:
- China’s government should use its $1 trillion of foreign currency reserves to buy overseas companies and assets, citing a central government economist.
- China should raise medium- and long-term deposit rates to curb increasing liquidity in the market.

Commercial Times:
- S&P may downgrade Taiwan’s credit ratings because of slowing economic growth, a government budget deficit and political instability.

China Daily:
- Walt Disney(DIS), Sony’s Columbia Pictures Entertainment and News Corp.’s Twentieth Century Fox Film Corp. are among five movie studios suing a Beijing-based company on piracy claims.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (MRVL), target $29.
- Reiterated Buy on (SNDK), target $69.
- Reiterated Buy on (EBAY), target $38.
- Reiterated Buy on (BBY), target $65.

Morgan Stanley:
- Cut (PCL) to Underweight, target $32.

Night Trading
Asian Indices are +.50% to +.75% on average.
S&P 500 indicated -.08.
NASDAQ 100 indicated +.03%.

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Earnings of Note
Company/EPS Estimate
- (FOE)/.28
- (LEH)/1.49

Upcoming Splits
- (CXW) 3-for-2

Economic Releases
2:00 pm EST
- The monthly budget deficit for August is estimated to widen to -$65.5 billion versus -$51.3 billion in July.

BOTTOM LINE: Asian indices are modestly higher, boosted by automaker and 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 Soar on Plunging Gas Prices, Lower Interest Rates and Less Irrational Pessimism

Indices
S&P 1,313.11 +1.04%
DJIA 11,498.09 +.89%
NASDAQ 2,215.82 +1.96%
Russell 2000 724.48 +2.39%
Wilshire 5000 13,125.83 +1.18%
S&P Barra Growth 611.25 +1.13%
S&P Barra Value 699.58 +.96%
Morgan Stanley Consumer 651.52 +.63%
Morgan Stanley Cyclical 814.15 +1.95%
Morgan Stanley Technology 519.32 +2.41%
Transports 4,369.85 +3.33%
Utilities 428.06 -.85%
Put/Call .94 -6.93%
NYSE Arms .89 -14.72%
Volatility(VIX) 11.92 -8.24%
ISE Sentiment 117.0 +23.16%
US Dollar 85.91 -.01%
CRB 310.71 -.96%

Futures Spot Prices
Crude Oil 63.77 -2.82%
Unleaded Gasoline 156.50 -1.94%
Natural Gas 5.56 -1.85%
Heating Oil 176.65 -2.15%
Gold 594.60 +.05%
Base Metals 227.99 -.52%
Copper 335.50 -.53%
10-year US Treasury Yield 4.76% -.70%

Leading Sectors
Airlines +4.88%
Homebuilders +3.84%
Networking +3.77%

Lagging Sectors
Energy -.71%
Gold & Silver -.83%
Oil Service -.99%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- US stocks had their biggest advance in a month, pushing the Dow Jones Industrial Average within 225 points of its all-time high, as revenue at Goldman Sachs(GS) set a Wall Street record and retailers rallied on a plunge in oil prices.
- Crude oil fell below $64/bbl., clearly breaking its long-term uptrend at $66.33, after the IEA cut its global consumption estimates.
- The company that produces “Girls Gone Wild” videos pleaded guilty to violating a law, aimed at protecting minors, that requires makers of sexually explicit films to document the ages of their performers.
- The US will raise the monthly bill for most people who get basic health care through Medicare by 5.6% next year, and by as much as 83% for rich Americans.
- New York chose Northrop Grumman(NOC) to build a $500 million wireless network which will enable public-safety workers and first-responders to get information more quickly.
- Apple Computer(AAPL) said it will start selling 75 full-length Walt Disney(DIS) films including the first “Pirates of the Caribbean” over the Internet today, and introduced iPod players with a brighter screen and more storage.
- Treasury 10-year notes posted their biggest gains in about two weeks after the government sold $8 billion of the benchmark securities at a yield lower than forecast by bond-trading firms.

BOTTOM LINE: The Portfolio finished higher today on gains in my Semi longs, Retail longs, Internet longs, Medical 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 very positive today as the advance/decline line finished substantially higher, almost every sector rose and volume was above average. Measures of investor anxiety were mostly lower into the close. Overall, today's market performance was very bullish. The 10-year yield is finished near session lows, down 3 basis points, despite today's sharp stock gains. With a number of sectors posting 3%+ gains today and the over-owned commodity stocks falling again, I suspect portfolio manager performance anxiety is rising at a rapid rate. Moreover, many of the best growth stocks, which are the cheapest relative to value in at least 30 years, rose 5%-7% today. Oil has now broken clearly below its long-term uptrend line at $66.33 during its seasonally strongest period. My intraday gauges of investor angst were slightly above-average levels throughout the day, which also bodes well for further gains in the near-term.

Stocks Soaring into Final Hour on Plunging Gas Prices, Lower Interest Rates and Less Irrational Pessimism

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Internet longs, Semi longs, Medical longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, most sectors are higher and volume is above average. The Johnson Redbook same-store sales index rose 3.8% year over year last week vs. a 3.9% rise the prior week. The long-term average is a gain of around 2.8%. There is mounting evidence that the anticipated collapse in consumer spending won't materialize anytime soon, even as investors continue to price this into stocks. As I said last week, mortgage resets and the other negative effects of housing were supposed to send consumer spending plunging already, and they have not. A healthy labor market, falling energy prices, lower long-term interest rates, decelerating inflation, a rising stock market and less irrational pessimism will continue to more than offset housing over the intermediate-term. The Morgan Stanley Retail Index (MVRX) has surged 11.8% in less than two months. I expect continued outperformance by the sector during the fourth quarter. I expect US stocks to trade mixed-to-higher into the close from current levels on bargain hunting, short covering, lower long-term rates and declining energy prices.

Today's Headlines

Bloomberg:
- Crude oil is falling for a seventh straight day, the longest stretch since October 2003, after the International Energy Agency cut its global consumption estimates.
- Best Buy(BBY) said second-quarter profit increased 22%, beating analysts’ estimates, as consumers bought flat-panel televisions and installed home-entertainment systems.
- Goldman Sachs(GS), Wall Street’s most profitable firm, set aside an average of $542,000 in pay per employee so far this year, already beating the total for the whole of 2005.
- AT&T(T), the largest US telephone company, is heating up competition with cable-TV rivals with a new live-television service for broadband Internet users.
- Bristol-Myers Squibb(BMY) CEO Dolan quit after bungling an agreement to keep a generic version of the drugmaker’s top-selling heart pill Plavix off the market.
- US farmers will harvest the second-biggest soybean and corn crops ever as August rains revived plants.
- President Bush, ending a day marking the fifth anniversary of the Sept. 11 attacks, called on Americans to unite behind the war against terrorism and said victory in Iraq was crucial to the nation’s safety.

Wall Street Journal:
- US businesses haven’t cut back on borrowing even though the US Fed has raised interest rates 17 times since June 2004.
- Ticketmaster, which sells the majority of US sports and concert tickets, is using auctions and resale programs as it seeks to thwart competition from rivals and scalpers.
- A US educator group, which in the past recommended the use of calculators in kindergarten, is now prodding schools to focus heavily and early on math basics such as long division.
- IMG Fashion, the producer of the NY Fashion Week, gave 40 so-called bloggers press passes to the city’s September fashion show as designers see them as a new marketing opportunity.
- Vanguard Group is expanding its range of exchange-traded funds to appeal to financial intermediaries such as brokers and advisers.
- US regional banks are buying investment-banking expertise, to give them the capacity to offer clients advice as the pace of mergers and acquisitions continues unabated.
- A new commission of corporate executives and financial experts supported by US Treasury Secretary Henry Paulson plans to recommend changes to the 2002 Sarbanes-Oxley Act and other rules to make US capital markets more competitive.

Reuters:
- Exxon Mobil(XOM) expects Russia to allow it to expand its Sakhalin-1 development in the Pacific Ocean, citing the CEO.
- John Bolton, the US ambassador of the UN, said the US may stop paying its full dues to the UN if reforms aren’t implemented before the end of the year.

AP:
- An Arizona law that requires voters show identification at the polls was upheld by a federal judge.

Washington Post:
- Freddie Mac(FME) said it expects “no further action” on a US Justice Dept. criminal investigation.

San Francisco Chronicle:
- The San Francisco police will begin enforcing a curfew on children 13 and younger to curb violence.

Containerisation International:
- Shipping lines charged lower fees to move cargo by containers in the three months ended June, a fourth straight quarterly decline, as more vessels were put into service.

Interfax:
- The US may agree to Russia’s membership in the World Trade Organization by the end of next month, citing the US Ambassador to Russia.

Trade Deficit Widens on US Economic Strength

- The trade deficit for July widened to -$68.0 billion versus estimates of -$65.5 billion and -$64.8 billion in June.

BOTTOM LINE: The US trade deficit widened more than forecast in July to a record $68 billion as imports reached an all-time high and exports declined for the first time in five months, Bloomberg reported. The trade deficit with China fell to $19.6 billion from $19.7 billion in June. A US economy that is still outpacing those economies of most of its major trading partners may keep the trade deficit elevated even as the price of energy declines. I expect the trade deficit to improve slightly over the coming months as falling commodity prices offset some of the effects of relative US economic strength.